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Operator: Hello, everyone, and thank you for joining us today for GBG First Half Results for Fiscal Year 2026. My name is Sammy, and I'll be coordinating your call today. [Operator Instructions] I'll now hand over to your host, Dev Dhiman, CEO, to begin. Please go ahead, Dev. Dev Dhiman: Good morning, everyone, and welcome to the GBG results announcement for the first half of fiscal year '26. We are pleased with the progress that we've delivered in the first half of the year, we're on track to meet our financial plan for FY '26, and we're confident in the acceleration that we'll see in the top line growth as we enter H2 and beyond. Whilst today is a chance for us to take you through the financial results, it's also a chance for us to remind you of the impact GBG has on the world at large in how we enable safe and rewarding digital lives for genuine people everywhere. The slide on the screen here speaks to that impact and the scale at which GBG operates. And I'm really proud of the mission that drives every one of Team GBG to show up and give more every day of the week. The statistics on this slide also serve to remind us all that the majority of the GBG business continues to perform strongly. However, we are very clear as to where the acceleration will come from, from here. 18 months ago, you heard me talk about the need for us to focus on 4 foundational areas. I'm really pleased with the progress we've made on each of these, whether that's in the way we've come together as a single global brand to remove complexity, whether that's how we've now recently signed to migrate our entire cloud to AWS to make sure we are globally aligned, whether that's the launch of GBG Go in April, driving our innovation agenda or whether that's the way we've rebalanced and reworked our entire performance frameworks for our people. We feel like a lot of the heavy lifting on these 4 areas are done, and therefore, our attention is now firmly turning towards driving shareholder value, in particular, through accelerating the top line. So how will we focus on creating shareholder value? We'll focus on 4 key areas. The first is around protecting and growing our amazing customer base. The second is about winning more new logos, more customers that need to work with GBG. Thirdly, we will unlock synergies in the GBG operating model. We've made some good progress on being globally aligned and removing complexity, but we think there's even more we can do, not just to drive efficiencies, but also to drive top line growth. And lastly, following a period of really hard work to get our balance sheet into a much stronger position, we'll talk about how we will optimize capital allocation. In my section, I'm going to focus on how we will drive revenue and unlock synergies. David will come back to talk about how we'll optimize capital allocation in his section. The good news is, underneath those key pillars, there are really only three things that matter. The first is how we complete the turnaround of our Americas business. The second is how we transition to the GBG Go platform. And the third is how we evolve our operating model to better serve customers, to innovate more quickly and to drive efficiencies that we can then redeploy into go-to-market. So let's start with, I'm sure what's on all of your minds, the Americas and where we're at with the turnaround. When I spoke to you 6 months ago, I talked about how we needed to strengthen the leadership team, execute the turnaround by driving productivity and focusing on metrics, evolve our commercial model away from pay-as-you-go towards subscriptions and commitments to lead with the GBG brand and to focus our teams on long-term growth and not distract them with short-term headaches. So where are we up to? So when it comes to our leadership team, in the first half of this year, we have appointed 6 new leaders. And it's important to stress those leaders come with deep industry experience. These are not people figuring out how to do this for the first time. Some of the measures that give us confidence that we're on pace for the turnaround. In the first half of this year, we have driven 4x more new business than we did in the first half of last year, and we're activating that new business more quickly with 28% faster in taking a deal from signature to go-live and ultimately when we start to earn revenue. In terms of our commercial model, standout progress with 8 renewals in the second quarter signed with a minimum commitment, almost the first time we've done that as a business. More encouragingly, as we look ahead, 74% of our upcoming renewal pipeline contains minimum commitment that's already been socialized with the customer. In terms of leading with the brand of GBG, you can see on the page a screenshot of the team at Money20/20, where we showed up as one team. That wasn't just Americas Identity. It was also the GBG Locate business showing up alongside our Americas Identity colleagues, really turning up as one business as GBG. And then lastly, as we focus on long-term growth, we took the decision this year to sunset a legacy platform, one that was creating significant distraction for the team and one that was never going to get our business to be a stronger underlying one, which is our complete intent as to how we focus on making decisions that drive the Americas business forward. Turning now to GBG Go and our transition to a platform business. At the end of FY '25 in our results presentation, you saw me demonstrate the benefits of Go for our customers. But today, I want to focus on the benefits of Go for GBG. We are confident that Go will increase the pace of our growth through the ability to win new customers. That momentum will build confidence in our teams and accelerate the opportunity to upgrade existing customers, driving cross-sell and upsell. Go is an adaptive platform. It's built for what's to come. It will meet evolving customer needs and drive advocacy and also improve NRR. From a technology perspective, Go enables us to rapidly innovate, build once and scale globally, releasing new capability to customers at the flick of a switch. The outcomes of our focus on Go will be accelerated growth, sustainable differentiation and a platform that unlocks efficiencies at GBG as we focus on 1 and not 16. And lastly, let me talk about how we will evolve and transform the GBG operating model. Really, there are three flavors to this initiative. The first is how we move to a functional organizational structure. Again, we've talked about the need for GBG to be simple and to align globally, and this is about taking that and ensuring it's embedded in our DNA. It enables us to ensure that we prioritize the key initiatives because we're now prioritizing across the whole portfolio and not by business unit or segment. And obviously, it reduces cost and duplication, which enables us to reinvest into our key initiatives, largely our go-to-market function. The second flavor of this initiative is how we innovate at a scale that we've not done before. By investing in a GBG-wide innovation system, we will deliver on the opportunity to combine all of the assets that we have in the GBG shop to create powerful new solutions for our customers. And lastly, this is also about driving improvements in our go-to-market. As a business, the majority of our revenue comes from about 15% of our customers. And we need to focus on those customers differently and treat them as GBG customers, not as identity or location or fraud. We believe our focus in this area is a meaningful revenue accelerator. And by increasing singular ownership of our largest accounts, we'll be hardwiring cross-sell into pay plans and the targets that we set to our salespeople, no longer relying on collaboration and lead sharing across teams. So what does all of that mean? It means that we are really clear on the three priorities that will make our boat go faster. And this is already turning into tangible benefits in the first half with more to come in H2 and beyond. So let's just give some of the key highlights. So driving the Americas turnaround. Year-to-date, we are on pace. We've got encouraging early proof points. I've spoken about those just now. And in the second half, you should expect the Americas business to return to growth by our continued focus on driving go-to-market execution and further improving some of the metrics I've spoken about. GBG Go and our transition to the platform. We launched the platform in April. We've had 18 new customer wins in the first half. And we've also integrated 200 digital identity schemes into the platform, which those 18 customers now have access to. In terms of what's ahead, we have a very strong sales pipeline, which we will execute in second half. From a capability standpoint, next on the road map is our no-code release and also really excitingly, our AI-driven insights module, unlocking synergies in the GBG operating model. In the first half, we have signposted a move to a global functional operating model. We have already combined our product and technology teams under single leadership, and we have created and funded the GBG innovation lab. In the second half, we'll continue the move to a functional model. The next phase is really focused on our go-to-market teams, and we'll continue to find efficiencies to reinvest in our key priorities. And lastly, how we'll optimize capital allocation. After a period of really hard work in getting our balance sheet into a much stronger place, GBG is now returning to optionality in how it deploys its free cash flow. In the first half of the year, we executed GBP 35 million in share buybacks, and we completed the first acquisition of this management team with the integration of DataTools in Australia, a business that we've worked closely with for a number of years and made huge sense strategically and financially. And as we look ahead to H2, this morning, we've announced a further GBP 10 million buyback as we continue to deploy our free cash flow to drive growth and shareholder returns. With that, I'm going to pass to David to take us through the financial results. David Ward: Thank you, Dev, and hello, and good morning, everyone. Thank you for joining us. I will now take you through a more detailed review of GBG's financial results for the 6-month period to the 30th of September 2025. We are pleased that the results we delivered in the first half of this financial year are in line with the plan that we built for this year and represent the operational progress that we are making towards an accelerating top line. We delivered revenue of GBP 135.5 million, which represents growth of 1.8% in constant currency terms. Setting aside two short-term impacts that were fully anticipated and which I will explain more shortly, constant currency growth on an underlying basis was 4.4%. This illustrates the improving momentum that we have already generated and which underpins our confidence in delivering a similar level of revenue growth in the second half of this year. Adjusted operating profit, also on a constant currency basis, increased 4.6% to GBP 29.5 million, reflecting our continuing cost control and profit margin control. Cash conversion remained strong at 85.8%, leading to a net debt-to-EBITDA ratio that remained below 1x at GBP 66.6 million. And demonstrating the Board's confidence in our plan, we have in FY '26, already before today committed a total of GBP 46 million in shareholder returns. And as Dev has already outlined, we have today announced a further GBP 10 million of share buyback. I can confirm that we are today reiterating our financial outlook for the full year, which is in line with consensus. So now let me provide an overview of the income statement here presented on an adjusted basis with the statutory format included as an appendix to this presentation. The headline is that we have maintained our strong control of margin, while at the same time, we have recycled cost savings from our ongoing transformation to a single global platform business into our growth-focused priorities, specifically for our largest segment of Identity. On a reported basis, revenue declined by 1% to GBP 135.5 million, but in constant currency terms increased by 1.8%. Our gross profit margin improved by 40 basis points over the prior year as we continue to focus on pricing as well as disciplined management of our data and cloud hosting costs. Adjusted operating expenses reduced by 1.5%. This too was impacted by FX translation. And on a constant currency basis, operating expenses increased by just 1.1%. That led to an adjusted operating profit of GBP 29.5 million, which represents an increase over the prior year of 4.6% in constant currency terms. As expected, our net finance costs decreased over the prior year as a result of the lower average level of net debt. And on tax, our effective adjusted tax rate for the period was 23%, which is a little lower than the 25% that we still expect for the full year due to accounting timing differences. As a result of the combination of the growth in adjusted operating profit, the reducing finance costs and tax charge, adjusted diluted earnings per share increased by 12.6% over the same period last year. As I said in my last presentation of our FY '25 full year results, we planned to continue with our business transformation initiatives and the costs associated with a few of the larger discrete items have been recognized as exceptional costs. These included the costs incurred in the period on our business systems unification and data insights projects as well as the costs of our move from AIM to the Main Market. The total cost recognized in the first half was GBP 3.6 million. Across the next two slides, I have more detail and analysis to explain the key dynamics behind our revenue performance. As I have already said, on a reported basis, revenue declined by 1% to GBP 135.5 million, but in constant currency terms, increased by 1.8%. That 1.8% was impacted by two short-term factors that we feel has somewhat masked the progress we have made in building greater momentum. The first of those two factors is the fully expected impact of high project-driven transaction volumes for Santander U.K. in the first half of FY '25. And the second is a decision we have taken to retire one of our legacy technology platforms as part of the Americas turnaround. As you can see from the bridge chart on this slide, without those impacts that both relate to our Identity segment, the underlying growth in the period was 4.4%. We feel it is important to share this sign that we have generated improved revenue momentum and also most importantly, because delivery of our plan for the full year assumes that we will continue to grow at approximately the same rate in H2, when there is no headwind from the Santander volumes and the headwind from the platform retirement is much smaller. My last comment on this slide is that we continue to enjoy a high proportion of repeatable revenue at 95% of our total. And we have a clear focus, as you have already heard from Dev, on increasing the 54% of that, which comprises subscription revenues. We now move to our rolling 12-month metrics and a reminder that these cover our two core segments of Identity and Location, covering 93% of the total group revenue. Global Fraud Solutions, our smallest segment, is excluded. It's pleasing to see the strong growth from new logo wins with this increasing to 4.1% for the last 12 months. This was assisted by a couple of larger wins with enterprise customers in the Location segment. We continue to see opportunity for us to maintain a growth rate of 3% to 4% from this factor, particularly as we make progress in closing the strong sales pipeline we have for GBG Go. Net revenue retention at the 30th of September was a little lower at 97.8%, but this was impacted by the short-term factors that I have already mentioned and which affected our identity growth rate. Excluding these, the trend for net revenue retention has been holding quite steady at around 100%. We continue to see improvement in net revenue retention as our largest opportunity for driving an overall growth rate improvement. And Dev has already outlined a number of initiatives that we are prioritizing to get net revenue retention back sustainably above 100%. Moving on to how each of our reporting segments performed. Identity, which represents 63% of total group revenue, grew 0.4% in constant currency terms and broadly maintained a consistent contribution margin. We generated strong growth in APAC and EMEA, although, of course, the EMEA growth was impacted by the unusually high Santander volumes in the prior year. While we had a small decline in revenue in Americas, we have been pleased with how the business is generally much more stabilized and gross retention has improved. The turnaround project has the highest level of focus and the momentum we carry into H2, together with the improved sales pipeline, we have confidence that this important component of our business will return to growth in the second half of the year. And Dev has already mentioned the encouraging early signs for GBG Go. Setting aside the two short-term factors that affected the first half and the comparative period from the last financial year, there is a trend for an improving growth rate in Identity. Location, which represents 30% of total group revenue, continues to be the main growth engine for the group with constant currency revenue growth of 4.8% in H1. That was despite some tariff-related softness in Q1. In terms of notable customer activity, we were pleased with our wins at Urban Outfitters and Alibaba and our scaled-up renewals at Shein and TalkTalk. Growth via our partner channel continues to be strong with customers like Oracle. And similarly, large enterprises like Microsoft are also recognizing the value of GBG's market-leading global addressing data for use in their own data quality processes. And finally, our smallest reporting segment of Global Fraud Solutions, which represents 7% of group. In this business, we are continuing to see very strong customer retention and subscription renewals, including the logos included on this slide. New business and the related implementation services has been a little bit weaker than a couple of years ago. And overall, we are reporting 1.4% growth. The contribution margin from the segment has expanded considerably as a result of the strategic review undertaken last year and which has led to some material cost reduction, which allowed investment to be redirected to our highest priorities of Americas go-to-market and the continued advancement of GBG Go. And then finally, and before I hand back to Dev for some closing remarks, a few comments on the balance sheet and capital allocation. As I said in our last year-end presentation back in June, with our debt leverage coming into this year comfortably below 1x EBITDA, we did feel that for the first time in a while, we had a greater degree of optionality on capital allocation. And so we have been proactive in utilizing that optionality to drive improved shareholder value. Firstly, of course, we paid the final dividend declared in respect of the previous financial year. And we have been continuing with our investments via exceptional items into our transformation initiatives and the costs of our move-up from AIM to the Main Market. We are confident that these initiatives will achieve strong returns for shareholders. We have also announced two share repurchase programs prior to today, the first ever in GBG's history. Those totaled GBP 35 million. Including the GBP 10 million that we have announced today, we have committed to share repurchases totaling GBP 45 million, with GBP 17 million of this completed in the first half of the year and a further GBP 28 million now committed to be completed by the end of the financial year. Given the share prices that we have been executing these programs at, we expect that in total, we will have repurchased approximately 7% of our issued share capital, and this should drive EPS accretion on a fully annualized basis of close to 4%. And finally, we were very pleased that we were able to add the DataTools business and team into the group. This was a financially attractive bolt-on opportunity to acquire a business that was known to us and which will add additional scale in a market where we are already seeing strong growth. Based on these capital allocation decisions that we have taken so far this year, we still currently expect to be able to exit this financial year with a net debt-to-EBITDA ratio of approximately 1x. With that, that concludes my section. Now back to you, Dev, for some closing remarks. Dev Dhiman: Thank you, David. So let's close out with a summary of some of the key messages you've heard today. 18 months ago, I said that GBG was a high-quality global business with scale, and that rings out even more truly today. I said we needed to focus on getting strong foundations in place for what was to come. And I think we've done a great job in getting that to a place where we can now turn our attention to driving acceleration of the top line. In the first half, we've shown exactly how we will deliver effective capital allocation through the buybacks and acquiring DataTools in Australia. And what you should really take away from this is that we have a very clear strategic direction, a direction that means that our focus on Americas, Go and our operating model will make the boat go faster. We have confidence in improving growth rates and those growth rates start to improve in the second half and beyond. Thank you all for your time, and we will now turn to questions. Operator: [Operator Instructions] Our first question comes from Andrew Ripper from Panmure Liberum. Andrew Ripper: I hope you can hear me okay. I got two questions, if that's okay. First question is for Dev. You counted through quite a few KPIs there, Dev, in relation to North American Identity. I wonder if you can tell us a little bit more about where you are winning, where the new leadership team is making a difference. And when you referenced that new bids have been 4x the level of the previous year, how significant is that in terms of being a delta on future revenue? Dev Dhiman: Thanks, Andrew. Sorry, we're waiting for your second one to come through at the same time. So I can take that. So I think as you said, we've seen some encouraging proof points as to where we're at with the Americas turnaround. And obviously, it is one of our three key focus areas, and we're putting a huge amount of effort and energy into making sure that we are on pace, which we feel like we are. I think in terms of some of those metrics, so 4x more new business, not only that, we're also activating that new business more quickly. You all know as a SaaS business, signing a deal is great, but then actually getting the customer live is as important, if not more. And we've seen encouraging progress on both of those. One of the reasons why we have won more new business kind of plays to your supporting question, which is we are focusing much more on where we win, and that's financial services, fintech and gaming. So almost all of that new business has come from those three verticals. And as a result, our win rate has ticked up. We've also seen in Americas where a customer has a more complex need and a larger order value, our win rate again increases. So we're getting much more analytical with Tom now at the helm and doing some of the things that he's done in former turnaround roles that he has performed. In terms of significance, it varies. A lot of those deals will be mid-market, but a couple of those, and we talked about price picks before, are more significant in terms of their revenue has until this year. Operator: Our next question comes from Nick Dempsey from Barclays. Nick Dempsey: I've got three, if that's possible. First of all, can you give us some more color on the initiatives that you have in place to get NRR back over 100%? And do you expect to be at least 100% in H2 2026? Second question, can you talk about the strength of your data relationships with the key credit bureau, Lexus, et cetera? Are you confident that you will have all of the existing data built into your offerings for many years to come? And is that starting to prove a real competitive advantage for retention and new logo wins? And then the third question, do you have any more legacy platforms, which could be in line for sunsetting, which could be a headwind at some point? Dev Dhiman: Thanks, Nick. I will maybe start with some of the color on the initiatives and then let David comment on the point around 100%. So I think we -- I think the good news is that, again, I'll just refer you to three key initiatives that drive NRR. The first is Americas, which has been a laggard in terms of revenue growth and therefore, NRR. And I think we've spoken already to Andrew's question and in the presentation around the work we're doing there. The second is Go, which we think obviously underpins our NRR because we moved to a licensed model versus consumption model. And obviously, we think the opportunity to drive cross-sell and upsell is significant. And the third is our operating model. You heard me talk in the presentation around how the majority of our revenue comes from, it's effectively an 80-20 rule, 80% of our revenue from 20% of our customers. And by focusing more on those 20%, I think that's where we see a big opportunity to upsell and cross-sell the whole breadth of GPG solution rather than treating them as a kind of divisional customer, if that makes sense. Maybe, David, you can talk about the kind of trajectory of NRR. David Ward: Nick, thanks for the question. I think a couple of points I'll just add to Dev's commentary there. I think the other point that I think came through in the presentation we just gave was also how we're now seeing the benefit of pricing coming through. That's been a really big focus for us for the last 18 months or so. And that's now much more embedded into everyday practice for our go-to-market team. So that's also having an impact for us. In terms of where do we expect it to get, we've talked that -- we've said previously that across the medium term, we do think that NRR should be able to get back to 105%, so that's our goal. That's probably a goal for a few years out. And we see sort of a relatively steady improvement towards that sort of number. For the second half, specifically, we will still have a bit of a headwind from the short-term factors I mentioned in the presentation. But I think the combination of what we're doing, plus particularly the improvement in gross retention in the Americas, which I talked about, I think should see us get back to 100% even before making any adjustment for Santander. Dev Dhiman: And then moving to your second question, Nick, around data relationships with bureaus or credit reporting agencies. I think the short answer is strong and strengthening. If, for example, for a couple of years now, we've been the only provider in the U.K. that has been able to have access to all three bureaus that operate here. Similarly, in ANZ, since Experian acquired Illion, we've now stepped in -- they have now stepped into our very close commercial relationship that we previously had with Illion and is now with Experian, and we've extended the length of that contract also in the first half. And in Americas, alongside everything you've heard me talk about, there's a lot going on, and therefore, we focused on the key things, but there's also work underway to drive data advantage and some early conversations with some of the people we've spoken about. So I think we feel like we're in a good place. Obviously, it's my background. For many years, we worked really closely with all three bureaus, large global bureaus as well as [Illion]. And it's an area where we continue to have a strong relationship and are talking about more what they could also take from us. And then the third question around legacy platform. So I think really important to remind everybody, we currently talk about having about 16. In the first half, we have taken the action to retire two. And those two are the ones that were most obvious to retire, the ones where revenue was going in the wrong direction and was not significant, but also cost was high and therefore, made them really easy decisions. The next 14 won't be as easy. And Nick, just to reassure you, what we're not saying is that as we retire those 14, we're going to see revenue go the wrong way. Our focus is on driving revenue growth, not shrinkage. And therefore, we're going to be really deliberate and mindful as to how we upgrade those customers to Go over the next 5 to 7 years. I think the good news in that is that there are operational efficiencies that, therefore, are not one-off, and we'll continue to see those over the midterm, and those will continue to help us drive reinvestment into our key priorities of Americas, Go and go-to-market. Operator: Our next question comes from Gautam Pillai from Peel Hunt. Gautam Pillai: I had a couple of questions on Go and to the comment you just mentioned, Dev. So when you migrate customers to Go, what is the typical level of recurring revenue uplift you're seeing per customer? And also beyond compliance and onboarding, what would you see are the differentiated capabilities of Go that kind of ensures pricing power and stickiness against competition? And one more follow-up on pricing generally, especially in the U.S., are you seeing customers push back on pricing at all? And how are the competition strategies kind of evolving from a discounting standpoint? Dev Dhiman: I can probably have a go at both of those and David, you can chip in. So I think on Go, Gautam, just important to remember that in the first half and probably for the rest of this year, our focus is on new business. We are not launching a migration of customers across. We have offered customers on the compliance platform the opportunity to move across, but -- so the answer to your question from a proof point standpoint is it's too early to say what the NRR uplift has been and will be. We think it's accretive to growth. But for right now, it's too early. The reason we think it's accretive to growth, though is your second question in that, which is the differentiated capability. So really Go moves us away from an onboarding solution into an insights platform. When we talked in the presentation about some of the things we're doing to get our data into better shape, it's also that we can deliver more insights to customers. So how are -- how is a gaming company performing in terms of its onboarding against its competitor set? What other things could we deploy into the workflow that will increase both the customer experience, making it better, but also increase the number of accepted customers and reduce fraud. So it's the analytics and the insights that we think will really differentiate us. We already have the underlying capability. So this really puts the icing on the cake is the way we think about it. And then on pricing, so I think a little bit linked back to the question around NRR. We're not waiting for Go to drive NRR. Some of the work we've done in the second quarter, in particular, in Americas to get 8 customers to renew with commitment has been driven partially through a pricing conversation. So a conversation that says, you've got the opportunity to defray price increases by signing up for commitment. The really good news is we have not had to give any of those 8 customers a haircut on price to get them to commit. It's the benefit of having someone that's done this for 20 years, Joe, who's joined our team to run our account management book, just driving best practice. We are also in Americas, launching pricing initiatives, especially around the long tail to see where we can see uplift. And those have not yet been launched, but the work that's underway, and we'll update you on those as we close out the year, I'm sure, in June. Operator: Our next question comes from Kai Korschelt from Canaccord. Kai Korschelt: I had a couple and just one is just to follow up on pricing, maybe more at an industry level. I mean it seems like there are a lot of players in the identity verification space. And I think previously, Dev mentioned that there's been sort of a downward trend on pricing. So I'm just wondering how do you plan to avoid commoditization, I guess, if that's the right word, and offset pricing pressure. It seems like Go is an important part of it, but just sort of more general, if you had any thoughts on a midterm basis, that would be helpful. And the second one was just around the capital allocation and specifically, how do you weigh, I guess, doing more share buybacks versus paying down debt as you also get accretion from lower interest cost as you've obviously shown in the half. Dev Dhiman: Thanks, Kai. So I'll take the pricing one and David maybe can chip in on the capital allocation. I think it's really important. It's another good example and an opportunity for me to remind everybody that the majority of our business, we have been really successful in maintaining and increasing price, be that the identity business in APAC, EMEA or the Location business worldwide. So really, where we've had -- where we've suffered on NRR has been Americas and part of that has been the commercial model, which has been pay-as-you-go. We think about pricing as a growth lever. We've demonstrated that, as I said, in most of our businesses, and we'll shortly be testing that in Americas. The ability for us to move customers to minimum commit underpins my confidence. And what else underpins my confidence is the fact that the majority of our industry is pricing in that way. So in Americas only, we are catching up. The point around commoditization, I think you kind of answered your own question, Kai, Go is what we think will differentiate us, in particular, the move to an insights-driven platform rather than a point in time tick in the box, which is never what we were, but I think that's kind of the underlying question that you have in the question that you've asked. And maybe, David, on capital allocation. David Ward: I'll pick up the question on capital allocation. I think we feel good that we've got much more optionality than we've had for a few years now. I think it's been great coming into this year with a level of debt below 1x. As I outlined in the presentation, the actions we've already taken and the decisions we've announced will probably mean that we exit this year at about 1x EBITDA to net debt leverage, which I think we feel very comfortable with. And obviously, at the moment, very aware of where the share price is at and particularly versus the level of interest costs that we've got on our debt, buying back shares is attractive for us at the moment. I mentioned in my presentation that based on what we've announced in terms of share buybacks, based on our forecasting assumptions, we expect about 4% accretion to EPS on a fully annualized basis. So that's pretty attractive. At the same time, it's been great that we've been able to execute our first acquisition in a while to be able to add a relatively small bolt-on business, but actually a business that gives us a bit more scale in a market that was already enjoying good growth. So we've added a business that was growing. It has got good profit margins, and we've added some very capable team members in a region that's important to us. I think it is also attractive. So it's great to have sort of that full range of options around how we deploy capital. But I guess the punchline is we are very focused on delivering improved returns for shareholders, and we will deploy capital in the best way to be able to do that. Operator: Our next question comes from Julian Yates from Investec. Julian Yates: I'd just like to dig a little bit more into the North America business versus EMEA to try and understand where we are in the upside. Do you have any color on sort of return on investment metrics? Like what is EMEA doing in terms of revenue per sales, head revenue per account, return on investment versus what North America is doing at the moment? And when -- and can North America move up to those sort of EMEA levels? Is there quite a lot of upside to go? And then on the flip, is it just massively underinvested in [indiscernible] the fact that there's going to be a cost taker for a couple of years before we see maybe sort of margins or [indiscernible] move up to that EMEA level? David Ward: Julian, it's David. So I'll have a go answering that one for you. And I think the first thing I would say is that the turnaround that we are executing in Americas actually looks very similar to the process that we went through for EMEA a couple of years ago. So there are great similarities, which, to be honest, is very helpful for us and obviously means that some of the expertise that we have in the EMEA team has been really helpful to the Americas team as well as the new capability and stronger team that we've deployed into that region. So I think there are some similarities. I think the way we think about the Americas business -- has been that we have had to strengthen the team that we have deployed there. We've talked about all of the actions that we've done to do that. We've also given them increased and better tools. So they've got better internal tools. They've got better support from the enabling functions. And at the same time, we are -- we've talked about unifying our back-office systems and CRM tools. So all of those things we have done, and we are almost through finishing. So that gives us a really solid foundation. Dev has talked about the fact that relative to our EMEA team, the Americas team is under resourced, but we've always felt that we needed to solidify those foundations first. And once we've done that, there is a really good opportunity for us to then enjoy the benefits of economies of scale as we employ and deploy more salespeople into the region. So I think that's how we think about it. I'm not sure I'd necessarily agree that it's going to be a cost taker. I think that was the phrase you used. I think we see that it's a business that should scale relatively well from here. We do want to deploy more cost into the region, but we expect pretty constant and relatively quick returns on that cost. So I think from here on in, we expect the opportunity for margin improvement for Americas. It will be relatively modest as we put the cost in there. And obviously, there's the benefits of Go to still add on top of that. So I think there's a number of things that we're pretty excited about. Operator: Our next question comes from Tintin Stormont from Deutsche Numis. Tintin Stormont: Just -- I think it's two questions, maybe three. The first one is the quality of the pipeline. Is there anything that sort of a sense that you could give us that obviously, there's the volume and the actual increase in the pipeline. But when you're trying to convey to us a sense of the improved quality of the pipeline, is there anything that you can share in that regard? And then, David, just picking up on your point on resourcing in the U.S., where are we in terms of the resourcing? And how easy is to find that additional resource in the market and for them to sort of kind of have the impact that you want them to have? And finally, from a competition standpoint, if you could just maybe describe sort of kind of in the environment if there are particular players that you're winning against with the GBG Go product? And sort of kind of -- I think, Dev, you talked about the features that are differentiating you, but would be really interested in that, the areas that you choose to play in, FS, gaming, fintech, et cetera, if there are particular competitors that seem to be relatively losing out to you now with this platform? Dev Dhiman: I think all 3 probably for me, Tintin. So in terms of quality of pipeline, so I think, again, we don't really disclose volume of pipeline. I think we talked about the number of Go opportunities specifically, but our pipeline is obviously much broader than that. I think what I can say is I think there are a handful of key opportunities that I'm very close to that feels a bit different maybe this time last year. So I won't say any more than that because I'm breaking my own cardinal rule to not talk about those. In terms of resourcing in Americas, I think, as I said in my presentation, we've hired 6 new leaders have all come from this space. It has not been difficult to find people that, number one, have deep industry experience, and it's not been difficult to find people who want to be part of the GBG story. I think what's been encouraging is how we've seen many of those 6 leaders bring in people from their network. That's interesting to me for two reasons. One, I think we've hired the right people if they know people. But secondly, the fact they're bringing people in that they trust and trust them means that their commitment to the cause and their ability to see the end of the turnaround and the start of acceleration is quite high. So open rates in the Americas, I think we measure them in days, not months. And then lastly, on competition, I'm going to answer this slightly differently. I think we're focused on ourselves and maybe that's also a bit different to a year ago. I think we're focused on how we stand out from our competitors. And I'd rather talk about what we're doing than what we're seeing in the market. Again, a good chance for me to remind everybody that for many years now, we've won against our competitors in location. We've won against our competitors in EMEA, and that's getting increasingly so, I would say. And in APAC, for a number of years, we continue to have a really strong market share in ANZ that should only get stronger with the integration of DataTools. So yes, hopefully, that answers your questions. Operator: We have no further questions. Dev Dhiman: Yes, I think that brings us to the end of questions. So thank you, everyone, for your time and for the questions. I will just close with a few short comments that really reiterate what I said at the end of the presentation as it was. I think a good chance for us to always take the opportunity to remind everybody what a great business this is that operates in a really fast-growing space that is only getting more interesting and the scale that we enjoyed. Good to be able to stop now talking, hopefully, in these presentations around the 4 focus areas that we set out on back in June of last year, although albeit our work is kind of never done on those. I think what you have heard today is really two things, a very effective and deliberate capital allocation that is all about driving increased shareholder returns and a very clear strategic direction that really means that you'll only really hear me talk about three things: Americas, GBG Go and our operating model, all of which gives David and myself and the Board confidence in improving growth rates, which, as I said in the presentation, start now. Thank you all for your time, and have a great rest of the day and week.
Operator: Ladies and gentlemen, thank you for standing by. My name is Colby, and I'll be your conference operator today. At this time, I'd like to welcome you to the CleanSpark Fiscal Full Year 2025 Earnings Results. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Star one again. Thank you. Terry, you may begin your conference. Harry Sudock: Thanks, Colby. And thank you for joining us today to review the fourth quarter and full fiscal year 2025 financial results for CleanSpark. We encourage you to review our earnings results press release, which was issued today and is available on our website. Our 10-Ks will be filed shortly. A webcast replay and transcript of today's call will be added to our website once available. On the call today, I am joined by Matt Shultz, our Chief Executive Officer, and Gary Vecchiarelli, our President and Chief Financial Officer. Some of the statements we make today will be forward-looking based on our best view of the world and our business as we see them today. The statements and information provided remain subject to the risk factors disclosed in our 10-Ks. We will also discuss certain non-GAAP financial measures concerning our performance during today's call. You can find the reconciliation of non-GAAP financial measures in our press release which is available on our website. And with that, my pleasure to introduce Matt Schulz. Matt Shultz: Thanks, Harry. Good afternoon, everyone, and thank you for joining us. I'm so excited to have stepped back into the role of CEO of CleanSpark this past August after serving as executive chairman for the past five years. In my first one hundred days, the team has been relentlessly cementing our current leadership position in Bitcoin mining while simultaneously positioning us to evolve our portfolio. We've also set a strategic direction for CleanSpark going forward as a digital infrastructure platform serving a wide range of compute opportunities. These opportunities include, but are not limited to, generative AI, workloads, grid balancing through Bitcoin mining, and high-performance computing broadly. I've also had the opportunity to meet with many of you listening to today's call. Your enthusiasm for the future of CleanSpark's business means the world to us and we're excited to execute our strategic plan and extend our track record of operational excellence into AI factories. As the company has matured, I'm inspired by our world-class team and operating business. Our strong balance sheet and most excitingly, our growing power and land portfolio across the U.S. and the optionality it represents. Together, all of these elements are evolving into a diversified compute platform to serve the needs of the next digital age. I've taken stock of what we built, I want to share with you just how well prepared the company is for this moment in time. While Bitcoin mining remains foundational to our business, we recognize that our expertise in securing power, developing infrastructure, and deploying at scale uniquely positions us to support the fast-growing demand for AI compute. A blended approach to growing and monetizing our portfolio serves to diversify revenue, enhance margin, and build long-term shareholder value. 2025 was the year CleanSpark achieved escape velocity. Reaching 50 exahash per second in operational hash rate with 100% U.S.-based infrastructure and run by our operations and technology teams. We delivered record revenues and demonstrated capital stewardship by not issuing a single share through an equity offering throughout this calendar year. All without slowing down our growth. I'm proud to share a few financial highlights from our 2025 fiscal year. We achieved record revenues of $766 million. Our gross margin was 55%. Now that's a 1% decrease year over year. This small decrease is actually impressive due to this being the first full year post-halving when the Bitcoin block rewards were reduced by 50%. Our Bitcoin treasury grew by nearly 62% to over 13,000, generated entirely from our wholly owned and operated hash rate. This puts us in a fundamentally different position relative to treasury companies purchasing spot Bitcoin since we mine it at greater than a 55% gross margin and we're actively monetizing our holdings. We now have a sustainable self-funded mining business thanks to our industry-leading mining team. And they're backed by an innovative digital asset management operation that's generating meaningful premiums and leveraging our treasury balance as a truly productive asset. We're in the process of deploying the 19,000 S21X XP immersion units that have an industry-leading 13.5 joules per terahash. It's beginning this quarter, and we expect that process to be complete in calendar '26. Now while this timeline is a bit longer than we had initially contemplated, our priority was a comprehensive portfolio review to ensure that we would not consume any AI applicable megawatts with this deployment. We have always had an infrastructure-first thesis. We avoided the asset-light strategies of past site and we prioritized control of power and infrastructure given the fundamental scarcity we're now seeing borne out in the market. Scaling our mining business required securing and developing a world-class power and land portfolio, and growing significant supply chain, engineering, construction, and operational capabilities. All highly relevant as we evolve into AI data center development. Today, we have more than a gigawatt of power under contract live in our data centers and infrastructure. Additionally, we have nearly 300 megawatts in Texas, fully contracted and scheduled to begin energization in early 2027. Coupled with a multi-gigawatt pipeline of additional near-term opportunities. Importantly, many of these locations are excellent candidates for AI campuses while others are best positioned for Bitcoin mining, load balancing, and securing the grid. Our objective is clear: to deliver each megawatt to its optimal use case. Have always had an internal philosophy of people first. As we look to expand our business, That was true in the earliest days of microgrid development. It was true as we grew into a Bitcoin mining company. It was clearly a winning strategy when we hired Taylor Monig to lead us to the forefront of immersion cooling. And most recently, it remains true as we added Jeff Thomas to lead our AI data center initiatives following his successful tenure as president at Humane. We've accomplished three key initial steps in our business evolution thus far with Jeff on board. The first thing is we reviewed our diverse to identify the most productive use of every single megawatt. Second, we secured a 285 megawatt site in Texas with the explicit intent of building an AI factory for a high-quality tenant. And three, we're aligning and expanding our internal team in conjunction with market-leading partners to deliver projects on time, and on budget that meet the exacting needs of offtake customers. When we took a close look at our facilities, it became clear that our 250 megawatt site in Sandersville, Georgia provides an immediate opportunity to host a large-scale tenant. Other sites surrounding the Atlanta Hartsfield Airport totaling over 100 megawatts with ready access to fiber are already in extremely high demand. In Texas, the site we recently acquired just outside of Houston, will be the location of our first exclusive exclusively purpose-built AI factory. We hold 271 contiguous acres of land located on a regional fiber backbone and have executed 285 megawatts in long-term power supply agreements that have already been fully approved by ERCOT. Better still, the site is located near several high-capacity natural gas pipelines which are being evaluated for industrial-scale behind-the-meter generation opportunities. This purchase positions us to deliver scalable resilient and energy-efficient capacity to meet demand from AI, cloud, and enterprise workload and represents a key step in our long-term strategy to leverage our vertically integrated infrastructure-first model. While this may be our first purpose-built facility, it certainly won't be our last. The entire team is focused on first securing tenants for Sandersville and Houston, which will then drive efforts to take the projects from commercialization to commissioning. Long-term tenants represent a superior risk-adjusted profile return profile, pardon me, for these assets rather than direct GPU exposure initially. Similar to past industrial revolutions, AI represents a new ecosystem. Power companies, chip companies, hyperscalers, infrastructure technology providers, and others are all collaborating And we're in direct discussions at every level to deliver maximum value for our customers and our shareholders. Jeff has been building the full life cycle playbook for AI campus development and operations that best serve this ecosystem. Together, his growing team is already vetting potential tenants, building high-quality site commercialization plans for our pipeline, and defining our project delivery roadmap. As part of those efforts, we entered into a memorandum of understanding with Submer a global pioneer in liquid-cooled and prefabricated data center solutions. Its end-to-end capabilities spanning from liquid cooling systems and mechanical, electrical, and plumbing modules to full facility builds set new benchmarks in energy efficiency, density, and sustainability, making them an ideal partner for CleanSpark's growth strategy. This relationship is our first step in taking elements of the construction process away from the data center and putting them into the factory. With approved reference architecture designs to support a broad range of tenant requirements. Together, we're working on an infrastructure that integrates power generation, data center development, and AI service delivery. Under this framework, CleanSpark focuses on selecting, developing, building, and operating AI-focused campuses while Submer will offer its technology and expertise as a strategic vendor in delivering sustainable modular data center systems. Meanwhile, we completed our largest financing ever. With a $1.15 billion upsized 0% convertible note. Gary, our President and CFO, will discuss the finer details and numbers momentarily. But before I pass it over to him, there are some elements I'd like to highlight. The terms are even better than our prior raise in December 2024. With the same 0% interest rate, a higher 27.5% conversion premium, and a six-point two five-year term. This financing provides the resources to expand our power and land portfolio, seed our first AI deployments, and continue investing in strategic growth opportunities. And as part of this transaction, we bought back $460 million worth of our own stock more than a 10% reduction in outstanding shares. We've once again bet on ourselves and we will succeed the CleanSpark Way. With that, I'll hand it over to Gary to take you through the financial results both for the quarter and the full year. Over to you, Gary. Gary Vecchiarelli: Thank you, Matt. I'd like to start by reviewing the numbers for the entire twelve-month fiscal period which was a landmark year for CleanSpark. Our revenue grew more than 100% year over year to $763.663 million with almost 8,000 Bitcoin produced. The major driver of this increase was due to a combination of growth in Exahash and Bitcoin price. Our full-year gross margin was 55%, which we're particularly proud of given that this was the first full year post-halving. These margins remained relatively in line with the prior year, which is attributed to the significant increases in efficiency our fleet had over the last twelve months. Also contributing to our gross margin consistency is our average marginal cost per bitcoin, which was slightly below $0.043 for the fiscal year. Our average revenue per Bitcoin was approximately $98,000. Our margins and cost per bitcoin represent the strength of our infrastructure quality, our world-class teams, and commitment to managing our business to profitability and margin rather than any single operating metric. Our high margins translated to an adjusted EBITDA of over $800 million which I must point out does not adjust for certain noncash items such as the mark to market on fair value of Bitcoin. When normalized, by excluding our gain on the fair value of Bitcoin the adjusted EBITDA from operations would be approximately $305 million which represents a net margin of approximately 40%. Additionally, the combination of increases in margins and fair value of the 13,000 plus Bitcoin we have on the balance sheet contributed to a significant positive net income of about $365 million. Looking at the most recent quarter over quarter performance, we also saw significant gains between the third and fourth quarters. Our revenue increased by approximately $25 million or 13% in Q4 versus Q3, and our margins increased two points to 56.5%. It's important to note that we achieved 50 exahash in June And while that remained our operational high for the fourth quarter, we still experienced increases in revenues and margins because of favorable mining economics during the quarter. Our high uptime also allowed us to capture periods of significant appreciation in Bitcoin price. In the fourth quarter, we recognized a slight net loss compared to the third quarter. This was due to a much larger gain on fair value of Bitcoin during the third quarter, and noncash tax adjustments recorded at our fiscal year end. Our adjusted EBITDA margins also saw similar changes which is inclusive of the noncash mark to market adjustment on fair value of Bitcoin. However, when adjusting any noncash mark to market effect, our normalized adjusted EBITDA was $97 million for the fourth quarter, a 25% increase over the $78 million normalized in the third quarter. This translates to margins of 43% and 39% respectively. Going forward, we do expect that our professional fees as we execute on our AI strategy, payroll, and G and A line items will increase. Additionally, I will point out that the AI data center business comes with stable cash flows and high margins. Both of which will help CleanSpark through the peaks and valleys of Bitcoin mining economics. Our escape velocity translates to operating leverage. We have developed scaled data center infrastructure that is delivering revenue and margin necessary to self-sustain and further support incremental investment in AI data center capabilities as we evolve into a power, land, and compute platform. Turning our attention to the balance sheet. I want to point out that we are one of the first if not the only company, which has a scaled cash-flowing business that is also using Bitcoin as a productive capital asset. Utilization of our Bitcoin stack resides in a team we refer to as digital asset management, or DAM. The fourth quarter was the first full quarter of DAM activity, we are extremely excited to share in more detail the steps we have taken in our crawl phase. Two initial strategies rolled out by DAM are our Spot Plus and yield strategies. Both utilize covered calls. But Spot Plus is designed to optimize for the cash needs of the business while Yield is designed to generate go-forward risk-adjusted output from our treasury holdings. Given that we are monetizing a significant portion of our monthly Bitcoin production, the Spot Plus strategy delivers a tactical uplift to cash generated on a weekly, monthly, and quarterly basis. This program functions smoothly because of the consistent output from our world-class operations and strong uptime. We are able to utilize this approach because of the investment we have made in making DAM an institutional-grade platform. It began with a comprehensive RFP for a range of products that you have heard us discuss on prior calls. And executing these option overlays requires a disciplined approach to risk management. Rather than selling Bitcoin through the spot market, we utilize apps near the money covered calls to generate both option premium and realized proceeds. If and when we ultimately get called away on these contracts. Our yield strategy utilizes covered calls as well. But instead of high delta short duration, we shift delta and extend or latter term to reduce the likelihood of exercise. Under our yield program, we saw an annualized yield of approximately 12% on a blended basis. Addition, as we scale our strategy and increase the volume, we believe there's room to incrementally increase the annualized yield and cash generated. Potentially significantly. While the fourth quarter represents a period when we're still in the crawl phase of the strategy, we were nonetheless able to generate a total of $9.3 million in premiums. To illustrate what that represents, our average spot Bitcoin sales price for the quarter was $111,721. However, when considering the additional premiums generated per Bitcoin, of $4,184 the all-in effective cash generated per Bitcoin was almost $116,000 a material uplift. One of the early wins for the DAM team was the successful monetization of costless Bitcoin repurchase options received as part of a Bitmain minor procurement contract from the third quarter. This was an excellent example of how our investment in the digital asset management function can help us to complete the arc of opportunities driven by our world-class mining operations. While our mining operations drove leverage in preferential terms to obtain mining rigs. DAM was able to monetize that option which would have otherwise had expired worthless. Driving $7 million of additional cash to the balance sheet. Due to the performance of DAM to date, we have increased the volume of transactions subsequent to our fiscal year end. In October alone, we traded more contracts than the total number of contracts traded during the entire fourth quarter. Additionally, we generated over $5 million in cash premiums for the month of October alone. The last leg of our current strategy involves writing puts. The put transactions we enter into are cash secured primarily using the premiums previously generated under the SPOT plus and yield programs. While this cash corpus is still growing, we saw analyzed returns of 8% on the put strategy. These three strategies do two things. First, they integrate in our operating business with the enhanced sale of production and second, create a capital flywheel as they relate to our balance sheet. Would also like to add that the results we are seeing in DAM do not necessarily translate directly to telling the story via US GAAP accounting. While all pieces are reflected across the income statement and balance sheet, there are certain punitive treatments of noncash mark to market valuations at contract expiry. What we think is important about these tables that, once again, CleanSpark is at the cutting edge of real nonhyperbolic strategies. Paired with full market-leading transparency. These tables can be found in the management's discussion analysis section of our Form 10-Ks. I want to note that US GAAP rules separate the accounting for covered call exercises into two different line items, for what is in substance a single transaction. Two line items on the income statement are loss and derivative contracts, and gain on fair value of Bitcoin. This is important because there are two sides of the same transaction. For example, the difference between the spot price expiry and the strike price is shown as a loss on derivative contracts. While the corresponding markup in Bitcoin value to the spot price recorded separately as a gain on fair value of Bitcoin. Offsetting that noncash loss with a noncash gain. Taken together, they reflect the economic outcome of our covered call program, continues to generate attractive risk-adjusted returns. I also want to point out that the Bitmain option was effectively costless to us. However, GAAP required us to bifurcate a portion of the ASIC contract to the option value. Even though the contract didn't explicitly state a value. That value of $6.8 million was recorded at contract inception in the third quarter. As the option ultimately expired out of the money, had we not taken steps to monetize the option, would have had a noncash write-off of that $6.8 million. However, instead, we generated almost $7 million of cash on that option. Which under GAAP considered it to be a net gain of approximately $200,000 even though we ended up with $7 million more cash in the bank at the end of the day. The overall takeaway is that the digital asset management strategy has met and, in fact, exceeded our expectations thus far and become a second source of cash generation to the business. Are looking to increase the size of our team to allow for greater volume and more complex derivative trades. Which we believe will not only grow the total cash generated from premiums, but also maintain attractive yields. On a final note, I'd like to take some time to discussing our capital strategy. Our focus is on building a capital stack which minimizes dilution. This starts with the sale of monthly Bitcoin production to cover our monthly OpEx. We also have Bitcoin-backed lines of credit with a total capacity of $400 million. We will continue to use the lines of credit opportunistically in the marketplace for accretive acquisitions. And as we previously mentioned, we issued a $1.15 billion convertible note. With a coupon of 0% and a conversion premium of 27.5%. Proceeds from this transaction were used for several purposes. First, we bought back $460 million of our stock. Which represents a reduction in our outstanding shares of 10.9%. The stock buyback not only helped facilitate the convert, we saw this as a bet on ourselves as we see our valuation increasing given the opportunities in front of us. Second, we used over $200 million from that raise to pay off our lines of credit. It's important to note that we have access to the full $400 million line available to drawdown at any time. On terms we continue to believe are market leading. The remaining net proceeds from the transaction will be used to do what we have a proven track record of doing. And that is hunting for power and land. The acquisitions of power and land, such as the most recently announced transaction in Sealy, Texas, are expected to be primarily used for our AI data center strategy. While we are in the early innings of our AI data center journey, the market is moving quickly and so is CleanSpark. Our conversations with off takers are ongoing. And it is not a matter of if but when we will have our first customer. Details regarding financing of our data centers will be coming in future periods. However, I will tell you this. There's an abundant amount of capital at a much lower cost of capital than previously available to our mining business. Our venture in AI data centers will open new pools of capital allowing us to benefit from the significant levered rates of return the market is providing. To close out another strong defining quarter for CleanSpark, and to discuss how these results position us for what's next, let's return to our Chairman and CEO, Matt Schulz. Matt Shultz: Thanks, Gary. Wow. As I listened to those results I can't help but think back to the earliest days of this company and the journey we've all been on together. Our fundamental thesis on being infrastructure-focused and people-first has served us incredibly well. They are two of the reasons we have such a meaningful opportunity in front of us today to grow into an infrastructure and compute platform that maximizes the value of every megawatt. The task in front of us is clear. We're working to secure tenants at our two initial flagship AI-ready locations while simultaneously expanding our land and power footprint to meet the market's insatiable demand. These efforts are made possible by our strength as a scaled Bitcoin miner, our capital markets rigor and, critically, our company's cultural focus on operational excellence. This past summer, our operations team coined the motto be the standard. I had the pleasure of having them present to me what that phrase meant to all of them. And I commit to you that in each of our endeavors, you can count on CleanSpark to continue to be the standard. I want to take a moment to thank our entire team for their tireless work I'm beyond grateful to our shareholders for their trust, and I truly appreciate all of you for joining us today. With that, I'll hand it back to Harry to lead us into Q and A. Harry Sudock: Matt. We will now open up the floor to questions from the analyst community. Operator, please provide instructions and manage the queue for the Q and A session. Operator: Thank you. We will now begin the question and answer session. Your first question comes from the line of Brian Dobson with Clear Street. Your line is open. Brian Dobson: Hey, good evening gentlemen. Just a quick question. There's been a considerable amount of volatility in the stocks as of late. Perhaps you could take this opportunity to give us a little bit of color on the types of conversations you're having with potential clients and your outlook for demand in the HPC AI space over the course of the next two years? Matt Shultz: Yes, absolutely. Brian, thanks for calling in, thank you for the question. I can tell you that we've had extensive conversations. Now I posted on my social media. Our whole team was invited to Northern California to spend some time with the team at NVIDIA. From that meeting, we've had subsequent follow-ups, and I can tell you that there is don't wanna say a bidding war, but strong multiple layer inquiries about Sandersville specifically, and we're starting to gain additional traction on the Sealy, Texas site. So we feel like the demand is there. Obviously, there have been some delivery challenges in credit risk on some of some of the other peers that maybe haven't been able to perform to the expectations. But we're based on the fact that we're running a company with nearly an $800 million annual run rate at 55% gross margins, we have the cash necessary to get us to that next level. So we actually feel very optimistic about it. Brian Dobson: Yeah. Outstanding. And as you're thinking about various campuses, what do you think about pairing Bitcoin mining with HPC campuses to provide, call it, power usage versatility? Or do you think that they'll be separate to start? Matt Shultz: You know, that's a really thoughtful question. We were invited by Jack Dorsey and his team to go to Dalton, Georgia. And spend some time as they launch their new domestic manufacturing ASIC, the proto rig that's built by Block. And it was a fascinating event. But leaving the event, the CEO of the utility there in Georgia grabbed Gary, Harry, and myself and asked us to go to lunch. And he shared that there's about a hundred and twenty hours a year that really causes problems for the utility. And he said, historically, they love Bitcoin miners because of the interruptible load. Now we've experienced providing that service in load balancing in many of our jurisdictions. I mean, you've heard the stories about, you know, redirecting power in Georgia to a hospital when the hurricane hit or whatever the case may be. But the takeaway from the utility was their interest and the fear that came from them was because Core Scientific is a big consumer power there in Dalton, and it's historically been a flexible load. And the concern is that extra hundred and twenty hours a year when they need somebody to be able to give back. So what they specifically the request from us was to consider blending AI, HPC, and Bitcoin mining so a component of those loads remain interruptible. So we see it as a dual-pronged strategy. And I think you'll see a lot of our sites will serve both loads. Brian Dobson: Excellent. Thank you very much for the thoughtful answer. Operator: Your next question from the line of Mike Colonnese with H. C. Wainwright. Your line is open. Mike Colonnese: Good afternoon, guys, and congrats on the strong fiscal year here. First one for me on the HPC side. Curious, what are some of the key development milestones that investors should be on a lookout for in 2026 as it relates to the HPC strategy? It sounds like the near-term focus will be on deployments. I know Texas and San Jose sites. So it'd be great to get some more color there. Matt Shultz: Yeah. You nailed it, Mike. I can tell you I had a conversation not with a Neo Cloud or anybody like that, but actually with the senior director of site development for a global hyperscaler. Last night, on my way leaving here, And what he shared with us is their 2026 forecasts are so constrained that they're looking at alternative types of builds just to facilitate the needs for 26. Takeaway from the conversation was Sandersville and Sealy because both of them can be energized. Sandersville is live and active right now. Powering 11 exahash of Bitcoin miners. But it could switch to a 200 megawatt critical IT load and be online, you know, in a reasonable period of time. And I think of a cool thing that maybe has gone unnoticed, and that is this MOU a submer. We don't historically I mean, if you look at CleanSpark's past, we don't announce MOU or LOI or anything that isn't definitive or concrete. It was really important to ink that with Submer because of the way that they approach the business. Submer has approved reference architecture for AMD, for NVIDIA, and they build the entire MEP solution, so mechanical, electrical, and plumbing, with all the fiber runs. They take that out of the field, put it into the factory, So a company like CleanSpark builds the powered gray shell We contract with Submer to roll in the MEP solution for specifically to the reference of the end user requirements. So speed to market is really, really critical right now. And having that modular approach, I think, is gonna be a massive differentiator for us. Mike Colonnese: That's helpful color, Matt. Appreciate that. And then the second one is on the Bitcoin mining side. I know you mentioned some of these near-term deployments you guys are looking to install in the first quarter. Just remind us of what your near-term expansion plans will look like for the Bitcoin mining business and existing site expansions versus any sort of new development opportunities on the greenfield side or mergers and acquisitions at this stage? Matt Shultz: Yeah. So I think what you're going to see is a migration of our Bitcoin mining away from areas that are closer to major metropolitan areas that are maybe more sensitive to utility rates? And into more remote locations. There are a number of utilities that have either recently passed or are discussing blockchain-specific tariffs. To my point on the last question, that interruptible component of the load is in such demand that they give us favorable rates, whether it's or Wyoming or any of a number of different jurisdictions, to have the offtake that allows us to flex and to assist the utility. So I think what you'll see is locations like Sandersville, locations like, the Metro Atlanta stuff sites in Norcross and College Park, etcetera. Those will probably be prioritized for HPC AI because of the quick access to fiber, the low latency loads that they can serve. Etcetera. And then the Bitcoin mining from those facilities will likely migrate out to some of the other locations. So to answer your question directly about scale, we're at 50 exahash per second right now. We have six exahash of the S21X immersion miners. We had slotted out a deployment strategy. Now we use modular immersion cool data centers for the vast majority of those. When we secured the 100 megawatts in Wyoming, we actually beat out a hyperscaler because of the fact Wyoming wanted to energize those megawatts today and not in three years. So we have the infrastructure purchased, delivered on hand, ready to roll to deploy these in very short order. So I think what you'll see is between now and towards the '26, calendar Q1, you'll see that additional six extra hash come online. Above that, what you'll see is as we do fleet upgrades, not in the $250 million capacity that we've historically done, but in a more disciplined, more thoughtful manner to ensure that we're protecting our share of the hash rate. And supporting what we believe to be a national security issue, and that is ensuring that there's Bitcoin mining hash rate domestically. So we're gonna take a real balanced approach at that, but you'll see us continue to grow And really, the differentiator is just in the fact that we have right now one of the most efficient fleets in the world. And with the deployment of this six extra hash of 13.5 jewel machines, we'll have hands down the most efficiently around. Mike Colonnese: Great. Thank you for taking my questions, Matt. Matt Shultz: Thanks, Mike. Operator: Your next question comes from the line of Paul Golding with Macquarie Capital. Your line is open. Paul Golding: Thanks so much and congrats on a strong finish to the year. I wanted to ask with the 13,000 Bitcoin on the balance sheet around $1.2 billion at fiscal year end. And with the recent financings that you've done, how should we think about the total aspiration to build this powered land bank as you think about the opportunity to bring tenants in for HPC or to simultaneously grow your Bitcoin mining fleet as you were just discussing? And then I have a follow-up. Thank you. Gary Vecchiarelli: Thanks for the question, Paul. Our tune around the Bitcoin stack really hasn't changed. Right? To give you context, we consciously have stacked Bitcoin quite rapidly over an eighteen-month period, and that brought us about 13,000 Bitcoin on the balance sheet. And we believe that we're one of the only companies using it in the strategic ways that it should be used as a capital asset. So I think going forward, what you can count on from us is if few things. One, we'll continue to monetize Bitcoin stack through yield strategies to generate some cash. Two, we'll continue to borrow against it to be opportunistic to draw down on cash make sure that we're nimble in the marketplace and take advantage of accretive acquisitions. And, you know, we've always said that we're not ideological about the Bitcoin balance. We're very strategic. And so if there comes a point in time where we needed to or we felt that the right thing to do is to part with that Bitcoin, balance through sales, we most certainly would do that, and we were open to do that. Because, again, we've built this entire company and even the financial wherewithal on optionality. But I'll tell you that you know, with those sales comes, punitive tax treatment because we have mined those at such a low basis. We'll have to pay, will be a cash-paying taxpayer on those items. So we take those into account, when we're looking at the stack. But overall, we'll continue to use this as a form of non-dilutive capital. Paul Golding: Got it. Thanks, Gary. And then turning to the MOU with Submer and, Matt, the explanation you were just giving on how you might break out the, shell development versus the MEP componentry. How should we think about the potential economic impact of that, if you can give any color? Just thinking about how pricing on some colocation deals involves yield on cost and, of course, build to suit can involve more capital, but with a partner just looking for any additional color you could provide. Thank you. Matt Shultz: Yeah. Great question, Paul. Thank you for joining. So the summer relationship really was born out of a prior relationship between Humane and Summer. Jeff had a working relationship with Patrick, the CEO at Submer. And we've also got Summer infrastructure deployed in our Bitcoin mining side. So we're very comfortable with them. And I can tell you that the quality of the product that they deliver it's much simpler in the Bitcoin mining side than some of the other modular immersion cool type companies. But because we haven't done a deployment domestic and they're just spinning up a manufacturing facility in Houston, I don't want to comment too much on what the cost per megawatt is, but I can tell you in general terms that the cost to build out a megawatt of mining infrastructure is about a million bucks. To do the same for AI and HPC, according to the reference architecture required by the menu the major chip manufacturers. Closer to $10 million. We also know that the mechanical, electrical, and plumbing, the MEP solution, is a pretty extensive, pretty robust build-out because you've got all those trades working inside a facility at the same time. Building these in a factory increases the speed to market by an order of magnitude and the initial representations are that it saves us anywhere from 10% to 15% over a built-in-the-field deployment. So we believe there's cost savings in speed to market that give us a very unique competitive advantage. Paul Golding: Fantastic. Thanks so much and congrats again. Matt Shultz: Thanks, Paul. Operator: Your next question comes from the line of Greg Lewis with BTIG. Your line is open. Gregory Lewis: Yes, hi. Thank you and good afternoon everybody and thanks for taking my questions. I guess Gary or Matt, I was hoping you could talk a little bit more about the Texas facility and just kind of you mentioned that it starts to energize in 2027. Is that energization is there steps along the way? And then longer term, as we think about that site, is there the ability to expand at that site or potentially grow with the customer? Harry Sudock: Hey, Greg, it's Harry. Want to give you the rundown on Texas because I think it's a really exciting project for us And it's the beginning of what you've seen from us across the Georgia, Tennessee, and Wyoming markets, which we take a fundamental land and expand approach, which is we get a foothold and then we know that once we have that toehold in the market, the opportunity to significantly extend our footprint is available to us. The energization schedule there, is that the first 200 and change megawatts are scheduled to come online 2027. And then there's two forty megawatt tranches in 'twenty eight and 'twenty nine. But what's critical is that the counterparty that we purchased, the land, the contracted power from is also among the largest substation developers in the state. And so what we were able to step into are the long lead time items and the placeholders that they had on those components giving us a high degree of build certainty to land the power on the site. The second piece is that that site is fully ERCOT approved. And so when we look at the energization schedule, we've already passed all of the regulatory hurdles that would typically be associated with a project in the state. The final piece of what you asked that I wanna touch on is about expansion. And you know, the ERCOT approval status wouldn't come with the expansion on grid that we're looking to accomplish there. But one of the parts that was most attractive, only to the power contract at that particular location and the service point from the utility that's going to be delivering to us, but it's also the parcel that's there. We have significant land capabilities to be able to digest more power in the same type of AI data center footprint going to be represented by the two eighty five. And so excited about the scalability. Matt touched on in his comments the behind-the-meter gas generation opportunity, but this is where we find ourselves at our true core competency. Which is being an opportunistic acquirer of land and power not only because we're able to locate high-quality assets for our portfolio today, but also for what those assets can represent to our business going into the future. Gregory Lewis: Okay. 100%. That was super helpful, guys. Hey, have a great Thanksgiving, and talk to you soon. Matt Shultz: You too. Thanks. Thanks, Greg. Operator: Your next question comes from the line of John Tadaro with Needham and Company. Your line is open. John Todaro: Great. Thanks for taking my question. Congrats guys on the progress here. As the first question here, as it relates to the AI readiness at Sandersville, just remind us if that site has forced curtailment. And then if so, really kind of how much should we earmark for HPC versus mining if you intend to kind of have both at that site? Harry Sudock: Yeah. Thanks, John. So, you know, what's important to understand about, the Georgia and the MEAG power specifically is that it is not subject to forced curtailment. At that location. It's part of why we didn't just we didn't just trip all on land with an AI thesis around the Sandersville assets. Those were also inbound because of the highly attractive nature of the Georgia power markets more broadly. And so we feel great about the applicability, of that location to the ultimate AI campus use case. And how we balance that versus the Bitcoin mining is gonna be the way we do everything, which is a fundamental return on investment profile We take a measured approach. We're data-driven. And the early indication is that every one of those megawatts is highly applicable for AI as its highest and best use. We're gonna remain data-driven across the analysis period for that asset. John Todaro: Great. Thanks. That's helpful. And then just as it relates to credit becoming a little bit of a concern out there, especially as it relates to Neo Cloud customers, Just walk us through how you are thinking about the customer profile, if there's a maybe bigger focus on hyperscalers now than maybe a couple of months ago when you guys were initially thinking about it. And then also, you know, hyperscaler backstops that starting to become a necessity? Would love to get some color on that. Gary Vecchiarelli: Hey, John. Thanks for the question. I'll tell you this about the financing. And I mentioned it in my prepared remarks is that new pools of capital that are going to be available to us. At much lower cost of capital. So we feel really good about that. We know we're going to introduce, at some point secured debt into the capital stack. So we're closely monitoring the deals that are going on and the debt markets. But I'll tell you the focus really first is to get that, you know, high credit quality tenant in there, to make sure that we can get the best deal possible because, as you know, levered IRR is significantly higher the more the higher the loan to value is. But I'll also tell you that you know, while we might expect to get dead at about 80, 85% LTV over time, we have no problem also bringing a little bit more equity to the table, maybe at 60% to 70% LTV for the first project or two. Yes, that will decrease our levered IRR just a bit, but also produce cash flows in the arm, which would also be helpful. But ultimately, to us, it's really going to come down to execution for which we still think that the industry hasn't proven. But we're going to see that over the next twelve to eighteen months, particularly as we bring our land and power to market. So I don't have specific answers for you right now, but I'd say that we are content. There's a number of options for us to get financing at attractive prices and get the levered IRR that this market is offering. John Todaro: Terrific. That's helpful. Thanks, guys, and congrats again. Operator: Thank you. Your next question comes from the line of Reggie Smith with JPMorgan. Your line is open. Reggie Smith: Congrats on the quarter. And on the pivot. Guess I had a question on the Sandersville site as well. I'm not sure if you guys talked about what type of CapEx would be required to upgrade that to HPC or if it's ready, like kind of move-in ready now? And then I'm curious, I know it's early, you thought about, you know, the use cases, whether it would be used for training or entrance, and whether that at all plays any role in the price that you may be to get throughout to kind of lease that space out? Like does the influence pay more or generate more revenue per megawatt than training? Any insights you can provide at least around how you're thinking about you know, kind of self-appraisal of the site and what it could be worth? Matt Shultz: Hey, Reggie. Thanks for joining. And thanks for the call. You've been to that Sandersville site, I believe. On some of our show and tell journeys. And I think what's important to note is the facility, you saw it would not be a conversion to HPC AI. We have a phenomenal relationship with the economic development director in the county. And so we secured an additional plot of land, hundreds of acres of land that's immediately adjacent. So what would what you would see would be construction that is parallel with Bitcoin mining continuing. And when we're ready to energize, we literally flip the switch, de-energize the Bitcoin mining and migrate that out and go to compute. Now specific types of compute. Jeff has built a model. Obviously, you have the Giga campus, which is large-scale training. Those are generally close to a gigawatt and above. Then you have the mega campus, which is that kinda sweet spot two to 800 megawatts. And that's generally perceived to be kind of a combo site where it's inference and training or primarily inference depending on the offtake client. The last mile or the low latency real mission-critical sites like what you've seen in and around Metro Atlanta would be kind of the exception to that rule, and those would obviously be low latency inference type operations. So this is gonna be I think Sandersville gonna be an interesting case study because quite frankly, the demand that we're seeing is for multiple one ninety to 200 megawatt critical IT loads and the off takers are asking for twenty twenty-six delivery. So there are some real challenges in getting that tipped up in time But as we saw, even with companies like Meta, for example, they're putting tents up and using behind-the-meter gas at 12¢ a kilowatt hour. Because the demand is such that there's no sensitivity to those utility rates. So we really feel like we're uniquely positioned in this, Reggie, and, you know, you and I when you first launched coverage on CleanSpark, we talked about the fact that when CleanSpark entered the space, there were a handful of household names that were the standard from Bitcoin mining. We mined our first Bitcoin in December 2020. And as of today, we have more hash rate in The United States Of America than anybody else Our uptime is second to none. And I think you can see you can count on seeing that same type of operational excellence and efficiency rolled into our next strategy. And Jeff is just the perfect guy to lead those initiatives. Reggie Smith: And if I can get one more in, because I'm not trying to nail you down to a timeline, I'm kinda reading between the lines. Like, I think about Cypher and, yeah, they purchased a property in Texas a year ago, and kind of just now announced a deal. And I understand it takes a while to sort these types of things out. But I'm curious, like, are you thinking about it if it took you a year to sign a deal, would that be your satisfactory or kind of disappointing based on what you're seeing from a demand perspective now? We think of something you know, much sooner than that? Like, any color you can help. On how you're thinking about that internally? Personally, that would be great. Thank you. Matt Shultz: Yeah. So that's a phenomenal question. I can tell you that you know, you called me, I was at my kids' basketball game. You called me when CoreSci Core we've announced their deal. And we talked about what the demand portfolio or the demand profile looked like back then. And at that point, it was we're going to convert these megawatts and we're going to identify a customer. I think there's been a complete paradigm shift in the space. And now you have customers knocking at the door because they have loads that need to be served very rapidly. So what I can tell you with a I would say, a strong amount of certainty is you'll see a lease executed much quicker than what you've seen in the space. And the flexibility that's now come, you know, I mean, we look at some of our peers that have extended their energization schedules because they're falling behind on construction, etcetera. The hyperscalers and the end users that work we're having conversations with, you know, we've made it abundantly clear. We're constrained like anyone else for the MEP side, but we have a distinct advantage. So I think what's likely to happen and, you know, Reggie, quite frankly, they're two different off takers. That wanna sign con sign the lease agreements by year-end. Is that going to happen? It's hard to say. But the demand is there. It's real. And I'm as I mentioned in earlier comments, we were working on this script in the slide deck that we showed today, and I left here at 08:00 last night. And the global director of site select for a hyperscaler was calling me wanting to confirm that they were still in the running. So I don't think there's any question that you're gonna see a lease much quicker than a year. Reggie Smith: Great. Perfect. Congratulations. Matt Shultz: Thanks, Reggie. Happy Thanksgiving. Operator: Your next question comes from Brett Knoblauch with Cantor Fitzgerald. Your line is open. Brett Knoblauch: Hi guys. Thanks for taking my question. Maybe Matt just on the land and tower side of the equation, Could you comment on what you had to pay for the new site in Texas that you guys just announced? And, you know, think you guys are the one out there that are looking to go out and find additional land that is, you know, energized soon, you know, think all of your peers, even hyperscalers, probably they're looking at to do it themselves. But I guess, how hard is it? How expensive is it? And how much is there out there that you think you can go out and buy that is kind of turnkey ready? Similar to the site that you guys announced in Texas? Matt Shultz: So yes, I could say what we paid for it, but I'm not going to. And I'll tell you why. There are some very fertile hunting grounds in the ERCOT region, and we don't want to price ourselves out of the market. What I can tell you is that the acquisition cost was a combination of equity and cash. We obviously filed the proper the appropriate filings for the share issuance. But the purchase price of that land and power came in line with what seeing in the market towards the low end of that range. Our advantage, I think, in securing land and power and speed to market is really because we've continued to state that Bitcoin mining is going to be a part of what we do going forward. And eighteen months ago, when we were invited to sit down at Mar A Lago, with Donald Trump during his candidacy. He brought in senator Hagerty from Tennessee And because the question that came was, can Bitcoin miners actually plow the road, so to speak? Can Bitcoin miners go in and monetize megawatts for utility that needs to generate revenues now? while they're waiting for an interconnect agreement. Or for an energy developer that needs to monetize their power And and so mister Trump asked Bill Hagerty, can Bitcoin miners do that? And what he said is unequivocally, they not only can they, but they do in TVA, and CleanSpark is one of them. And so when we talk about Cheyenne, you know, we're driver nine iron across the street there from Effie Warren Air Force Base, and there's another trillion-dollar company, trillion-dollar market cap company that's in our same neighborhood. They were bidding for those megawatts. And we won. We didn't win because the utility thought that our balance sheet was pretty or we were a better credit risk. We won because we said if you sell us those megawatts, we'll start buying them in six months, not a year and a half or two years. So I think long answer to your question, I think being a Bitcoin miner with a diverse mining portfolio and the flexibility of the modular deployments that we've done on some of the sites that you've actually seen it gives us an advantage to jump in, monetize those megawatts on a small portion of the campus while we're tilting up the powered shell in the background. So you know, I think our speed to market is complemented not only by the modular approach with summer partnership, but also by using Bitcoin to go in and buy the power today. Brett Knoblauch: Awesome. Really appreciate it, Happy Thanksgiving. Matt Shultz: Thanks. Brett. Happy Thanksgiving too. Operator: Your next question comes from Jim McIlree with Chardan Capital. Your line is open. James Patrick McIlree: Thank you. Good afternoon. Is Sandersville the only existing mining site you've identified for critical IT applications? Or the first one, and there's going to be others? Matt Shultz: Hey, Jim. Thanks for the question. The answer to your question is b. It's the first one. The inbound inquiries we've had for the 100 megawatts surrounding the Atlanta Airport are second in urgency only to Sandersville. And Sandersville is because it's two fifty megawatts energized operating today. The demand for College Park and Norcross is because it's low latency in the most dense compute environment in North America outside of Northern Virginia. So there's a tremendous amount of demand there as well as some of our sites in Tennessee. So it's really just a sorting process. And as we mentioned in our prepared remarks, we've done a portfolio analysis to kind of determine. We don't wanna move Bitcoin mining infrastructure into a facility that's going to be rapidly pivoted to an AI HPC deployment. So I think the answer is Sandersville is the low-hanging fruit that everybody wants. The Metro Atlanta stuff is second, and then we've got a whole bunch of third-place sites. James Patrick McIlree: And the way you described it, it sounds like that flipping of the switch from mining to AI can take place before the CLI facility is energized. Am I understanding that correctly? Matt Shultz: Yeah. So think about it this way, Jim. Our facility in Sandersville is purpose-built Bitcoin mining. We have a couple of hundred acres adjacent. We're gonna build on that land while we're still mining. Now the speed to market really the summer is a big differentiator. As I mentioned before, you know, there are hyperscalers that are popping up tents because they need access so quickly. So I think it's a relative question. The Sealy project is very appealing. Because we've done all the analysis, all the engineering is done. We we've gone to the levels of completing the survey and finding where there are easements for the gas lines on-site, etcetera, So we can configure the footprint based on the needs of an end-use customer. So we spent a great deal of time in NVIDIA with some of their teams, and they have a giga site. They have all the reference architecture for a g v 300 deployment for a gigawatt of power. And everything is detailed down to the inch of fiber runs. So that type of build is obviously much more detailed and gonna take a longer period of time than tilting up a powered shell and slotting in a modular solution like you'd see from a submer, like you'd see from a company like Integra out of Houston. There are a number of these companies that provide that full MEP turnkey solution. So I think what is likely to happen is we'll probably execute on both simultaneously. The delay on Sealy and it's not really a delay. It's just the energization schedule on ERCOT is fixed. The cool thing about that is the large load studies are done. There's no if. It's just when. And the first two zero seven megawatts energizes the first half of 'twenty seven. You know, their commitment is April, but they have flexibility for the first half. So I think the conversations we've had with off takers for Sandersville they're looking to get something in the books fast, with Sealy. It's also high demand and with the understanding that by Q2 twenty-seven, it's energized, and you can build in the meantime. James Patrick McIlree: Understood. Thank you. And just one more, if I might. You talked about increased expenses And given that as well as the recent prices of you need to sell the entirety of your Bitcoin production in order to cover your expenses? Matt Shultz: Not at all. We're, you know, we're generating $607,100 bitcoin a month and we're doing sort of 54, 55% gross margin. So the expenses we talked about and, you know, as we're building, I think it really depends on the lease we put together. And the ability to leverage that lease for financing. But what we're seeing is that you know, depending on the credit quality of the end-use tenant, the LTVs are anywhere from 15% to 30%. Having just put up or the inverse of that, I'm sorry, 70 to 85%. Having just put up that $1.15 billion 0% bond, we're sitting on a pretty healthy stack of cash. Then as Gary mentioned in his prepared comments, we have $400 million in low single-digit interest unused capacity on Bitcoin-backed credit facilities. So I think you'll see us take more of a hybrid approach rather than sell the stack And then the last thing, you know, with regard to the compressed margins in the environment, having the highest uptime and the most efficient fleet in the nation means that as energy prices press up, margin compression happens to everybody. We just happen to make more money out of the same megawatts because of fleet efficiency and uptime. So, you know, I tell the story. It's like when you know, my grandfather told me when, you know, two guys are camping in a tent and a bear walks into the campsite, and the one guy puts on his shoes, and the guy says, what do you you putting on your shoes? You can't outrun a bear. And he said, I don't have to outrun the bear. I just have to outrun you. And that's really what we see as our Bitcoin mining advantage. You know, they're still industrial-scale miners operating fleets greater than 20 joules per terahash with not significantly better power pricing than we do. So we have a ton of flexibility and I really like the position that we're in to continue using Bitcoin mining. Operator: Next question comes from the line of John Hickton with Ladenburg. Your line is open. Jon Robert Hickman: Hi. As you might imagine, most of my questions have been answered. But I was just wondering if you could maybe opine about there are others in the space that are trying to do the same thing that you're doing, taking Bitcoin sites and moving them over to HPC and AI. And they've been, you know, telling us they're gonna do this, and it's been a year's gone by and there's no like, lease. Why would could you opine as to why it would be taking so long when there's so much demand? Matt Shultz: I'll tell you from my perspective, and then certainly invite either of my colleagues to chime in on it. What we learned when we spent some time with NVIDIA and AMD There's there are very specific reference architecture that is required for specific clusters. And I think that the challenge that we're seeing, and I'm certainly not casting aspersions on anyone's strategy, But I think if there's so much demand for a hyperscaler, but they want a specific cluster, be that the new Google chips or AMD or NVIDIA. The site needs to be specifically designed for those clusters. And I think building a site and then suggesting that it's flexible for somebody else to reconfigure or modify it you know, it could be useful. I think, is a little bit of a challenge. So to have it purpose-built to the specific architecture of the off taker I believe, is a real advantage. And having all these sites that are already energized, that we're currently using those megawatts to mine Bitcoin give us that flexibility. I'm not in a rush. I don't have to do anything quite frankly, until we have a lease I don't even have to start construction because I wanna make sure that it's built to suit for the offtake customer. So I guess my perspective, John, and, again, I invite Harry or Gary to comment, I think that build it and they will come mentality doesn't apply if it's not to the specific architecture requirements of the end user. Harry Sudock: I would just add one quick thing, John. Which is just that the market today is different than the market a year ago. The demand profile was accelerated. The crunch for power is tighter than it was And so we're seeing some of the hesitation that some of these off takers might have had twelve or eighteen months ago the sense of urgency is just more significant. And you know, that's gonna represent a difference in execution timelines today than they would have looked like back then. Jon Robert Hickman: Okay. And then I just have one question. On Sandersville, you get the AI part built and you want and sign it flip the switch, what happens to the Bitcoin mining site? So fantastic question. Would they have no power You shut it you the shutter, would you? Matt Shultz: Yeah. No. A couple of opportunities there. First and foremost, the ASICs would be migrated to a facility that needs them right and there's always plenty of demand for that. The facilities that we built and, John, I don't remember if you visited Sandersville on our Analyst Day. The facility is at Sanders Okay. So they're identical to what we built in Jackson, Tennessee as an example. So the cool thing is we build all the foundational stuff and then what goes vertical is basically bolt together. So we have the ability to repurpose those buildings based on any number of different factors. But, no, it wouldn't be a write-off in mothball. It would be repurposing those assets for deployment elsewhere. Jon Robert Hickman: But you'd need more power. Matt Shultz: Yeah. For sure. That's why we would move it somewhere else. Like, for example, you know, Wyoming or Tennessee or even other sites in Georgia, we would for sure. Now Sandersville is a bit of an anomaly because there are some for power expansion there. And that's something that's still out for discussion. Okay. But the demand is significant. Jon Robert Hickman: Okay. Well, thanks. Appreciate your time. Matt Shultz: Thanks, John. You bet. Happy Thanksgiving. Jon Robert Hickman: You too. Operator: And with your last question, it comes from Nick Giles from B. Riley Securities. Line is open. Nicholas Giles: Great. Thanks for squeezing me in guys. You spoke to a multi-gigawatt pipeline, and I was hoping you could break that down a bit. I mean, how many of these opportunities would you describe as late stage? Or how soon can we see those drop down? And then which of your existing power markets do you see most of these opportunities? Thanks a lot. Harry Sudock: Yes, Nick. Great question. And I wanna give you a historical example to kinda illustrate, you know, why we don't always give direct pipeline granularity as our business. So look back to the prior quarter's call, we talked about pipeline. And it was contemplated in that environment. Wasn't contemplated in either of those numbers was the two eighty-five megawatts that we purchased in Texas. And that's because the relationships that we have across the utility and infrastructure space are diverse, they're all very warm and deep. And so there are opportunities that come out of the woodwork along the way. That leapfrog to the front of lists that we thought were very set. And so it's part of our capital strategy. Have dynamic flexibility and execution with speed And it's also part of the pipeline and relationship management that we do work on across the infrastructure and utility partners that we have And so that type of dynamic flexibility is why we've been successful acquiring Power and Land and developing it with the quality that we have And so when we look at that multi-gigawatt pipeline, a lot of those regions where we see expansion opportunities are places where we have relationships, the Georgias, Tennessees, Wyomans, and now Texases of the world. But some of the utilities that serve those regions I'll use TBA as an example because I'm a homer, Tennessee Valley Authority serves seven different states. And so while it's the same utility partner, it bleeds outside the lines of the great state of Tennessee. And so those are the types of dynamics that we see replicated across those relationships, and part of why we feel so good about the pipeline growth opportunities and why we capitalize the business to hunt, power, and land, just like Gary said. Nicholas Giles: Understood. Well, guys, appreciate the update and have a great holiday. Matt Shultz: You too, Nick. Happy Thanksgiving. Operator: And with no further questions in queue, I'd like to turn the call back over to Harry for any closing remarks. Harry Sudock: Everyone, thank you again for joining today's earnings call. We look forward to staying in touch and sharing future results with you in the coming quarters. Stay tuned for more progress and exciting achievements ahead of us at CleanSpark's. America's Bitcoin Miner. Operator: This concludes today's conference call. You may now disconnect.
Operator: Hello, ladies and gentlemen. Thank you for standing by for NIO Inc. Third Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. Today's conference call is being recorded. I will now turn the call over to your host, Rui Chen, head of investor relations and corporate finance of the company. Please go ahead, Rui. Rui Chen: Good morning, and good evening, everyone. Welcome to NIO's Third Quarter 2025 Earnings Conference Call. The company's financial and operating results posted on the company's IR website were published in the press release earlier today. On today's call, we have William Li, Founder, Chairman of the Board, and Chief Executive Officer, and Stanley Qu, Chief Financial Officer. Before we continue, please be kindly reminded that today's discussion will contain forward-looking statements made under the safe harbor provisions of The US Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's actual results may be materially different from the views expressed today. Further information regarding risks and uncertainties is included in certain filings of the company with the US Securities and Exchange Commission, the Stock Exchange of Hong Kong Limited, and the Singapore Exchange Securities Trading Limited. The company does not assume any obligation to update any forward-looking statements except as required under applicable law. Please also note that NIO's earnings press release and this conference call may include discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. Please refer to NIO's press release, which contains a reconciliation of unaudited non-GAAP measures to comparable GAAP measures. With that, I will now turn the call over to our CEO, William Li. William, please go ahead. William Li: Hello, everyone, and thank you for joining NIO's 2025 Q3 earnings call. In Q3 2025, the company delivered 87,071 smart EVs, representing a year-over-year growth of 40.8%. During the quarter, we launched two large zero battery electric SUVs, the Omo L90 and the new Omo ES8. Both models have received strong recommendations from users for their comprehensive competitiveness and continue to see solid demand. In the meantime, Firefly continued to see steady market growth and meeting more diverse needs by covering a broader range of price segments. The new Envo and the Firefly brands are able to drive significant growth in deliveries. In October, the company delivered 40,397 smart EVs, up 92.6% year-over-year, marking three consecutive months of record-high delivery. For Q4, we expect total deliveries to be in the range of 120,000 to 125,000, a year-over-year increase of 60.1% to 72%, achieving a new quarterly high. On the financial front, thanks to the ongoing cost optimization, in Q3, the vehicle gross margin improved to 14.7%, and the gross margin of other sales was 7.8%, resulting in an overall gross margin of 13.9%, the highest in nearly three years. This reflects the company's strengthened product and service profitability. Operational efficiency in R&D, sales, and general administration continued to improve. Non-GAAP operating loss was narrowed by 30% quarter over quarter. In Q3, the company's operating cash flow and free cash flow both turned positive. NIO remains committed to the battery electric vehicle roadmap featuring chargeable, swappable, and upgradable batteries. Leveraging the company's full-stack R&D capabilities in 12 key tech areas, the third brands are able to precisely meet users' needs across multiple market segments. The competitiveness of our new products under all their brands has been well received. The new brand recently introduced three color themes for the ET9 Horizon edition. The Horizon edition is a special collection reserved for NIO's most prominent flagship models. The distinctive design, advanced technology, executive excellence, and exclusive services make the ET9 Horizon edition a standout in the market. The all-new ES8, an all-around tech flagship SUV, was launched and started delivery at NIO Day in September. Leveraging the unrivaled space and driving experiences made possible by all-electric technology, the all-new ES8 has remained a top seller in the premium large zero SUV segment, surpassing 10,000 deliveries within just 41 days, the fastest for a price above 400,000 RMB. In November, the ES6, another all-around SUV in NIO's lineup, celebrated its 300,000 unit delivery milestone, topping the sales chart of China's fabs model twice over 300,000 RMB. Within the Amo brand, the L90 delivered over 33,000 units in three months since its launch in late July, leading the large battery electric SUV segment for three consecutive months. The L60 also delivered strong performance, maintaining a top two position in the battery electric SUV segment with MSRP above 200,000 RMB during the first March. With exceptional products, experiences, and word-of-mouth, the Amo brand increasingly becomes the preferred choice for families. Since delivery began, Firefly has led the high-end small EV market in sales volume, establishing itself as a benchmark in the market. With creative launches of special editions, it continues to strengthen its appeal among users who value quality and individuality. This dynamic small car is already making its way into the global market and will expand into more countries and regions across Europe and Asia. In smart driving, the new world model, NWM, is the first world model that not only understands and predicts the real world but also operates with a closed-loop training system. Actually, the industry trend is increasingly toward a work model roadmap. Next, we will gradually roll out upgrades on NWM for vehicles equipped with NIO's NX90 31 and Amelia's O ring X smart driving chips, further enhancing urban and highway NOP plus, parking, and smart safety performance. The upgrade will also enable execution of open set command. For the on-road smart driving, the Coconut 210 scheduled for release at year-end will upgrade its model-based end-to-end solution for urban and highway NOA, as well as parking, delivering a more seamless driving experience. Our self and service network currently includes 172 NIO houses, 395 NIO spaces, 422 Amo stores, as well as 405 service centers, and 70 delivery centers. Our global charging and swapping network now operates 3,641 power swap stations, providing users with more than 92 million swaps. Besides, NIO has built over 27,000 power chargers and destination chargers. On September 17, NIO completed a total of $1.16 billion in equity financing on both the US and Hong Kong stock exchanges, further strengthening its balance sheet and providing ample resources for its long-term commitment to R&D and user services. On November 23, the 2025 NIO Cup Formula Student Electric China successfully concluded in course A. NIO has been supporting this competition since 2015, helping cultivate tens of thousands of young professionals for the industry. Today also marks the company's eleventh anniversary. Over the past eleven years, we have remained committed to in-house R&D in core smart EV technologies, continued investing in charging and swapping infrastructure, built a multi-brand sales and service system, and created a vibrant community for over 900,000 users to share joy and grow together. These advantages have been increasingly recognized by our users. This year, our new products across three brands have performed strongly in their respective market segments, marking the beginning of a new phase of rapid growth. At the same time, through the cell business unit mechanism, we have comprehensively optimized our organization and enhanced operational efficiency, consistently improving our business rooted deep and growing beyond. Looking ahead, we will continue to provide more competitive technology products and services to deliver better user experience and greater user value. As the company evolves into a user enterprise, leading in technology and experience, we aim to shape a sustainable and brighter future with more users. Thank you for your support. With that, I will now turn the call over to Stanley for Q3 financial details. Over to you, Stanley. Stanley Qu: Thank you, William. Let's now review our key financial results. For 2025, average total revenues reached 21.8 billion RMB, increased 60.7% year over year and 14.7% quarter over quarter. Vehicle sales were 19.2 billion RMB, up 15% year over year and 19% quarter over quarter. The year-over-year growth was mainly due to higher deliveries, partially offset by lower average selling price from product mix changes. The quarter-over-quarter increase was mainly from higher deliveries. Other sales were 6.226 billion RMB, up 31.2% year over year and down 9.8% quarter over quarter. Year-over-year growth was driven by increased sales of used cars, technical R&D services, and sales of car accessories, and after-sales vehicle services. While the quarter-over-quarter decrease was mainly due to the decrease in revenues from used cars technical R&D services, partially offset by the increase in parts accessories, and after-sales vehicle services and provision of power solutions. Looking at margin, vehicle margin was 14.7%, compared with 13.1% in Q3 last year and 10.3% last quarter. The year-over-year and the quarter-over-quarter increase were mainly due to the decreased material cost per unit primarily driven by our comprehensive cost reduction efforts. Overall, gross margin was 13.9%, versus 10.7% in Q3 last year, and 10% last quarter. The year-over-year increase mainly reflected higher vehicle margin and better profitability in sales of parts, accessories, and after-sales vehicle services, driven by cost reduction and efficiency improvements. The quarter-over-quarter increase was mainly attributable to higher vehicle margin. Turning to OpEx, R&D expenses were 2.4 billion RMB, decreased 28% year over year and 20.5% quarter over quarter. The decrease year over year and quarter over quarter were mainly driven by lower personnel costs in R&D functions due to organizational optimization and decreased design and development costs from different development stages. SG&A expenses were 4.2 billion RMB, up 1.8% year over year and 5.5% quarter over quarter. Year over year, SG&A expenses stayed stable. The quarter-over-quarter increase was mainly driven by the increase in sales and marketing activities associated with new product launches. Loss from operations was 3.5 billion RMB, down 32.8% year over year and 28.3% quarter over quarter. Excluding share-based compensation expenses and organizational optimization charges, adjusted loss from operations was 2.83 billion RMB, representing a decrease of 39.5% year over year and 31.3% quarter over quarter. Net loss was 3.5 billion RMB, showing a decrease of 31.2% year over year and a decrease of 30.3% quarter over quarter. Excluding share-based compensation expenses and organizational optimization charges, adjusted net loss was 2.7 billion RMB, representing a decrease of 38% year over year and 33.7% quarter over quarter. Furthermore, we generated positive operating cash flow and positive free cash flow this quarter, together with the $1.16 billion US dollar equity offering in September. We ended the quarter with 36.7 billion RMB in total cash and cash equivalents, restricted cash, short-term investments, and long-term time deposits, laying a solid foundation for our future growth. That wraps up our prepared remarks. For more information and the details of our unaudited third quarter 2025 financial results, please refer to our earnings press release. Now I will turn the call over to the operator to start our Q&A session. Operator? Operator: Thank you. If you wish to ask a question, please press 1 on your phone and wait for your name to be announced. If you wish to cancel your request, please press 2. If you are on a speakerphone, please pick up the handset to ask a question. For the benefit of all the participants on today's call, please limit yourself to two questions. And if you have additional questions, you can reenter the queue. Our first question comes from the line of Tim Hsiao from Morgan Stanley. Please go ahead. Tim Hsiao: Hi. Thanks for taking my question. This is Tim from Morgan Stanley. So I have two questions. The first question is about a breakeven target because we noticed that NIO's updated fourth quarter delivery guidance of 120,000 to 125,000 came in around 20% lower than our previous target of 150,000. Just wondering if there was a volume shortfall adversely affecting the company's breakeven target for the fourth quarter. And considering the sub-seasonal demand and positive uncertainty, when could the company achieve the previous monthly ROE of 50,000? That's my first question. William Li: Thank you for the question. Actually, for the company, we still have the confidence in achieving quarterly breakeven in Q4, and this is still our financial target towards the end of the year. But in the meantime, we did see the impact coming from the phase-out and the termination of the trade-in and replacement subsidies since October. But this is actually the challenge faced by the entire industry. In that case, in Q4 for the entire industry, we may not see the year-end sales spike that we normally expect towards the end of the year. As you are closely tracking the market and all the numbers, probably you have also foreseen that potential change towards the end of the year. And in the meantime, as next year, the purchase tax exemptions on the new energy vehicles will be further reduced for the new products like the ES8 with order backlog that will continue towards the next year. Car companies, including NIO, provide the guarantee for the purchasing tax exemptions to users waiting up for their cars next year. Yet no car company is going to provide the guarantee for the trade-in and replacement subsidy. In that case, the overall market demand has been affected because of the cancellation of the trade-in subsidy. Especially for our company, our Amo L60 and L90 are majorly affected by this cancellation as they are also relatively low price segment and are more sensitive to such changes. Yet we still have confidence in achieving the Q4 breakeven target. This is mainly because we do see a strong demand for our high-margin products like the all-new ES8. We still have ample order backlog and also new order intake for that product. So overall speaking, the order intake on the Amo has been affected because of the cancellation of the trade-in subsidy, yet the overall impact on the gross profit is limited. In that case, we do have the confidence for the financial targets. In the meantime, in terms of the vehicle gross margin, in Q3, we have achieved the vehicle gross margin of 14.7%, better than we expected. In the meantime, we are also working with our supply chain partners on the continuous cost reduction and also commercial negotiation efforts towards Q4. With that, we foresee the vehicle gross margin in Q4 to be around 18%. And for the ES8 in Q4, we also expect significant growth in sales and the delivery volume with a very lucrative margin of over 20%, then the overall gross profit for the entire company will be significantly improved from Q3. In the meantime, we also see good financial performance of our non-car sales business, and we also expect such momentum to continue into Q4. So we see improvements both in the sales revenue contributed by the non-vehicle business as well as the gross margin improvement of that part. With that, the gross profit, the vehicle gross profit, or the non-vehicle gross profit will also see improvement from Q3 to Q4. And in terms of the expense and also cost control, since this year, we've been taking a series of actions in improving our operational efficiency and our expenses utilization. And we already see some good results from the Q3 financials. And we will also continue such effort in Q4 in improving the sales SG&A expenses as well as the R&D expenses and their efficiency. Especially in Q4, we don't expect any major or high-profile marketing or campaigns. In that case, we will be controlling our expenses in Q4 with our SG&A as well as the R&D. So to sum up, our sales volume was affected by the phase-out of the trade-in and replacement subsidy, yet the gross profit is not majorly affected. In the meantime, we will continue our efforts in improving the efficiency and utilization of our investment and expenses. In that case, we expect also improved business results from Q4 and also have the confidence in achieving the quarterly breakeven target. Tim Hsiao: Thank you, William, for all the details. My second question is about our volume targets, together with the new model schedule. Because I think back to previous quarters, the management mentions that we target, like, 50,000 monthly run rate in the fourth quarter. So if we are not going to achieve that, when can we achieve 50,000 monthly sales? And considering all the macro uncertainties, will NIO need to consider moving up the launch schedule of the new models to the first quarter or earlier to bolster the sales momentum into next year? That's my second question. Thank you. William Li: Thank you for the question. As also previously mentioned in my remark, the guidance we provide for Q4 is 120,000 to 125,000 units. In terms of the adjustment on the guidance, as also explained, it's mainly because of the impact on the phase-out of the trade-in and replacement subsidy. With that, we will not be able to see the year-end sales spike driven by the seasonality towards the end of the year, especially this will affect the sales of our cars that have already experienced their new car hype stage. But this is also the challenge faced by the entire industry. Based on our current product lineup and also launch cadence, we do expect that sometime next year, in the 50,000 monthly delivery. This is based on the consideration that we will be launching three large models next year and also based on the continuous improvement in our cell capacity and also our sales and marketing efficiency. So we do see the opportunity of achieving more than 50,000 units per month somewhere in the first half of next year. And in the meantime, we will also not just randomly change our new car launch cadence or plan simply because of short-term or temporary policy changes or impact. We will still keep our original launch cadence, that is to launch two new models in Q2 next year and one new model in Q3 next year. Tim Hsiao: Thanks. Thank you, William and Stanley. Looking forward to the first breakeven quarter and more to come. Operator: Thank you. Your next question comes from Paul Gong with UBS. Please go ahead. Paul Gong: Hi, William. Thanks for taking my question. My first question is regarding the 2026 outlook. Given there would be 5% of the purchase tax being levied on the EVs, how shall we think about the company's preparation for such a policy change? Or shall we compensate for the customers for this amount and adjust it along the supply chain and internal cost control? Or do we expect to let the consumers take the majority of the ads? This is my first question. William Li: Thank you for the question. As next year, the purchasing tax on the new energy vehicles will be halved. Actually, the impact on us is less major in comparison to other new energy vehicle models and also companies. As 80-90% of our users choose to buy the car while subscribing to the battery. In that case, the price of the battery is excluded from the tax base. In that case, our tax exemption is still more advantageous than other companies and also non-swappable models. And in the meantime, for the popular products like the Allian ES8 with very long waiting time for the deliveries and pickup, we are also the first car company to announce the purchasing tax guarantee for our users who have to pick up their cars next year. We have made this purchasing tax guarantee already at the launch of the ES8. For other products and models, as their waiting time is not as long as on the ES8, so far, we don't have the guarantee policy for other models. As for the specific measures that we are going to take in the face of the purchasing tax changes next year, well, it highly depends on the dynamics of the market, the landscape of the competition, and also the practices of other peers. So we will keep flexibility in our measures and also policies. But currently, we don't have a very specific plan. And in the meantime, we also see that the entire industry, including the public and users, are gradually digesting the phase-out of the purchasing tax policies on the new energy vehicles. Especially right now, if we look at the smart EV industry in China, it is now less policy-driven. As the actual user experience and also the cost advantage of battery electric vehicles are more evident and also becoming more attractive to the users. In the first ten months of this year, the sales volume growth of the app actually increased significantly. This also gave us the confidence in continuing such momentum. So there will be an impact from the purchasing tax phase-out, but it will be very limited. Paul Gong: My second question is regarding the expense control. And we have already seen quite some cost reduction, especially from the R&D in Q3. And per your guidance, Q4 should see further efficiency improvement there. Heading to 2026, shall we expect the lower cost structure on the expense side to stay as a constant and new normal? Shall we expect, like, low 2 billion something for the R&D per quarter? Around 4 billion or even lower than 4 billion on the SG&A per quarter? William Li: Thank you for the question. As mentioned, in Q3, our R&D expenses are around 2 billion RMB on a non-GAAP basis. And also for Q4 and the next year, we expect our quarterly R&D expenses to be flat, also around 2 billion per quarter. And so far, we don't have any plan to dial back on the R&D expenses. But in the meantime, we will focus more on improving the efficiency of our R&D activities, especially leveraging our self-business unit mechanism. We will make full use of the output of this 2 billion R&D investment every quarter inside the company for the project initiation and approval. We have established the ROI evaluation mechanism. We also have the closed loop with the project review and also improvement. By continuing such efforts, we believe that at RMB 2 billion per quarter in R&D, we will be maintaining our existing product development as well as the key technology development without compromising on the competitiveness of the entire company. And in terms of the SG&A expenses and its percentage to the sales revenue, as in Q4, based on the sales volume guidance, we have lowered our volume from 50,000 units per month. In that case, originally, our target is to achieve a 10% ratio between SG&A and the sales revenue, and now it's around 12%. And in Q4, we will also be keeping that level, but this is against the overall background of achieving the quarterly breakeven in Q4. And in terms of the absolute amount, that's around 4 billion per quarter, as you mentioned. And next year, we will focus on improving our efficiency in sales and also overall activities. Overall, we believe that 10% between SG&A to the total sales revenue should be a winnable target for us to achieve. Paul Gong: Thank you, William and Stanley. Looking forward to more efficient operation going forward. Operator: Thank you. Your next question comes from Nick Lai with JPMorgan. Please go ahead. Nick Lai: Yes. This is Nick from JPMorgan. Thank you for taking my question. The first question is actually regarding the possibility into 2026. Based on William's comment earlier, now from the second quarter of next year, we have three new models and monthly sales reaching 50,000 units. And William also mentioned that this expense ratio of expense should be compared. So with all these comments, is it fair to say that the second quarter of 2025 breakeven and then next year, for the full year or at least the second half of next year, likely, you know, profitability should also be very strong? That's my first question. How should we think about profitability in 2026? William Li: Thank you for the question. Actually, for the full year, our business target is to achieve profit for the full year 2026 on a non-GAAP basis. And we do see confidence in achieving this profitability target for next year. Non-GAAP, as we basically look at this from both market trend as well as the relative competitiveness of our product and services. Here are some insights into the trend over the past one year or so. We will be really looking at the penetration rate of the battery electric vehicle in the premium segment and also most specifically in the large railroad SUV market. In Q3, the sales volume of the fab increased by 26% quarter over quarter, while for RIV and TEAHIVE, the sales volume only increased by 127%. Well, actually decreased by 127% quarter over quarter. And if we look at the entire new energy vehicle market, the penetration rate has reached 55% in Q3, and this is majorly powered by the growth in the battery electric vehicle. And in the first three quarters, the sales volume of the bypass increased by 33%, while for rib, it's only 3%. And more specifically in October, the BAV sales volume increased by 13% while for the rib, it decreased by 13%. So this is also showing how well received and adopted the BAV model is. And more specifically, on the premium segment, price above 300,000 RMB, this is where our new brand and our products are in. For the past, it's still at a relatively low penetration rate, but we do see a trend of improving that penetration. This also gives a huge opportunity for enlarging our penetration and market share in that segment. For this year, especially, we see the trend where the premium battery electric vehicle products are more and more received by the users. We have already seen the awareness and also the appetite for such products. And, also, this has powered the increase in the penetration rate of this product. For the full year last year, the penetration rate of the battery electric vehicle in the premium segment was only 12%. But in 318%, and in the first three quarters, the penetration rate of the fab has increased by 33%. Yet for the range-extended vehicle, it actually decreased by 10%. And more specifically, for the large railroad SUV segment, the sales volume of the bus took the first place for the first time in September, and it continued such momentum in October. In October, we see the total volume of the fab registration was around 39,000 units. Well, for RIB, that was only 24,000 units. Regarding the sales volume and also for next year, as for the OA L90 and also the new OA ES8 next year, we will still continue the bus around these two new products relatively new to the market. Plus, we are going to introduce another three new large models. So we will be having five new large models available to the market next year from the new and Amo brand. And if we look at the mid to large and also the large SUV segments where our new models will be targeting, in Q3, the sales volume of fab models increased by 140%. Well, for WIP, it's only 19%. But as mentioned, the overall penetration rate of a bath among the premium largest vehicle models, it's still relatively low, which means that we do have huge opportunities and potential in this segment. So overall speaking, our product launch cadence is in line with the market shift and also the trend, especially considering our large models are also competitive in both products as well as the charging and swapping experience. And, also, for these five large models, they will also contribute the major sales volume among all of our products. As they are high-margin products, they will also contribute more significantly to the vehicle gross margin. With that, next year, we expect the vehicle gross margin to be around 20%. That is the further improvement on top of our existing gross margin for Q3 and also outlook for Q4. But, also, this result will be dependent also on the continuous cost optimization efforts together with our supply chain partners. And in terms of the expenses, as we rolled out this cell business unit mechanism, we have tightened our control over expenses. We already see some good results and we will continue such efforts next year in controlling the R&D and also SG&A expenses. And also, for our large vehicle models, based on its strong market performance and demand, it already proves that with the right product definition and also with our unique advantages in battery swap, we do can capture a decent market share in that segment. And in the meantime, we also see a positive trend and also huge potential for the battery electric vehicles to take up a higher market share and also penetration among large models and also premium models. And also, thirdly, we have confidence in achieving the product gross margin of 20% plus our continuous efforts on the cost and expenses control. With all that combined, we think that achieving a full year profitability on a non-GAAP basis for the year of 2026 is a reasonable target for the team. Nick Lai: Clear and certainly, I think, an exciting outcome for next year. My second question is more about the choice between in-house chain against media. Can you remind us what is our long-term strategy between insourcing and outsourcing? What are the pros and cons between these two strategies? William Li: Thank you for the question. Our NX1931 is the first smart driving chip made also with a five-nanometer process, and its tape-out mass production application on the car and also full-stack operations were all earlier than the competitors of similar performance in the industry. We also see how this in-house developed chip is contributing to both performance improvement as well as the cost structure optimization. So for the long term, we will continue our investments and also efforts in the chip-related technologies. And in the meantime, maybe you have also noticed that with media, we have announced a partnership where we are going to share our chip solution and the technologies with more industry players, both from the automotive as well as from the non-automotive industry, as we do see a good potential of applying this high computing power resonant chip on different types of devices, for example, on robots. So we will work with our tech partners together to explore more use cases and also application scenarios of our chip. Operator: Thank you. Your next question comes from Bin Wang from Deutsche Bank. Please go ahead. Bin Wang: Thank you. The first question is about the margin in the third quarter. It clearly has a big margin drop by 4.4% by its explanation because of cost reduction. Since the just enough. Do you think because of the mix because in our IT, has been a volume contribution more than 20,000 units. Can you break about the margin driver? How much came from the margin from the onboard LID? How much from the cost reduction? Really construction was the key item you actually got cost the job in the number three quarter. Thank you. William Li: Thank you for the question. As you've mentioned, our vehicle growth margin result in Q3 and the improvement from the previous quarter, this is majorly driven by two factors. The first is the cost reduction contributed by the supply chain driven by the increase in our sales volume. And the second factor is the sales and the delivery of the L90, which is a high-margin product that we have started to deliver from Q3 in comparison to Q2. We have delivered more than 20,000 L90 contributing better margin performance than the L60 in the previous quarters. These are two major drivers of the gross margin improvement in Q3. As for the specific breakdown, I will also share more information offline with you. But here, I can share with you some of the vehicle margin performance model by model. For the new ES8, as mentioned by William, the vehicle margin is 20%. Of course, we didn't start the delivery of the ES8 until late Q3, so its actual contribution in the volume side is relatively small. And for the ET5, ET5T, their vehicle gross margin is between 15 to 20%. And for ES6, and EC6, their vehicle gross margin is over 20% and even reaching 25% as these are already products being in the market for a while. We have already worn off the new car bus on this model. And for the L90, the vehicle margin is around 15 to 20%. Overall speaking, for the new models plus the onboard L90, they do have a pretty good vehicle margin performance. Bin Wang: My second question is about your latest chip joint venture with Xcela. This is maybe not for shareholders with a 36.4% stake in the company. My question is number one, why did you choose this partner, Xcela, from Chongqing? Why not somebody else? Secondly, what's the best model about this joint venture? Is it just a sales company? And it's always actually you really made a joint venture to make a check by itself. Meanwhile, do you actually get any license fee income already from the store manager? Because this is to be will save your chips. Thank you. William Li: Thank you for the question. Yes, some media has covered the establishment of this chip joint venture. And, also, we are leveraging our partners of this joint venture to sell our chip and also our IC design capabilities to other clients and also potential users. But this is not an exclusive partnership with you. We have the possibility and also the opportunities to sell our chip solution and the product to other partners and companies from our site. So that's one part of the way to sell that solution. We can also leverage our partners' resources to provide our chip solution to other car companies or other clients and they will be acting as a tier one providing such a solution. In the meantime, as mentioned, we also see opportunities of applying such a chip in the non-car or the non-automotive industry. So that is also a pretty common practice for car companies to share their technologies across different industries. And for our partners, they do have mature experience and also skills in the industry, in the design industry. They also have their own client and also network connections. And, they have some chip products that can be complementary to our chip across different scenarios. So overall speaking, we believe that this is a win-win partnership. Operator: Thank you. Your next question comes from Jeff with Citi. Please go ahead. Jeff: Hi. This is Jeff from Citi. My first question is on the 4Q ASP. So it looked like the 34 billion of revenue guidance should match with vehicle ASP. Up 12% Q on Q at the 246,000 RMB. So if the GB margin reaches 18%, that's around 6 billion gross profit. Right? So this is my first question. And my second question is the first quarter. Because we recognize the 4Q guidance, such as the revenue up 56% Q on Q. Right? And the GP margin reached 18%. But having said that, entering the first quarter next year, our volume is not going to drop back to the third quarter level. Right? And secondly, it looks like our high-margin products, the Q on Q volume, in the first quarter is going to be stable. So, therefore, the product mix should further improve into one queue. On a Q on Q base. So my second question is would the first quarter vehicle margin also stay closer to the 18% level because the higher margin products contribute more to the mix. William Li: Thank you for the question. Regarding the average selling price, it will increase in Q4. This is mainly driven by the sales of the high-margin product, the ES8. As for the full year, our volume guidance for the year, that is around 40,000 units, and most of this result will be happening in Q4. So it is also contributing to the improvement. And regarding your second question on the gross margin outlook for Q1 next year, well, normally, Q1 is the low season of the automotive industry. So overall speaking, the soft volume in Q1 will not be as good or as high as we normally expect for Q3 and Q4 in the previous years. But as also mentioned, in Q4 this year, we may not see the common sales spikes fueled by the seasonality. In that case, even if we are going to encounter the low season in Q1 next year, the impact or the reduced or the decrease from Q4 this year to Q1 next year won't be that significant in comparison to the previous years. Not to mention that we also have the ES8 order backlog that will last into the next year. This will also help to offset the seasonality impact in Q1 next year. So overall speaking, our operations and also volume forecast for Q1 next year will not be as good as in Q4 this year, but will also not be as low as in Q1 this year. So overall speaking, the vehicle gross margin falls into the same trend. It will be lower than the margin outlook we have for Q4 this year, but will be better than Q1 last year. Operator: Thank you, Jeff. Your next question comes from Ming-Hsun Lee with Bank of America. Please go ahead. Ming-Hsun Lee: Hello, William. This is Ming. So my first question is regarding your overseas plan because I think in the past few years, you have built several sales channels in Europe. And could you give us more of your strategy for overseas expansion for the next few years? Thank you. That's my first question. William Li: Thank you for the question. We entered into Europe in 2021. And from 2021 to 2024 in the past several years, we've been doing direct to customers or direct to users, the direct selling model for the European market. Yet in the meantime, with all the external factors, such as the tariffs in the EU, we also started to realize that for a broader market entrance, we do need to rely on and leverage more on the partner's support and resources. That's why starting this year, we have started to look for local partners for our market entry. Right now, we already have identified high-quality partners in more than 10 countries and regions, and the Firefly will be the first brand where we introduce to the overseas markets leveraging our partners' resources and network. The product will become available not only in Europe, Asia, but also in the Middle East and South America. So overall speaking, for the global market expansion, we are switching our business model from the direct-to-selling business model to a more partner-based and also local partner-supported business model. And also for the Firefly and its product, it's actually a very good product suitable for broader markets and also its European version and right-hand drive version already developed. Ready for the global market entry. So we do have confidence in the global expansion of the Firefly product. And in the meantime, we are also developing the Onward product for the global market. It is also a brand with a reasonable price range and product set lineup for the global market expansion. As for the new brand, as it targets the premium segment, it does take patience and time to establish brand awareness on the new product. In that case, we are also more patient and also more long-term for the global market expansion of the new brand. So overall speaking, in China, we started with the new premium one, and then we have the Amo brand and the Firefly. But for the global market expansion, they will take the opposite way where we will start with Firefly and then when Amo has the product ready for the global market, we will then push out Amo and then NIO. Ming-Hsun Lee: Thank you, William. My second question is regarding the expansion of more mass market opportunities. So since Amo is very successful in L90 and also recently, L60. Volume sales also continue to grow. So in the future, do you expect to launch more products under the Amo brand and to have more business opportunities for the segment at the 200,000 RMB or even below? Yeah. Thank you. William Li: Thank you for the question. For the Amo brand, it is defined as a family-oriented brand for the mass market. So just like Toyota and Volkswagen, for the long term, we do need to create a wide and broad product bandwidth to cater to more needs and also to cover more price and market segments. So for the long term, for the Amo brand, our price bandwidth will be ranging from 100,000 to 300,000 RMB. Within that range, we are going to offer more diverse products and options for our users to choose from. We started with L60 priced around 200,000 RMB. And for the L90, the fully loaded one has a price point of around or close to 300,000 RMB. And next year for the L80, it will also be between 200 to 300,000 RMB. So that is already a plus segment captured by the existing three products. In the meantime, we are also developing a new product platform where we are targeting the price range below 200,000 RMB. We believe that with this diversified product and price lineup, plus a more mature power swap network, we are able to achieve a reasonable market share in the price range from 100,000 to 300,000 RMB. This is also the single largest price segment in the market in China's passenger vehicle market with a total volume of 15 million. In such a large market, there's no reason for us not to launch enough products to capture a sufficient market share. Operator: Thank you. Your next question comes from Xing Chang with CICC. Please go ahead. Xing Chang: Hi. Thank you for taking my question. I have only one question, a follow-up question. Regards to the R&D expense. We have already seen our R&D expense in the third quarter decreased a lot to our previously guided level. So but in the industry is increasing investment in intelligence and also AI-related other areas. How do we allocate our limited R&D expense and how do we balance the short-term R&D efficiency and also long-term R&D cost? William Li: Thank you for the question. Actually, this year, our major focus in the R&D activities is to improve the efficiency and also to identify the priority of different R&D activities and projects. In that regard, the CPU mechanism has played a very important role in helping to make useful use of the R&D investment and expenses. In the meantime, we will also make sure that we will not lose our long-term competitiveness as that is a baseline that we will not cross. So with the CPU, we are pleased to see that even if we're dialing back on the R&D expenses in the recent quarters, yet we still maintained the R&D capabilities and competitiveness in the 12 full-stack capabilities for the smart TV. So we're also confident to control to continue that competitiveness. And, also, in the past several years, we've made major investments in developing the fundamental technologies for the core EV products, including our chips, operating systems, intelligent chassis, and also 900-volt high voltage architecture. As the foundation is already laid for the future product and technology platform, the follow-up iterations won't be as costly as developing the foundation and also the fundamental as the future iterations will also get more efficient in utilizing limited R&D resources. And also regarding the AI technology and its applications, like the smart driving and also our AI companion, Nomi, as well as the internal management and efficiency tools, we will continue our R&D intensity and efforts, but we'll achieve that in a more efficient way. And in terms of using algorithms and data, we actually have identified some good practices and approaches that can be more efficient than simply putting up investments or resources for the sake of achieving a high computing power or data performance. So we have identified some approaches with higher return on the investment. Actually, in the AI industry, the success of the deep sick has also proven that you don't need to make costly investments into developing a good large language model performance. So it's the same practice for us. Not to mention that we can also leverage our collective artificial intelligence equipped on all the vehicles and also our data close loop with that to achieve a same level of computing performance, we actually need to use that much computing power as our competitors or other peers are doing. So overall speaking, in terms of the R&D, we have been putting more focus on the return on investment evaluation as well as doing a better priority for our R&D activity. Xing Chang: Yes. Thank you. I get it. Thank you. Operator: Thank you. Your next question comes from the line of Yuqian Ding with HSBC. Please go ahead. Yuqian Ding: Thanks, team. I got two questions. First one is, could you share the cost benefit when we hit the volume threshold? The current run rate is half a million now. And it's only gonna get higher next year. What benefit can we get, let's say, and all the critical components that have high weight in the bomb structure? William Li: Thank you for the question. As mentioned, when the source volume reaches a certain level of scale, we will actually see how the economy of scale is contributing to the improvement in the financial performance, and it's mainly contributed where it's mainly from two perspectives. The first is regarding stronger bargaining power along the chain. This can also help improve the vehicle cost structure as you already see in our Q3 and Q4 vehicle margin guidance. And for the next, we don't have a clear picture regarding how much it will be contributed by the economy of scale from the supply side. Yet, as mentioned by William, our margin target for next year is 20%. That will actually partially be driven by the economy of scale on the supply side. And the second is regarding the improvement in manufacturing efficiency and cost optimization. Driven by the manufacturing as we improve our sales volume, the overall amortized manufacturing cost per unit will be gradually optimized. That will also contribute to the improvement in the cost structure of our products. Yuqian Ding: Thank you, Stanley. The second question is regarding next year's new model. Could you help us to put in context the potential higher scale and also the mixed impact? We talked about the bigger vehicle has better margin. But we also talked about the Amo L90 still 15 to 20%. So L80, will be below, 90 in terms of the pricing. Presumably. Will there be dilution or joint on those scale outweigh? That? William Li: Thank you for the question. As mentioned, the three new large SUV models that we're going to introduce next year, they are all positioned at the higher end of the price spectrum of their respective segment. We haven't finalized the prices for these new models yet. Yet we already expect more significant margin contribution by these three models. Not to mention that these three large models are fully synergized with the current audio ES8 and L90 from the cost structure. So this year and next year for the cost structure for the cost optimization and the cost-saving opportunities, that we've identified on the ES8 and L90 can also be carried over to these three new models. So with five large models combined, we expect them to contribute to the good product as a good product performance as well as on the margin levels. Overall speaking, achieving 20% of equal margin. Yuqian Ding: Thank you. Operator: Thank you. As there are no further questions, now I'd like to turn the call back over to the company for closing remarks. Rui Chen: Thank you again for joining us today. If you have any further questions, please feel free to contact our Investor Relations team through the contact information on the website. This concludes the conference call. You may now disconnect your line. Thank you.
Operator: Hello, ladies and gentlemen. Thank you for standing by, and welcome to Atour Lifestyle Holdings Limited third quarter 2025 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a Q&A session. Today's conference is being recorded. I would now like to turn the conference over to Mr. Luke Hu, Senior IR Manager. Please go ahead, sir. Luke Hu: Thank you, Operator. Good morning, and good evening, everyone. Welcome to our third quarter 2025 earnings conference call. Today, you will hear from our Founder, Chairman, and CEO, Mr. Haijun Wang, and our EVP, Co-CEO, Mr. Jianfeng Wu. Before we continue, please be aware that today's discussion will include forward-looking statements under federal securities laws. These statements are subject to various risks and uncertainties, and actual results may differ significantly from what is stated or implied in our comments today. The company is not obligated to update any forward-looking statements except as required by applicable laws. Additionally, during this call, our management will discuss certain non-GAAP financial measures solely for comparison purposes. For a clear understanding of these measures and a reconciliation of GAAP to non-GAAP financial results, please refer to the earnings release issued earlier today. Furthermore, a webcast replay of this conference call will be accessible on our website at ir.yadu.com, where a copy of the results presentation is also available. Now I will turn the call over to Mr. Wang, our CEO. Haijun Wang: Thank you, Luke. Hello, everyone. Thank you for joining Atour Lifestyle Holdings Limited's third quarter 2025 earnings call today. Amidst the ongoing volatility in the macro environment, consumers have shown a clear shift toward prioritizing value and making more rational purchasing decisions. Innovative experiences emerging from new scenarios and business models have become a key force driving the release of consumption potential. For the hotel sector, the overall market has shown a moderate recovery since the third quarter. While travel and leisure demand continues to be robust, the industry is also characterized by rapidly shifting hotspots and uneven recovery across regions. In the retail market, consumption is increasingly centered around experiential offerings and quality of life upgrades. Evolving consumer habits coupled with technological advancements are jointly fueling development across various segments. As a leading lifestyle group, Atour keenly observes the evolution of user needs and captures consumption trends with precision. Through continuous innovation and enhanced experience in both our hotel and retail businesses, we consistently respond to and lead contemporary consumers' pursuit of quality living. Now I would like to provide more details on our performance for 2025. Let's begin with our hotel business. Please turn to Slide four of our third quarter 2025 results presentation. In the third quarter, our RevPAR was RMB 371.3, representing 97.8% of its level in the same period of 2024. Specifically, OCC nearly recovered to the prior year level at 99.9% of the same period in 2024, and ADR reached 98.1% of its level in the same period of 2024. Please turn to Slide five. In the third quarter, RevPAR for our mature hotels in operation for more than eight months was 95% of the level in the same period of 2024, while OCC and ADR stood at 98.5% and 96.6% of their levels in the same period of 2024, respectively. Please turn to Slide six. Driven by our brand power and product excellence, Atour's hotel network steadily expanded with the successful launch of various high-quality projects. In the third quarter, we opened 152 new hotels, a record high for a single quarter. By the end of the third quarter, we had a total of 1,948 hotels in operation, representing a 27.1% year-over-year increase. We have full confidence in achieving our strategic target of 2,000 premier hotels by year-end, laying a solid foundation for the next phase of our journey. As of the end of the third quarter, our pipeline of hotels under development remained steady at 754. Amid our rapid expansion, we remain steadfast in our quality-first principle. By applying rigorous project selection criteria and strict quality standards, we are driving healthy and sustainable high-quality growth. Next, I would like to share the latest developments for our hotel brands. Please turn to Slide seven. Within our upper mid-scale product portfolio, ATURE 3.6 represents a new benchmark for ATURE series three hotels. To date, we have opened 19 3.6 hotels, which continue to gain market recognition and acclaim. Through meticulous attention to detail and optimized scenario design, ATURE 3.6 seamlessly integrates functional amenities, premium service, and humane ambience. It effectively addresses the core needs of guests for efficiency and comfort, offering a new, more refined choice for travel experiences. Please turn to Slide eight. Grounded in a forward-looking understanding of consumers' long-term needs, Atour Series four has received strong market recognition, reaffirming its precise product positioning. In the third quarter, the RevPAR of the Atour 4.0 hotels in operation for more than three months surpassed RMB 500, while delivering both functional utility and emotional value. Atour 4.0 hotels place greater emphasis on fostering a deep resonance with guests, creating a healing experience that promotes holistic well-being. The upper mid-scale segment has long been our core focus and strategic foundation. By leveraging the synergistic deployment of ATURE series three and Series four, we effectively serve the diverse needs of different customer groups. As Atour products continue to penetrate core business districts across cities, we will further solidify our competitive moat and leading position in the upper midscale market. Please turn to Slide nine. Saka Hotel represents a significant breakthrough for us in the upper-scale lifestyle segment. In the third quarter, the two operating hotels demonstrated robust performance, with RevPAR exceeding RMB 900. On November 18, our third Saka Hotel began its soft opening in Guangzhou and has already received positive market feedback. With its unique design style and exceptional accommodation experience, Saka Hotel continues to attract a diverse clientele, demonstrating its substantial growth potential. Saka Hotel is dedicated to creating rejuvenating journeys for the discerning clientele, masterfully fusing Eastern cultural heritage with modern aesthetics. We are now collaborating with a professional institution to integrate scientific wellness concepts across the guest experience, from customized healthy diets to carefully curated in-room amenities, building a comprehensive deep experience for guests and showcasing our thoughts and practice of the Chinese experience concept in the upscale segment. For our expansion strategy, we will continue to adhere to precise site selection, striving to make every Saka hotel a model of local lifestyle. Please turn to Slide 10. For our midscale brand, we consolidated our differentiated advantages by continuously refining our products, improving operational efficiency, and enhancing brand building. ATURE Lite continued its strong performance in the third quarter, with the RevPAR of ATURE Lite Series three hotels in operation surpassing year-ago levels. As the latest upgraded version, ATURE Lite 3.3 has seen its first batch of hotels successively open. 3.3 features a more mature model that incorporates targeted optimizations in practicality and spatial aesthetics, earning strong acclaim from both users and franchisees. At the current stage, ATURE Lite will continue to concentrate its presence in higher-tier cities, advancing steadily while building brand recognition through benchmark projects. Simultaneously, we are systematically enhancing our operational framework by refining service touchpoints, optimizing operational standards, and strengthening talent development. These efforts ensure premium experiences while consistently driving operational efficiency, solidifying our competitive edge in the midscale segment and laying a solid foundation for the long-term development of the ATURE Lite brand. Moving now to our retail business. Please turn to Slide 11. During the third quarter, our retail business sustained strong growth, with GMV reaching RMB 994 million, representing a 75.5% year-over-year increase. Online channels continue to contribute over 90% of total GMV. During the recently concluded Double Eleven Shopping Festival, Atour Planet has not only delivered its excellent sales momentum but has also further strengthened the DeepSleep brand image in the mind of users. Meanwhile, across both the third quarter and the Double Eleven period, Atour Planet also ranked among the top brands in the bedding category on major third-party platforms. Please turn to Slide 12. The outstanding performance of Atour Planet keeps validating our ability to provide comprehensive sleep solutions in the market. In our core categories, we pursue breakthrough innovation through initiatives like collaborative R&D with academic institutions, consolidating our competitive advantages while gradually expanding market reach. Meanwhile, based on in-depth insights into user needs, we are also developing new categories such as deep sleep fitted sheets and deep sleep loungewear, refining and enriching the sleep ecosystem of Atour Planet. Next, I will now walk you through the latest updates on Atour Planet's core categories. Please turn to Slide 13. In the third quarter, Atour Planet continued to lead the market in the pillow category across major third-party platforms. Deep Sleep Memory Foam Pillow Pro 3.0 has received glowing reviews for its excellent support and comfort. Since its launch, it has shown strong sales performance, exceeding RMB 100 million GMV in just 25 days, reducing 19 days compared to the previous generation. Up till now, the cumulative sales volume of the Deep Sleep Pillow Series has exceeded 8 million units since its release. In addition, we have expanded the Pillow portfolio with products like DeepSleep travel pillow and Deep Sleep Pillow for Children, gradually building a product portfolio that covers different scenarios and serves various user groups. This expansion demonstrates our execution capabilities in enhancing sleep experiences while reinforcing our category leadership position. Please turn to Slide 14. Atour Planet is leading the transformation of the category driven by the exceptional performance of our deep sleep thermal regulating comforter series. As the seasons change, we launched two upgraded products in the third quarter: DeepSleep Thermal Regulating Comforter Pro 2.0, all season and winter season, both featuring an upgraded dual-layer temperature control system that dynamically adjusts the sleep microenvironment for more stable rest. To date, the cumulative sales volume of the DeepSleep thermal regulating comforter series has exceeded 2 million units since its launch. Please turn to Slide 15. With the launch of new products targeting users' core sensory needs during sleep, we officially released the Atour Planet Deep Sleep Standard, covering the dynamic pressure stabilization factor for the pillow category and the dynamic temperature management factor for the comforter category. In the future, this standard will serve as the core criteria for product iteration, ensuring high quality and consistency of products. The establishment of this standard has also driven us to continuously enhance our supply chain capabilities, further strengthening our competitive advantages and the technical barriers in the sleep field. Our goal with this is to elevate industry standards and make natural deep sleep an experience that every user can truly perceive and achieve. In the current market where imitators and followers are emerging, Atour Planet remains committed to its founding aspiration, dedicated to listening to users' genuine needs and refining product details. Our deep understanding and agile responsiveness to user needs have become a solid moat, supporting long-term brand development. In the meantime, we will keep strengthening our foundational capabilities. We will pursue excellence in product development, supply chain management, and quality control to solidify a strong foundation for healthy growth. Looking to the future, we are ready to work with our industry partners to move forward together and guide China's sleep industry to a new stage of higher quality development. Please turn to Slide 16. Last but not least, I would like to share our progress across our membership business and channel development. With our growing brand influence and the continuous enrichment of our membership benefit system, our membership base maintained robust growth. By the end of the third quarter, the number of registered individual members exceeded 108 million, representing a year-over-year growth of over 30%. In terms of channel development, our core CRS channel remained stable, accounting for 62.4% of the total room nights sold in the third quarter. The contribution of room nights sold to corporate members was 20% during the quarter. Please turn to Slide 17. The evolution of the A-Card system and the upgrade of membership benefits stem from our deep understanding of members' genuine needs. By integrating online and offline resources, we have created multi-scenario end-to-end service experiences that continuously explore innovative possibilities in quality living. Looking ahead, we will sharpen A-Card's brand positioning. With a focus on a complete customer life cycle, we will analyze consumption patterns across accommodation and retail scenarios among different user groups, expanding lifestyle experiences and introducing compelling benefits and activities to deepen emotional connection with our members. Please turn to Slide 18. Moving forward, we will continue to deepen our focus across three key areas: user, employee, and fundamental capabilities. As for our users, we will always adhere to the user-first philosophy, embedding it across all touchpoints of our hotel and retail business. We will continuously enhance users' experiences and deepen our emotional connection with them. For our employees, we pay close attention to their growth trajectories and accumulated experience. Through diversified mechanisms, we redefine traditional industry promotion and development paths, driving continuous organizational evolution. To strengthen our foundational capabilities, we have been leveraging digital solutions alongside granular operations management, thus driving a comprehensive upgrade in both efficiency and the customer experience, providing a solid foundation for the group's long-term sustainable high-quality growth. I will now turn the call over to our Co-CFO, Mr. Jianfeng Wu, who will discuss our financial results. Jianfeng Wu: Thank you, Haijun. I would like to present the company's financial performance for 2025. Please turn to Slide 20 of the results presentation. Our net revenues for 2025 grew by 38.4% year over year and 6.5% quarter over quarter to RMB 2,628 million. Revenues from our monetized hotels for 2025 were RMB 1,560 million, up 32.3% year over year and 20.1% quarter over quarter. The year-over-year increase was primarily fueled by the ongoing expansion of our hotel network. The total number of our monetized hotels increased from 1,504 as of September 13, 2024, to 1,924 as of September 30, 2025. The quarter-over-quarter increase was mainly due to the growth in RevPAR and our supply chain business. Revenues contributed by our leased hotels for 2025 were RMB 164 million, representing a decrease of 13.4% year over year and an increase of 9.7% quarter over quarter. The year-over-year decline was primarily driven by a decrease in the number of leased hotels as a result of our product mix optimization. The quarter-over-quarter increase was mainly due to an increase in RevPAR. Revenues from our retail business for 2025 were RMB 846 million, reflecting a 76.4% year-over-year increase but a 12.3% quarter-over-quarter decline. The year-over-year growth was driven by increasing brand recognition, successful product innovation, and a broadened range of product offerings. The quarter-over-quarter decline was primarily due to the seasonality of our retail business. Now let's move to cost and expenses. Please turn to Slide 21. Hotel opening costs for 2025 increased by 23.5% year over year and 21.1% quarter over quarter to RMB 1,082 million. These increases were primarily due to higher variable costs, such as supply chain costs and hotel manager costs, associated with our ongoing hotel network expansion. Gross margin of our hotel businesses expanded to 37.3% in 2025, from 36% during the same period of 2024, primarily due to a lower proportion of leased hotels as the result of our product mix optimization. Retail costs for 2025 went up by 36.3% year over year and down by 11.2% quarter over quarter to RMB 100 million. The year-over-year increase was associated with the rapid growth of our retail business. Gross margin of our retail business remained stable compared to the same period of 2024. Now please turn to Slide 22. Selling and marketing expenses for 2025 were RMB 355 million compared with RMB 218 million for the same period of 2024. Selling and marketing expenses accounted for 13.5% of net revenues for 2025 compared with 11.5% for the same period of 2024. The increase was mainly due to investments in brand recognition and the effective development of online channels, in line with the growth of our retail business. General and administrative expenses for 2025 were RMB 100 million and included RMB 10 million in share-based compensation expenses, compared with RMB 82 million for the same period of 2024, which also included RMB 3 million in share-based compensation expenses. General and administrative expenses, excluding share-based compensation expenses, accounted for 3.4% of net revenues for 2025, compared with 4.2% for the same period of 2024. The decrease was primarily due to improved management efficiency and economies of scale. Technology and development expenses for 2025 were RMB 44 million compared with RMB 30 million for the same period of 2024. Technology and development expenses accounted for 1.7% of net revenues for 2025 compared with 1.6% for the same period of 2024. Please turn to Slide 23. Adjusted net income for 2025 was RMB 488 million, representing a 27% increase year over year. Adjusted net profit margin for 2025 was 18.6%. Adjusted EBITDA for 2025 was RMB 685 million, up by 28.7% year over year. Adjusted EBITDA margin for 2025 was 26.1%. Please turn to Slide 24. We also maintained a healthy cash position. As of September 13, 2025, our cash and cash equivalents totaled RMB 2,670 million with net cash of RMB 2,603 million. Please turn to Slide 25. In line with our commitment to enhancing shareholder value and our annual dividend policy adopted in August 2024, today, we declare our second cash dividend for 2025, totaling approximately USD 50 million. Through a comprehensive shareholder return initiative encompassing dividends and share repurchase, we are taking concrete actions to reward shareholders' trust and support, enabling all shareholders to share in the company's growth achievements. Please turn to Slide 26. For the full year 2025, given ongoing network expansion and rapid growth of our retail business, we currently expect total net revenues to increase by 35% compared with the full year 2024. That concludes our financial highlights for 2025. Now let's open for Q&A. Operator: Thank you, management. We will now begin the question and answer session. To ask a question, please wait for your name to be announced. For the benefit of all participants on today's call, if you raise your questions in Chinese, please immediately repeat your questions in English. Please limit your questions to one at a time. If you wish to have follow-up questions, please rejoin the queue. One moment for the first question. Our first question comes from the line of Dan Chi from Morgan Stanley. Please go ahead. Dan Chi: Hello, management. Could the management share the RevPAR trend since October? And also, if it's possible, can you provide your outlook for RevPAR in the fourth quarter and also potentially next year? Thank you. Haijun Wang: Thank you, Dan. Let me address your question. Since the beginning of this year, with the continued recovery in industry supply and demand dynamics, we have adhered to high-quality development and leveraged a refined strategy of revenue management, demonstrating strong operational resilience. Throughout the first three quarters of this year, our RevPAR has shown a trend of progressive improvement on a year-over-year basis. During the National Day holiday, leisure travel demand remained robust, but the market exhibited some significant structural divergence. Driven by stronger ADR, our RevPAR achieved year-on-year growth. After the holiday, the market returned to a business-dominated environment. But benefiting from active exhibitions and business travel activities, the demand in core cities demonstrated strong resilience. Therefore, we expect the pressure from the year-on-year decline in RevPAR to further ease in the fourth quarter. Looking ahead, the market will continue to show divergence, with still some challenges and uncertainties remaining. We will continue to deeply understand user needs, strengthen our foundational capabilities, and attract users with high-quality hotel products and differentiated experiences. By forging deeper emotional ties with them, we will secure long-term advantages in a volatile market environment and demonstrate our resilience for development. Thank you. Dan Chi: Thank you, Haijun. Next question, please. Operator: Thank you for the question. Next question comes from Sijie Lin of CICC. Please go ahead. Sijie Lin: Thank you, management. Could you please share more about the recent new hotel signing trends and whether there are any changes to the full-year hotel opening and closure targets? Thank you. Haijun Wang: Thank you, Sijie. Let me answer your question. In recent years, we found that during our scale expansion, Atour Lifestyle Holdings Limited has consistently maintained our strategic focus on premier hotels, concentrating on core locations for expansion, and we strictly controlled quality. At the same time, we have launched several new hotel products that align with market needs. With the successful launch of many high-quality projects, our brand strength and differentiated competitive advantage have been further solidified. So we do not endorse a growth strategy driven purely by scale. We firmly believe that only by advancing scale growth on the foundation of quality can we achieve sustainable betterment. Regarding signings, as we mentioned earlier, we maintain a strict selection mechanism, focusing on expansion in core business districts of key cities. With high quality being a prerequisite, the total number of new hotel signings this year is generally in line with last year, maintaining a steady development pace. At the same time, we are also clearing stock projects in the pipeline in an orderly fashion to promote the healthy development of our pipeline. In terms of openings and closures, we opened 152 hotels in the third quarter. We have full confidence in achieving the full-year guidance of 500 new openings and reaching our strategic target of 2,000 premier hotels by the end of this year. Meanwhile, for the operating hotels of ours, we place great emphasis on operational quality and user experience. By strengthening standard implementation and refined management, we can ensure that every hotel can deliver consistently high-quality service. To this end, we maintain a certain proactive replacement rate to continuously enhance the quality of our overall hotel network. In the third quarter, we closed 28 hotels and expect approximately 80 closures entirely for this year. Thank you. Sijie Lin: Thank you, Haijun. Next question, please. Operator: Thank you for the question. Next question comes from Xin Chen of UBS. Please go ahead. Xin Chen: This is Xin Chen from UBS. My question is about the retail business. Could the management share your perspective on the competition in the retail business? In addition, given the consistent performance of the retail business, would you consider any adjustments to your full-year retail revenue guidance? Thanks. Haijun Wang: Thank you, Xin Chen. Let me start by sharing the development strategy of ours and the competitive landscape of our retail business. Since Atour Planet entered the sleep industry, our brand and product power have gradually gained market recognition. This has been followed by a rise in imitators and industry participants, leading to increasingly fierce competition. However, we always believe that the real competition is not about the peers but is about the ever-evolving user needs. To address this, we did not simply follow the existing industry path. Instead, we progressively built our products and supply chain system with our distinctive characteristics. For example, we officially launched the Atour Planet Deep Sleep Standard recently. This standard differs from traditional industry metrics like fabric weights or thread counts, but it is based on sensory science and the natural rhythms of human sleep, focusing on two core sensory indicators of sleeping users: the fluctuation of pressure and the change of temperature. This standard also places higher demands on our product development and production. We aim to continuously strengthen our product barriers through this forward-looking standard while collaborating with the upstream supplier partners to jointly lead the industry progresses. As a relatively new player in the industry, we always plan our layout with a longer-term mindset. While developing quite rapidly, we have been constantly building our foundational capabilities. I believe our underlying philosophy is consistent between the retail and hotel businesses, which is to always prioritize quality over scale. Moving forward, Atour Planet will continue to strengthen our product power, remain user-centric, focus on the systematic development of our long-term capabilities, and practice Atour Lifestyle Holdings Limited's long-termism development path. Let me address your question about our retail revenue. During the Double Eleven period, Atour Planet delivered outstanding performance and continuously strengthened our brand presence in the minds of users. Based upon our strong performance in Q3 and the Double Eleven, we are now raising our full-year retail revenue growth outlook to at least 65% year on year and accordingly adjust the group's full-year revenue guidance to a growth of 35% year on year. Thank you. Xin Chen: Thank you, Haijun. Next question, please. Operator: Certainly. Next question comes from Ronald Leung of Bank of America. Please go ahead. Ronald Leung: Let me translate my question into English. So we noticed Atour Lifestyle Holdings Limited has announced a second dividend distribution plan this year. Could management provide an update on the planning and progress regarding shareholder returns? Thank you. Haijun Wang: Thank you, Ronald. Regarding dividends, as we announced today, our second dividend distribution this year amounts to approximately USD 50 million, representing about 29% of last year's net income. Consequently, the cumulative dividend total for this year reaches about USD 100 million, accounting for approximately 2% of the prior fiscal year's net income, exceeding our commitment of no less than 50% of that. Additionally, we formally commenced our share repurchase program in September and will continue to execute them in accordance with our established three-year plan. Looking ahead, we will continue to implement our comprehensive shareholder return program, combining dividends and repurchases, targeting a payout ratio of 100% based upon the previous fiscal year's GAAP net income, with the specific implementation pace to be dynamically arranged in line with our business development and capital planning. Through these tangible actions, we are committed to creating long-term value and sharing the success of the company with our shareholders, in appreciation of your ongoing support and trust. Thank you, Ronald. Next question, please. Operator: One moment for the next question. The next question comes from Lydia Ling of Citi. Please go ahead. Lydia Ling: Thank you, management. I'm Lydia from Citi. We noticed the strong operational performance for Atour Lite in the third quarter. Could you share your plan for Atour Lite in the next step? And any plan for accelerating the store expansion? Thank you. Haijun Wang: Thank you, Lydia. Yes, indeed. In the third quarter, the RevPAR of operating Atour Lite Series three hotels surpassed the level from the same period last year, performing pretty decently. In fact, since the beginning of this year, Atour Lite has achieved notable results in brand building, operational efficiency, and user experience, with both operational performance and scale growth meeting our expectations. We always believe that the core of a brand license is products. The Atour Lite hotel product accurately aligns with the needs and aesthetic preferences of today's young users. The newly launched Atour Lite 3.3, with its constantly optimized investment model, achieved a better balance between service experience and operational efficiency. Through the implementation of the first batch of our Atour Lite 3.3 project, we are constantly gathering feedback from various sites, refining product details, and strengthening our differentiated competitive advantage in the midscale market. We expect the scale of Atour Lite Series three hotels in operation will be reaching 170 to 180 by the end of this year. We are firmly optimistic about the long-term development of Atour Lite. At this current early stage of the brand development, we are particularly focused on solidifying the operational foundation and our systematic capabilities. As for our next step, we will systematically build a dedicated operational system for Atour Lite, strengthening its differentiated positioning in all aspects, including from brand concept to service delivery. This will not only distinguish it from our main Atour Hotel brand but also highlight the unique value in the midscale hotel market. On this basis, we will steadily advance towards a longer-term development goal of hitting the 1,000 hotels milestone for the Atour Lite brand. Thank you. Lydia Ling: Thank you, Haijun. Operator: That concludes today's question and answer session. I would like to turn the conference back to Mr. Luke Hu for any additional comments or closing comments. Luke Hu: Thank you for joining us today. If you have any further questions, please feel free to contact our IR team. We look forward to speaking with you again next quarter. Thank you, and goodbye. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Good day, everybody, and welcome to the Movado Group Third Quarter Fiscal twenty twenty six Earnings Call. As a reminder, today's call is being recorded and may not be reproduced in full or in part without permission from the company. At this time, I would like to turn the conference over to Alison Melkin of ICR. Please go ahead. Alison Melkin: Thank you. Good morning, everyone. With me on the call today are Efraim Grinberg, Chairman and Chief Executive Officer and Sally DeMarcellus, Executive Vice President and Chief Financial Officer. Before we get started, I would like to remind you of the company's Safe Harbor language. Which I'm sure you're all familiar with. The statements contained in this conference call, which are not historical facts, may be deemed to constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual future results may differ materially from those suggested in such statements due to a number of risks and uncertainties all of which are described in the company's filings with the SEC which includes today's press release. If any non GAAP financial measure is used on this call, a presentation of the most directly comparable GAAP financial measure to this non GAAP financial measure will be provided as supplemental financial information in our press release. Now, I would like to turn the call over to Efraim Grinberg Chairman and Chief Executive Officer of Movado Group. Efraim Grinberg: Thank you, Allison. Good morning, and welcome to Movado Group's third quarter conference call. Joining me today is our Executive Vice President and CFO, Sally DeMarcellus. After I review the highlights of our quarterly results, and the progress we're making against our strategic initiatives, Sally will discuss our financial results for the quarter and year to date in greater detail. We'll then be glad to take your questions. We're pleased with our results for the third quarter. And more importantly with the progress we're making in building our brands and business in a sustainable way. In a globally challenging retail environment, we delivered revenue growth of 3.1% to $186,100,000 Excluding The Middle East, where we have rebuilt our team and are refining our strategy, growth was 5.9%. We plan to return to growth in that region next year. For the quarter, gross margin improved by 80 basis points to 54.3% compared to 53.5% last year. Despite a $4,500,000 and two thirty basis point impact from incremental U. S. Tariffs. After quarter end, The US and Switzerland announced a framework agreement that we expect will lower our overall US tariff rate on Swiss watches to 15%. Roughly one third of the rate we've paid since August. This positive development will allow us to plan effectively for next year and reduce the level of price based mitigation. Benefiting both American consumers and the company. Adjusted operating income grew more than 40% to $12,600,000 For the first nine months, we generated positive operating cash flow of $1,300,000 versus a use of cash of $40,600,000 last year. We ended the quarter with a strong balance sheet dollars 183,900,000.0 in cash and no debt. And our board has approved a quarterly dividend of 35¢ per share. This quarter reflects continued progress on our strategic priorities. Strengthening our brands driving innovation, delivering improving financial results. Our results are a direct reflection of our team's effort, dedication, and commitment. Despite ongoing global economic and political uncertainty, we're increasingly optimistic about the improving dynamics in the fashion and accessible luxury watch categories. Driven by innovation in new shapes, and sizes and growing interest from women and younger consumers. We're also seeing a strong momentum in fashion jewelry. Supported by the growing adoption of jewelry for men. Regionally, we're pleased that The United States returned to 6.9% growth, led by our fashion brand business and our direct to consumer business. 11.9% growth in Movado Company stores, and 12.4% growth on movado.com. Internationally, our business in Europe and Latin America continue to perform strongly partially offset by softer results in The Middle East. From a branding standpoint, we're very pleased with the progress we're making on the Movado brand. Our product innovation this year has resonated strongly. The museum collection performed well, particularly our new BANGL collection. And we're introducing a new style that would allow lab grown diamonds for the holiday season. This collection will be featured prominently in holiday marketing with Jessica Alba and Julianne Moore. For men, we launched the Automatic Museum Imperial, a new hero collection inspired by an iconic design from the late nineteen seventies. Holiday marketing will feature the collection in videos with star running back Christian McCaffrey. In bold, our limited edition collaboration with brand ambassador Ludacris celebrating the twenty fifth anniversary of his debut album, has been a standout. The MVP collection is already sold out. We're also seeing strong growth in Movado Heritage. Inspired by our rich archives. The new 1917 collection based on a square vintage design from that year has launched successfully. Supported by a digital campaign featuring basketball superstar Tyrese Halliburton who is an avid vintage watch collector. Sell through is strong across both men's and women's styles. Our holiday campaign is designed to deepen engagement between our products, ambassadors, and consumers while driving performance at the point of sale through enhanced displays, training, and retail partner support to ensure an elevated in store experience. The Movado brand helped drive double digit growth in both sales and contribution margin in our company stores. Overall, sales in Movado company stores grew 9.4% on a comparable store basis. With Movado brand sales up 17.7%. Over the past year, we've refreshed all Movato display displays and visuals in our stores. Improved assortments, leading to a strong strong results from these initiatives. Among our licensed brands, we saw strong performance in both jewelry and watches, delivering a 6.4% growth overall and a 2.9% on a constant currency basis. Leading the way to Gen Z consumers has been coached. Continues to drive double digit growth led by the SAMI collection. Inspired by Coach's iconic turn lock. We've expanded his hero family with SAMI stretch bracelets and a mini ring watch. Which is trending strongly. Other successes include the Caddie, Cass, and Reese families. All featuring shaped cases. Hugo Boss continues to perform well. Led by hero families such as Sky Traveler, the Grand Prix, and the Principal Tank Watch. We're also excited about the potential in Hugo Boss jewelry, particularly for men, led by the watch inspired candor bracelet. For Tommy Hilfiger, the new T. H. Oxford family, with a dial inspired by the classic Oxford shirt is gaining traction. With new case shapes rolling out this fall. On the women's side, we are increasing our penetration with our best selling Mia collection already sold out in many markets. Lacoste continues to set trends in jewelry, with the best selling Metropole collection and strong results in the rugged LC33 anti digi lie. Which is truly aligned with the Lacoste brand. The new black and gold version introduced this fall is expected to sell out over the holidays. In Calvin Klein, we're building leadership in women's watches, complemented by a strong jewelry offering. The Mini Pulse has quickly become a best seller and the new micro contemporary is performing very well. For Olivia Burton, we're seeing healthy growth in our two key markets. The US and The United Kingdom. Led by the Mini Grove Collection our Mini to the Max campaign, which will continue through the spring. We're very proud of our team's execution this year. Especially following a challenging fiscal twenty twenty five. We're making strong progress against our strategic initiatives and capturing opportunities across global markets. We're also encouraged by the renewed interest among younger consumers embracing analog watches for their design, innovation, quality, and value. With our strong portfolio of brands, we're well positioned to capture this momentum. At the same time, we've made meaningful strides in improving gross and controlling expenses as we return to sales growth. Looking ahead, our focus remains on driving improved profitability across every aspect of the business. We're looking forward to a strong holiday season and to building on this momentum as we plan for the next year. I'll now turn the call over to Sally. Sally DeMarcellus: Thank you, Efraim, and good morning, everyone. For today's call, I will review our financial results for the third quarter and year to date period of fiscal twenty twenty six. My comments today will focus on adjusted results. Please refer to the description of the special items included in our results for the third quarter and first nine months of fiscal twenty twenty six and fiscal twenty twenty five in our press release issued earlier today. Which also includes a reconciliation table of GAAP and non GAAP measures. Turning to a review of the quarter. Overall, we were pleased with our performance for the 2026. Sales were $186,100,000 as compared to $180,500,000 last year. An increase of 3.1%. In constant dollars, the increase in net sales was 1.2%. Net sales increased across licensed brands and company stores, partially offset by a decrease in net sales in owned brands. By geography, US net sales increased nine I'm sorry, U. S. Net sales increased 6.9% as compared to the third quarter of last year. International net sales increased 0.6% with strong performances in certain markets such as Europe, and Latin America, offset by a weaker performance in The Middle East. Which is where we are making progress rebuilding this important market. On a constant currency basis, international net sales decreased 2.5%. Gross profit as a percent of sales was 54.3% compared to 53.5% in the third quarter of last year. The increase in gross margin rate as compared to the same period last year was primarily driven by favorable channel and product mix and the increased leverage driven by certain reduced costs and higher sales. This was partially offset by increased tariffs. Operating expenses were $88,500,000 as compared to $87,900,000 for the third quarter of last year. The $600,000 increase was driven by an increase in performance based compensation partially offset by a planned reduction in marketing expenses. The combination of higher revenue and gross profit more than offset a relatively small increase in operating expenses to deliver a 43.5% increase in operating income. To $12,600,000 This is a $3,800,000 improvement from the $8,800,000 spent in the 2025. We recorded approximately $1,200,000 of other nonoperating income in the 2026 as compared $1,400,000 in the same period of last year. Other nonoperating income is comprised of interest earned on our global cash position. We recorded income tax expense of $3,500,000 in the third quarter fiscal twenty twenty six as compared to $1,500,000 in the third quarter fiscal twenty twenty five. Net income in the third quarter was $10,200,000 or $0.45 per diluted share as compared to $8,500,000 or $0.37 per diluted share in the year ago period. Now turning to our year to date results. Sales for the nine month period ended 10/31/2025 were $479,700,000 as compared to $471,900,000 last year. Total net sales increased 1.7% as compared to the nine month period of fiscal two thousand twenty five. In constant dollars, the increase in net sales for the year to date period was point 6%. U. S. Net sales increased by 1.5% and international net sales increased 1.8%. Gross profit was $260,000,000 or 54.2% of sales. As compared to $254,800,000 or 54% of sales last year. The increase in the gross margin rate for the first nine months was primarily due to favorable channel and product mix partially offset by increased tariff costs, and the unfavorable foreign currency exchange. Operating expenses were $239,500,000 as compared to $241,300,000 for the same period of last year. The decrease was driven by a reduction in marketing expenses partially offset by an increase in performance based compensation. For the nine months ended 10/31/2025, operating income was $20,500,000 compared to $13,500,000 in fiscal twenty twenty five. We reported approximately $4,000,000 of other nonoperating income in the nine month period of fiscal two thousand twenty is primarily comprised of interest earned on our global cash position as compared to $5,200,000 in the same period of last year. Net income was $17,400,000 or $0.77 per diluted share as compared to $13,900,000 or $0.62 per diluted share in the year ago period. Now turning to our balance sheet. Cash at the end of the third quarter was $183,900,000 as compared to $181,500,000 in the same period of last year. Accounts receivable was $118,300,000 up $4,500,000 from the same period of last year, primarily due to foreign currency. Inventory at the end of the quarter was up $20,800,000 or 11.8% above the same period of last year. $5,400,000 of the increase was due to foreign currency. And $6,400,000 of IEPA reciprocal tariffs is included in the inventory on hand at the end of the third quarter. We are comfortable with the composition and balance of our inventory at quarter end. In the first nine months of fiscal twenty twenty six, capital expenditures were $3,500,000 and we repurchased approximately 100,000 shares under our share repurchase program. Of 10/31/2025, we had $48,400,000 remaining under our authorized share repurchase program. Subject to prevailing market conditions and the business environment, we plan to utilize our share repurchase program to offset dilution. As Efra mentioned, there has been a recent trade agreement impacting future Swiss tariff rates, we will adjust our mitigation strategy accordingly. Given the current economic uncertainty and the unpredictable impact of tariff developments, the company is not providing fiscal twenty twenty six outlook. I would now like to open the call up for questions. Thank you. The floor is now open for questions. Operator: Once again, that's star one if you'd like to register a question at this time. Our first question today is coming from Hamed Khorsand of BWS Financial. Please go ahead. Sally DeMarcellus: Hi. Good morning. So first, I just wanted to ask you, the success you're seeing with many of your watches and brands, is that coming from your, you know, influencers, your, you know, the spokespeople that you have, or is that because of the design and it's just trending well with with Gen z? Efraim Grinberg: Well, I think it's a combination of both, Amit. Thank you. A good question. And so what you're seeing is is an increased coverage of of these products on social media and obviously, the bulk of our campaigns are also on digital media, and and and so that resonates they're resonating, with with younger, consumers across the spectrum. I think it's also the combination of innovation of new shapes and sizes. And the embrace of younger consumers to the the watch category. And and that's occurring pretty much on a global basis. So it's it's nice to see. Hamed Khorsand: Okay. And then as far as the commentary you made about many of your brands being selling well or being sold out, Do you want the sold out conditions? I mean, would that that impair your sales? Efraim Grinberg: So, I think it's really on some select product families across, I think I mentioned Tommy Hilfiger in some markets and some of our other brands. And and and and I think that that that what you know, this is not a in some cases, we also in the case of the ludicrous watch and Movado, it was a limited edition. So it was planned to be sold out. We still have one model available. Which we expect to sell out in the next few weeks. So I think it's always good to have a balance of supply and demand, and we'll be able to replenish most of the styles into the first early first quarter or the end of the fourth quarter of this year. So I think it's a good balance to have. And part of it is as the category comes back and the innovation has has increased and consumers are drawn back into the category. Obviously, the levels of demand change. And that's also very good to see. Hamed Khorsand: And the success you're seeing in sales, does that change your commentary coming into the calendar year about you know, what your spending levels would be for the the fiscal year? Efraim Grinberg: I think it's really a balance. And our focus has been on improving profitability. And you saw that through the first nine months of this year and particularly in quarter. So it's really we will continue to invest in in in our brand building efforts. But at the same time, we have made it a goal and we're very serious about it. Of of driving improved profitability at the company. Hamed Khorsand: Okay. Thank you. Operator: Once again, that's star one if you'd like to register a question at this time. We're showing no additional questions in queue at this time. I'd like to turn the floor back over to Mr. Grinberg for closing comments. Efraim Grinberg: Well, thank very much all for participating today. I'd like to wish everybody a great Thanksgiving holiday. And, of course, it's the really formal beginning of the holiday shopping period. We'll all be in stores looking to see how how businesses out there, and I'm sure many of you will be as well as, beginning your holiday shopping. So, again, enjoy the holiday, and and thank you very much for being here today. Operator: Ladies and gentlemen, this concludes today's event. You may disconnect your lines or lock off the webcast at this time, and enjoy the of your day.
Clint Tomlinson: Good morning, everyone, and welcome to the Anavex Life Sciences Fiscal 2025 Fourth Quarter Conference Call. My name is Clint Tomlinson, and I'll be your host for today's call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. And during this session, you would like to ask a question, please use the q and a box or raise your hand. Please note that this conference is being recorded, and the call will be available for replay on website at www.anavex.com. With us today is doctor Christopher Missling, president and chief executive officer and Sandra Bohnish, financial officer. Before we begin, please note that during this conference call, the company will make some projections and forward looking statements. These statements are only predictions based on current information and expectations and involve a number of risks and uncertainties. We encourage you to review the company's filings with the SEC that include, without limitation, the company's forms 10 k and 10 q, which identify the specific factors that may cause actual results or events to differ materially from those described in these forward looking statements. These factors may include, without limitation, risks inherent in the development and or commercialization of potential products, uncertainty in the results of clinical trials or regulatory approvals, need an ability to obtain future capital, and maintenance of intellectual property rights. This conference call discusses investigational uses of agents in development and is not intended to convey conclusions about efficacy or safety. And there is no guarantee that any investigational uses of such products will successfully complete clinical development or gain health authority approval. And with that, I would like to turn the call over to doctor Misslin. Christopher Missling: Thank you, Clint. And good morning, everyone. Thank you for being with us today to review our Q4 financial results and quarterly business update. We are fully committed to bringing Oral Black Amazin and oral ANAVEX three seventy one to patients. We are dedicated to delivering on the value of our pipeline and maximizing its potential for patients investors, and our employees. Over the coming months, we will continue to focus on progressing our clinical trials and regulatory actions. At the same time, we're aiming to expanding our collaborative initiatives and strategic partnership activities. As previously announced, through our update on the status of the regulatory filing of blacaramazine in Europe, we expect the CHMP to adopt a negative opinion on the MAA at its December meeting. We intend to request a reexamination of the CHMP opinion upon its formal adoption based on feedback and continued guidance from the CHMP, EMA and the Alzheimer disease community. DMA procedures adopted by the CHMP allow an applicant to request reexamination of its decision. Which would be undertaken by a different set of reviewers that conduct a new examination. Independent from the first opinion. Our expert advisers investigators, as well as patients and their caregivers encourage us our commitment to continue working in partnership with global regulatory bodies to advance science and potentially new treatment options for patients and their families. As part of the MAA review process, we have successfully undergone a full good clinical practice GCP inspection of the trial data by EMA. The manufacturing package has passed the EMA review as well. A good clinical practice GCP inspection is an official review by a regulatory authority over clinical trials documents facilities, records, and other resources to ensure compliance with g p GCP guidelines. We're looking forward to working closely with EMA and other stakeholders advance our investigational therapy for early Alzheimer disease. Importantly, we also announced we had initial contacts with the authorities in The US regarding our Alzheimer's disease program. And we intend to provide further updates on our interaction with the FDA as they become available. Going forward, we will provide both regulatory and clinical trial updates on dacamazine in other indications, such as Parkinson disease, Rett syndrome, and fragile X. This will include the disclosure of planned future clinical trial designs as we continue to advance our therapeutic pipeline. Scientific & Clinical Data Updates Christopher Missling: During the most recent quarter, we announced several new scientific and medical publications includes a peer reviewed publication in the journal Neuroscience Letters, titled Prevention of Memory Impairment: in Hippocampal Injury with blacamazine in an Alzheimer's disease model. This study shows that pretreatment with blacarbazine prevented amyloid beta induced memory impairment. And brain oxidative injury suggesting that blackamcin is an attractive candidate for Alzheimer disease pharmacological prevention. A peer reviewed publication the journal Eye Science asserting the precise autophagy mechanism of sigma one receptor through blacamazine activation titled conserved LI R specific interaction of sigma one receptor in GABA RAB. A publication oral glycogen phase two b slash three trial confirms identified precision medicine patient population significant broad clinical and quality of life improvements for early Alzheimer disease patients. To be available online as a preprint and in submission to a peer reviewed medical journal. Anavex announced the latest published scientific results for blacamazine. On all standard scales for measuring Alzheimer's disease and cognitive decline after forty eight weeks, the defined precision medicine population ABCEAR three, consisting of early Alzheimer's disease patients with confirmed and progressed pathology taking thirty milligram once daily oral blacamazine demonstrated barely detectable decline This was comparable to minimally perceptible decline in prodromal which is pre dementia aging with adults. On October 29, we announced additional long term clinical data for blacamycin, This new data demonstrated continued long term benefit from oral blacamazine compared to decline observed in the Alzheimer disease neuroimaging initiative control group also called ADNI, a control group established by a clinical research project launched by NIH in 2004. In the intent to treat population, significantly less cognitive decline was observed for the black carnosine participants compared to the acne control group at forty eight weeks with a significant and clinically meaningful difference in mean change from baseline at a 13 total score of minus 2.68. Points. Over the course of the open label extension study, at time point ninety six weeks, these two groups further diverged sharply with statistical significant differences in mean change in ADAS cogs. 13 total score at ninety six weeks of minus 6.41 points. The difference between groups continues to increase at one hundred and forty four weeks. To ADA's COC 13 total score difference of minus 12.78 points. The results provide evidence of the significant beneficial therapeutic effect of blacamazine which positively separates from black from which positively separates from the ADNI control group with duration of treatment. This significant beneficial therapeutic effect of blacamazine compared to decline observed in the ADNI control group, trans translates into seventeen point eight months of time saved with oral blacamazine. Allowing for longer independence of the patients by approximately over one point five years. Looking ahead, Annavec will be presenting additional data and scientific findings at upcoming conferences and in publications. These include the direct relationship between cognitive function and reduced brain region atrophy with blacamazine. Oral blacamazine for early symptomatic Alzheimer's robust effect size through precision medicine an analysis of the ANAVEX two seventy three AD024 randomized trial. Also, newly identified precision medicine gene collagen 24A1, with over seventy percent, seven zero, prevalence, establishes effective treatment of early Alzheimer's disease with glacamazine. And also, continued long term benefit from oral blacamazine compared to delayed start analysis and decline compared to natural history studies. ANAVEX 3-71 (Schizophrenia & Neuropsychiatry) Christopher Missling: With regard to ANAVEX three seventy one, in October, ANAVEX announced positive top line results from its placebo controlled Phase two clinical study, evaluating ANAVEX three seventy one for the treatment of schizophrenia in adults on stable antipsychotic medication. The study successfully achieved its primary endpoint demonstrating that ANAVEX three seventy one was safe and well tolerated. The safety profile was consistent with previous studies of ANAVEX three seventy one in healthy volunteers. With no serious or severe treatment emergent adverse events reported in either Part A or part b of the study. In addition, to meeting the primary safety endpoint, secondary and exploratory analysis revealed encouraging trends in several outcome measures. Our other oral medicine candidate ANAVEX three seventy one, represents therefore, a transformative opportunity in neuropsychiatric drug development. Leveraging its unique dual sigma-one agonist unique sigma-one m one PAM mechanism to address multiple high value indications through a unified neuroinflammatory biomarker platform Further detailed analysis of randomized, strictly double blind, and placebo controlled clinical trial under DEX371 SZ001 revealed very encouraging data in suffering from schizophrenia. Following successful Phase two results from the SZ 001 study while confirming the accident safety profile of ANAVEX three seventy one, the study demonstrated reduction in GFab NYLK40 neuroinflammatory markers. G Fab is a structural protein of astrocytes in the brain, represents aberrant activation of astrocytes the major brain glycol cell lineage. Astrocytes participate in brain neural function in multiple ways. Amongst them, critical modulation of synaptic relay between neurons in neural circuits. Its dysfunction a key pathogenesis mechanism in schizophrenia. This positions ANAVEX three seventy one to advance into pivotal trials with the once daily modified release oral tablet enabling once daily dosing across depression, and psychosis indications where current therapies have failed or shown limited efficacy. Addition to schizophrenia, one high unmet need opportunity would be depression in Alzheimer's disease. With currently no approved therapies. Up to forty percent of people with Alzheimer experience significant especially in early and middle stages of the disease. Depression in Alzheimer's is associated with worse quality of life. Accelerated cognitive decline, and earlier onset of dementia symptoms. The neuroinflammatory biomarker strategy positions Anavex 371 to potentially achieve disease modification claims beyond symptomatic treatment, representing a paradigm shift in neuropsychiatric drug development. And now I would like to direct the call to Sandra Boenisch, principal financial officer of ANAVEX, for a financial summary of the recently reported quarter. Sandra Boenisch: Thank an you, Christopher, and good morning to everyone here. I'm pleased to share with you today our fourth quarter financial results for our 2025 fiscal year. Our cash position as September 30 was 102,600,000.0, and we had no debt. During the quarter, we utilized cash and cash equivalents of 8,600,000.0 in our operating activities. After taking into account changes in non cash working capital accounts. As of today, with a current cash balance of over a 120,000,000 we anticipate that at the current cash utilization rate, our cash runway is more than three years. Our research and development expenses for the quarter 7,300,000.0 as compared to 11,600,000.0 in the comparable quarter of last year. General and administrative expenses were 3,500,000.0 as compared to 2,700,000.0 for the comparable quarter of last year. Compared to the same quarter of fiscal twenty twenty four, we saw a decrease in operating expenses mostly driven by the completion of a large manufacturing campaign of larcamesine and a decrease in clinical trial activities. As a result of the completion of our open label extension studies and our ANAVEX three seventy one phase two study in schizophrenia. And lastly, we reported a net loss of $9,800,000 for the quarter which is $0.11 per share. Thank you. And now I will turn the call back to Christopher. Christopher Missling: Thank you, Sandra. In summary, we are focused on continuing to advance our precision medicine compounds we are excited to be potentially making a difference for individuals suffering from these diseases by presenting a scalable treatment alternative alongside the ease of all administration. I would now like to turn the call back to Clint for Q and A. Clint Tomlinson: Thank you, Kasr. We'll now begin the Q and A session. If you have a question, please raise your hand or enter it into the q and a box. It looks like our first question will from Michael Obadiah from HC Wainwright. Hello. Good morning. So are we asking the questions on behalf of Ram Selvaraju? From H. Wainwright? Have a couple of questions for the management. And the first question is, what is the likely commercial impact of the failure of semaglutide on the outlook for glycogenesine in Alzheimer's disease? Second one is when is the next formal discussion of black hemisinin scheduled to take place with the FDA? And the third question is, what initiatives does INOVIX plan near term pursue glycemic sign approval in regions beyond the European Union and The United States? Thank you. Christopher Missling: I appreciate the questions. So to answer the first question about the impact of the semaglutide glutide results. We understand there's an unmet medical need here. And this is certainly further highlighted by the recent setback by the two EVOQUE studies from Novo Nordisk. And also by other companies, including other large pharma companies recently, with also with anti tau injectables. So there's a lack of upcoming pipeline certainly. We also understand that the Evoque semaglutide GLP one finding highlight the complexity of Alzheimer disease biology. And the challenges of expecting metabolic pathway alone to meaningfully alter your dinner processes. But Alzheimer's more complex, involves impaired proteostasis, autophagy dysfunction, synaptic failure in multiple converging mechanism. So therapeutic effects seen in related conditions do not always translate into kind of benefit here. However, we have with oral once daily blacamazine with this upstream mechanism of action, which restores autophagy, which precedes these pathologies adjust summarized and has demonstrated in early Alzheimer disease patients clinically meaningful efficacy of slowing cognitive decline significant amounts. Some cases over fifty percent. With an acceptable safety profile with no ARIA, and as demonstrated in the phase two b less free study. So the answer to the question is this makes it more clear that this is a complex disease and there's a lack of compounds near term available for patient to address this unmet need. Second question is about timing. So we provide as we stated, updates what we'll follow-up in the initial discussion with The US regulators and we'll provide updates as we receive them. But we're very excited about the initiation of these discussions. Regarding the third questions, we are continuing to now explore other regulatory geographies. As well as moving forward where we can see fit to address open questions. So I trust this addresses the question. Michael Obodai: Yes. Very much for the clarity and transparency. Christopher Missling: Thank you. Clint Tomlinson: The next question is gonna come from Tom Bishop at BI Research. Tom, you need to unmute Christopher Missling: per the press release, the, CHMP seems to have given you some guidance about the additional information they they need to see, for example, biomarker. But can you elaborate, what this includes? Christopher Missling: So we we want to proceed with the reexamination. Because we owe it to the patient, and we get the feedback also from investigators that the unmet need is very high, And we it boils down to CHMP the benefit await the risks. Of the drug to be on the market. And that discussion includes all available data. And it might be you know, to make the glass half full, that the should or may out biomarker, which are not subject to influence, might be helping in getting to that point. So that is the background of biomarker best including biomarker assessments. Tom Bishop: Well, there was no particular biomarkers that you you hope to bring out? Christopher Missling: We have communicated, and it's, been published that we have a brace strong biomarker of the pathology. Which is the analogy of oncology where tumor grows and you look at the size of the tumor, which is measurable objectively, can be measured objectively, and it cannot be influenced by a patient or by anybody else. The same as in Alzheimer's disease is the brain shrinks. So the brain gets smaller, then the the brain mass shrinks, and we can measure that as well. And it's a very objective marker of neurodegeneration, and we demonstrated that this marker of neurodegeneration is significant, the less or even halted in some patients, with active oral blacamazine. While in the placebo arm, this shrink, the brain continues. Which is the clear definition of the advancement of the Alzheimer pathology. And we like to include, of course, that as well in the discussion. Tom Bishop: What about the ABC Clear data? I mean, that was very compelling with forty eight to eighty six percent slowing depending on the gene biomarker, or combination Was this guess this was not considered by the CHPT as it came out, MP because it came out kinda late. But, can this be included for consideration on reexamination? Christopher Missling: It's a good question. So we like to emphasize our focus is on each individual patient affected by Alzheimer. And we see that very clear beneficial signal of cognitive also clinically meaningful effect in both cognitive and functional also in all the other endpoints consistent improvement and significant improvement of the clinical outcomes that is the CGI that is the quality of life and PRQ, MMSE, all the measures are the SCOC 13, see there from the boxes, ADCS ADL, In all this a b clear, two and three, populations, we see clearly clinically meaningful and significant improvement. So we would like to also point that out and that is really good a good dataset to have and to put this forward. And also, last but not least, making the point about the focus on each individual patient we see a reversal of the negative trajectory of quality of life of the patients in seventy percent of the patients seven zero, in the trial. That means the quality of life is better after one year than at the start of the trial. That's very impactful because that's what is really impacts the individual patient. Tom Bishop: Okay. If the approval ultimately came from the EMA, and and let's assume perhaps it was conditional. Is is there a rule of thumb or how long you would have to to do a conditional trial? Christopher Missling: It's really not it's it's really hard to speculate about this. But we would like to make sure we wanna point out we are motivated and driven by the fact that there's a huge significant unmet need for a drug which with these features today, and we pointed out the recent pipeline failures, And also, I wanna point out that between twenty and twenty five, this year and 2030, there will be more than 300,000,000,000 of large pharma revenue at risk from loss of exclusivity with over 40% of top pharma sales exposed creating an estimated $90,000,000,000 growth gap even after internal pipeline contributions. So that means there's also a huge unmet need not only for this indication, but also for overall pipeline to be filled by large pharma. Tom Bishop: Well, that's interesting that you brought that up because I wanted to ask about how you're coming with you know, exploring your options if you get approval. For example, blarcamesine to market. large pharma, organizations, and so forth to take Christopher Missling: Yes. So we pointed out in just in this call that one of the key things we are focusing on now is expanding the corporate development partnership activities And we mentioned that we are presenting at the most important conference every year, which takes place in San Francisco in early January. And we are a presenting company on Wednesday. On at that conference itself. And that allows for more meaningful discussions, which is the hotspot for business development activities. At at this conference, and we will make sure we are present in that regard. Tom Bishop: Okay. Well, I think it'd be a real tragedy for Alzheimer's patients to to to not see this drug approved because especially the ABC CLEAR data to me is so convincing. That and and the risks are so low, and it's oral. That it I I just can't fathom that it wouldn't get approved, but that's just me. I wish I had a vote. Christopher Missling: We would agree. Thank you for your vote as well. Clint Tomlinson: Tom, are you there? Tom Bishop: Yeah. Okay. As long as I'm still on, is there a mechanism of action for call 241? Christopher Missling: Yes. There is. And this will be now published in a peer review paper But in summary, I can say that collagen twenty four zero one is the ingredient key ingredient of the extracellular matrix called ACM. When you look at pictures of brain neurons or astrocytes, we see this very nice you know, connections or network like a web. Spider web description or pictures. And in the background, it's always like pitch black. And you're wondering this is how the brain looks like. And, of course, it doesn't it does not. And this background is actually the axosodular matrix. And that's where these neurons and astrocytes are residing or sitting on. Your brain. And if you have a mutation of this extracellular matrix, then your response to blacamazine is impaired. The autophagy flux the autophagy restoration, which is the recycling mechanism of the neurons, which precedes a beta and tau. So it's further upstream closer to the origination of the pathology of Alzheimer, if you like, that is impaired. And for that reason, we found that patients with a wild type, with not mutated collagen genes, they respond extremely well. And we see effects of in ADAS-Cog13, minus 4.7. In the patients with that effect. With that wild type gene. And in in the CDS or the boxes, the scores go up, up to 1.4, minus 1.4. And these are really very unprecedented effects of benefit. And we pointed out that that means since patients are actually almost not declining or declining less than prodromal patients. Which are less impaired. So that's quite impactful. And this is really intriguing science. And it will be published in a major peer review paper very soon. So extremely intriguing. And also consistent with the mechanism of blackamazin. Tom Bishop: Great. Okay. Well well, that's it for me. I'm just excited to see this ABC data get examined by the e CHMP as well. Christopher Missling: Appreciate it. Thank you. Clint Tomlinson: Thank you for the questions, Tom. The next question going to come from Jesse Silvera. Spirit of the Coast Analytics. Jesse Silveira: Hey. Good morning. Can you hear me alright? Clint Tomlinson: Yes. You're fine. Ahead, Jesse. Jesse Silveira: Good morning, Clint and doctor Missling. This is Jesse Silvera from Spirit of Coast Analytics. Thank you for taking my call. Some of these questions you've kind of addressed a little bit earlier, but hopefully you can maybe provide some additional color on on some of them. Yeah. Just to reiterate kind of one of your previous points. My first question is sort of an assumption, though I think you got at it earlier. But considering the CHMP review is ongoing and a final decision hasn't even been rendered yet, is it safe to say that you can't discuss the reasons negative CHMP trending or give details on the strategy going into the reevaluation Christopher Missling: That that's, yeah, correct. That's correct. Jesse Silveira: Okay. Got that. And perhaps adjacent to that conversation, you think you can give more detail on a statement that was found in the fourteen November press release? It stated, quote, the company intends to request a reexamination of the CHMP opinion upon its formal adoption, including providing relevant biomarker data based on feedback and continued guidance from the CHMP, EMA, and Alzheimer's disease I think it was Tom that was getting at this earlier, but can you can you comment any further on the the biomarker data? I think I saw in your press release this morning that you plan to publish maybe a paper about brain atrophy and its direct correlation to cognition. Is that accurate? And is that some of the data that you may may not be presenting to to the EMA? Christopher Missling: That's accurate. So the advantage of the biomarker is that the biomarker endpoint is objective and cannot be influenced by a patient the caregiver, or the physician, or anybody else as a matter of fact, because it's objective. And I pointed out that in analogy to oncology where you get drugs approved purely by the effect of the brain measure sorry, of the tumor measurement. And while, for example, the clinical effect was not yet significant, And that is something which we like to point out that the analogy is in Alzheimer, the clear pathological shrinking of the brain, which is one of the first features Alois Alzheimer himself actually identified his patients with Ultima, the first patient he assessed. Subsequent later on when he looked into the brain, he found this additional, you know, aberrant features of proteins than identified as a beta plaque or tau. But the first thing he identified was really that the brain shrinks and the holes, the gaps widen in the brain. And that's really the pathological logical consequence of a declining brain, less less functional brain. And it's like a lemon which is drying up. You cannot squeeze anything out of it. And that is really a strong objective biomarker and biomarker end point for demonstrating an objective effect of a drug and that was demonstrated with blacamazine. So we just make sure that gets visibility and and part of this is also a correlation analysis. That we are able to find that not only that there's a shrinking less shrinking of the brain, shrinking of the brain going along with blackamazin treatment, but also that correlates with each patient with a improvement in the respective regions. Of the brain's activities of the adascoct 13 subdomains, for example, For example, learning and and reading and writing as in one area of the brain, and if that is improved, in the clinical trial for the patient, that same region of the brain responsible for that if that also is less impaired in the active glycogen treatment arm compared to placebo. And if you can find this this further confirms the true effect of the drug. And that will be convincing in our opinion. Jesse Silveira: I I think that's really interesting. I'm definitely looking forward to that. And I think kind of related is in light of the semaglitude failure is that they reported that you know, that the drug had improved bio markers, amyloid, maybe tau. I don't recall about tau. But you know, the improved amyloid but had no clinical effect no improvement on CDR sum of boxes. And I think that I'm not sure exactly when there needs to be if there will be a time where regulators will no longer see amyloid equals, you know, better cognition or whatever. But moving along kind of on September, the company PR'd really impressive AppClear three comparisons to Prodromal. Populations and had a detailed follow on analysis of AbClear two and AbClear three subpopulations in a GWAS preprint a little bit later. AbClare three in particular appears to showcase an effective functional cure in early Alzheimer's patients and you covered the mechanisms of these earlier But can you give further color on APCLEAR one versus APCLEAR two and APCLEAR three? Specifically whether they were prespecified or exploratory and how regulators may or may not view these subpopulations in light of being exploratory or being prespecified. Is this something you can talk about? Christopher Missling: Yeah. So the definition of a b clear one which basically is the wild type sigma one gene. Which was identified already in the beneficial effect of that gene, in the previous preceding phase two a study. Which was published 2020, we identified that patients with the sigma one wild type which represents seventy percent, seven zero, of the population, had a better response to blarcamesine than those with the respective mutation. It's a point mutation and that's how biology is. Thirty percent of overall population, that's not patients, but overall population has a one point mutation, r s one eight hundred eight sixty six, and this one mutation changes the confirmation of the gene makes it a little bit less viable or effective in its ability to restore homeostasis. Increase autophagy, which is the mechanism of the activation of blackamisines through sigma one activation as its ultimate effect. And so the patients with the wild type, the fully functional non mutated gene respond better. So this was identified in the phase two a. So we prespecified the analysis of the primary endpoint as well as the secondary and exploratory endpoints With these in mind, how would patients do in the phase two b slash three study? With the wild type sigma one. And that was prespecified, and we now define this as a b clear one. And we did indeed demonstrate or it was demonstrated that indeed that was confirmed Blacamazine increased effect of patients with that of seventy percent, roundabout is the number of patients, seven zero, which improved better than the patients with the mutation. And that is improving. So now ABCLEAR2 was the result of a pre planned in the trial. We did a whole genomicosome analysis. That means we looked at all patients in the study and analyzed their genes and genes expression and response to the drug based on the genetic profile as well. That is the DNA of all patients. And in this analysis, which was preplanned, we found to our surprise, unexpectedly, one gene showing up is a extremely strong driver of efficacy And that gene turned out to be the collagen 24 a one gene. And that gene, I explained it just before, is involved in the buildup of the extracellular matrix. That's really really intriguing novel science and underappreciated or overlooked up to now by the in the field because everybody always looks at the neurons or the astrocytes or the areas of active involvement in the brain. But the extracellular matrix is where all these neurons and astrocytes are residing or sitting on. It's like a a pavement, like a street. And if that street is not smooth, like a highway, or like a a pavement, then then this then this these neurons cannot function well. And we were able to find find them because the patients with the mutation of this colagene in gene in this extracellular matrix, not respond so well, to blackamazine, representing that they're not as viable as the respective wild type carriers. And the good news, though, is the collagen wild type represents seventy one patient percent of the overall population. And that was also found in our trials. We had run about seventy percent with patients with this cytology and wild type gene. So very intriguing new data, and that was, as a consequence, was preplanned in the study. Of course, not prespecified because we found it in the analysis of the phase two b slash three study. Jesse Silveira: Okay. And it's my understanding that Leqembi and Kisunla were both approved after a CHMP reexam, and that subpopulation data enrich their filing by conferring a more desirable like, safety efficacy axis. Is that true, and is this any way relevant to Anavex's current position with some of this data, the the ABC CLEAR two and ABC CLEAR three data. Christopher Missling: It's it's it's correct. Both lecanumab and donanemab and these are run by large pharma companies. They had been a low prior approved in The US, reached the same point as we did just as we communicated a few weeks ago. And they underwent the same reexamination and were able to get approval. I don't want to I would say, make that that this is a guarantee for us because every review is complex and we are not able to anticipate or know the outcome of this re reexamination process, but the body pulls down to in the assessment of lecanumab and donanemab. Was the assessment and the judgment of benefit needs to outweigh the risk. Sure. And our our drug has safe has safety. It's has no ARIA. We talked about the efficacy, which we just discussed. But we cannot anticipate, of course, an outcome of the regulatory review. Jesse Silveira: Okay. Understood. And moving forward, will you be immediately refiling for the EMA reevaluation? To my knowledge, it took about three and a half to four months for the CHMP to give Leukemia and Kasimha their next opinions respectively. So maybe we could see something around April. Is that about what you're projecting? Christopher Missling: That that's correct. We will immediately ask for the reexamination as soon as possible. And, again, while there's never certainty to obtain approval from regulators, we remain highly excited about the science and the data. Jesse Silveira: Okay. And, you know, being a small with a unique mechanism of action, it's probably difficult for you to garner support from the community. I recall that the European Alzheimer's disease consortium, Alzheimer's Europe, and even the US Alzheimer's Association kinda put together persuasive arguments for the CHMP to consider during the Lyckembian re evaluations. Does Anivex have any support like this? Are you aware of any organizations, key opinion leaders, or even patients from the trial attempting to persuade the CHMP to reconsider. Do you have that support from the community? Christopher Missling: It's really not for us to make that move, and the community is aware of our of our drug, and we let them basically do what they think is appropriate. And what we only can do is point out the data and this is a process. And we are committed to this process. But also, very importantly, with this process, we gain also confidence with the regulators We are doing this in a partnership. We are doing this in a open discussion. We are are also getting the the ability to get feedback, which we need to move this forward in what way it takes to help patients addressing this unmet medical need. Jesse Silveira: Okay. Well, I see that we're, you know, nearing time. So to conclude for me, least, it's pretty obvious to anyone paying attention that, you know, Blarcamesine should likely be approved for early Alzheimer's patients and, you know, the the efficacy has been absolutely unprecedented in these megalithic effect sizes were achieved in a really small population, which should theoretically make it more difficult to do So I think it's a clear win for patients, caregivers, and payers, and I I think part of the problem the first time around may have been that it was sort of you know, piecemeal analysis and you're, you know, you're introducing analysis as you're going. But now that you have all analysis at your disposal, and a clear narrative, it's my hope that the company will use know, the reexamination to tell Barcambizine's story and earn the approval it deserves. So thank you for taking my call, and you have a good rest of day. Thank you. Christopher Missling: Oh, we appreciate the kind words, and our expert advisers advises us also to proceed and so do the patients and investigators They also advise us to proceed. And we may remain committed to do our best. Thank you. Clint Tomlinson: Yeah. Thank you, Jesse. And doctor, I don't see any further questions at this time. Christopher Missling: Well, thank you. So we are thankful for your continued interest and trust in ANAVEX. Wishing you a happy and blessed Thanksgiving. But in closing, we like to continue to point out our focus on execution as we advance our therapeutic pipeline to potentially improve patients' lives living with these devastating conditions. Oral once daily blacaramazine has the potential to address high unmet medical need in early Alzheimer patients. With its clinically meaningful efficacy profile, of slowing cognitive decline by more than thirty percent and sometimes even higher for certain populations. Its acceptable safety profile as demonstrated in the phase 2bthree program. Thank you very much. And, again, happy and blessed Thanksgiving. Clint Tomlinson: Thank you, ladies and gentlemen. This will conclude today's conference call. We appreciate you participating, and you may now disconnect.
Operator: Welcome to Fisher & Paykel Healthcare's Results Conference Call. My name is Lisa, and I'll be your operator for today's call. [Operator Instructions] Please note, this conference call is being recorded. I'd now like to turn the call over to Marcus Driller, VP Corporate. Marcus Driller: Thank you, Lisa. Well, good morning, everyone, and welcome to the conference call for Fisher & Paykel Healthcare's First Half Results for the 2026 financial year. On the call today are Lewis Gradon, Managing Director and Chief Executive Officer; Lyndal York, Chief Financial Officer; Andy Niccol, Chief Operating Officer; Justin Callahan, VP, Sales and Marketing; and Andrew Somervell, VP of Products and Technology. Lewis and Lyndal will first provide an overview of the results, and then we'll move on to questions. We'll be discussing our results for the 6 months ended 30 September 2025. Earlier today, we provided our 2026 interim report, including financial statements and commentary on our results to the NZX and ASX. These disclosures can be accessed on our website. With that, I'd now like to turn the call over to Lewis. Lewis Gradon: Okay. And thank you, Marcus. Good morning, everyone, and thanks for joining us here this morning. I'm going to be referring to the investor presentation pack that we released to the NZX and the ASX earlier today. So we'll start on Page 2 with a recap of some of the recent highlights. I'm pleased to note that the company has achieved $1 billion in first half revenue for the first time, and we really appreciate the contributions of our people right around the world during this half. Thank you, everyone. We continue to roll out our latest Nova Nasal OSA mask during the period, and this is now available in New Zealand, Australia and major markets in Europe. At our investor event in Royal Melbourne Hospital in Australia this year, we showcased the complexity involved in how clinical practice changes. And one way we contribute to that journey is hosting clinical forums and that's where interested health care professionals can get together, compare their clinical practice, compare their results with clinical data and the clinical practice guidelines. And over the last half, we hosted over 100 of these forums globally. Our U.S. team was honored to be recognized with the Zenith Award from the American Association for Respiratory Care and we got the construction of our fifth building at our East Tamaki campus here in Auckland, New Zealand underway, and they're making good progress as we speak. So turn now to Page 3. Operating revenue for the first half was $1.089 billion, up 14% on the prior period or that's 12% at constant currency terms. Net profit after tax was $213 million, and that's up 39% on the prior period or 28% in constant currency. Lyndal's going to unpack the financial results in more detail shortly. So we'll move on to the Hospital product group on Page 5. Operating revenue was $692 million. That's up 17% on the first half last year or 15% in constant currency, and that's come from a broad-based strength right across the hospital consumables business. New applications consumables revenue was up 18% or 16% in constant currency. And when we consider the robust growth that we're lapping from the first half last year, we think this result probably does reflect a consistent ongoing change in clinical practice. Hospital hardware revenue grew 21% in constant currency. And as you all know, hardware revenue can be quite variable on a month-to-month basis. And so we do anticipate that the full year hardware results will probably moderate down from this first half year result. So turn now to Page 7 for Home Care. Home Care operating revenue was $396 million, up 10% on our first half last year or 8% in constant currency. I would say, mask growth was 8% or 6% in constant currency. Our latest range of OSA mask has performed well and the Solo range and the Nova Micro range are available in most major markets. And as I mentioned earlier, Nova Nasal is in the early stages of its rollout, with a U.S. launch planned for later in our second half. Our home care result also has a strong contribution from OSA hardware growth, which we're not expecting to repeat in the second half. And if anything, we feel it might be a pull forward of demand from the second half. I'll pause there for now and hand over to Lyndal. Lyndal York: Thanks, Lewis, and good morning, everyone. On Page 8, our gross margin was 63% for the half. This is an increase of 110 basis points or 60 basis points in constant currency over the same period last year. The range of margin improvement efforts across our business, including manufacturing efficiency and other efficiency gains continued making a positive impact. U.S. tariffs on hospital products sourced from New Zealand impacted our gross margin by 32 basis points in this half. If the current global tariffs remain in effect as they currently are, our gross margin would be impacted by approximately 130 basis points on an annualized basis with approximately 75 basis points impacting in the 2026 full financial year. Our ongoing investment -- our ongoing improvement efforts are anticipated to more than offset this to provide an overall gross margin improvement for the full year FY '26 of roughly 50 basis points in both constant currency and reported currency using end of October exchange rates. Moving on to Page 9. Total operating expenses grew 8% or 6% in constant currency compared to the prior period. This reflects the higher investments made over the last few years and modest increase in people in the last financial year. Operating margin was 26.3% for the half, an increase of 335 basis points or 286 basis points in constant currency over the same period last year. This reflects the improvement in gross margin as well as our operating expenses growing below revenue growth. R&D expenses grew 4% to $114 million and were 10% of revenue for the half. We continue to estimate that about 60% of our R&D spend is eligible for the 15% R&D tax credit. SG&A expenses were $285.5 million this half, an increase of 10% or 7% in constant currency. Moving to Page 10. Operating cash flow this half was $245.8 million, up 5% from last year. Tax payments this half of $119.6 million were up from $53.8 million in the same period last year. Capital expenditure, which includes purchases of intangible assets, was $61.8 million for the half, up from $55.1 million in the same period last year. This includes the progress on the construction of the fifth building at our East Tamaki campus in New Zealand. Capital expenditure for the full 2026 financial year is expected to be approximately $210 million. Within this is around $125 million on land and buildings, including the next payment on our Karaka land purchase. Looking at the balance sheet, debtor were largely in line with last year at 43 days. Net cash at the 30th of September 2025 was $237.8 million, and our gearing ratio was minus 13.5%. Interest-bearing borrowings were $55 million, all of it being current. Turning to Page 11. We have declared a fully imputed interim dividend of $0.19 per share. This represents a 52% payout of our first half profit and is an increase on the interim dividend declared last year. It will be paid on the 16th of December. Looking now at foreign currency on Page 12. Foreign currency movements positively impacted our net profit after tax by $19 million compared to the same period last year. This largely reflects the movement in spot rates and hedging results when compared to the same period last year. In this half, hedging losses were $6.2 million after tax and foreign exchange losses on balance sheet translations were $1 million after tax. At end of October rates, we would have an overall positive impact on net profit after tax of approximately $10 million to $15 million for the full financial year FY '26 when compared to the full financial year FY '25. This includes hedging losses in FY '26 of $20 million after tax and losses on balance sheet translation of about $0.5 million after tax for the full 2026 financial year. Now back over to you, Lewis. Lewis Gradon: Okay. Thanks, Lyndal. So turning now to our outlook on Page 13. At 31 October exchange rates, we now expect full year operating revenue to be in the range of approximately $2.17 billion to $2.27 billion. And net profit after tax to be in the range of approximately $410 million to $460 million. And this revenue guidance revision is driven by currency movements since our last update in August. Our Hospital consumables second half growth can be influenced by year-on-year variations in the Northern Hemisphere winter respiratory season, and we don't have any additional insights into the potential impact at present. The available data does indicate that last winter was a historically strong season and so a similar season this year would be pushing our results towards the top end of our guidance. And conversely, a lower season would be tending to push us towards the lower end of guidance. Net profit after tax guidance incorporates this FX-driven revenue update, a 75 basis point impact to gross margin due to tariffs, good progress on gross margin improvements achieved during the first half and maintaining our operating expense growth below our long-term aspirational revenue growth. So I'll end my remarks here, so that we can open the line to questions. Marcus Driller: Thanks, Lewis. Lisa, if I could ask you to please open up the lines for questions. And can I please ask everybody to limit your questions to 2. This is to ensure that everybody has an opportunity to participate and then you can rejoin the queue for additional questions. Operator: [Operator Instructions] Marcus Driller: Okay. So the first question comes from the line of Lyanne Harrison at BofA. Please go ahead, Lyanne. Lyanne Harrison: Congratulations on hitting that $1 billion revenue for the first half. I might start with guidance and a question for Lyndal. I know you mentioned that FX is driving that increase or upgrade in guidance that you provided today. But for the NPAT level, you mentioned FX tailwinds of about $10 million to $15 million. But from a guidance perspective, your range increased by about $20 million. Can you talk to what else might be in that? Lyndal York: Yes, Lyanne, that's sort of what Lewis mentioned in terms of the gross margin improvement activities continuing on through the second half and growing our operating expenses below that long-term revenue aspiration to aim for some continued modest growth there. Lyanne Harrison: Okay. And then on the gross margin, can you talk a little bit more, obviously, got very good gross margin expansion this half one on a constant currency basis. Can you talk about what aspects contributed most to that gross margin expansion? Lyndal York: Yes. Look, it's really everything that we do in the business. We've been back to sort of business as usual across our business with everything playing a role there. It's our manufacturing teams, getting the manufacturing efficiencies, doing all their continuous improvement projects, getting really strong improvement out of that, a bit of pricing through the sales team that we typically get and just sort of all of that playing a role into the gross margin improvement. And so as we anticipate, pre-COVID, we're able to improve gross margin about sort of 100 to 150 basis points on average per year, and we saw delivering that. Lewis Gradon: Maybe one other little bit of color, Lyanne, the complexity in that answer is in the operations and manufacturing space. Typically, that's over 3,000 improvement projects per year, all individually relatively small, but all adding up. Marcus Driller: Thanks, Lyanne. Next question comes from Dan Hurren, MST. Dan Hurren: Look, thanks for the guidance on the tariff impact and that color there. But I was hoping you could help us understand like how that tariff experience is playing out in the ground with price efficiencies? Lewis Gradon: Sure, Dan. We're thinking of is just another cost-in just like all other cost-ins and it's in the bag of just business as usual cost-ins. We're running the business as we normally would. We're running our continuous improvement projects as we normally would. So today that's really no material impact on the ground at all. Dan Hurren: And look, a follow-up then. If we -- if you have a look around, it appears that Fisher & Paykel will probably be more gentle on price compared to other tariff impacted companies and broadly the same channel. Is there a potential that the price becomes a more of a lever over time as sort of the -- as the world gets used to these tariffs. Lewis Gradon: Could look at that 2 ways down. I mean we've got wonderful opportunities with every single customer we have to improve clinical practice. We don't have a single hospital anywhere in the world let alone in the United States, that's fully penetrated using all of our therapies for every patient that could. So we think we get a much better result spending our time talking about improving clinical practice, improving current outcomes. We think that gives us a better result in the short term and the long term, gives the customers a better result. So that's where our focus is at present. Marcus Driller: Thanks, Dan. Next question come from Stephen Ridgewell at Craigs Investment Partners. Stephen Ridgewell: Just had a couple of questions on the hospital business performance, particularly during the first half and perhaps what you're seeing going to the second half. Hospital devices were a standout with constant currency growth of 21% in the period. Unless you may recall back in May, I think the indication was you weren't expecting too much from Airvo 3 or Airvo 3 NIV in terms of being a material driver. I'm just wondering, was that 21% growth we've seen, does that include a strong contribution from those products or otherwise, could you just give us a little bit color as to perhaps what's driven that strong result from Hospital Devices in the first half, please? Lewis Gradon: Yes, sure. First caveat, Stephen, is if you've been following us for more than a year or 2, you've seen that, that hospital hardware result is very lumpy, can be lumpy year-on-year, certainly lumpy half-on-half and kind of where we're going with that first half result, but I mean it's a great result, 21%. It looks like a very positive lump. We would not be surprised if it's followed by a negative lump for our second half and kind of reverting to more traditional growth for the full year, that would be our pick. And then the contribution very consistently in our business pretty much forever is a mix shift from one generation of product to the previous one. And right now, you're seeing that from 850 hardware to 950 hardware, and you're seeing that from Airvo 2 to Airvo 3. So that's certainly a contributor. Probably not much more than normal would be my pick, it's always happening. Stephen Ridgewell: And so just a follow-up to that. Have you seen within that 21% more of tilt towards growth from the Airvo product suite or pretty consistent with the humidifier controllers? Lewis Gradon: I don't think consistent out of that choice. I mean there are different stages, there are different evolutions, but nothing unusual there. Stephen Ridgewell: Okay, good. And then the second question is still on the hospital business. Again, so probably another surprise versus where the market was at was on kind of core consumables, which have come in again, a bit stronger, which given -- I know it's not purely with the respiratory data has a big influence, but we sort of see 19% constant currency growth in core. Just curious, is it sort of more market share gains have you entered some new markets or won some contracts. Just a bit of color there would be helpful to understand. Is that growth sustainable into the second half in the core consumables business? Lewis Gradon: Yes. So what we think is going on there, is during COVID an awful lot of these fully functional ventilators went out that could do invasive, noninvasive and nasal high flow. So we think, over time, people are using those ventilators across the range and they're using them for noninvasive and nasal high flow in some markets. And that does mean that for us, it looks like they're using an invasive circuit. So we think some of the noninvasive should we say growth and maybe even a little bit of the Optiflow nasal high flow growth in circuits a little bit sleeked into what looks to us and looks to you like that traditional consumables or invasive consumers. Marcus Driller: Thanks, Stephen. Next question come from Davin Thillainathan at Goldman Sachs. Davinthra Thillainathan: I just want to understand the guidance upgrade for the full year a little bit better. Just trying to make sure we understand the moving parts here. Part of it is clearly FX that is helping. But if I look at your first half results, you have come ahead of your guidance for the half, clearly indicating there's underlying momentum in the business? Because my understanding is your FX for the half hasn't really changed relative to when you set that guidance. So could you help us understand where the business outperformed in the half and perhaps why you don't expect that outperformance to flow through for the full year, if my understanding is right that your guidance upgrade is largely FX driven. Lewis Gradon: Absolutely right and good question. Thank you. So there's 2 components there. First one is hospital hardware, which we kind of just spoke to. It's quite lumpy. That performed pretty well in last couple of months. And I think probably doesn't flow into H2 like that. In fact, maybe even goes the other way. And then the other one is also hardware but OSA hardware. And this is CPAP machines where we've had a customer in a market where 3G is being turned off, accelerate the CPAP replacement cycle. So that's in our home care result. And once again, that hardware has probably come out of the second half. Davinthra Thillainathan: Okay. And then thinking about the consumables part of your business in the Hospital segment. There's a whole range of new products that have, I guess, been released progressively over the last few years. And one particular sort of therapy that seems to be getting a bit more attention from a product launch perspective is in the NIV part of your franchise. Could you perhaps help us understand that a little bit better how does NIV sort of help the business, particularly given you are focused on changing clinical practice with the high flow part of it. So perhaps just the overlap between those therapies and how you expect that part of the franchise to grow over the next few periods? Lewis Gradon: Sure. Well, I think, overall, we are building our respiratory care business that covers all respiratory care applications and usages in a hospital, whatever the requirement and wherever the patient is. So NIV plays a role in that. And the leading clinical change in that space is nasal high flow for respiratory support. But another component of that is more and more usage of NIV and another component of that is humidified NIV, probably still less than 20% of the market would be humidifying NIV. So the way we tend to think of it is our driver is a change in clinical practice towards nasal high flow. And once a customer is using that therapy to some extent, it makes a lot more sense for them to move to humidification and noninvasive therapy as well or to move to our noninvasive therapy offering. So we said it's kind of following along behind the change in clinical practice. Marcus Driller: Thanks for your questions, Davin. Next questions come from the line of Vanessa Thomson at Jefferies. Vanessa Thomson: I just wanted to ask about the respiratory season. You mentioned that last year, it looks like it was a strong season. I think when we look at all respiratory illness combined my understanding was it looked moderate. Is that wrong? Or is it that flu requires more support -- inducing more of your products than the other viruses? Lewis Gradon: So I'd kind of like to restate that, if you don't mind. So our assessment of last year, second half was that was the biggest flu season data in 15 years. So we think that was a biggie. You've got a COVID component and other components in there. So over time, you'd expect COVID to probably be coming down. And then we've kind of moved away from classifying them as high, moderate and low and all that kind of thing. It's just too murky. And what we've done last year, what we're trying to do this year is really just confine our analysis to this year versus last year and not categorize them. We've just found it too confusing. And so when we go down that route, well, last year, H2, our biggest flu season in 15 years, COVID was still relatively material. Vanessa Thomson: Okay. Thank you. Okay, and my second question, I just wanted to ask if you had seen any impact from the shutdown. I think it was around 6 weeks, and we've seen some of the distributor companies talk to some slowdown. I wanted to get that affected you at all? Lewis Gradon: Shutdown. I would say I'm looking around the room, not from hospitals, not from FDA, not from reimbursement. We're shaking our heads on that one. Marcus Driller: Thanks, Vanessa. Next questions come from Matt Montgomerie at Forsyth Barr. Matt Montgomerie: Well done on a solid result. Just on Home Care for the second half. I was wondering if you could give us a feel for where you see growth rates. Would that be roughly consistent with the first half? Lewis Gradon: Well, I think probably the case for us is you'd expect a similar result to the first half under similar conditions, certainly for masks. And I've spoken to the hardware component of that. We think our first half growth is probably coming out of the second half. Matt Montgomerie: And then secondly, on the anesthesia business, are you able to give us color for where that's in terms of growth or as a share of new apps in the first half? Lewis Gradon: Well, growth is still pretty solid, still got a 40% odd, something like that off that low base, that low base has become a bit over 10% of new apps consumables this half. Marcus Driller: Thanks, Matt. Next questions come from Craig Wong-Pan at RBC. Craig Wong-Pan: Just looking at the full year guidance ranges. If I look at what that implies for the second half growth, I calculate the midpoint would imply 6% revenue growth, but actually NPAT declining by 1% in the second half. Just wanted to understand, is there anything we should be aware of in thinking about NPAT either in the PCP or in this coming second half to explain why there might be a decline in NPAT? Lyndal York: I'll take that. It's really a case of the revenue that Lewis has spoken about, the hardware likely coming back from the second half into the first half. Margin, we're still expecting improvements, but we get the full half of impact of tariffs in the second half. So there's quite a headwind related to that. And then OpEx still managing to grow that below our long-term revenue aspiration. And so what that ends up being will depend on where we land from a revenue perspective. Craig Wong-Pan: Okay. That's helpful. And then just wanted to understand the clinical forums. I mean, Lewis, you called out 100 hosted events this kind of period. Just trying to understand, is that sort of a similar level to usual? Or is this going to be something kind of going forward to help you change clinical practice? Lewis Gradon: So our business is based on a change in clinical practice. That's what we do for living. It's pretty much what we've always done, and it's relatively unique in our space. It's a relatively unique thing to be doing. And we had an Investor Day in a hospital in Melbourne earlier this year, and we went through some of the complexities and changing clinical practice. So what I thought I'd do this time is just following up on that theme, giving people more of an understanding of what changing in clinical practice, what that really means. I'd follow up with giving you some insight into the forums that we run. Now having said all that, that is actually pretty normal to us. We generally do over 100, I'd say, every half. Just trying to give some insight to that whole process. Marcus Driller: Thanks, Craig. Next question has come from Saul Hadassin at Barrenjoey. Saul Hadassin: First one is on OpEx. I think at the full year '25 results, the guidance was for around 10% growth in operating costs in FY '26. Clearly, it's a lot lower in the first half. Maybe Lyndal, just if you can talk about where you think OpEx growth will land for the full year and what's embedded in that NPAT guidance range? Lyndal York: Yes. Look, probably sort of high single-digit growth we'd be anticipating for the full year in OpEx. Saul Hadassin: Okay. And Lewis, just your comments about sort of pull forward of sales on Home Care flow generators, but also that commentary around Hospital Hardware. You've had 2 months almost of the second half. Can you comment on what you're actually seeing on the ground in terms of those hardware sales? Is that what is giving you the guide as it relates to second half? Is it what you're already seeing? Or is that just still effectively an estimate and you don't actually have insights yet into second half performance? Lewis Gradon: It's just an estimate. I mean when we look at our hospital hardware numbers on a 6-monthly basis, you can see they're pretty lumpy. There's nothing to read into it. On a month or 2, I wouldn't read much into it. But I guess our pack is we probably wouldn't expect to see that first half again in the second half that kind of volume. Marcus Driller: Thanks, Saul. Next question comes from Marcus Curley at UBS. Marcus Curley: Just on the Home Care business, you reported 6% in masks. It's probably a touch below market. Could you just talk a little bit about what you think is happening there? Maybe it reflects weakness in the full face category again? Or just some color would be useful. Lewis Gradon: Okay. Sure. I think the fundamental is lapping 14% growth this half last year. So this half last year, we had the Solo Nasal, Solo pillows were launched that drove 14%. In the second half, we had Nova Micro launch. In the second half, we also had 3 or 4 launches from competitors in that half. And that still drive 9%. So I think this H1 story is more about what we're lapping, and it's about no new introductions for us materially during the half. Marcus Curley: Have you seen any impact on those growth rates in the installed base or resupply part of your business? Or is it too difficult to tell in terms of your visibility into that? Lewis Gradon: So as far as we can tell, I'd say no. We haven't seen any unusual impact in resupply at all. Marcus Curley: And then just on Home Care, competitive bidding most likely kicking off next year. Do you have a view on how that would affect the industry and yourselves? Lewis Gradon: Justin, what? Justin Callahan: Marcus, it's Justin here. I think, I mean, at this stage, the final rules and requirements around competitive bidding haven't been really disclosed. And we expect the market to sort of react in a reasonable way. So we're not reading too much into it at this stage. It's still pretty early. Marcus Curley: So Justin, your base view would be reimbursement levels in the U.S. relatively stable. You wouldn't be expecting a material decline? Justin Callahan: I think we'd be expecting whatever the adjustment is it would be sort of a lot more reasonable. There's a lot more sort of experience in that space now from our customers. So I think it's -- we're not expecting anything too major. Marcus Driller: Thanks, Marcus. Next questions come from Andrew Paine at CLSA. Andrew Paine: Congrats on the results. Just looking at your full year guidance of $460 million at the top end of the range for NPAT. And just kind of working down, looking at that at the top end of the range, you've done $213 million in the first half. So you need $247 million in the second half to hit the top end of the range. If we back out FX there, bringing that down to $237 million constant currency, that would imply just 6% growth year-over-year in NPAT. Obviously, you've got the tariff impact in there, which if I'm right, that's about 120 basis points annualized. So that adds another 4% but OpEx is also performing better than expected. So just trying to get a bit of color around that growth rate at the top end of the range. It looks somewhat achievable even with maybe a slightly worse flu season year-over-year. Lyndal York: Maybe one thing, Andrew, that I'll just clarify that currency is actually a headwind in our second half compared to the second half of last year. So these numbers instead of being a tailwind of the 10 that you were talking about, it's actually a headwind of close to that. So because if you remember, the first half, we've got a $19 million benefit of NPAT. And we said for the full year, probably $10 million to $15 million. So that means the second half itself has got quite a tailwind -- sorry, headwind. So -- and then it's pretty much revenue dropping down, the tariff coming in, but still getting some good improvements, excluding that tariff for gross margin and OpEx in that sort of high single digit growth. Andrew Paine: Yes. Okay. So even with the FX kind of moving favorably. I assume that's just impacted by the hedging that you have in place? Lyndal York: Yes. Look, it's a range of things. They're the biggest mover in the currency half compared to the second half last year is actually the balance sheet translations where we had a gain of about $7 million last year in the balance sheet translations. So not expecting much this year. So there's a large part of that headwind. Andrew Paine: Okay. Sure. Okay, that makes sense. And then just obviously, it's difficult to really kind of talk to this, but there's the ongoing tariff investigation. I don't know if you can provide any clarity around if a similar tariff was applied in Mexico, what that would mean in terms of margin impact to the business? Lewis Gradon: We haven't really gone there. I mean, I think -- our thinking about tariffs is somewhat colored may be compared to most but anything we think about to do with tariffs or to manage tariffs or to change things because of tariffs, that's time and effort that we're not putting into growth. So that's always as a front line for us, actually, in tariffs are the topic. Marcus Driller: Thanks, Andrew. Next questions come from Adrian Allbon at Jarden. Adrian Allbon: Maybe just a clarification question. Maybe this is for you, Lyndal. Just on your interim report, and as you get to the bottom of the comments from Neville and Lewis, there is like a discretionary bonus of $9 million to be shared amongst the employees. Just to understand that, is that a normal feature? Or is it -- and you just called it out this time? Or -- and how is it sort of accounted for? Lyndal York: Yes. So we've been doing this. This is a profit share payment that we make to all employees globally, and we've been doing it since we were formed basically... Lewis Gradon: Since before listing. Lyndal York: Since before listing. And we do normally show that amount in our annual report every year and in our interim report. So nothing's changed, nothing out of the ordinary. Adrian Allbon: Okay. And would that have been accrued until the first half anyway, just as per normal? Lyndal York: Correct, yes. Adrian Allbon: Or is it a full year payment? Lyndal York: No, no, no. It's half on that premium. Adrian Allbon: Okay. All right. No problem. Sorry about that. Just the second question, like also in that sort of interim report, like you make a call out on the RENOVATE study, which I guess in the theme of this one, like you sort of -- you are putting a bit more emphasis on the change in clinical practice. Like is my sort of read of that, that's sort of like quite -- it's a large sort of clinical trial that's sort of you're presenting some useful results in terms of for hypoxic cases using high flow as a triaging type product. Is that the right way to think about the output from that study and how you might be using it to sort of educate? Lewis Gradon: Well, I think the thing about that study is the number, I think it's towards 2,000 patients. So it's a large number of patients and covers COVID and not COVID as well. And it's a comparison against noninvasive ventilation if memory serves me correctly, which is kind of a step up. And if finds nasal high flow, the word they use is not non-inferior, non-inferior. So as we're saying -- yes, yes, you've got a therapy that the user would rather use. You've got a therapy that a patient would rather have, and it's not inferior to NIV. That would be the short version. Adrian Allbon: Right. And obviously -- but presumably, that also dovetails nicely into like the Airvo 3 being wider use across the hospital as well and simpler to use for -- as you go down the staff levels. Lewis Gradon: Yes. I mean I want to be careful. We've called out one. It had a lot of press at the time it was released. It's unusual. It's big numbers elegantly done an analyzed study, but it's one of hundreds and probably more compelling is into clinical practice guidelines around the world. And that's really stepped up the issuing of clinical guidelines from the different professional bodies. Marcus Driller: Thanks, Adrian. Next questions come from David Bailey at Morgan Stanley. David Bailey: One for Lyndal and one for Lewis. Lyndal, 50 bps in gross margin this year, including 75 bps from tariffs. So if you strip out tariffs, you're doing 125. You sort of said on a full year run rate, full year tariff impact is 130. So as I look at fiscal '27, should we be thinking that all else equal, there's an incremental 65 basis point tariff impact to come through and then the underlying will give you sort of 60. So just trying to understand the incremental change from the tariff impacts in '27, just given that we know that the underlying should be around 125 basis points or so. Lyndal York: Yes, David. Look, you're spot on that. There's another top up of that headwind of tariffs coming into FY '27. So you're right, sort of 65 bps. And look, anywhere from sort of 100 to 150 basis points on average a year, we try to do is underlying improvement. David Bailey: Okay. That's helpful. And just for Lewis, I mean there's some commentary here around clinical adoption. There's clinical evidence that comes through to the sales and marketing effort as well. Just wondering if you can sort of talk to a little bit about how those two have progressed? And then in terms of utilization of hardware and asset turns on, how is that sort of driving more consumables used per device, if you can? Lewis Gradon: Yes. So that's sort of a double bang. I'll answer the second one first because our therapies are used across such a diverse range of hospital situations from EDs to recovery rooms to general wards to ICUs, we don't really have a utilization versus consumable terms per device, model or predictor because there's so much variation in there. We can't do it. So we've kind of abandoned that measure. And then in terms of clinical evidence, sales and marketing effort, the big mover there is clinical practice guidelines. Once we have clinical practice guidelines from a reputed clinical body, our approach is generally to use the clinical practice guideline. And I think I'm looking at Justin, I don't think we've got any hospital anywhere on the planet perfectly implementing clinical practice guidelines on every patient they could. Justin Callahan: Not yet. Lewis Gradon: Any comment? Justin Callahan: Correct. Lewis Gradon: So at this stage of the nasal high flow evolution anyway, it's about the clinical practice guidelines, and that's what we utilize in our sales, if it's more than anything else. David Bailey: Yes. Understood. Okay. Maybe just a different way to ask it then is, do you think the devices are being used more broadly across the hospitals? Justin Callahan: Yes, we do. Yes, absolutely. Marcus Driller: Thanks, David. Next questions come from Christine Trinh at Macquarie Bank. Christine Trinh: Congratulations again on a strong result. Just 2 quick questions from me on the consumables space. Firstly, New Apps growth of 16%, constant currency was ahead of our expectations. Can we expect a similar level of growth going forward? And on the U.S. launch of the Nova in the second half, can we just get your expectations for contributions to growth there? We think in kind of double digits that we saw in the first half of '25. Lewis Gradon: U.S. Nova, let me talk to that first, probably late in H2. So I wouldn't be making any material contribution at this stage probably later in our second half. And then New Apps at 16%. So when we think about second half, we're moving into the seasonal hospitalization zone. And you would think that if we had a similar seasonal hospitalization, this second half compared to last year, this should probably get a similar growth rate in the second half to what you saw in the first half. This time around, because of the very high flu season numbers from last year and also COVID probably decreasing, we would characterize last year as probably really high and probably top end of range. If we had a similar season this year, we'd expect we'd be at top end. Christine Trinh: Great. And just on that Nova piece, if it's in the first half of '27, can we just get your thoughts on growth expectations for that half? Lewis Gradon: Yes, maybe way bit too far out for us at the moment, Christine. Marcus Driller: Next question comes from Marcus Curley at UBS. Please go ahead, Marcus. Marcus Curley: Could you just talk a little bit maybe a little about the trajectory on R&D. Obviously, 4% in half is low for the business. Is that just reflecting some lumpy projects? Or are you generally starting to see lower percentages of R&D for the business for the next, say, 12 to 24 months? Lyndal York: Yes, Marcus, what that is, is really reflecting the higher than sort of our normal revenue aspirational growth over the past number of years. So it's just sort of writing that as the sort of average over time. So we'd probably expect that to remain a little bit on the lower side, sort of low to mid-single digits for probably another year or 2. Marcus Curley: Great. And then just on anesthesia. Could you provide any color in terms of any noticeable difference between trace and switch specifically, is it sedation or GA driving it or both? Just can you get a bit of color in terms of the different components of the market? Lewis Gradon: It kind of depends on the release track we've taken places where we've had Trace and Switch for -- from day 1, probably on comparable contributions. And then at least in the U.S., we led with Trace, and we're still leading with Trace. That's the bulk of it in the U.S. So the answer to your question, it varies depending on what we led with when we led with it. Marcus Curley: And Switch is in the U.S. these days? Lewis Gradon: Well, it's approved in the U.S. We are still following up all the Trace opportunities in the U.S. at present. Marcus Curley: And that's different to a Switch opportunity? Lewis Gradon: Yes. That's right. Marcus Driller: Thanks, Marcus. We don't have any more questions in the queue. So I will now turn over to Lewis for some concluding comments. Lewis Gradon: All right. Well, thanks, Marcus, and thanks to everybody for your questions today. And as always, I'd like to conclude by thanking all of the people at Fisher & Paykel for your contribution this half. And we'd like to acknowledge the support of our customers, suppliers, clinical partners and shareholders. So thank you, everybody, and enjoy the rest of your day. Thank you. Operator: This concludes our call today. Thank you for your participation. You may now disconnect.
Operator: Good afternoon, and welcome to the Petco 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 Tina Romani, Head of Investor Relations and Treasury. Please go ahead. Tina Romani: Good afternoon, and thank you for joining Petco's Third Quarter 2025 Earnings Conference Call. In addition to the earnings release, there is a presentation available to download on our website at ir.petco.com. On the call with me today are Joel Anderson, Petco's Chief Executive Officer; and Sabrina Simmons, Petco's Chief Financial Officer. Before we begin, I'd like to remind everyone that on this call, we will make certain forward-looking statements, which are subject to a number of risks and uncertainties that could cause actual results to differ materially from such statements. These risks and uncertainties include those set out in our earnings materials and SEC filings. In addition, on today's call, we will refer to certain non-GAAP financial measures. Reconciliations of these measures can be found in our earnings release, presentation and SEC filings. With that, let me turn it over to Joel. Joel Anderson: Thanks, Tina, and good afternoon, everyone. Thank you for joining us to discuss our third quarter results, where I'm pleased to share that we delivered another profitable quarter in line with our plan. We've continued to strengthen the foundation of our operating model, improved retail fundamentals and position Petco for sustainable, profitable growth over the long term. We delivered sales in line with our outlook and meaningfully improved our profitability, increasing operating income over the last year by over $25 million, generating $99 million in adjusted EBITDA and more than $60 million in free cash flow. I want to thank our teams across the organization for their dedication, focus and execution on our transformation initiatives that are continuing to gain traction as reflected in our improvement in profitability and cash flow in Q3 and year-to-date. You've heard me talk about the importance of culture, and you will continue to hear that as a key theme of our transformation. When I joined Petco, we had a strong culture centered around pets first. The passion of our 30,000 partners was one of the many things that attracted me to joining. Over the last 9 months as a collective leadership team, we've been building on that culture in 2 ways. First, through reinstilling retail fundamental discipline, which is driving increased financial rigor and accountability, this is a testament to how the organization has embraced new ways of working with strengthened operating principles and was a large contributor to our results. Second, creating a culture that is playing to win. We are fostering a culture equally focused on operating discipline and a winning mindset. Last month, I had the opportunity to spend time with our support center and store leaders at our Leadership Summit. Together, we aligned on what our go-forward values will be for a reimagined Petco and what that means for our customers and our plans to execute on our [ One Petco Way ] vision. We are squarely in Phase 2 of our transformation which is centered on improving profitability and strengthening our foundation from which to grow. The success to date has fundamentally changed the way we think and work to continuously identify future areas of opportunity that will further unlock long-term value. At the same time, we are now strategically shifting resources towards Phase 3, a return to growth now that our bottom line has meaningfully been improved. Last quarter, I outlined the 4 pillars that support Petco's return to growth. First, delivering compelling product and merchandise differentiation; second, delivering a trusted store experience; third, winning with integrated services at scale; and finally, serving our customer with a seamless omni experience. Let me now provide you more specific color on each pillar. Starting with compelling product and merchandise differentiation. I view this in 2 categories. On the consumable side, we have improved shopability with higher in-stock availability, our customers rely on us to have everyday go-to product, better integrated assortment planning and merchandising teams have been created an improved in-store experience as well as online. On the discretionary side, we are focused on infusing a steady stream of newness in 2026 that complements our evergreen product assortment with more seasonal and trend-driven buys. Previously, there has been a said-it-and-forget-it mentality, which is not a very aspirational shopping experience and one that we are changing. As we look forward, we see significant opportunity to change our collective merchandise mindset from solely a needs-based business to also a wants-based business by overhauling our product offering and surprising our customers with unexpected ideas for their pets. A great example with the success of our online pilot, our new My Human product line was expanded into over 200 stores. This is a small milestone but exemplifies our team's focus and ability to lean into trend forward impulse purchases. Next, moving to a trusted store experience. Joe Venezia, our Chief Revenue Officer, who joined us just about a year ago, leads our operations and services team. Since joining, he has been focused on store simplification, standardizing processes across our fleet and taking costs out of our operations. He is now shifting his focus to additionally include revenue-driving KPIs like increasing transaction size, driving sales contests and increasing customer interactions. With our passionate partners, strong customer engagement and a full suite of services, we can create both a fun and convenient experience that pet parents are unable to get anywhere else. Our store partners are a unique differentiator for Petco. We benefit from having long time, passionate and knowledgeable partners that serve our pets and our pet parents. Our opportunity today is around making it easier to run our stores, freeing up our store associates to interact with customers and use what we call their superpowers of pet knowledge, improving these areas will make it easier for us to drive sales growth in 2026. Moving now to services at scale. Our nationwide wholly owned and operated services business continues to be our fastest-growing category and is our competitive moat, given its in-person nature, high barriers of entry and difficulty to replicate, a holistic ecosystem between grooming, owned hospitals, clinics and center of store can only be found at Petco. What especially excites me here is the opportunity we have with our existing assets. I think about it in 3 ways: one, improving utilization through increased staffing and appointment availability; two, improving engagement to enhance digital capabilities; and three, improving integration of services and center of store. With regards to veterinarian staffing, I'm pleased to share that we are ahead of our doctor hiring goals that we set at the start of the year with record high doctor retention. During the quarter, we also promoted 2 of our long-time leaders to chief veterinarians, reinforcing our commitment to growing our veterinary business. Simultaneously, we are fostering a culture of team development, top talent recruitment and execution of our strategic veterinary initiatives. All of this is foundational and is critical to increasing the utilization of our hospitals. Additionally, we are increasing access to care by strategically adding hours back on peak client demand and making appointments easier to book. We are standardizing processes across our fleet to secure in-store follow-up bookings. We are increasing efficiency for our refined grooming apprenticeship model, freeing up both appointment availability and increasing volume. And finally, we are enhancing online appointment scheduling to ensure we have better coverage and better flexibility for our customers. Clearly, Q3 has been a busy yet productive time for our services businesses. Let me spend a moment on improving integration between services, and center of store as the opportunity here may not be well understood. Historically, Petco stores and services operations were run relatively siloed which was a missed opportunity. There is a tremendous value unlock when better integrating our stores and services experience. I'll give you a simple example. Previously, our veterinarians did not have access to customer purchase data. We are in the process of fixing that. And in 2026, our veterinarians will be able to see purchase history and make more informed diet recommendations based on overall pet health and specific needs. Taking that a step further, the veterinarian will be able to direct the customer to the recommended product in store, or recommend a store associate to assist. This is a simple example but illustrates how increased integration of services in stores can create a better outcome for pets and improved experiences for our customers. Now moving on to our fourth and final pillar, seamless omni integration. Layered on to everything I just discussed are enhanced digital capabilities, a more compelling membership offering, and a frictionless digital to store experience to customers wherever they choose to engage. I'm happy to report we are on plan with our improvements -- and in fact, we are starting to implement some of these changes in Q4 of this year. For example, we are transitioning the way we buy media, beginning with better targeting and bidding strategies which we expect to drive efficiencies in our marketing spend as we continue to strengthen Petco's reintroduction of our tagline, Where the Pets Go. I'm pleased with the progress of the membership program, and we will begin live testing and pilot the program this quarter in a small handful of districts. Our focus on these 4 pillars will fuel our growth, which we still expect to see in 2026. In closing, as you can hear in my voice, this has been a productive quarter at Petco, and I'm pleased with the progress we continue to make on the commitments I outlined at the beginning of the year. As each quarter passes, we get better at celebrating amazing pet experiences, executing our strategies and delivering on our promises internally and externally. The initiatives planned for the fourth quarter will advance the Petco transformation, and I look forward to sharing updates with you in March. Ahead of the Thanksgiving holiday, I want to personally express my gratitude for our partners who puts pets first every day and boldly reflect who we are and what we stand for. Our Petco Love foundation has demonstrated our long-standing commitment to saving lives, finding loving homes for over 7 million pets to improve the welfare of animals. With that, I'll hand the call over to Sabrina to take you through the specifics of our third quarter results and outlook for the remainder of the year. Sabrina? Sabrina Simmons: Thank you, Joel. Good afternoon, everyone. In the third quarter, Petco once again delivered against our commitments while building a stronger foundation from which to grow. As we've discussed all year, strengthening the health of Petco's economic model has been our top priority. I'm pleased with our progress, as demonstrated in our expanding gross margin, expense leverage and operating margin expansion, not only in the quarter but year-to-date. In line with our outlook, which reflects our decision to move away from unprofitable sales. Net sales were down 3.1%, with comp sales down 2.2%. As a reminder, the difference between total sales and comp is driven by the 25 net store closures in 2024 and the additional 9 net store closures year-to-date. We ended the quarter with 1,389 stores in the U.S. Gross margin expanded approximately 75 basis points to 38.9%. Similar to the first half, gross margin expansion was primarily driven by a more disciplined approach to average unit retail and average unit cost, including stronger guardrails and more disciplined processes to effectively manage our pricing and promotional strategies. It's important to note that in this quarter, tariffs began to more meaningfully impact our cost of goods sold. Moving to SG&A. For the quarter, SG&A decreased $32 million below last year and leveraged 97 basis points. As we've discussed previously, our shift in mindset an increase in rigor around expense management is evident in our results. Savings were achieved across the board and especially in G&A areas. Notably, marketing spend was about flat year-over-year. Our expanded gross margin and expense leverage resulted in operating margin expansion of over 170 basis points. Adjusted EBITDA increased 21% or $17 million (sic) [ $17.3 million ] to $99 million (sic) [ $98.6 million ] and adjusted EBITDA margin expanded nearly 140 basis points to 6.7% of sales. Moving to the balance sheet and cash flow. Q3 ending inventory was down 10.5% while achieving higher in-stocks for our customers. We continue to manage inventory with discipline, which is one of the drivers of our improving cash profile. Free cash flow for the quarter was $61 million, and year-to-date was $71 million. Both the quarter and year-to-date were significantly above the prior year. Notably, year-to-date cash flow from operations has nearly doubled versus the prior year to $161 million. We ended the quarter with a cash balance of $237 million and total liquidity of $733 million including the availability on our undrawn revolver. And now turning to our outlook for the full year. We are once again raising our adjusted EBITDA outlook for 2025. We now expect adjusted EBITDA to be between $395 million and $397 million, an increase of roughly 18% year-over-year at the midpoint. For the full year, given we are entering the last quarter, we are narrowing our range for net sales and now expect net sales to be down between 2.5% and 2.8%. For the fourth quarter, we expect net sales to be down low single digits versus the prior year as we continue to execute on the initiatives we've outlined. We expect adjusted EBITDA to be between $93 million and $95 million. It's important to note that the impact of tariffs is sequentially more meaningful in Q4. Additionally, the significant progress we've made year-to-date against strengthening our economic model and improving our earnings profile has provided us the option to begin selectively investing behind the business where it may make sense as part of our ongoing efforts to set the stage for Phase 3, a return to profitable sales growth. With regard to other guidance items. For the full year, we expect depreciation to be about $200 million, net interest expense of approximately $125 million, about 20 net store closures and $125 million to $130 million of capital expenditures with a greater focus on ROIC. In closing, as Joel discussed, we're in a period of significant change, and I want to extend my deepest appreciation to all of our teams for embracing that change to deliver better outcomes for all of our stakeholders. With that, we welcome your questions. Operator: [Operator Instructions] The first question will come from Simeon Gutman with Morgan Stanley. Simeon Gutman: Let me -- I was intrigued by something you talked about some of the wants. Can you talk about -- can you frame what mix of the business is wants versus needs today and it may be far out there but what's the vision? And my guess is the wants aren't truly wants. I think it's -- given your background, there's probably some unique merchandising that's partially wants but curious how you can frame that and maybe tease it out a little. Joel Anderson: Thanks, Simeon. It's a great question. And yes, if you think about it in the traditional sense, consumables is traditionally a needs business. And it's the overwhelming majority of our business but even that business, Simeon, I think, has some elements to it that can be more of a want in principle. And what I mean by that, and I alluded to it in my prepared remarks, we've just had this said-it-and-forget-it mentality for our entire business. And if I just focus on consumables for a second, for example, in 2025, we our dog food business was largely all surrounded around 1 big episodic reset in the middle of the year. And we're really going to change that in '25, and as our big vendor partners come out with innovation, newness, different types of product, new flavors, cat extensions, we're going to roll that out in line with their timing, not our timing. So that's going to make more of a perception of wants rather than just needs in the sense that somebody walks in and -- is a sense of discovery and we just haven't been good at that in the past, Simeon. So I think the whole business has an opportunity to create more of a exploration throughout our store, not just our supplies business which is traditionally probably the way you were thinking there's an element to it in consumables as well. And certainly, when we get on the call in March, we'll go through that in more detail. I cut you off, Simeon. Simeon Gutman: No, I cut you off. My follow-up, it's related. You talked about integrating the store functions. You talked about wants versus need, and then there was a little bit of maybe forward investing, I think, Sabrina just mentioned. So if you -- and by the way, the business itself is getting close to lapping like whatever tough compares. It seems like it's naturally getting back to positive territory. So what kind of clicks or what's the priority among the things we heard where the top line starts to move or? Is it something we haven't heard yet? Joel Anderson: No, I don't think it's something you heard. I think, look, we're going to approach 2026 from the top line, the same way we approached 2025 from the bottom line. In 2024, we came out with the strategies that would fix the bottom line, and then we executed them in 2026 -- in 2025. We're doing the same thing for top line growth. I outlined 4 pillars. We backed it up with building blocks which I talked about many of them today. And then we're going to execute against those with the same rigor and discipline. And so it's not just to cross your fingers and hope. We've got plans around 4 pillars with a lot of building blocks for each 1 of them. And I'm really excited about all 4 of them. I alluded to some of them that we're already testing here in Q4 but all of them are making traction and some just take longer to implement than others but teams are all focused and we got a good plan. Operator: Next question will come from Oliver Wintermantel with Evercore ISI. Oliver Wintermantel: Joel, what is the realistic time line for comp stabilization? And which categories or customer behaviors would represent the biggest swing factors there? Joel Anderson: Yes. Look, I'm not going to get into 2026 today on this call and the timing of it. But certainly, what you should expect from me in March is to not only give you guidance for Q1 but we'll give you an outlook on the full year. But specifically, I can tell you all 4 of the pillars I went through today are getting traction. And -- so I would expect all 4 of them to contribute towards comp in 2026, and then we'll just outline the timing for you on the March call. Oliver Wintermantel: Got it. That makes sense. And then just on the free cash flow side, strong improvements there year-to-date and in the quarter. But how much of the Q3 working capital improvement is sustainable, and what financial or operational levels continue to support the cash generation for next year? Sabrina Simmons: Yes. I mean, I think we view cash flow and all of its levers as continuous improvement. So we certainly are focused on continuing on this path of generating strong free cash. The principal lever of core solver is net earnings. So we're going to continue to focus on our bottom line and growing net earnings. We'll continue to focus on inventory discipline. We're not done. We've made huge strides this year. in terms of rationalizing our SKUs and reducing our inventory compared to our sales which is fantastic. But I wouldn't say we're best-in-class in turns yet. We still have a lot of opportunity, so we'll be looking at that lever as well as all of our other levers to continue delivering on strong cash generation. Operator: Question will come from Michael Lasser with UBS. Michael Lasser: Can you size the magnitude of the potential investments that you would make in what form those are going to come in, whether it's labor, marketing or promotions? And are those investments necessary as you look to 2026 in order to drive top line growth. Sabrina Simmons: Well, maybe I'll just start, Michael, with the framework, and then Joel can chime in on how he feels -- he's looking at each one. What we've tried to do, and we're really pleased that we banked so much profit improvement through Q3. And this has afforded us, as I said, the option, and it's only an option to consider investing in areas that we think can drive improvements both in Q4, but also for our future. So everything you mentioned is on our plate of options certainly, marketing, certainly looking at labor. And sure, we'll always continue to look at promos to see if we can do them effectively in a way that brings value to our customer but also in a way that's very responsible as we continue to manage our margin expansion. Joel, do you want to... Joel Anderson: Yes. Yes, Sabrina, I think you nailed that pretty good. And when Michael, I look at the 4 pillars, we outlined. I don't think any of them as it relates to 2026 require any substantial step change from what we're doing today in terms of cash investment or a change in OpEx investment or something. It's really -- you take merchandise, like we're selling through our existing merchandise and we're buying into new. So that's really just a steady flow change and really don't see any episodic change in 2026 from an investment standpoint from the run rate we're already on today. Michael Lasser: I guess the question and the critical point is can Petco experience the same magnitude of the improvement in the profitability while reversing what seems like some market share losses this year and be on that path next year? Sabrina Simmons: Yes. If I'm hearing you, Michael, and I might want you to repeat the question, but we for sure, believe that investments are going to be necessary. Our whole focus and what I talked about all year long in terms of the economic model we're pursuing is delivering leverage on expenses. But as you know, if sales improve, you increase operating expenses and still deliver leverage. So we're very aware that we need to make some investments. That's why we're talking about in Q4, we may make some of those investments in advance of entering the new year because we've been able to bank so much profitability and leverage. And we will measure our success in meeting our goals and expanding margin and delivering expense leverage on a full year basis. That's another thing we always said, we never said every single quarter in the same way. It's on a full year basis. So that's why we've given ourselves the option because we know that the next phase will require investment and we are prepared to stand behind that in a responsible way that still delivers on our full year goal to deliver the model. Michael Lasser: Sabrina, could I just clarify? If we look at what the embedded EBITDA margin is in the fourth quarter versus what Petco has experienced over the last couple of quarters. It looks like the pace of improvement is going to moderate. Should we think about the magnitude of the potential investment, the option for investing would be the difference between what Petco has achieved over the last couple of quarters and what's implied in the fourth quarter? Is that how we should think about quantifying that potential investment? Sabrina Simmons: I think that's a fair framework, Michael. I would add to that, as we look to Q4, as I stated, remember, when we think about gross margin, there's more tariff impact. So that's just 1 factor. It's not enormous as we said all year. It's -- we're pleased that we're in a retail sector that doesn't have mountains of tariffs but it is an impact. So that's 1 factor. The second impact is that investment that we're talking about, and how much we will choose to do and how we'll manage through that in the fourth quarter. So yes, I think your statement, broadly speaking, is fair. Operator: Next question will come from Kendall Toscano with Bank of America Global Research. Kendall Toscano: Hopefully, you can hear me okay. I was just wondering if you could talk more about the impact of tariffs during the quarter. I know you mentioned they became more meaningful in 3Q but maybe not as much as you're expecting for the fourth quarter. But just curious what you saw in terms of COGS impact, if any, and then in maybe some categories where there was tariff impact on price? What did you see in terms of consumer elasticity? Sabrina Simmons: Yes. Thanks, Kendall. Just to go back to your statement. So the first time we saw a tariff impact flow through our P&L through cost of goods sold in any meaningful way is the third quarter because the second quarter has like, let's call it, de minimis, amounts of that. We had it on our balance sheet, we had an inventory buys but it wasn't flowing through COGS yet. The third quarter is the first quarter of that. And my only point was, in the fourth quarter, it becomes a bit more meaningful. So it's just a reminder that sequentially the tariff headwind is a bit more meaningful. But again, in the broad spectrum of things, it's a very manageable number which we've managed all year and have been revising guidance upward in the face of it. So I think that hopefully helps frame it up. We also know that it's mostly in the private label supplies area, as we've said in the past. So hopefully, that helps frame it up, too. Kendall Toscano: Got it. That's helpful. And then my other question was just in terms of some self-inflicted headwinds in the Services segment as you've deprioritized that program ahead of the planned relaunch. Just curious, as you're now getting closer to relaunching that in 2026, and it sounds like maybe starting to pilot it in the fourth quarter, what kind of tailwind would you expect to see on same-store sales growth or, I guess, just services growth? Sabrina Simmons: I think you mean our membership program? Kendall Toscano: Yes, that's what's I meant. Sabrina Simmons: Yes, that's what combined with services in the way we report services and others. So probably, Joel, if you want to start with the membership program and... Joel Anderson: Yes, because our paid membership rolls into there. But I think the more important thing to take away from that is -- and I alluded to it in my prepared remarks that we are on track with our new membership program. And in fact, here in the fourth quarter, we have begun live end-to-end testing in several markets. And so -- we really haven't seen any major glitches in fact, minor at best. And so that's a really good sign for us. We'll then take that to a few more markets and to roll out the new marketing attached to it and are still on track then for a rollout sometime in 2026 with the rest of the fleet. But membership so far has really come together nicely, and it's a really important element to our growth that's going to begin in 2026. Sabrina Simmons: Yes. And since you raised it, Kendall, on the services piece, I think you can see that, that continues to be not only a strategically important area for us but it's also an area of nice growth and continues to be. Operator: Next question will come from Kate McShane with Goldman Sachs. Katharine McShane: We wanted to ask a little bit more of a higher level question. Just your view on where you think the industry is now from a digestion standpoint where you think the industry can grow in 2026 if we do return to growth in '26 for the industry? And just what you may have been seeing out of the competitive set this most recent quarter as some of these higher tariff costs and prices have come through? Joel Anderson: Yes. Thanks, Kate. Look, overall, the competitive set really hasn't changed much from the last quarter. I would say, the -- what's changed is the consumer has been probably a little bit more cautious. I mean, obviously, with tariffs and political tensions and interest rates still high that's really been bogging down their outlook on the economy a little bit. But as far as the pet industry goes, it's been pretty stable, flattish in terms of growth I think the progress we've made on our digital side has really been promising and that will be very important to us as we turn to growth next year. But overall, we're positioned nicely. Our services business is -- Sabrina just talked about is already growing, and that is an area of growth in the pet industry, and then we'll layer in the focus we've made and the progress we've made on our digital improvements. But overall, it's pretty stable. Operator: Question will come from Chris Bottiglieri with BNP Paribas. Christopher Bottiglieri: The first 1 I had was just hoping to -- now the cash -- free cash flow profile has improved. How do you think about prioritizing the usage of cash? Is it continued debt paydown. Do you think about reaccelerate veterinary practices? Just curious how you think about that over the next few years. Sabrina Simmons: Yes. Our first priority would always be to invest in our business to sustain growth going forward. So that's definitely the priority. That said, we go back to our statement that we have a lot of assets on our books already that really are ramping up now, vet hospitals predominantly the #1 on the list that are already on our books that we are ramping up for better returns. So we don't have to make big capital investments in those, and we, in fact, you'll hear us talk about more in the Q4 call, Chris, we have a set of those that where we're going to focus on bringing utilization up in 2026 as well without any large capital investments. So I view this as really great news because it provides a nice path for return improvement while not having to invest a lot of capital in it. So of course, though, we'll be looking at pockets and areas as we move forward and we finalize what kind of remodel prototype we want to land on how we'll start to bring those into our system. But there's no huge big capital spend necessary in the horizon, likely to increase some in '26, but no big, enormous dramatic change overall in profile because we have these assets in our books where we're increasing utilization. Now beyond that, beyond that priority to first invest in our business, the second, of course, is we are always looking, as I stated, on the first call when I talk to you guys, we want to bring down our leverage on an absolute basis. We also want to bring down our ratio. We're doing a terrific job with the growth and profitability of bringing down the ratio. So it's quite remarkable. We started the year at over 4x debt to EBITDA. And if we hit the midpoint of our new guidance, we should be below 3.5x net debt to EBITDA. So quite a bit of progress. And indeed, we'll look to opportunities to even potentially do some opportunistic debt pay down. Christopher Bottiglieri: Got you. That's really helpful. And then your gross margins were, I think, down 20 basis points on the product line. Is that primarily that tariff headwind you're referring to? Or is it also somehow -- or is like -- is the elasticity offsetting the ticket increase and there's also a headwind on top. Just curious by like tariff headwinds that you're referring to there where it's manifesting? Sabrina Simmons: I have our merch margins expanded both in our products and services. Christopher Bottiglieri: Sorry, I meant quarter-on-quarter, not year-on-year. Sabrina Simmons: Oh, quarter-on-quarter, sure. Yes, I would say that is primarily a little bit of tariff headwind coming in. Year-on-year, though, we are up in both products and services. Operator: Next question will come from Steve Forbes with Guggenheim Securities. Steven Forbes: Joel, you spoke about services in stores coming together. And I guess my question is, can you help us frame up sort of how you guys see that opportunity internally, whether it be how spending per customer sort of evolves as they engage in services, if they're a store-only customer or vice versa? Like any way to sort of talk about how like the net sales per customer evolves as they broaden their engagement across the store? Joel Anderson: Yes. Look, look, I think any great bricks-and-mortar retailer has to define their moat, has to define what differentiates them from anybody else. And services is definitely 1 of our moats, right? It's 1 of our key elements that is really hard for any other pet retailer to replicate in the way we built out grooming, hospitals, vet clinics, dog walking, dog training, all those elements. And so that's obviously an area there for we've leaned in the most, and we've made incredible progress with our existing assets, utilization we've improved, engagement improved. And then what you're getting at is the integration with the center of store with product. And so -- what's key to all that, Steve, as I look to '26 is layering that in with a membership program that really helps us better understand the profile of each 1 of our customers, how many are you using services? How many use services and merchandise, how many are buying in-store and online. And you put all those elements together, it starts to create profiles of different customers. And we really see -- honestly, the better we get at services, the halo effect that has on the overall business just gets stronger because it's something that's hard for anyone else to replicate. So service is probably the area that we made the most amount of progress, pleased with the results we're seeing there. And you'll continue to see us talk about that and -- but that gives you a little color on how I see it playing out turning into 2026. Steven Forbes: And then maybe if I just do a quick follow-up on that. Is there any way to set the baseline here on just sort of what percentage of your customers today actually buy services or any sort of baseline KPI that we can sort of begin to track as we think about your progression in the business? Joel Anderson: Yes. Look, I think at this point in time, I'm not going to get into the specifics on it at that level of detail. I mean, I think the baseline KPI to track as we look into the future, it will be transactions overall and then let us manage it at the different elements we have to serve up to the customer. But services will definitely be a key component to it, Steve, as we keep growing. Operator: Last question will come from Zack Fadem with Wells Fargo. Zachary Fadem: Is there a way to quantify the impact of moving away from less profitable sales and deemphasizing the member program in Q3. As it seems like you expect your Q4 comp to step down a bit more. I'm curious to what extent you're expecting those items to also impact Q4? Sabrina Simmons: Yes. I mean I'll just start by -- it's a pretty broad range, Zack, the implied Q4, so we can land anywhere in that range. Clearly, what we've stated all year very consistently is our primary focus this year was around expanding our margins, walking those unprofitable sales and building this very strong foundation upon which to start sales growth in 2026. But Joel, I'll let you take it from there, if you want to... Joel Anderson: Yes. I think -- Sabrina, I think you nailed it. And I think I'd add to that, like you asked what's the impact? Well, the impact you're seeing quite clearly is we're growing pet EBITDA market share. And so while sales are down, EBITDA is up. So clearly, we -- I think we've done a really nice job of identifying which sales are really onetime transactions and our empty calorie as I call them, versus which customers we want to grow lifetime value and be with us for the long term. And so you've seen that play out quarter after quarter for us as sales have been down consistently low single digits but bottom lines continue to improve. So as each quarter goes by, we get better at identifying those, largely, getting them out of our base. And you layer in a membership program, more strategic media buying aspect and all that will start to lead towards improvement in the top line with the bottom line as well. Zachary Fadem: Thanks, Joel. And then just to level set as we look ahead to 2026, I mean the expectation is to return to sales growth. I'm curious how generally you would frame broader category performance in dog and cat food, supplies, services, et cetera, and then how you would layer in the impact of both your initiatives? And then net store opening and closings to kind of get to that total sales growth? Joel Anderson: Yes. Look, I think it's too early now to spell that out specifically for 2026. I mean, clearly, if you look at what we published, you can see the consumables and supplies are negative this year and we're getting growth in services. We expect a return to growth in consumables and supplies going forward. And what I've got to just outline for you or translate for you is what I laid out today in terms of 4 pillars, how does that translate into growth at what time and what period next year. But a lot -- what you guys can't see is all the progress we're making here internally. And then we just got to put the pieces together for you so you can help you think about your model. But we haven't -- I think I answered on a few questions before. We're approaching '26 the same way we approached '25, outline the strategies and then execute. And the team is just getting better at that as every passing quarter goes by. Sabrina Simmons: Yes. And Zack, just to emphasize what Joel is saying, for sure, I think your thinking is in line with ours, where you always look at what's your base sales build, then we layer on all the many initiatives, which Joel has been outlining and we'll continue to get more granular as we go into '26 but we have all of those building blocks on top of that base, and they layer on throughout the year. So what you can count on is it's a gradual ramp. And then the last thing I'll say as a little bit of a preview is we would expect fewer net closures in 2026 than we had in 2025. And again, the 2025 expectation is about 20 net store closures. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Tina Romani for any closing remarks. Tina Romani: Perfect. Thanks so much, Joel and Sabrina, and thanks, everyone, for your time. That concludes our call, and we hope everyone has a wonderful holiday. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Welcome to Fisher & Paykel Healthcare's Results Conference Call. My name is Lisa, and I'll be your operator for today's call. [Operator Instructions] Please note, this conference call is being recorded. I'd now like to turn the call over to Marcus Driller, VP Corporate. Marcus Driller: Thank you, Lisa. Well, good morning, everyone, and welcome to the conference call for Fisher & Paykel Healthcare's First Half Results for the 2026 financial year. On the call today are Lewis Gradon, Managing Director and Chief Executive Officer; Lyndal York, Chief Financial Officer; Andy Niccol, Chief Operating Officer; Justin Callahan, VP, Sales and Marketing; and Andrew Somervell, VP of Products and Technology. Lewis and Lyndal will first provide an overview of the results, and then we'll move on to questions. We'll be discussing our results for the 6 months ended 30 September 2025. Earlier today, we provided our 2026 interim report, including financial statements and commentary on our results to the NZX and ASX. These disclosures can be accessed on our website. With that, I'd now like to turn the call over to Lewis. Lewis Gradon: Okay. And thank you, Marcus. Good morning, everyone, and thanks for joining us here this morning. I'm going to be referring to the investor presentation pack that we released to the NZX and the ASX earlier today. So we'll start on Page 2 with a recap of some of the recent highlights. I'm pleased to note that the company has achieved $1 billion in first half revenue for the first time, and we really appreciate the contributions of our people right around the world during this half. Thank you, everyone. We continue to roll out our latest Nova Nasal OSA mask during the period, and this is now available in New Zealand, Australia and major markets in Europe. At our investor event in Royal Melbourne Hospital in Australia this year, we showcased the complexity involved in how clinical practice changes. And one way we contribute to that journey is hosting clinical forums and that's where interested health care professionals can get together, compare their clinical practice, compare their results with clinical data and the clinical practice guidelines. And over the last half, we hosted over 100 of these forums globally. Our U.S. team was honored to be recognized with the Zenith Award from the American Association for Respiratory Care and we got the construction of our fifth building at our East Tamaki campus here in Auckland, New Zealand underway, and they're making good progress as we speak. So turn now to Page 3. Operating revenue for the first half was $1.089 billion, up 14% on the prior period or that's 12% at constant currency terms. Net profit after tax was $213 million, and that's up 39% on the prior period or 28% in constant currency. Lyndal's going to unpack the financial results in more detail shortly. So we'll move on to the Hospital product group on Page 5. Operating revenue was $692 million. That's up 17% on the first half last year or 15% in constant currency, and that's come from a broad-based strength right across the hospital consumables business. New applications consumables revenue was up 18% or 16% in constant currency. And when we consider the robust growth that we're lapping from the first half last year, we think this result probably does reflect a consistent ongoing change in clinical practice. Hospital hardware revenue grew 21% in constant currency. And as you all know, hardware revenue can be quite variable on a month-to-month basis. And so we do anticipate that the full year hardware results will probably moderate down from this first half year result. So turn now to Page 7 for Home Care. Home Care operating revenue was $396 million, up 10% on our first half last year or 8% in constant currency. I would say, mask growth was 8% or 6% in constant currency. Our latest range of OSA mask has performed well and the Solo range and the Nova Micro range are available in most major markets. And as I mentioned earlier, Nova Nasal is in the early stages of its rollout, with a U.S. launch planned for later in our second half. Our home care result also has a strong contribution from OSA hardware growth, which we're not expecting to repeat in the second half. And if anything, we feel it might be a pull forward of demand from the second half. I'll pause there for now and hand over to Lyndal. Lyndal York: Thanks, Lewis, and good morning, everyone. On Page 8, our gross margin was 63% for the half. This is an increase of 110 basis points or 60 basis points in constant currency over the same period last year. The range of margin improvement efforts across our business, including manufacturing efficiency and other efficiency gains continued making a positive impact. U.S. tariffs on hospital products sourced from New Zealand impacted our gross margin by 32 basis points in this half. If the current global tariffs remain in effect as they currently are, our gross margin would be impacted by approximately 130 basis points on an annualized basis with approximately 75 basis points impacting in the 2026 full financial year. Our ongoing investment -- our ongoing improvement efforts are anticipated to more than offset this to provide an overall gross margin improvement for the full year FY '26 of roughly 50 basis points in both constant currency and reported currency using end of October exchange rates. Moving on to Page 9. Total operating expenses grew 8% or 6% in constant currency compared to the prior period. This reflects the higher investments made over the last few years and modest increase in people in the last financial year. Operating margin was 26.3% for the half, an increase of 335 basis points or 286 basis points in constant currency over the same period last year. This reflects the improvement in gross margin as well as our operating expenses growing below revenue growth. R&D expenses grew 4% to $114 million and were 10% of revenue for the half. We continue to estimate that about 60% of our R&D spend is eligible for the 15% R&D tax credit. SG&A expenses were $285.5 million this half, an increase of 10% or 7% in constant currency. Moving to Page 10. Operating cash flow this half was $245.8 million, up 5% from last year. Tax payments this half of $119.6 million were up from $53.8 million in the same period last year. Capital expenditure, which includes purchases of intangible assets, was $61.8 million for the half, up from $55.1 million in the same period last year. This includes the progress on the construction of the fifth building at our East Tamaki campus in New Zealand. Capital expenditure for the full 2026 financial year is expected to be approximately $210 million. Within this is around $125 million on land and buildings, including the next payment on our Karaka land purchase. Looking at the balance sheet, debtor were largely in line with last year at 43 days. Net cash at the 30th of September 2025 was $237.8 million, and our gearing ratio was minus 13.5%. Interest-bearing borrowings were $55 million, all of it being current. Turning to Page 11. We have declared a fully imputed interim dividend of $0.19 per share. This represents a 52% payout of our first half profit and is an increase on the interim dividend declared last year. It will be paid on the 16th of December. Looking now at foreign currency on Page 12. Foreign currency movements positively impacted our net profit after tax by $19 million compared to the same period last year. This largely reflects the movement in spot rates and hedging results when compared to the same period last year. In this half, hedging losses were $6.2 million after tax and foreign exchange losses on balance sheet translations were $1 million after tax. At end of October rates, we would have an overall positive impact on net profit after tax of approximately $10 million to $15 million for the full financial year FY '26 when compared to the full financial year FY '25. This includes hedging losses in FY '26 of $20 million after tax and losses on balance sheet translation of about $0.5 million after tax for the full 2026 financial year. Now back over to you, Lewis. Lewis Gradon: Okay. Thanks, Lyndal. So turning now to our outlook on Page 13. At 31 October exchange rates, we now expect full year operating revenue to be in the range of approximately $2.17 billion to $2.27 billion. And net profit after tax to be in the range of approximately $410 million to $460 million. And this revenue guidance revision is driven by currency movements since our last update in August. Our Hospital consumables second half growth can be influenced by year-on-year variations in the Northern Hemisphere winter respiratory season, and we don't have any additional insights into the potential impact at present. The available data does indicate that last winter was a historically strong season and so a similar season this year would be pushing our results towards the top end of our guidance. And conversely, a lower season would be tending to push us towards the lower end of guidance. Net profit after tax guidance incorporates this FX-driven revenue update, a 75 basis point impact to gross margin due to tariffs, good progress on gross margin improvements achieved during the first half and maintaining our operating expense growth below our long-term aspirational revenue growth. So I'll end my remarks here, so that we can open the line to questions. Marcus Driller: Thanks, Lewis. Lisa, if I could ask you to please open up the lines for questions. And can I please ask everybody to limit your questions to 2. This is to ensure that everybody has an opportunity to participate and then you can rejoin the queue for additional questions. Operator: [Operator Instructions] Marcus Driller: Okay. So the first question comes from the line of Lyanne Harrison at BofA. Please go ahead, Lyanne. Lyanne Harrison: Congratulations on hitting that $1 billion revenue for the first half. I might start with guidance and a question for Lyndal. I know you mentioned that FX is driving that increase or upgrade in guidance that you provided today. But for the NPAT level, you mentioned FX tailwinds of about $10 million to $15 million. But from a guidance perspective, your range increased by about $20 million. Can you talk to what else might be in that? Lyndal York: Yes, Lyanne, that's sort of what Lewis mentioned in terms of the gross margin improvement activities continuing on through the second half and growing our operating expenses below that long-term revenue aspiration to aim for some continued modest growth there. Lyanne Harrison: Okay. And then on the gross margin, can you talk a little bit more, obviously, got very good gross margin expansion this half one on a constant currency basis. Can you talk about what aspects contributed most to that gross margin expansion? Lyndal York: Yes. Look, it's really everything that we do in the business. We've been back to sort of business as usual across our business with everything playing a role there. It's our manufacturing teams, getting the manufacturing efficiencies, doing all their continuous improvement projects, getting really strong improvement out of that, a bit of pricing through the sales team that we typically get and just sort of all of that playing a role into the gross margin improvement. And so as we anticipate, pre-COVID, we're able to improve gross margin about sort of 100 to 150 basis points on average per year, and we saw delivering that. Lewis Gradon: Maybe one other little bit of color, Lyanne, the complexity in that answer is in the operations and manufacturing space. Typically, that's over 3,000 improvement projects per year, all individually relatively small, but all adding up. Marcus Driller: Thanks, Lyanne. Next question comes from Dan Hurren, MST. Dan Hurren: Look, thanks for the guidance on the tariff impact and that color there. But I was hoping you could help us understand like how that tariff experience is playing out in the ground with price efficiencies? Lewis Gradon: Sure, Dan. We're thinking of is just another cost-in just like all other cost-ins and it's in the bag of just business as usual cost-ins. We're running the business as we normally would. We're running our continuous improvement projects as we normally would. So today that's really no material impact on the ground at all. Dan Hurren: And look, a follow-up then. If we -- if you have a look around, it appears that Fisher & Paykel will probably be more gentle on price compared to other tariff impacted companies and broadly the same channel. Is there a potential that the price becomes a more of a lever over time as sort of the -- as the world gets used to these tariffs. Lewis Gradon: Could look at that 2 ways down. I mean we've got wonderful opportunities with every single customer we have to improve clinical practice. We don't have a single hospital anywhere in the world let alone in the United States, that's fully penetrated using all of our therapies for every patient that could. So we think we get a much better result spending our time talking about improving clinical practice, improving current outcomes. We think that gives us a better result in the short term and the long term, gives the customers a better result. So that's where our focus is at present. Marcus Driller: Thanks, Dan. Next question come from Stephen Ridgewell at Craigs Investment Partners. Stephen Ridgewell: Just had a couple of questions on the hospital business performance, particularly during the first half and perhaps what you're seeing going to the second half. Hospital devices were a standout with constant currency growth of 21% in the period. Unless you may recall back in May, I think the indication was you weren't expecting too much from Airvo 3 or Airvo 3 NIV in terms of being a material driver. I'm just wondering, was that 21% growth we've seen, does that include a strong contribution from those products or otherwise, could you just give us a little bit color as to perhaps what's driven that strong result from Hospital Devices in the first half, please? Lewis Gradon: Yes, sure. First caveat, Stephen, is if you've been following us for more than a year or 2, you've seen that, that hospital hardware result is very lumpy, can be lumpy year-on-year, certainly lumpy half-on-half and kind of where we're going with that first half result, but I mean it's a great result, 21%. It looks like a very positive lump. We would not be surprised if it's followed by a negative lump for our second half and kind of reverting to more traditional growth for the full year, that would be our pick. And then the contribution very consistently in our business pretty much forever is a mix shift from one generation of product to the previous one. And right now, you're seeing that from 850 hardware to 950 hardware, and you're seeing that from Airvo 2 to Airvo 3. So that's certainly a contributor. Probably not much more than normal would be my pick, it's always happening. Stephen Ridgewell: And so just a follow-up to that. Have you seen within that 21% more of tilt towards growth from the Airvo product suite or pretty consistent with the humidifier controllers? Lewis Gradon: I don't think consistent out of that choice. I mean there are different stages, there are different evolutions, but nothing unusual there. Stephen Ridgewell: Okay, good. And then the second question is still on the hospital business. Again, so probably another surprise versus where the market was at was on kind of core consumables, which have come in again, a bit stronger, which given -- I know it's not purely with the respiratory data has a big influence, but we sort of see 19% constant currency growth in core. Just curious, is it sort of more market share gains have you entered some new markets or won some contracts. Just a bit of color there would be helpful to understand. Is that growth sustainable into the second half in the core consumables business? Lewis Gradon: Yes. So what we think is going on there, is during COVID an awful lot of these fully functional ventilators went out that could do invasive, noninvasive and nasal high flow. So we think, over time, people are using those ventilators across the range and they're using them for noninvasive and nasal high flow in some markets. And that does mean that for us, it looks like they're using an invasive circuit. So we think some of the noninvasive should we say growth and maybe even a little bit of the Optiflow nasal high flow growth in circuits a little bit sleeked into what looks to us and looks to you like that traditional consumables or invasive consumers. Marcus Driller: Thanks, Stephen. Next question come from Davin Thillainathan at Goldman Sachs. Davinthra Thillainathan: I just want to understand the guidance upgrade for the full year a little bit better. Just trying to make sure we understand the moving parts here. Part of it is clearly FX that is helping. But if I look at your first half results, you have come ahead of your guidance for the half, clearly indicating there's underlying momentum in the business? Because my understanding is your FX for the half hasn't really changed relative to when you set that guidance. So could you help us understand where the business outperformed in the half and perhaps why you don't expect that outperformance to flow through for the full year, if my understanding is right that your guidance upgrade is largely FX driven. Lewis Gradon: Absolutely right and good question. Thank you. So there's 2 components there. First one is hospital hardware, which we kind of just spoke to. It's quite lumpy. That performed pretty well in last couple of months. And I think probably doesn't flow into H2 like that. In fact, maybe even goes the other way. And then the other one is also hardware but OSA hardware. And this is CPAP machines where we've had a customer in a market where 3G is being turned off, accelerate the CPAP replacement cycle. So that's in our home care result. And once again, that hardware has probably come out of the second half. Davinthra Thillainathan: Okay. And then thinking about the consumables part of your business in the Hospital segment. There's a whole range of new products that have, I guess, been released progressively over the last few years. And one particular sort of therapy that seems to be getting a bit more attention from a product launch perspective is in the NIV part of your franchise. Could you perhaps help us understand that a little bit better how does NIV sort of help the business, particularly given you are focused on changing clinical practice with the high flow part of it. So perhaps just the overlap between those therapies and how you expect that part of the franchise to grow over the next few periods? Lewis Gradon: Sure. Well, I think, overall, we are building our respiratory care business that covers all respiratory care applications and usages in a hospital, whatever the requirement and wherever the patient is. So NIV plays a role in that. And the leading clinical change in that space is nasal high flow for respiratory support. But another component of that is more and more usage of NIV and another component of that is humidified NIV, probably still less than 20% of the market would be humidifying NIV. So the way we tend to think of it is our driver is a change in clinical practice towards nasal high flow. And once a customer is using that therapy to some extent, it makes a lot more sense for them to move to humidification and noninvasive therapy as well or to move to our noninvasive therapy offering. So we said it's kind of following along behind the change in clinical practice. Marcus Driller: Thanks for your questions, Davin. Next questions come from the line of Vanessa Thomson at Jefferies. Vanessa Thomson: I just wanted to ask about the respiratory season. You mentioned that last year, it looks like it was a strong season. I think when we look at all respiratory illness combined my understanding was it looked moderate. Is that wrong? Or is it that flu requires more support -- inducing more of your products than the other viruses? Lewis Gradon: So I'd kind of like to restate that, if you don't mind. So our assessment of last year, second half was that was the biggest flu season data in 15 years. So we think that was a biggie. You've got a COVID component and other components in there. So over time, you'd expect COVID to probably be coming down. And then we've kind of moved away from classifying them as high, moderate and low and all that kind of thing. It's just too murky. And what we've done last year, what we're trying to do this year is really just confine our analysis to this year versus last year and not categorize them. We've just found it too confusing. And so when we go down that route, well, last year, H2, our biggest flu season in 15 years, COVID was still relatively material. Vanessa Thomson: Okay. Thank you. Okay, and my second question, I just wanted to ask if you had seen any impact from the shutdown. I think it was around 6 weeks, and we've seen some of the distributor companies talk to some slowdown. I wanted to get that affected you at all? Lewis Gradon: Shutdown. I would say I'm looking around the room, not from hospitals, not from FDA, not from reimbursement. We're shaking our heads on that one. Marcus Driller: Thanks, Vanessa. Next questions come from Matt Montgomerie at Forsyth Barr. Matt Montgomerie: Well done on a solid result. Just on Home Care for the second half. I was wondering if you could give us a feel for where you see growth rates. Would that be roughly consistent with the first half? Lewis Gradon: Well, I think probably the case for us is you'd expect a similar result to the first half under similar conditions, certainly for masks. And I've spoken to the hardware component of that. We think our first half growth is probably coming out of the second half. Matt Montgomerie: And then secondly, on the anesthesia business, are you able to give us color for where that's in terms of growth or as a share of new apps in the first half? Lewis Gradon: Well, growth is still pretty solid, still got a 40% odd, something like that off that low base, that low base has become a bit over 10% of new apps consumables this half. Marcus Driller: Thanks, Matt. Next questions come from Craig Wong-Pan at RBC. Craig Wong-Pan: Just looking at the full year guidance ranges. If I look at what that implies for the second half growth, I calculate the midpoint would imply 6% revenue growth, but actually NPAT declining by 1% in the second half. Just wanted to understand, is there anything we should be aware of in thinking about NPAT either in the PCP or in this coming second half to explain why there might be a decline in NPAT? Lyndal York: I'll take that. It's really a case of the revenue that Lewis has spoken about, the hardware likely coming back from the second half into the first half. Margin, we're still expecting improvements, but we get the full half of impact of tariffs in the second half. So there's quite a headwind related to that. And then OpEx still managing to grow that below our long-term revenue aspiration. And so what that ends up being will depend on where we land from a revenue perspective. Craig Wong-Pan: Okay. That's helpful. And then just wanted to understand the clinical forums. I mean, Lewis, you called out 100 hosted events this kind of period. Just trying to understand, is that sort of a similar level to usual? Or is this going to be something kind of going forward to help you change clinical practice? Lewis Gradon: So our business is based on a change in clinical practice. That's what we do for living. It's pretty much what we've always done, and it's relatively unique in our space. It's a relatively unique thing to be doing. And we had an Investor Day in a hospital in Melbourne earlier this year, and we went through some of the complexities and changing clinical practice. So what I thought I'd do this time is just following up on that theme, giving people more of an understanding of what changing in clinical practice, what that really means. I'd follow up with giving you some insight into the forums that we run. Now having said all that, that is actually pretty normal to us. We generally do over 100, I'd say, every half. Just trying to give some insight to that whole process. Marcus Driller: Thanks, Craig. Next question has come from Saul Hadassin at Barrenjoey. Saul Hadassin: First one is on OpEx. I think at the full year '25 results, the guidance was for around 10% growth in operating costs in FY '26. Clearly, it's a lot lower in the first half. Maybe Lyndal, just if you can talk about where you think OpEx growth will land for the full year and what's embedded in that NPAT guidance range? Lyndal York: Yes. Look, probably sort of high single-digit growth we'd be anticipating for the full year in OpEx. Saul Hadassin: Okay. And Lewis, just your comments about sort of pull forward of sales on Home Care flow generators, but also that commentary around Hospital Hardware. You've had 2 months almost of the second half. Can you comment on what you're actually seeing on the ground in terms of those hardware sales? Is that what is giving you the guide as it relates to second half? Is it what you're already seeing? Or is that just still effectively an estimate and you don't actually have insights yet into second half performance? Lewis Gradon: It's just an estimate. I mean when we look at our hospital hardware numbers on a 6-monthly basis, you can see they're pretty lumpy. There's nothing to read into it. On a month or 2, I wouldn't read much into it. But I guess our pack is we probably wouldn't expect to see that first half again in the second half that kind of volume. Marcus Driller: Thanks, Saul. Next question comes from Marcus Curley at UBS. Marcus Curley: Just on the Home Care business, you reported 6% in masks. It's probably a touch below market. Could you just talk a little bit about what you think is happening there? Maybe it reflects weakness in the full face category again? Or just some color would be useful. Lewis Gradon: Okay. Sure. I think the fundamental is lapping 14% growth this half last year. So this half last year, we had the Solo Nasal, Solo pillows were launched that drove 14%. In the second half, we had Nova Micro launch. In the second half, we also had 3 or 4 launches from competitors in that half. And that still drive 9%. So I think this H1 story is more about what we're lapping, and it's about no new introductions for us materially during the half. Marcus Curley: Have you seen any impact on those growth rates in the installed base or resupply part of your business? Or is it too difficult to tell in terms of your visibility into that? Lewis Gradon: So as far as we can tell, I'd say no. We haven't seen any unusual impact in resupply at all. Marcus Curley: And then just on Home Care, competitive bidding most likely kicking off next year. Do you have a view on how that would affect the industry and yourselves? Lewis Gradon: Justin, what? Justin Callahan: Marcus, it's Justin here. I think, I mean, at this stage, the final rules and requirements around competitive bidding haven't been really disclosed. And we expect the market to sort of react in a reasonable way. So we're not reading too much into it at this stage. It's still pretty early. Marcus Curley: So Justin, your base view would be reimbursement levels in the U.S. relatively stable. You wouldn't be expecting a material decline? Justin Callahan: I think we'd be expecting whatever the adjustment is it would be sort of a lot more reasonable. There's a lot more sort of experience in that space now from our customers. So I think it's -- we're not expecting anything too major. Marcus Driller: Thanks, Marcus. Next questions come from Andrew Paine at CLSA. Andrew Paine: Congrats on the results. Just looking at your full year guidance of $460 million at the top end of the range for NPAT. And just kind of working down, looking at that at the top end of the range, you've done $213 million in the first half. So you need $247 million in the second half to hit the top end of the range. If we back out FX there, bringing that down to $237 million constant currency, that would imply just 6% growth year-over-year in NPAT. Obviously, you've got the tariff impact in there, which if I'm right, that's about 120 basis points annualized. So that adds another 4% but OpEx is also performing better than expected. So just trying to get a bit of color around that growth rate at the top end of the range. It looks somewhat achievable even with maybe a slightly worse flu season year-over-year. Lyndal York: Maybe one thing, Andrew, that I'll just clarify that currency is actually a headwind in our second half compared to the second half of last year. So these numbers instead of being a tailwind of the 10 that you were talking about, it's actually a headwind of close to that. So because if you remember, the first half, we've got a $19 million benefit of NPAT. And we said for the full year, probably $10 million to $15 million. So that means the second half itself has got quite a tailwind -- sorry, headwind. So -- and then it's pretty much revenue dropping down, the tariff coming in, but still getting some good improvements, excluding that tariff for gross margin and OpEx in that sort of high single digit growth. Andrew Paine: Yes. Okay. So even with the FX kind of moving favorably. I assume that's just impacted by the hedging that you have in place? Lyndal York: Yes. Look, it's a range of things. They're the biggest mover in the currency half compared to the second half last year is actually the balance sheet translations where we had a gain of about $7 million last year in the balance sheet translations. So not expecting much this year. So there's a large part of that headwind. Andrew Paine: Okay. Sure. Okay, that makes sense. And then just obviously, it's difficult to really kind of talk to this, but there's the ongoing tariff investigation. I don't know if you can provide any clarity around if a similar tariff was applied in Mexico, what that would mean in terms of margin impact to the business? Lewis Gradon: We haven't really gone there. I mean, I think -- our thinking about tariffs is somewhat colored may be compared to most but anything we think about to do with tariffs or to manage tariffs or to change things because of tariffs, that's time and effort that we're not putting into growth. So that's always as a front line for us, actually, in tariffs are the topic. Marcus Driller: Thanks, Andrew. Next questions come from Adrian Allbon at Jarden. Adrian Allbon: Maybe just a clarification question. Maybe this is for you, Lyndal. Just on your interim report, and as you get to the bottom of the comments from Neville and Lewis, there is like a discretionary bonus of $9 million to be shared amongst the employees. Just to understand that, is that a normal feature? Or is it -- and you just called it out this time? Or -- and how is it sort of accounted for? Lyndal York: Yes. So we've been doing this. This is a profit share payment that we make to all employees globally, and we've been doing it since we were formed basically... Lewis Gradon: Since before listing. Lyndal York: Since before listing. And we do normally show that amount in our annual report every year and in our interim report. So nothing's changed, nothing out of the ordinary. Adrian Allbon: Okay. And would that have been accrued until the first half anyway, just as per normal? Lyndal York: Correct, yes. Adrian Allbon: Or is it a full year payment? Lyndal York: No, no, no. It's half on that premium. Adrian Allbon: Okay. All right. No problem. Sorry about that. Just the second question, like also in that sort of interim report, like you make a call out on the RENOVATE study, which I guess in the theme of this one, like you sort of -- you are putting a bit more emphasis on the change in clinical practice. Like is my sort of read of that, that's sort of like quite -- it's a large sort of clinical trial that's sort of you're presenting some useful results in terms of for hypoxic cases using high flow as a triaging type product. Is that the right way to think about the output from that study and how you might be using it to sort of educate? Lewis Gradon: Well, I think the thing about that study is the number, I think it's towards 2,000 patients. So it's a large number of patients and covers COVID and not COVID as well. And it's a comparison against noninvasive ventilation if memory serves me correctly, which is kind of a step up. And if finds nasal high flow, the word they use is not non-inferior, non-inferior. So as we're saying -- yes, yes, you've got a therapy that the user would rather use. You've got a therapy that a patient would rather have, and it's not inferior to NIV. That would be the short version. Adrian Allbon: Right. And obviously -- but presumably, that also dovetails nicely into like the Airvo 3 being wider use across the hospital as well and simpler to use for -- as you go down the staff levels. Lewis Gradon: Yes. I mean I want to be careful. We've called out one. It had a lot of press at the time it was released. It's unusual. It's big numbers elegantly done an analyzed study, but it's one of hundreds and probably more compelling is into clinical practice guidelines around the world. And that's really stepped up the issuing of clinical guidelines from the different professional bodies. Marcus Driller: Thanks, Adrian. Next questions come from David Bailey at Morgan Stanley. David Bailey: One for Lyndal and one for Lewis. Lyndal, 50 bps in gross margin this year, including 75 bps from tariffs. So if you strip out tariffs, you're doing 125. You sort of said on a full year run rate, full year tariff impact is 130. So as I look at fiscal '27, should we be thinking that all else equal, there's an incremental 65 basis point tariff impact to come through and then the underlying will give you sort of 60. So just trying to understand the incremental change from the tariff impacts in '27, just given that we know that the underlying should be around 125 basis points or so. Lyndal York: Yes, David. Look, you're spot on that. There's another top up of that headwind of tariffs coming into FY '27. So you're right, sort of 65 bps. And look, anywhere from sort of 100 to 150 basis points on average a year, we try to do is underlying improvement. David Bailey: Okay. That's helpful. And just for Lewis, I mean there's some commentary here around clinical adoption. There's clinical evidence that comes through to the sales and marketing effort as well. Just wondering if you can sort of talk to a little bit about how those two have progressed? And then in terms of utilization of hardware and asset turns on, how is that sort of driving more consumables used per device, if you can? Lewis Gradon: Yes. So that's sort of a double bang. I'll answer the second one first because our therapies are used across such a diverse range of hospital situations from EDs to recovery rooms to general wards to ICUs, we don't really have a utilization versus consumable terms per device, model or predictor because there's so much variation in there. We can't do it. So we've kind of abandoned that measure. And then in terms of clinical evidence, sales and marketing effort, the big mover there is clinical practice guidelines. Once we have clinical practice guidelines from a reputed clinical body, our approach is generally to use the clinical practice guideline. And I think I'm looking at Justin, I don't think we've got any hospital anywhere on the planet perfectly implementing clinical practice guidelines on every patient they could. Justin Callahan: Not yet. Lewis Gradon: Any comment? Justin Callahan: Correct. Lewis Gradon: So at this stage of the nasal high flow evolution anyway, it's about the clinical practice guidelines, and that's what we utilize in our sales, if it's more than anything else. David Bailey: Yes. Understood. Okay. Maybe just a different way to ask it then is, do you think the devices are being used more broadly across the hospitals? Justin Callahan: Yes, we do. Yes, absolutely. Marcus Driller: Thanks, David. Next questions come from Christine Trinh at Macquarie Bank. Christine Trinh: Congratulations again on a strong result. Just 2 quick questions from me on the consumables space. Firstly, New Apps growth of 16%, constant currency was ahead of our expectations. Can we expect a similar level of growth going forward? And on the U.S. launch of the Nova in the second half, can we just get your expectations for contributions to growth there? We think in kind of double digits that we saw in the first half of '25. Lewis Gradon: U.S. Nova, let me talk to that first, probably late in H2. So I wouldn't be making any material contribution at this stage probably later in our second half. And then New Apps at 16%. So when we think about second half, we're moving into the seasonal hospitalization zone. And you would think that if we had a similar seasonal hospitalization, this second half compared to last year, this should probably get a similar growth rate in the second half to what you saw in the first half. This time around, because of the very high flu season numbers from last year and also COVID probably decreasing, we would characterize last year as probably really high and probably top end of range. If we had a similar season this year, we'd expect we'd be at top end. Christine Trinh: Great. And just on that Nova piece, if it's in the first half of '27, can we just get your thoughts on growth expectations for that half? Lewis Gradon: Yes, maybe way bit too far out for us at the moment, Christine. Marcus Driller: Next question comes from Marcus Curley at UBS. Please go ahead, Marcus. Marcus Curley: Could you just talk a little bit maybe a little about the trajectory on R&D. Obviously, 4% in half is low for the business. Is that just reflecting some lumpy projects? Or are you generally starting to see lower percentages of R&D for the business for the next, say, 12 to 24 months? Lyndal York: Yes, Marcus, what that is, is really reflecting the higher than sort of our normal revenue aspirational growth over the past number of years. So it's just sort of writing that as the sort of average over time. So we'd probably expect that to remain a little bit on the lower side, sort of low to mid-single digits for probably another year or 2. Marcus Curley: Great. And then just on anesthesia. Could you provide any color in terms of any noticeable difference between trace and switch specifically, is it sedation or GA driving it or both? Just can you get a bit of color in terms of the different components of the market? Lewis Gradon: It kind of depends on the release track we've taken places where we've had Trace and Switch for -- from day 1, probably on comparable contributions. And then at least in the U.S., we led with Trace, and we're still leading with Trace. That's the bulk of it in the U.S. So the answer to your question, it varies depending on what we led with when we led with it. Marcus Curley: And Switch is in the U.S. these days? Lewis Gradon: Well, it's approved in the U.S. We are still following up all the Trace opportunities in the U.S. at present. Marcus Curley: And that's different to a Switch opportunity? Lewis Gradon: Yes. That's right. Marcus Driller: Thanks, Marcus. We don't have any more questions in the queue. So I will now turn over to Lewis for some concluding comments. Lewis Gradon: All right. Well, thanks, Marcus, and thanks to everybody for your questions today. And as always, I'd like to conclude by thanking all of the people at Fisher & Paykel for your contribution this half. And we'd like to acknowledge the support of our customers, suppliers, clinical partners and shareholders. So thank you, everybody, and enjoy the rest of your day. Thank you. Operator: This concludes our call today. Thank you for your participation. You may now disconnect.
Operator: Good day, everyone, and welcome to the Fourth Quarter 2025 HP Inc. Earnings Conference Call. My name is Regina, and I will be your conference moderator for today's call. At this time, all participants will be in listen-only mode. We will be facilitating a question and answer session toward the end of the conference. Should you need assistance during the call, please signal the conference specialist. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Alok Juhyol, Head of Investor Relations. Please go ahead. Alok Juhyol: Good afternoon, everyone, and welcome to HP's Fourth Quarter 2025 Earnings Conference Call. With me today are Enrique Lores, HP's President and Chief Executive Officer, and Karen Parkhill, HP's Chief Financial Officer. Before handing the call over to Enrique, let me remind you that this call is a webcast and a replay will be available on our website shortly after the call for approximately one year. We posted the earnings release and accompanying slide presentation on our investor relations webpage at investor.hp.com. As always, elements of this presentation are forward-looking and are based on our best view of the world and our business as we see them today. For more detailed information, please see disclaimers in the earnings materials relating to forward-looking statements that involve risks, uncertainties, and assumptions. For a discussion of some of these risks, uncertainties, and assumptions, please refer to HP's SEC reports, including our most recent Form 10-K. HP 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 now and could differ materially from the amounts ultimately reported in SEC filings. During this webcast, unless otherwise specifically noted, all comparisons are year-over-year comparisons with the corresponding year-ago period. In addition, unless otherwise noted, references to HP channel inventory refer to tier one channel inventory, and market share references are based on calendar quarter information. For financial information that has been expressed on a non-GAAP basis, we've included reconciliations to the comparable GAAP information. Please refer to the tables and slide presentation accompanying today's earnings release for those reconciliations. With that, I will now turn the call over to Enrique. Thank you, Alok, and a special welcome to your first earnings call. Enrique Lores: And thank you to everyone for joining today's call. Today, we will cover our Q4 performance and 2025 full-year results. We will also highlight the opportunities ahead of us, expectations for fiscal year 2026, and how we are continuing to advance our company strategy. I want to begin by saying how proud I am of the progress we have made across our priorities, especially as we have navigated a challenging external landscape. We have driven sequential profit improvement the last two quarters, demonstrating our ability to quickly respond to the challenging trade environment we began to face in Q2. We also invested in our supply chain, making it more resilient to mitigate future risks, which is core to the future-ready plan we laid out three years ago. Our performance, both for the quarter and the full year, underscores the strength of our strategy, the power of our portfolio, and the tenacity of our team. Let's start our Q4 results. I am pleased to report that HP delivered its sixth consecutive quarter of revenue growth, up 4% year over year, largely driven by personal systems gains in commercial and consumer. In print, the market remained soft, but we delivered revenue in line with our expectations. Collectively, key growth areas grew double-digit year over year and delivered gross margin above our core business. Non-GAAP EPS came above the midpoint of our guidance. We continue to execute our future of work strategy. We are accelerating innovation with AI-powered devices that harness AI at the edge and create better together experiences across our portfolio. We are also empowering CIOs with the tools they need to drive transformation, and we are leveraging the power of customer data to deliver meaningful insights. These priorities guide our innovation. For example, we introduced a new edge class device, the AI station powered by NVIDIA, which can run up to 200 billion parameter models. It brings highly performant AI compute to the data instead of moving this data to the cloud for processing. We also launched innovations that boost productivity, such as the industry's first 49-inch ultra-wide monitor that integrates AI noise reduction. And focusing on solutions, we are making printing smarter and more intuitive with new AI-driven printing and scanning features. These enhancements make printing easier by cleaning web and email layouts, reducing unnecessary pages. They also streamline everyday tasks, improving scan quality, and auto-generating file names. Our Workforce Experience Platform now uses telemetry from 48 million endpoints to manage 2.4 million connected devices and already remediate more than 12 million IT issues every month. With its new integration with Microsoft Security Covalent, we are bringing generative AI directly into IT management for faster, smarter responses to critical issues. Inside HP, we are adopting our AI-powered innovations first, leading as a customer zero. For example, by deploying AIPCs with curated applications, we are equipping teams to deliver better results with their productivity app 16%. Now, I will take a closer look at the performance of each business unit. In Personal Systems, revenue grew 8% year over year, above our expectations. We drove worldwide PC market share gains, particularly in high-value categories, including commercial and consumer premium and workstations. With 40% of the installed base still on Windows 10 at the end of Q4, the Windows 11 refresh will remain a tailwind for the PC market into 2026. And demand for AIPCs continues to accelerate, now representing more than 30% of our shipments this quarter. In our key growth areas for Personal Systems, strong performance in data science workstations contributed to double-digit revenue growth in Advanced Compute Solutions. In print, revenue declined 4%, reflecting market softness and delayed purchasing decisions across all regions. Print units declined year over year but improved sequentially. We maintained our number one share in print. Supply revenue performed as expected, and we gained share. Looking closer at print key growth areas, consumer subscriptions delivered double-digit revenue growth and is just under $1 billion in annual revenue. We continue to see strong adoption of our all-in plan offering, with subscribers up double digits sequentially. Momentum continued in Industrial Graphics, which exceeded $1.8 billion in annual revenue, driven by the ninth consecutive quarter of year-over-year growth. We also saw double-digit growth in 3D, driven by applications in drone and robotics manufacturing. In Workhorse Solutions, double-digit growth was accompanied by key wins in industries such as energy, technology, and services. We added 10 new customers from the world's 200 largest companies, a testament to the strength of our sales team. Turning to our full-year performance, revenue grew by 3%, returning to growth. Our key growth areas collectively grew double-digit year over year and represented over a third of our revenue for the year. Personal systems revenue grew 6%, driven by commercial strength. Print revenue declined 4% as market weakness persisted, and we prioritized placement of profitable units. Supplies revenue declined 2% in constant currency, and we gained share. Operating profits declined as trade-related costs during the year took a few quarters to be absorbed. Aligned to our commitments, we executed with discipline in a challenging environment, driving a double-digit operating profit increase from the first half to the second. This reflects our ability to act decisively and accelerate supply chain transformation. HP continues to evolve, highlighted by recent leadership transitions that underscore our focus on combining the best internal and external talent to drive our long-term strategy. I am excited to welcome Kate and Patel as head of personnel systems, Manoj Lilanivas as Head of HP Solutions, and Prakash Arun Kundrum as Chief Strategy and Transformation Officer to our leadership team. Each brings the right capabilities, experiences, and a proven track record of driving innovation and delivering results. I also want to thank Alex Cho and Dave Scholl for their many contributions to HP. Their leadership has been instrumental in strengthening our business. Now, let me address the trend of rising memory costs and its implication for our business. Memory costs are currently 15% to 18% of the cost of a typical PC. And while an increase was expected, its rate has accelerated in the last few weeks. Our portfolio is less sensitive to the commodities market than it was during the last memory cycle. Over a third of the peers' gross profit comes from services and peripherals. We expect to mitigate the impact of these cost headwinds in the first half of our fiscal year with our inventory on hand and a set of actions across our portfolio and basket of commodities. For the second half of the year, we expect Personal Systems margins to be impacted. Therefore, we are taking a prudent approach to our guide while implementing aggressive actions to mitigate this. They include qualifying lower-cost suppliers and redesigning the portfolio for reduced memory configurations, accelerating our AI-enabled transformation to drive further cost savings, and raising prices in close partnerships with our channel and direct customers. From a supply perspective, we are in a good position due to our strong relationships and long-term contracts with key suppliers. Moving to fiscal year 2026, our plan is built on four pillars. First, in personal systems, we expect the revenue market to be up low single-digit with Windows 11 refresh, AIPCs, and pricing as catalysts. We also expect to see a positive impact from the growth of premium devices, including workstations, and an increase of attach rate from services and preference. Our goal is to perform better than the market. Second, in print, we expect to grow slightly faster than industry projections of low single-digit market decline. We intend to take share by doubling down on big tanks. We are increasing our marketing investments, driving new product and solution introductions, and expanding globally our successful all-in subscription offering. We also intend to grow share in office with new products and solutions designed for SMB and enterprise customers, reinforcing HP's leadership, manageability, security, and AI. And we intend to strengthen our leadership in 3D printing and further build on the momentum from labels and packaging to maintain our lead in industrial printing. Third, in workforce solutions, we are focused on growing recovering revenue by expanding our software, security, and services businesses. We are also scaling our workforce experience platform in key verticals, building on the strong momentum generated in fiscal 2025. Fourth, driving an improved cost structure remains a top priority. We have demonstrated our ability to execute major transformations as part of our future-ready program, over-delivering on our initial expectations. And as we look ahead, we see a significant opportunity to embed AI into HP, to accelerate product innovation, improve customer satisfaction, and boost productivity. We have launched a company-wide program led by an executive reporting directly to me, and we have a line of sight to drive approximately $1 billion of gross run rate savings over three years across product development, customer service and support, and many of our operational processes. These will result in workforce reductions of 4,000 to 6,000 people over the next years. These are some of the most difficult decisions we need to make, and we are committed to treating our colleagues with care and respect. We are planning to hold our Investor Day on April 23, where we will share the full plan on how AI is transforming HP. We remain confident in our ability to lead the future of work through technology. With a clear strategy and disciplined execution, we are focused on driving long-term value while managing short-term headwinds. I will now turn it over to Karen. Karen Parkhill: Thank you, Enrique, and good afternoon, everyone. We are pleased with our results in Q4, delivering another quarter of solid performance to close out the fiscal year. Our teams executed well, driving better-than-expected top-line growth fueled by continued momentum in Personal Systems and in our key growth areas. We delivered operating margins within our expected ranges for both businesses and non-GAAP EPS slightly above the midpoint of our guidance range, underscoring our ability to meet or exceed our financial commitments. We are also proud of the results we delivered with our multi-year future-ready cost plan. We surpassed our original $1.4 billion savings target, ultimately delivering $2.2 billion in cumulative gross annualized savings. And on $1.2 billion of restructuring spend, we delivered a savings to charge ratio of almost 1.8 times, well above our initially projected ratio of 1.4 times. On the quarter, we delivered revenue growth of 4% year over year, both nominally and in constant currency. In constant currency, EMEA grew 6% and APJ was up 9% on strong personal systems performance. Americas revenue was flat in constant currency, reflecting demand softness in North America, particularly in commercial. Our gross margin at 20.2% was impacted by a higher mix from personal systems and increased trade-related costs, which we partly offset with pricing actions and cost reduction. Contributions from our future-ready cost program and continued strong expense management drove operating expenses down as a percent of revenue year over year. These efforts also enabled our investment in key strategic and go-to-market initiatives aligned with our future of work strategy. All in, our non-GAAP operating margin was 8%, down year over year, but improving almost one point sequentially, in line with our expectations. And our non-GAAP diluted net earnings per share was $0.93, representing a sequential increase of 24%. Now let's turn to segment performance. We delivered better-than-expected top-line growth in personal systems, with revenue up 8% on increased ASPs and 7% unit growth. We outperformed the market in both consumer and commercial and continued to shift mix toward premium categories while maintaining disciplined pricing to help mitigate cost increases. Key growth areas performed well, including in AIPCs, where we doubled revenue year over year. In commercial, we drove revenue and units up 7% on continued momentum from Win 11 refresh and AIPC adoption. We also delivered strong performance in consumer, growing revenue 10% on 8% unit growth. We drove higher ASPs and share gains in consumer premium, in line with our strategy to rebalance our portfolio to a more profitable mix. And with holiday seasonality in consumer, we delivered revenue and unit growth of 17% sequentially. As we had signaled, the actions we started earlier in the year to leverage supply chain flexibility, reduce costs, and maintain pricing discipline, gain traction in the 5.8% in Q4, in line with our guidance. In print, our results reflect a pricing environment that remains competitive despite higher industry costs and continued market softness globally, as customers delay printer hardware refresh decisions. Against this backdrop, we continue to focus on profitable long-term unit placement, increasing lifetime value per customer, and cost reduction actions. We also drove solid growth in key growth areas in the quarter. Looking at the details, print revenue declined 4% on lower supplies volume and market-driven hardware declines in both consumer and commercial. Consumer revenue was down 9% year over year and commercial revenue down 4%, as higher ASPs were offset by lower volumes. Supplies performed as expected, down 3% year over year in constant currency. We continue to drive market share gains with favorable pricing that partially offset installed base and usage headwinds. For the year, supplies revenue declined 2% in constant currency, in line with our long-term range. And we delivered operating margin of 18.9%, in line with our guidance and at the top end of our range. Now let me move to cash flow and capital allocation. We generated $1.6 billion in cash from operations and roughly $1.5 billion in free cash flow on the strength of the sequential growth in Personal Systems. Free cash flow for the fiscal year was $2.9 billion, consistent with our outlook. And we improved our cash conversion cycle quarter over quarter, driving days payable up through higher manufacturing activity. On capital allocation, we remain committed to returning approximately 100% of our free cash flow to shareholders, as long as our gross leverage remains below two times and there aren't better return opportunities. In Q4, we returned close to $800 million to shareholders through both dividends and share repurchase, and returned more than $1.9 billion for the fiscal year. While we finished the quarter slightly above our target leverage ratio, we increased our cash balances, reserving sufficient funds to pay down 2026 debt maturities, which enabled us to buy back shares in the quarter. And if needed, as we move through the year, we can operate with higher cash balances in fiscal 2026 to further reduce leverage with maturities in fiscal 2027. Our Q4 and FY 2025 results reflect strong execution against challenging trade dynamics, with continued sequential improvement as promised in the back half of the year. Looking ahead, our guidance reflects the increasing inflationary pressures predicted for memory costs, which we expect at this point to have an impact as we move into the back half of our fiscal year. That said, we have a proven track record of managing challenges, and this one will be no different. We are prudently including these pressures in our outlook, yet we remain confident in the strength of our organization and partnership we've built with our suppliers to deliver the best possible outcome for our shareholders. We are also continuing to invest in driving transformation within the company, and we see a significant opportunity ahead to embed AI almost all that we do, to improve productivity, accelerate innovation, and improve customer experiences. As Enrique said, we have already made excellent progress in identifying key focus areas that are expected to generate approximately $1 billion in gross run rate savings by the end of our fiscal year 2028. And we expect approximately $300 million of those savings to be achieved by 2026. We estimate associated restructuring charges of around $650 million over the three-year period, which include roughly $250 million in charges to be incurred in FY 2026. We continue to identify additional opportunities as part of this initiative, and we'll share those with you at our upcoming Investor Day. Now turning to our segment outlook for FY 2026. In Personal Systems, we are aligned with industry experts projecting the PC unit TAM to decline in units, but the revenue TAM to grow low single-digit. Against that backdrop, we expect to gain share in premium categories, including AIPCs, workstations, and new device categories, and increase our attach of higher-margin offerings, all leading to revenue share gains. And we anticipate revenue to be stronger in the second half of the year, driven by normal seasonality and pricing as needed against rising costs. On operating margin, we expect the PSOP rate to stay in the 5% to 6% range in the first half of the year. And as Enrique said, we are already taking decisive steps to manage commodity inflation. However, with higher memory cost increases impacting our back half, we estimate our OP rate for the full year could be at the low end of our long-term 5% to 7% range. In print, we anticipate a low single-digit decrease in the hardware market in 2026, with growth in big tank and industrial markets offset by declines in traditional hardware. We expect to outperform the market as we execute our plans to gain share in Big Tank and higher-value office categories through new products and solutions, and to expand our subscription business and deliver continued growth in industrial. We also anticipate supplies revenue to be down low single digits in constant currency, within our long-term guidance range, with favorable pricing and continued share gains. And we expect print revenue by quarter to be generally in line with historical seasonality. We expect print operating margins for the year to be in the upper half of our 16% to 19% range, while we continue to focus on profitable unit placement and disciplined cost management. Beyond the segments, we expect corporate other and OI and E to be roughly flat year over year. And as is typical, we expect corporate other expense to be more heavily weighted in Q1 due to the timing of our stock compensation expense. With all of this, and including an estimated 30¢ impact from projected memory cost increases net of mitigations, we expect FY 2026 non-GAAP diluted net earnings per share to be in the range of $2.9 to $3.2 and FY 2026 GAAP diluted net earnings per share to be in the range of $2.47 to $2.77. For Q1, expect non-GAAP diluted net earnings per share to be in the range of $0.73 to $0.81 and first quarter GAAP diluted net earnings per share to be in the range of $0.58 to $0.66. On FY '26 free cash flow, we expect to deliver between $2.8 billion to $3 billion. As typical, we expect the second half to be stronger than the first, consistent with our earnings, and recognizing that our first quarter is typically lower given the timing of our incentive comp payment. Before closing, over the past year since joining HP, I have had the opportunity to not only learn and understand our businesses more deeply, but also reflect on key drivers of growth and value ahead. Across both print and personal systems, we have a relatively small but growing base of services, subscriptions, software, and products as a service that are contractual in nature. And as we look to the future, we intend to drive greater growth in this important base of higher-margin, more stable recurring revenue. So expect us to highlight this even more for you as we continue to focus on strengthening our company and increasing the value we offer to our investors. Lastly, we are pleased to announce today that we are raising our quarterly dividend to $0.30 per share. This is the tenth consecutive annual increase since our separation in 2015 and reflects the confidence we and our board have in our long-term outlook ahead. With that, I would like to hand it back to the operator and open the call for your questions. Operator: Thank you. We will now begin the question and answer session. We'll take our first question from the line of Wamsi Mohan from BofA. Please go ahead. Wamsi Mohan: Yes. Thank you so much. Guess to start, your free cash flow guide for next year is flat year on year despite the margin pressures you alluded to from increased memory pricing. What are some of the elements offsetting these headwinds in cash flows? And does the $2.9 billion in free cash flow include any cash restructuring charges? And I have a follow-up. Karen Parkhill: Yes. Thanks, Wamsi, for your question. We obviously remain focused on driving value to our shareholders through strong free cash flow. And like we're doing with our earnings guide, we're taking a prudent approach to our expectations there, particularly the recently projected increase in memory cost. So at this point, we expect our free cash flow to be relatively flat, as you said, with slightly lower earnings, and that's offset by improvements in working capital, primarily due to the favorable cash conversion cycle we have with the expectation of our growing PS business. We also expect CapEx and restructuring costs to be down slightly year over year. And I would just say on free cash flow, as always, if we can do better, we will. Enrique Lores: And yes, it includes the restructuring funds for the restructuring activities. Karen Parkhill: Yes. And we expect for the year the restructuring cost to be roughly $250 million. Wamsi Mohan: Okay. Okay. Great. And then maybe Enrique, like, we've seen plenty of memory cycles in the past. This one, you know, is fairly unprecedented in rate and pace of change. I'm just wondering, as you think about the various strategies you're going to deploy to navigate this, how do you think about price elasticity in a somewhat weaker consumer market? How do you think about despeccing and any other sort of strategies that HP could deploy in terms of being able to raise price without sort of impacting the demand elasticity, if that's at all possible? Like what are some of the things that you're looking at executing to limit this impact to what you quantified about $0.30 or so? Thank you. Enrique Lores: Thank you. So as you said, this is not the first time we go through a situation like that. So the team has plenty of experience handling these situations. I think the first thing that helps us in this situation is our scale. And by using our scale, we have today a good supply position, thanks to the long-term agreements and the relationships we have with many suppliers. And we are using that also to qualify additional suppliers to mitigate this even further. We also can use the breadth of our portfolio to make sure that customers get the right configuration and to de-scale in those cases where it's possible to balance company profitability with experience from customers. Something unique that we have this time is something that I have been mentioning before, which is the workforce experience platform. This is a tool that we deploy to our commercial customers that allows CIOs to monitor the performance of individual users. And by using telemetry data that we have been capturing over time, we can make recommendations for what is the optimum configuration per customer. But this will help us significantly for those customers that when we deploy the tool, to make sure that they get the right solution and the right memory configuration. And then what we have seen in the past in these situations from a demand perspective, are usually the more low-end categories, those that are impacted. And by managing our portfolio and shifting demand to the areas where we think we will have more products available and better configurations, is an important way for us to manage that. And then finally, of course, pricing will be another tool to mitigate the impact, and we will use this as soon as we can, given the contracts and the different relationships that we have. Operator: Our next question will come from the line of David Voith with UBS. Please go ahead. Brian Luke: Hey guys, thanks for taking the question. This is Brian Luke on for David. Just on the topic of higher memory prices, you talked about a number of actions you could take. Staying on the topic of pricing, now would you consider price increases across the entire portfolio, or would you consider them more tactical in nature? And would you be able to quantify any price increases you'd be considering going forward? And then I have a follow-up. Thank you. Enrique Lores: Yeah. I would say we are gonna be looking at it case by case, country by country, category by category. But the impact on memory cost is significant. I would say it's gonna happen across the board, but more selectively or higher or lower depending on the specific situation. Brian Luke: Got it. That's helpful. And then in regards to the Windows 11 refresh, talked about us being roughly 60% of the way through, according to our checks, that's roughly in line, and you expect it to be a tailwind going forward in fiscal year 2026. Do you expect it to be a tailwind for longer than that time period? And would you expect, you know, tariff considerations to be having an impact going forward? Thank you. Enrique Lores: Yes. So usually, right, we estimate that about 60% of the installed base have moved to Windows 11. We have seen the conversion happening faster in the enterprise space and also in North America. The biggest opportunity now is going to be in SMB, and in Europe and in Asia. This is very consistent with previous processes. In terms of the tailwind, if you think about what has been the conversion during the last quarter, it has been about 10 points, but this can give you a prediction of for how long we think this is going to last. For sure, for the first half of the year, but probably beyond that. Karen Parkhill: We also have the catalyst of AIPCs being a continued uptick as we look ahead to we had about 30% or more than 30% of our shipments being AIPCs in the fourth quarter. We expect that to be higher next year, 40% to 50%. Operator: Our next question will come from the line of Amit Daryanani with Evercore ISI. Please go ahead. Irvin Liu: Hi. Thank you for the question. This is Irvin Liu dialing in for Amit. I wanted to understand the rationale behind the company cost savings initiative that was announced today. Since you recently completed the you already recently completed the Future Ready program. Was this new initiative more of a response to higher memory cost? Or should we view this as kind of a broader cost savings program in nature? Enrique Lores: Yes. We I actually started to talk about this in the last earnings call, so this was way before the memory cycle started. And this is really driven by the opportunity that we think AI is going to bring us to accelerate product development, improve customer satisfaction, and also boost productivity. Two years ago, we started to do some pilots on how AI could help us to drive these things. And during the last two quarters, we have been shifting from pilots to specific initiatives in areas where we can have significant impact. What we have learned is that we need to start from redesigning the process. And once the process once we know how the process could be redone, using AI, using agentic AI can really have a very significant impact. And this is why we think that really over the next few years, this can have a very significant impact across areas I mentioned before, faster product development, customer satisfaction, and also productivity. And we have quantified productivity around $1 billion over the next three years. And this is really what we have deployed now and what we are working with the teams to deliver on. Operator: Our next question will come from the line of Samik Chatterjee from JPMorgan. Please go ahead. Joseph Cardoso: Hey, good afternoon. Thanks for the question. This is Joe Cardoso on for Samik. Maybe just wanted to follow-up on kind of the PC PS momentum or PC momentum you're you're thinking about or seeing going into 2026. I was curious if you could just flush out the conviction here, particularly as we're cycling past the bulk of the Win 11 refresh. I know, Antonio, you talked about, you know, 60% or 50% plus of the installed base moved over, and so there's some, header there to continue. But interestingly enough, when you guys talked about the forecast for next year, it seemed like pricing was a bigger contributor for the next year relative to this year. Where I think units were bigger. So I'm just curious, like, where you guys are seeing that dynamic play out and what's kind of the conviction behind it? Then I have a follow-up. Thank you. Enrique Lores: Yes. So the conviction comes from the same drivers that we have seen driving demand during the last few quarters. We have an aged installed base of PCs that need to be refreshed. Of all the PCs that were bought four, five years ago, we have the opportunity driven by the change to Windows 11, and we have seen that tailwind helping us during the last quarters. As you said, the conversion has been done to 60% of the installed base. So we have still close to 40% of the installed base to be converted, especially in SMB and especially outside of North America, and this will be a tailwind now for several quarters. And we also see the opportunity to continue to improve the mix of AIPCs that has exceeded expectations that we had for the year. So all these will be positive drivers. On top of that, our strategy is going to continue to be focused on premium categories as it has been during the last few quarters where we have made very significant progress both in commercial customers, consumer customers, and workstations. We also have an opportunity to continue to drive attach of peripherals, attach of services, all these kind of will help us to drive revenue growth faster than unit growth in 2026. Joseph Cardoso: Got it. And then maybe follow-up for Karen. So just curious, if you could share any thoughts on how you're thinking about seasonality for next year. Seems like a lot of moving pieces with the company cycling past the tariffs of this year, maybe the bulk of the Windows 11 refresh this year. And then kind of entering a dynamic memory pricing environment just to kind of name a few of the things that are going on, obviously. Anything we should keep on top of mind relative to maybe first half second half dynamics relative to revenues? I know you talked about the margin implications as kind of cycle past some of the inventory that you built on the memory side, but any other moving pieces we should think about as we're thinking about our models for next year? Karen Parkhill: Thanks, Joe. Happy to talk about that. So I did mention that we anticipate our revenue to be stronger in the second half of the year. And that's really just driven by normal seasonality as well as pricing as needed against the tariffs and the rising costs. When I say when you when you look at our margins, we expect our print operating margins to be in line with seasonality where we see Q3 typically lower seasonally than the rest. And on PS, as we talked about, we expect our PS operating profit rate to stay in the 5% to 6% range in the first half of the year. But then with higher memory cost increases in our back half, we expect we said we expected our full year rate to be at the low end of our long-term 5% to 7% range. So given that, we could see Q3 and Q4 temporarily below that 5% range. But as you know, we're working to minimize that and ultimately mitigate the full impact. So if we can do better, we will. When you think about it from an EPS perspective, we typically have EPS, more stronger in the back half. But with the impact of memory in the back half of this year, you can think about EPS being more evenly weighted through the year. Hopefully, that helps. Enrique Lores: And maybe let me add a couple of comments on the memory side. As we said in our prepared remarks, we expect a major impact of the memory cost increases to impact the second half of the year. In fact, almost no impact in the first half given the inventories on hand that we have. I think it's important to have in mind that we are one of the first companies that are guiding for the full year. And the impact we really see on the second half, we don't see it in the first half. Operator: Our next question will come from the line of Michael Ng with Goldman Sachs. Please go ahead. Michael Ng: Hey, good afternoon. Thanks for the question. I was wondering, and Enrique, if you could just expand a little bit about the comment around the growing base of services, subscriptions, and software that are more contractual in nature. You know, was that a comment more about, you know, workforce solutions or print subscriptions? You know, appreciate the highlight. Just if you could expand on anything that you're thinking about in the future, that would be helpful and how you would work to grow that type of business. Thank you. Enrique Lores: Yes. It's coming across the board. So we have seen very solid growth, for example, in the consumer subscriptions side of instant ink and on in. We mentioned that business is approaching $1 billion, which is really a significant milestone for these types of businesses. We have also seen very solid growth in the workforce solutions space, in PCs. In PCs as a Service, that has driven very significant growth during 2025 and that we expect to continue to see in 2026. And also our software businesses are having very strong performance. And I will let Karen make a few comments. Karen Parkhill: Yeah. I would just add that we're excited to drive even greater growth and value in the future with revenue that is less cyclical and more stable and higher margins. It's really an important focus for us at the company, and it means that as we innovate products and develop new business models around them, we'll be focused on driving more recurring revenue. And when we think about doing our capital allocation too, this is gonna be a priority focus for us. But I would say it's not something that's gonna change, you know, rapidly overnight. We see this as an important gradual transition, and we'll just continue to highlight it for investors. Michael Ng: Great. Thank you. And if I could just follow-up around the headwind from memory of $0.3 on EPS net of mitigations. What do you think gross impact is? And what's your confidence level on the mitigations? Could it be better or worse? And then just as a quick follow-up, are you also seeing similar kind of tightness on PCV and kind of inflation related to that? Thank you. Enrique Lores: Sure. So let me start on the quantification. We have here enough numbers that you can calculate. We have shared that the cost of memory is between 15-18% of PCs, but from there, you can calculate the gross impact that you will see is significantly bigger than the $0.3 that we are quantifying. And we have fairly high confidence in the actions that we have put in place. In fact, we mentioned that we have been conservative in the guide for the full year. And that based on the actions I described before, if we can do better, we will be better. But given that we are guiding the full year, and we expect to see the majority of the impact in the second half, we thought it was important to be prudent at this point. In terms of other components, when we this is the area where we see the biggest impact, memories, and storage. The rest of the space, are confident, and we don't see any shortages at this point. And as I said before, even in the memory and storage space, we are in a good position from a supply perspective given the relationships and the contracts we have with our suppliers. Operator: Our next question will come from the line of Assia Merchant with Citigroup. Please go ahead. Mike Cadiz: Hi, good afternoon. This is Mike Cadiz on behalf of Assia Merchant at Citi. So my question is on AI PC penetration. So, despite you hitting the 25 to 30% penetration excuse me, penetration ahead of schedule, how do you think that tariffs and now the elevated commodity costs have affected the expected trajectory towards the 50% in the coming years that you that you telegraphed? Enrique Lores: So we continue to be very optimistic about the penetration of AI PCs. And as I mentioned before, as we will be prioritizing premium categories, into as we will actually, we will be working on the memory situation next year. The penetration of AIPCs as I said before, is above 30% today at the end of the quarter. Easily driven by the additional value this is being compared to the installed base and the fact that our customers want to be ready as soon as applications start taking advantage of other capabilities of these products. Last quarter, I mentioned the work that we are doing with software companies to leverage those, and this work has continued, and we have continued to make progress. With the announcements that Microsoft made last week on the consumer side, the ability to manage PCs with voice, think are going to be exciting very exciting for our consumers. They have improved the tools that they have for other companies to take advantage of GPUs and NPUs in the devices. We have made progress with other software companies like Adobe in leveraging those assets. With more local vendors like Rakuten or in Japan to take their models and the systems that they have in the cloud and bring them today, an announcement we made a few weeks ago. And we have also worked with smaller companies that drive very specific value example, in helping sales teams to be more efficient, or in helping product managers to present better. All these are really helping to drive adoption. And something very we think very relevant is as we have deployed these solutions internally in HP, with not only the PCs, but with a curated set of applications, we have seen up to 17% of productivity improvement. And this is a very important value proposition for us. But also for our customers. Mike Cadiz: Thank you for that. And then as my follow-up, for both PC and print, would you mind talking about the customer and market reception to the pricing actions that you've taken whether or not it's different between consumer and commercial and how you perhaps balance that with maintaining margins and share as well? Thank you. Enrique Lores: Sure. The majority of I mean, if I look at print, we have done price actions both in the consumer and commercial space. In the commercial space, probably because our most of our competitors are Japanese, and they continue to have a very significant help from yen. We didn't see these changes happening across the board. And this is why we lost Sam's share in Q4. It didn't happen in consumer. It didn't have any supplies where we grew our share, especially supplies where we grow our share. And in the PC space, our price increases have been smaller because the impact of tariffs so far has been smaller. And therefore, we haven't seen a strong reaction one way or another. Prices had grown year on year quarter on quarter but less than what we have seen in other spaces. Karen Parkhill: And even with this pricing environment, you're seeing us have strong revenue performance. Both last quarter and for the full year. We expect that to continue. Operator: Our next question will come from the line of Eric Woodring with Morgan Stanley. Please go ahead. Maya Newman: Hi, thank you. This is Maya Newman on for Eric Woodring. You know, maybe just to start to build on some of your comments regarding your mitigation tactics for the memory cycle and your supplier relationships. Could you quantify how many weeks of memory inventory you have on hand? And you know, are suppliers willing to sign long-term agreements? And kind of just overall, where do you believe HP is most differentiated within the supply chain or has the greatest competitive differentiation versus peers to weather this memory cycle? Thank you. And then I have a follow-up. Enrique Lores: Sure. I'm not gonna share the specifics of the weeks of inventory we had. But I said before that given the inventory we have today, we are fairly well in a fairly good situation for the first half of the year. So this helps you to understand that it's not gonna have a short-term impact. In terms of long-term agreements, have long-term agreements with our key suppliers. And the scale, the depth of our relationships are key assets when we go through situations like this. As you know also, after COVID, we made a lot of work to improve our operational processes within the supply chain. Both in terms of supply-demand matching in terms of forecasting, and they will be very useful now as we need to go through this situation. It's not only about getting the memory, it's also about getting other supplies that will work with memory like processors, and it's about aligning demand to that. We did a lot of work during the last quarters of COVID to improve that. And the team is very experienced now in how to manage this situation. Maya Newman: Got it. Thank you very much. And then last question for me. If we take a step back and think about your overarching strategy and print, how should we think about it going forward? I understand we'll probably get more details at the analyst day, but it's obviously a secularly declining business. But you're also seeing yeah, operating income decline in print as well on a dollar basis. I know a lot of actions around pricing, big ink, toner subscriptions, the graphics market, are meant to protect. Is this a business where we should expect operating income growth? And if so, how do we get there on a sustainable basis? Enrique Lores: Yeah. We said we will talk a little more about this in our Investor Day in a few months. But the strategy that we have been executing during the last years is not changing. Our goal continues to be to capture more value per customer and reduce the number of unprofitable customers, which we have been doing during the last year. Our shift or our doubling down on big ink is a consequence of that strategy as well. We see a big opportunity to grow profitable units in that space. While at the same time continue to accelerate and continue to drive the transition into subscriptions in this space. And we have been making very good progress both on the supply side and now also integrating printers in our all-in program. In the office space, we see an opportunity to grow our share in profitable units, and the new portfolio that we will be launching during 2026 and the work that we continue to do in cost will help us to achieve that goal. And then finally, on the industrial space, both especially in the graphic side, it's a business that has been growing during the last nine quarters, and we expect it to continue to grow during 2026. Operator: Our final question will come from the line of Mark Newman with Bernstein. Please go ahead. Mark, you might be on mute. Mark Newman: Apologies. Apologies. Thanks for taking my question. Yes, yes, just following up a bit on the memory price environment. Thanks very much for the clarity on the $0.30 impact. Just curious though, you mentioned that's mostly on the back half. So presumably, it's if you think if you just do the math, 30¢ on $3 or so annual earnings. So your impact is more than 10% on the back half. Considering, of course, you can pass through a lot of that with pricing, it seems like that it should be less given you have quite a few months to correct pricing. So just wondering if anything I'm thinking about wrong there. This seems like it may be conservative from you on the 30¢, but let me let me know if I'm thinking about that wrong. And I also wanted to ask does it have an impact on mix? Given how significant memory prices have moved? I mean, cut specs change average specs of what you what you sell change, could that also impact the AI PC dynamic considering the AI PCs typically have higher specs? Thanks very much. Karen Parkhill: Yes. Thanks for the question, Mark. And let me just talk about the $0.30 in the guide. You know, I would just say we remain focused on taking a prudent approach to our guidance. And particularly as we start a new year, we're setting our guidance at a level that we have a high confidence in meeting and hopefully exceeding. You know, I would say we're taking that same prudent approach this year with the rising cost of memory, but we've already been implementing actions to mitigate. And I would note that we have a proven track record of managing challenges like this, and we are confident in the strength of our organizations and the partnerships that we've built to deliver the best possible outcomes. So while we have included that 30¢ in the guide, if we can do better, we certainly will. And your math is roughly right. Enrique Lores: And then finally, in terms of configurations, as I said before, we are gonna be prioritizing those units where we see more margin for the company. And what we have seen in other cases is where volumes are more impacted as more in the entry space, whereas customers are usually more sensitive to price. And as Karen said before, we decided to take a conservative approach. We are guiding now the full year. We think the impact will be mostly on the second half. We are taking a lot of actions to mitigate that impact. But given how fast things have unfolded during the last few weeks, at this stage, again, we thought it was better to be prudent. Operator: And that will conclude our question and answer session. I'll turn the call back over to Enrique for any closing comments. Enrique Lores: Perfect. And thank you, everybody, for joining today's call. We remain confident in our ability to lead the future of work through technology, and I'm really proud of the progress we have made across our priorities. We finished 2025 strong, growing profit from the first half to the second. In 2026, we intend to grow faster than the market. We have a significant opportunity to embed AI in everything we do and transform the company. The memory headwinds that we have been talking about today, while material, are also temporary. And we're taking action, and we have managed, as we said also, such challenges before, and we have a lot of experience on how to handle that. So with a clear strategy and disciplined execution, we are focused on driving long-term value while managing these headwinds. Again, thank you for joining today. And for those of you in the U.S., we wish you a very happy Thanksgiving holiday. Thank you. Operator: This concludes today's call. Thank you all for joining. You may now disconnect.
Ahmed Moataz: Hello, everyone. This is Ahmed Moataz from EFG Hermes and welcome to IDH's Third Quarter of '25 Results Conference Call. I'm pleased to be joined with Dr. Hend El Sherbini, Chief Executive Officer; Sherif El Zeiny, Vice President and Group CFO; and Tarek Yehia, Director of Investor Relations. The company, as usual, will start with a brief presentation and then we'll open the floor for Q&A. IDH management, please go ahead. Tarek Yehia: Thank you, Ahmed. Good afternoon, ladies and gentlemen and thank you for joining us for our third quarter analyst call. My name is Tarek Yehia, I'm Head of Investor Relations. Joining me today, Dr. Hend El Sherbini, our CEO; Mr. Sherif El Zeiny, our CFO and VP. Dr. Hend will begin the call with a summary of latest period main highlights. After that, I will discuss in more details the main macroeconomics and geopolitical trends seen across our markets. Then after my presentation, Mr. Sherif will offer a deeper analysis of our financial performance. Then we will open for Q&A. Dr. Hend will start now. Thank you. Hend El Sherbini: Thank you, Tarek and good afternoon, everyone. I'm Dr. Hend El Sherbini, CEO of IDH. As we approach the end of what has been another very strong year for the group, I'm pleased to report a robust set of results for the first 9 months of 2025. The performance we are presenting today reflects not only healthy market dynamics but also the tangible results of the strategic initiatives we have been implementing over the past 2 years, particularly around network and geographic expansion, operational optimization, digitization and service diversification. Throughout the year, we have continued to strengthen our core business in Egypt and Jordan, while making pronounced progress in newer markets, namely Nigeria and Saudi Arabia. We are also very encouraged by the sustained improvements in our profitability metrics, which confirm the scalability of our model and our ability to translate revenue growth into margin enhancement. We are particularly pleased to see the continued strength and stability of operating conditions in our home market of Egypt, where macroeconomic sentiment has improved and demand for high-quality diagnostic services remain strong. Turning to our performance in more detail. During the first 9 months of the year, we continued to build on the strong momentum established earlier, delivering 41% revenue growth year-on-year, supported by growth across both volume and value metrics. Test volumes increased by 10% with all operation geographies contributing to this expansion, supported by stronger patient engagement, deeper penetration in walk-in and corporate channels and improved referral flows. At the same time, our average revenue per test rose 28%, reflecting a richer test mix, broader uptake of high-value radiology and specialized diagnostics and favorable price adjustments introduced earlier in the year. These trends also helped us further strengthen our average test per patient, which reached 4.6 tests per encounter, demonstrating the continued depth of patient relationships and our success in expanding cross-service utilization across our platform. In Egypt, momentum strengthened further through Q3, supported by solid growth in both volumes and value alongside strong brand equity and stable market conditions. Test volumes in Egypt continued to grow steadily, while average revenue per test saw a significant uplift, owing to favorable mix dynamics and strong -- with strong traction in radiology, specialized diagnostics and corporate channels. Egypt remains the core engine of group performance, contributing 84% of total revenues in the 9 months of 2025 and continued to demonstrate high scalability, resilience and operating efficiency. The ongoing expansion of our physical network in Egypt continues to be a key growth driver. Over the past 12 months, we have added 103 new branches in Egypt, bringing the total up to 670 locations nationally as of September. These new sites have helped deepen our presence, not only in Greater Cairo but also in fast-growing regional cities, allowing us to better serve both corporate and walk-in patients. Our household service remains a strategic differentiator, sustaining its strong contribution of around 20% of Egypt's revenue, continues to demonstrate the effectiveness of our post-pandemic strategy and reinforces our position as an early mover in home-based diagnostics in the region. Al Borg Scan continues to demonstrate strong momentum as a key component of our long-term strategy to build a fully integrated diagnostics platform. Year-to-date scan volumes and patient traffic recovered well following the Q1 of Ramadan slowdown with Q3 recording clear sequential volume growth. The integration of Cairo Ray for radiotherapy, which was consolidated this quarter, is progressing well. This acquisition provides us with direct access to radiotherapy service and strengthens our positioning in oncology diagnostics, a fast-growing and strategically important segment. We expect radiology to play an increasingly prominent role in our growth mix over the coming quarters, supported by continued network expansion, enhanced service capability and rising demand for specialized imaging. Over the past 2 years, a key strategic priority for IDH has been the successful launch and scale up of our Saudi operations. I'm pleased to share that our presence in the Kingdom continues to develop very encouragingly with strong momentum supported by growing demand, deep market visibility and sustained improvement in both volume and value metrics. Year-to-date, we have seen revenues more than quadruple compared to the same period last year, reflecting rising test volumes, improving mix and early network scale benefits. This growth continues to highlight the effectiveness of our ramp-up strategy in the market, which aims to accelerate revenue growth and establish Biolab KSA as a key player in the large but high fragmented Saudi diagnostics market. As part of this plan, we inaugurate our third branch in Riyadh during the third quarter and we remain on track to open 3 additional locations over the coming months. These new branches will help extend our footprint across high potential catchment areas. At the same time, we continue to advance our growth approach, which includes targeted marketing campaigns to build brand recognition, selective promotional initiatives to drive patient acquisition and ongoing discussions with the insurers and corporate health care providers to broaden our referral and partnership networks. While still in the early stages of development, Biolab KSA is demonstrating strong operation traction and reaffirming our belief in the long-term potential of Saudi Arabia as a key pillar in the group's regional growth strategy. As always, profitability remains a core focus for us and we are very pleased to see sustained improvements across all levels of the income statement. We continue to benefit from strong operational leverage, tighter cost controls and better resource allocation across our subsidiaries, including Nigeria, where Echo-Lab remained positive EBITDA throughout the 9-month period, marking a key milestone in its turnaround and confirming the potential of its high -- of this high-growth market. Overall, both COGS and SG&A and share of revenue continued to decline, supported by disciplined cost management and our growing digitization efforts. COGS to revenue fell to 57%, while SG&A declined to 15% from 17% last year, underscoring the success of our optimization initiatives. Consequently, our EBITDA margin expanded to 35% from 30% last year, while gross profit margin rose to 43% compared with 38% in the 9 months of 2024. These efforts, combined with strong top line growth and improved pricing dynamics have translated into meaningful margin expansion and greater earnings quality with adjusted net profit more than doubling year-on-year while excluding FX effects. Before handing the call over to Tarek, I would like to briefly reiterate our full year guidance in light of our year-to-date performance and the momentum we are seeing across all markets. Given the strong results delivered over the first 9 months, coupled with relatively stable operating conditions, continue to expect full year revenue growth to come in at more than 35% in the full year of 2025. On the profitability front, we remain confident in delivering an EBITDA margin more than 30%, supported by sustained cost discipline, stronger operating leverage and the continued improvement in our Nigerian operations. With that, I will hand the call back over to Tarek and Sherif, who will take you through key trends across our markets and a more detailed breakdown of our financial performance of the period. Thank you very much. Tarek Yehia: Thank you, Dr. Hend. This year, we have continued to operation in relatively stable conditions with supportive macro trends and constructive across all our key markets as we approach the end of 2025. In Egypt, we are continuing to see slower inflation compared to prior years with the latest trading of September coming at a multi-month low of 11.7%. [ Decreasing ] increasing inflation pressure have been supported by relative strengthening of EGP versus dollar as well as increased ForEx inflows into Egypt as investor confidence recovers and remittance continue to rise. In fact, in recent weeks, we have seen EGP continuing to appreciate, reaching a low of 47.3 to dollar in October and as low as 46.92 last week. Successful rate cuts throughout the year continued to reach 6.25 points have now brought the overnight deposits to 21%. This will undoubtedly help prop up local investments activity and drive further recovery in consumer spending. Similar to Egypt, Nigeria also has seen relative stability in 2025. Inflation has come down from last year highs and expected to support gradual recovery in consumer spending. Over in Jordan and Saudi, the economic situation remained largely stable despite increased regional uncertainty. While Saudi Arabia economic could be tested by the ongoing global trade tensions, we remain confident that the excellent work done by the Saudi government to build resilience in the economy will help safeguard the country. Turning quickly to our latest results. Egypt continued to deliver strong growth with revenue rising 44% year-on-year, supported by both volume expansion and significant increase in average revenue per test, particularly driven by radiology and high-volume diagnostics. Meanwhile, Jordan continued its solid performance, reporting revenue growth in both AP and local currency terms. Test volume increased by 21% year-on-year, supported by Biolab ongoing promotion campaign and digital outreach initiatives. In a market where volume-driven growth is critical for long-term sustainability, we are pleased to see Biolab's strategy continue to deliver strong volume momentum and patient retention through community engagement and service quality. In Nigeria, Echo-Lab has maintained its positive EBITDA momentum supported by successful implementation of our turnaround strategy launched last year. We are increasingly confident in long-term potential for our Nigerian subsidiary to expand its radiology and specialized testing capability and capture the significant upside of a growing market. In Saudi, the ramp-up progressed ahead of expectations with revenue more than quadrupling year-on-year and [ subscription ] growth supported by increasing brand visibility and network expansion. Finally, in Sudan, operation remains significantly constrained by the ongoing conflict with only one branch partially operating and no material updates to report at this stage. I will now handle the call to Mr. Sherif, who will provide a more detailed overview of our cost and profitability for the first 9 months. Sherif Mohamed El Zeiny: Good morning -- good afternoon, ladies and gentlemen and thank you for your time today. As Tarek mentioned, during my presentation, I will focus on costs, margins, profitability and our working capital position before opening up the floor to your questions. In line with our guidance, profitability for the first 9 months of the year has continued to improve, supported by our group-wide efforts to boost operational efficiency and keep spending at bay. A major focus area over the last 18 months has been digitalization, where we have continued integrating advanced data tools and analytics into our internal platforms, procurement systems and financial planning to enhance decision-making and improve cost discipline. These efforts, combined with a stronger operation leverage and better resource allocation helped drive meaningful improvements in efficiency with both COGS and SG&A as a share of revenue declining versus last year. In parallel, we also -- we are also keenly focused on keeping costs down. Our efforts here have translated in a 9 percentage point drop in our total cost to revenue ratio for that period compared to last year. More specifically, our COGS to revenue ratio improved to 57% in 9 months '25, down from 62% in the same period of last year, supported by disciplined inventory management and stronger purchasing processes. The most notable improvements came within raw materials, which decreased to 19.6% of revenue, down from 21.9% last year, reflecting our scale advantages and smarter procurement practices. At the same time, total wage and salaries as a share of revenue remained broadly stable, underscoring our balance between supporting our staff with appropriate salary adjustment while continuing to optimize headcount. As you can see in the bottom right chart, these efficiency gains translated directly into a stronger profitability with gross profit margin expanding to 43% from 38% last year and EBITDA margins rising to 35% from 30% in 9 months 2024. On the SG&A front, spending remains well contained with SG&A as a share of revenue declined to 15%. The main increase within SG&A was in advertising and marketing expenses, which continued to support the ramp-up in Saudi Arabia and targeted promotional initiatives in Egypt and Jordan. Moving to our bottom line. We reported a net profit of EGP 964 million in 9 months 2025, up 33% year-on-year. As highlighted earlier, last year's reported net profit, including substantial ForEx gains, which distort direct comparisons. When controlling for those ForEx gain, adjusted net profit increased more than 119% year-on-year with an associated adjusted net profit margin of 17% versus 11% last year. As always, we maintained a disciplined approach to working capital management as we supported rising demand while preserving strong liquidity. Similarly, we saw our cash conversion cycle improved further to reach 127 days in September 2025 versus 155 days at the end of '24. It is also important to mention that as expected, we saw a decline in days inventory outstanding, stronger sales momentum and more efficiency inventory turnover during the second and third quarters of the year following the seasonal Ramadan slowdown in March. Finally, as 30th of September 2025, our total cash reserves stood at EGP 1.8 billion with a net cash balance of EGP 271 million. Thank you for your attention. We now welcome any questions you may have. Thank you. Ahmed Moataz: [Operator Instructions] There is one question in the chat on whether you're at a position right now to disclose the planned price increases in Egypt that would start from January of 2026. Tarek Yehia: We're still in the process of preparing the budget, and it's too early to comment on this but of course, will be a price increase for next year. Ahmed Moataz: Understood. The second is on whether you can disclose a time line for the breakeven for Nigeria -- sorry, Saudi operations. And if you have a targeted revenue contribution over, let's say, 3, 5 or even longer than that as a percentage of total revenue. Tarek Yehia: For the EBITDA, we are expecting a breakeven by end of 2026. Ahmed Moataz: Understood. And is there something on the revenue contribution as well? Tarek Yehia: Revenue continued to grow year-over-year and contribution to the top line still less than 1% but by time, gradually will increase. Still Egypt represents 82% and Jordan represents 14%, 84% for Egypt and 14% for Jordan. Ahmed Moataz: All right. Two questions from [ Johannes ]. Can you talk us through the change of ownership of the Actis stake and what you expect from Elliott? That's one. The second is, what is your dividend policy at the moment? Hend El Sherbini: So I mean the Actis stake has been bought by Elliott as a part of a bigger deal. We don't really have any visibility on this right now. And regarding the dividends, as usual, any money that we have, which are not used for investments and for the work, we give it back as -- we give it back to investors as dividends, as long as it's -- we are able to do that. Ahmed Moataz: [Operator Instructions] We'll take questions from the line of [ Darren ]. Unknown Analyst: Dr. Hend, you just -- you commented that the Actis sale is part of a bigger deal. What does that mean exactly? Do you have any other color there you can share? Hend El Sherbini: I know that Actis have [ exited ] private equity and they sold their shares in IDH and other companies to Elliott. But I don't know exactly -- I don't have the exact details of this deal. Unknown Analyst: Okay. Understood. So you're saying there's other businesses that have been sold to Elliott. And you haven't had -- the management team hasn't had any correspondence with Elliott at all? They haven't reached out to you or you guys haven't reached out to them to get a sense of what their plans are? Hend El Sherbini: I've seen them when I was in London. I've met with them. And -- but this was like an introductory meeting, nothing -- no specifics. Unknown Analyst: And do you have a sense, is it their intention just to be passive shareholders? Is it a purely financial investment? Or is there something more strategic? My understanding is they have, I think, interest in another Egyptian diagnostics business, if that's correct? Hend El Sherbini: No, this I don't know. Which other diagnostic business? Unknown Analyst: I think it's a much smaller one but they were part of a transaction in last year, I believe. But I can't remember the name of the firm but anyways. Hend El Sherbini: I haven't heard -- and they didn't mention it, no. Ahmed Moataz: We received 2 questions in the chat. I'll take them one by one. First one is how much CapEx have you got planned for Saudi operations and expansions? Tarek Yehia: For Saudi, we have a plan for the next 5 years with a CapEx of $20 million. Ahmed Moataz: All right. This is 2025 included? Or when you say 5 years, this is 2026 and beyond? Tarek Yehia: This starts from 2026. Ahmed Moataz: Starts from 2026. Okay. Two more questions in the chat. The first one, [indiscernible]. Please, can you share your expectations on growth beyond this year in terms of volume and value? And can you also comment on market-specific growth expectations? Tarek Yehia: We're still in the process of preparing the budget but we are aiming to targeting growth across all the geographies we are working at -- operating in. Ahmed Moataz: Understood. [ Ali Masood ] is asking, how many Actis Board representatives are on IDH's Board? And any expectations on if and when those members will step down? Hend El Sherbini: So there's only one Board member from Actis and he's also representing -- I mean, he's not stepping down because he's -- I think he's going to be also Elliott's representative. Ahmed Moataz: Understood. Can you comment on your expectations for branch additions in Egypt in 2026? Will it be at a similar level to 2025, higher or low? Tarek Yehia: It is -- we're still also the same for the budget. We're still in the process but we will see growth in the number of branches as -- and our growing brand -- ongoing process of growth each year. Ahmed Moataz: Sure. [indiscernible] is asking, how will the growing contribution from Saudi impact group returns and margins when Saudi is in steady state? Tarek Yehia: After 5 years for the 5-year plan for Saudi to represent 7% from the group revenue. Ahmed Moataz: Okay. And the question was more on how do you expect this when it has a 7% revenue contribution to impact your overall returns and margins. I think the question is trying to assess whether Saudi operations by itself is margin accretive or not relative to what you're generating right now and at the same time, return accretive or not? Do you want me to repeat the question? Hend El Sherbini: We're expecting it in the 5 years to be in the vicinity of the 30%, if this is -- if this answers the question. Ahmed Moataz: [Operator Instructions] All right. We haven't received any -- no, we actually did one, sorry, 2 questions. What does the $20 million Saudi CapEx imply for the number of branches in Saudi 2030 Vision. Sorry, one second, I'll re-read the question. Actually, we'll skip this one and I'll go back to it. Are margins at 38% sustainable? Or do you think it's a function of the strong EGP FX taking place this year? Hend El Sherbini: I mean, as long as we have a stable currency, I think this is sustainable. We're getting back to our 40% margins. And the strong FX has nothing to do with our improvement in margin. However, the stabilization of the currency is, of course, is helping in maintaining our margins. Ahmed Moataz: All right. Back to [ Farooq's ] question. How does the $20 million Saudi CapEx imply for the number of branches by 2030? So by the end of the year plan, how many -- or by the end of the 5 years, how many total branches you have in Saudi? That's one. And the second is, is the Saudi strategy branch-focused more? I think he means corporate or wholesale contract focus because [ Farooq ], can you send a clarification on the second part of the question until they answer the branches part? Hend El Sherbini: So we're expecting 45 branches by the end of the 5 years. And this is where the CapEx is going together with, of course, the instruments and everything else. This in terms of CapEx. In terms of revenue, we're expecting a breakdown of 50% corporate and 50% walk-in. Ahmed Moataz: Understood. Could you also please talk us through the outlook on margins for Jordan? Tarek Yehia: Jordan margin for the current year, in the range of 30%. Ahmed Moataz: All right. [ Ali Naser ] is asking, can you please provide details on the Cairo Ray acquisition? What was the investment size? And what is the annualized P&L impact on the consolidated level? And lastly, how much did it impact third quarter results? Tarek Yehia: The total investment cost was around $400 million. sorry, EGP 400 million. Ahmed Moataz: And the rest of the question, please, what is the annualized P&L impact? And how much did it impact third quarter results? Tarek Yehia: For the quarter, it is minimal because we already consolidated for a small portion in Q3. The same will apply for Q4 and more contribution will be done in the full year next year. Ahmed Moataz: Understood. [indiscernible] is asking, what is a stable long-term level for COGS and SG&A as a percentage of revenue? How much more cutting or savings do you expect and the potential uplift to EBITDA margins? Tarek Yehia: For the COGS to revenue ratio, which already improved to 57% in the 9 months, coming down from 62%, we're expecting we can go down 1% or 2 more percent going forward. And also for the SG&A, it already went down from 21.9% to 19.6%. And going forward, we can see 1% or 2% more advantage from recruitment and a lot of cost optimization that we are in process improvement year-over-year. Ahmed Moataz: Understood. [ Marina ] is asking, how do you see the contract and walk-in dynamic play out in Egypt over time, let's say, for the next -- sorry, 3 to 5 years? Do you expect contract volumes to continue growing faster than walk-ins? And what does that mean for longer-term margins? Hend El Sherbini: So yes, we expect the contract contribution to grow. However, we're also seeing increase in the walk-in volumes. So both are increasing. And this -- I mean, this is not -- this is affecting -- this is not really affecting our margins directly because in the corporates, we are seeing increased volumes. So the test per patient in the corporate side is much higher than in the walk-in side. And as this is an economy of scale, we always want both things, the increase in volume as well as the increase in pricing. So this is -- I think this dynamic we have been seeing for a few years now and it hasn't affected our margins. Ahmed Moataz: Understood. [indiscernible] is asking, volume growth in Egypt was solid at 9%. Is this primarily driven by the 103 new branches opened over the last year? Or are you seeing same-store sales growth in the more mature branches? Hend El Sherbini: We are seeing volume growth in both the new and the existing branches on both sides, corporate and walk-ins. Ahmed Moataz: [indiscernible] has a question. Unknown Analyst: Just a follow-up on the question I asked about Cairo Ray. I don't think you answered that. Please again but I know you bought it for EGP 400 million but I wanted to ask about what is the revenue of this company? What's the EBITDA of this company? What's the net income of this company on a trailing 12-month basis or maybe '26 basis? Sherif Mohamed El Zeiny: Our full year estimates on the top line is around EGP 52 million and on the EBITDA level, around EGP 16 million. This translates to around 30% EBITDA margin. Ahmed Moataz: All right. I'll pass it back to you, Dr. Hend, Sherif or Tarek for any concluding remarks. Tarek Yehia: Thank you, everyone. If you have any more questions, you have our contact. We're happy to have a follow-up call, any -- respond to any e-mails. Thank you, everyone, for attending today and thank you, Ahmed, for hosting the call. Hend El Sherbini: Thank you. Thank you, everyone. Ahmed Moataz: Thank you, everyone, and to IDH's management as well. Have a good rest of the day, everyone. This concludes today's earnings call. Tarek Yehia: Thank you.
Operator: Involve known and unknown risks and uncertainties that may cause our actual results, performance, or achievements to be materially different from those expressed or implied by the forward-looking statements. These forward-looking statements include our growth prospects, future revenue, operating margins, net income, cash balance, and total addressable market among others. They represent our management's belief and assumptions only as of the date such statements are made, and we undertake no obligation to update these. During today's call, we will discuss non-GAAP financial measures which are in addition to and not a substitute for or superior to measures of financial performance prepared in accordance with GAAP. A reconciliation between GAAP and non-GAAP financial measures is available in the earnings release, which can be found on our Investor Relations website. Further information on these and other factors that could cause the company's financial results to differ materially are included in filings we make with the Securities and Exchange Commission, including our most recently filed Form 10-K as well as our subsequent filings made with the SEC. With that, I will turn the call over to Jennifer. Jennifer Tejada: Thank you, Christine. Good afternoon, and thanks for joining us today. In the third quarter, PagerDuty, Inc. delivered revenue of $125 million, up 5% year over year. Non-GAAP operating margin of 29% exceeded guidance by 750 basis points over last year. We also achieved GAAP profitability for the second consecutive quarter, evidence of disciplined execution and a durable profitable growth model. Annual recurring revenue of $497 million represents 3% year-on-year growth. New and expansion bookings were consistent with the first half, offset primarily by customers rightsizing seat licenses amidst budget caution. We accelerated our product innovation and operational efficiency in the market, which extends our leadership in the increasingly important and complex digital and emerging AI operation space. In order to build long-term and near-term shareholder value in a budgetary environment, we are focused on three objectives. One, expanding operating and free cash flow margins as we further increase operational efficiency. Two, extending our product advantage in surface area in AI operations and incident management, and three, scaling the initial successes in our go-to-market transformation to drive faster adoption of the full PagerDuty operations cloud and effectively monetizing the value we create for customers. This will be our sixth consecutive year of expanding operating margins as part of our commitment to profitable growth. Structural efficiency initiatives are accelerating product and business execution while lowering our cost base. With the added benefit of modern software and AI, we expect to continue expanding operating margin towards our long-term target of 30%. Demand for our platform remains strong with double-digit year-over-year growth in new customer acquisition and in total paid and free customers. Customer retention and growth remain our top priority. While the number of customers expanding with us each quarter has remained consistent throughout the year, we are focused on increasing our average transaction size by more effectively attaching new usage-based products like AI ops and PagerDuty Vans and by driving adoption through new professional services and customer success playbooks. Targeted customer retention efforts, including a more efficient proactive coverage model, delivering high-demand features, and flexible pricing have stabilized customer low retention. That said, seat license compression continues to be our most significant challenge, large enterprises where budget caution and right-sizing have had the most impact on our incident management business. During the quarter, we mitigated longer-term risk by leveraging multiyear agreements, expanding to a broader product footprint, and including professional services to ensure fast time to value. We are scaling this motion with a refined adoption and value realization program through the customer success team while at the same time enabling the field to focus on our agentic offering, both of which will support improved retention and growth over time. We have also sharpened renewal forecasting to identify, measure, and address risk earlier in what is now a multi-quarter cycle. On a strong foundation of financial and operational discipline, we extended our product advantage in end-to-end incident management and AI and agentic operations. In the past, AI ops referred to modern event management techniques that support root cause analysis and incident triage. Now in an environment where trillions are being deployed on AI investments, yet enterprise resilience is more important than ever, the need for a new operating model has emerged. Agentic orchestration is one of many new operational aspects that enterprises must manage. The new ecosystem required to support AI includes energy, storage, compute, data management, large language models, applications, agents, and the systems to test, control, and run AI solutions safely and responsibly. Connected intelligent orchestration, and operations of the entire AI stack and the functional automation application across a business create new surface area that PagerDuty is uniquely positioned to support. The operations cloud connects seamlessly via our integration ecosystem and our model context protocol, or MCP. It intelligently detects potential disruptions and risks, and orchestrates human-led agent-based and model-centric events to prevent and resolve issues. This is the new era of AI operations, real-time orchestration and action across AI agents, applications, and infrastructure. We continue to invest in our roadmap to ensure our position as a central nervous system for both digital and AI operations going forward. PagerDuty pioneered and defined the incident management space starting in DevOps and expanding to enterprise IT, security, and business operations in service of supporting the largest and most innovative companies in building resilience at scale. In October, we released over 150 platform enhancements and the industry's agentic end-to-end incident management offering. Customers can now leverage PagerDuty agents to address high-value, time-critical work at every point in the value chain. PagerDuty agents have the unique advantage of being built on our open and neutral ecosystem of more than 700 integrations leveraging the broadest context on causes and resolution of incidents in order to take the most effective actions. Early traction and positive customer feedback on PagerDuty's agents demonstrate the need for AgenTex solutions to scale operations effectively. This is especially critical as a higher volume of code is being shipped with AI. We deepened our AI ecosystem leadership in the quarter, with an initial partner as an initial partner in the Glean MCP directory. This enables teams to adopt and accelerate value realization of the operations cloud. PagerDuty is also the first incident management and operations platform integrated into Spotify's developer portal for Backstage. Which positions us at the forefront of modern development. Spotify noted that this fundamentally helps organizations shift from reactive to proactive issue prevention. Developers can now initiate, triage, escalate, and resolve incidents without leaving their workflow. Our roadmap prioritizes standards-based enterprise-grade interfaces for discovery and control deep workflow integration in developer, agentic and operations tooling, and an automation fabric that seamlessly weaves human responders and autonomous agents together. Compared to point solutions, PagerDuty capabilities, and use cases span functions such as supply chain, IoT, storage, and security. Recent global infrastructure outages also highlight the differentiated resilience that we provide every day. Go-to-market excellence is critical to our success. We are transforming the way we go to market, especially in enterprise. Where we have seen ongoing customer budget caution and organizational rightsizing and change. Over the midterm, we are establishing PagerDuty as the enterprise operations platform for AI. In the near term, we are transitioning from a traditional single-year seat-based license model to a multiyear platform usage model. On a year-over-year basis, our go-to-market execution has improved. In Q3, we advanced customer acquisition. Adding 284 net new customers year to date. Nearly four times the total in FY25 validating demand for our products and services. Leading AI native companies like Perplexity and AnyScale continue to choose PagerDuty as their primary operations platform. We have also continued to grow our high-value customer base those spending over $100,000 per year with us, by 5% year over year to 867 customers. During the quarter, we welcomed Todd McNabb to PagerDuty as our chief revenue officer. He and the team are focused on accelerating this transformation to improve our land, realize, and expand motion, activating new partners to support this effort. In his first thirty days, we have seen nearly 40 customers together and expect to see over 100 by the end of the year. It is clear from those conversations that our customers want to do more with us and need both our expertise and support to realize the full value of our platform. Initial progress in our shift from seat-based to usage-based pricing is encouraging. Flexible operations cloud packaging enables customers to seamlessly scale between human responders, agents, and automated solutions without needing to precisely predetermine users and product mix. This better aligns our customer investments to business outcomes rather than headcount and licenses. In the quarter, customers across industries made multiyear commitments to PagerDuty. A leading AI native company's multiyear renewal and expansion this quarter demonstrates the need for best-in-class and AI operations. Digital and AI operations. In a high-growth segment where proven scale, resilience, and strategic partnership are required. PagerDuty safeguards enterprise resilience at a global scale that competitors cannot match as the company's engineering footprint is expanded rapidly from research-focused to a global production platform supporting hundreds of millions of users they required a strategic partner to support their unprecedented operational scale. As AI has accelerated, they have joined our million-dollar ARR cohort. A Fortune 25 global automotive leader, selected PagerDuty for a multiyear agreement as it modernizes enterprise operations optimizes manufacturing operation operations, and advances electric and autonomous vehicle initiatives. PagerDuty won via executive alignment and enterprise-grade capabilities to support operations beyond software teams to manufacturing and the dealer network. Critical to our selection was fast time to value integration with their native ITSM system, Slack first workflow automation, and our strong track record of scale deployments in manufacturing. One of Australia's largest banks and a PagerDuty customer since July 2024 expanded for the second time this year during Q3 to support their ambitious growth goals. The bank added several thousand enterprise incident management licenses in a multiyear partnership, increasing their investment by nearly $1 million in ARR. The deployment is transforming operations for reactive and manual preventative with scaled service ownership across the entire organization. PagerDuty is the bank's enterprise platform for AI. In the competitive gaming industry, a leading digital entertainment with millions of daily active users selected PagerDuty's operations cloud with flexible pricing to enhance operational resilience. Moving beyond seat-based licensing constraints, the customer chose PagerDuty's usage-based offering to reduce expansion friction and to better align their investment with business value, automating more work as they target 99.99% availability, and reduce operational toil by 20%. Developers can now focus on innovation rather than operational issues. Our focus and sustained investment creation. continue to yield returns in talent, critical drivers of long-term value PagerDuty's recognition among Fortune's best workplace's top 50 included this quarter's placement in the small and medium company list in technology and validates our ability to attract and retain the high-caliber employees essential to deepening our competitive moat in digital operations and expanding our offerings in AI operations. Building on the digital operations category we pioneered, AI operations is a natural growth platform to support our long-term strategy and profitable growth goals. Progress in our go-to-market transformation along with flexible enterprise and usage-based pricing support both midterm growth and ongoing margin expansion. While these efforts will take time to be fully realized, we are executing from a position of strength, including product leadership, expanding operating margins, and a strong balance sheet. Our unique platform offering and improvements in underlying execution underpin our confidence in accelerating profitable growth. I would like to share one additional leadership update. Howard Wilson, CFO, has decided to retire during the financial year. Howard has been at PagerDuty for nine years and has been instrumental in growing the business to nearly $500 million in ARR. His impact has been deep and broad as he has led PagerDuty through our successful 2019 IPO and in achieving critical milestone positive cash flow, significant operating margin expansion, profitability, and then recent quarters GAAP profitability. During his tenure, Howard has built and led incredibly capable teams in finance, corporate strategy, operations, and customer success. He has opened international markets, helped to shift PagerDuty from product to platform, and led us in acquiring several companies. We have started the search for a new CFO, and Howard is committed to supporting a smooth succession during the 2027 financial year. With that, I will turn it over to Howard, and we look forward to your questions. Howard Wilson: Thank you, Jen, and good day to everyone joining us on this afternoon's call. Before reviewing our third-quarter financial results, I want to highlight our strong operational discipline reflected in our second quarter of GAAP operating margin profitability. We expect to be GAAP profitable for the full year next fiscal year. And now unless otherwise stated, all references to our expenses and operating results on this call are on a non-GAAP basis and are reconciled to our GAAP results in the earnings release that was posted on our Investor Relations website before the call. Moving to results. Revenue for the quarter was $125 million, up 5% year over year. Q3 GAAP net income was $160 million. This includes a one-time income tax benefit of $154 million from the release of a valuation allowance. International revenue increased 7% year over year contributing 29% of total revenue. Annual recurring revenue exiting Q3 grew 3% year over year to $497 million. Although we expected incremental ARR to be higher, there was more pressure on seat licenses and smaller expansion deal sizes this quarter. We delivered a 100% dollar-based net retention compared to 102% in Q2, DBNR was negatively impacted by lower gross retention. We expect this pressure on DBNR to continue in Q4. Customers spending over $100,000 in annual recurring revenue increased 5% year over year, resulting in 867 by quarter end. Total paid customers grew to 15,308 in Q3, growing 2% year over year. Paid and free customers on our platform grew to over 34,000, an increase of approximately 13% compared to Q3 of last year. Q3 gross margin was 87%, above the high end of our 84 to 86% target range. The overachievement demonstrates PagerDuty's ability to drive its own operational efficiency while ensuring that the platform improves that of our customers. We expect gross margin in the long term to return to within our target range as we invest further in customer success management. Operating income was $36 million or 29% of revenue compared to $25 million or 21% of revenue in the same quarter last year. The outperformance reflected our focus on increased productivity and operation execution with lower payroll and other personnel costs. In terms of cash flow for the quarter, cash from operations was $25 million, 20% of revenue, and free cash flow was $21 million or 17% of revenue. Turning to the balance sheet, we ended the quarter with $548 million in cash, cash equivalents, and investments. In Q3, we repurchased 2.4 million shares under our $200 million repurchase plan. And at the end of the quarter, $162 million of the total amount authorized to be repurchased remained available. Consistent cash generation and a strong cash position provide a solid foundation for us to advance our enterprise transformation while returning capital to shareholders. Trailing twelve-month billings were $496 million, an increase of 4% compared to a year ago. With respect to Q4, we anticipate trailing twelve months billings year-over-year growth to be flat. At the end of Q3, total RPO was $450 million, increasing 2% year over year. Of this amount, approximately $287 million or 69% is expected to be recognized over the next twelve months. $101 million or 24% over months thirteen to twenty-four, and the remainder thereafter. Now turning to guidance. When we provided guidance at the end of Q2, we underestimated the current headwinds. Operator: Retention. Howard Wilson: Although the number of customers churning and downgrading is trending downwards, the dollar value of the contraction driven by seat-based reductions and customer budget caution has been larger than we forecast. As a result, we are lowering our top-line guidance. To improve visibility, we have made changes to our renewal process and implemented operational changes to drive earlier customer engagement. In addition, in line with our ongoing focus on efficiency, we are increasing our full-year net income and operating margin guidance. So for the fourth quarter fiscal 2026, expect revenue in the range of $122 to $124 million representing a growth of zero to 2%. And net income per diluted share attributable to PagerDuty, Inc. in the range of 24 to 25 cents. This implies an operating margin of 21%. For the full fiscal year 2026, we now expect revenue in the range of $494 to $497 million, representing a growth rate of 5%. This compares to the range previously provided of $493 to $497 million and net income per diluted share attributable to PagerDuty, Inc. in the range of $1.11 to $1.12. This implies an operating margin of 24%. This compares to our prior guide of $1 to $1.04 and 21 to 22% respectively. This quarter, we expanded margins beyond targets delivered our second consecutive quarter of GAAP profitability, and generated strong cash flow, capital we have been returning to shareholders. At the same time, we are making the strategic investment position the business to reaccelerate our ARR growth while maintaining our disciplined financial profile. In summary, we are expanding margins generating cash and progressing the pricing and go-to-market transitions that support durable growth. We are executing from a position of strength with product leadership disciplined capital allocation, and a strong balance sheet. While staying tightly aligned to customer outcomes. On a personal note, as Jen mentioned, I intend to retire next year. My journey at PagerDuty has been one of incredible growth, and I am proud of what we have accomplished. I appreciate our customers, partners, investors, and our employees for their support, and I am committed to supporting Jen and the team in a smooth succession. With that, I will open up the call for Q&A. Operator: Thank you, team. We have a number of hands raised already. Analysts, first, we will hear from Jeff Van Rhee. Jeff, can I have you open up your line? Joining us from Craig Hallum. Go ahead, Jeff. Jeff Van Rhee: Yeah. There we go. Great. Thanks, guys. So I appreciate you taking the questions. And, Howard, congrats. Nine years. Great run. Wish you all the best. Hope you are doing what you enjoy. Come on out of here. So, Jen, just talk to me about, you know, the DBNR, the trend of deceleration there declines. And as Howard addressed, some gross churn issues that sound like you are trying to figure out. How do you, you know, from a leadership standpoint, evaluate what is going on there and compare it maybe to past periods where you have seen buyers be more cautious about spending, you know, pulling in the reins to say, okay. This is like something we have seen before or, hey. This is something different here. What is going on? And how is that thought process for you right now? Jennifer Tejada: Yeah. Thanks for the question, Jeff. And, you know, as we said, like, we have a lot to be proud of in the quarter with a very strong bottom line result, you know, 29% margin up 800 basis points over year over year, 70% free cash flow. But we are unsatisfied with our retention effort at this or our retention outcome from this quarter. It is a little different than anything that we have seen in the past in that what we saw this quarter was improvement around logo retention, so fewer customers leaving the platform. And actually fewer absolute customers downgrading. But the customers that did downgrade tended to be larger downgrades in size tied to pretty significant reorganizations. And those reorganizations, you are hearing about them in the news every day. They come with sometimes thousands of jobs leaving a business, a lot of leadership turnover and change, and that has made it hard to anticipate the scale and scope of those. Having said that, some of the things that we have done to better understand what is happening in those customers is, one, take a multi-quarter view on renewal planning with the customer so that as those customers make changes, we are moving in lockstep with them to giving them an alternative from a flexible pricing perspective. I talked about a gaming platform in prepared remarks. Where they came to us with this challenge. You know, we are changing our organization pretty significantly and want to reduce seat-based licensing and by moving the seat-based licensing conversation off the table, in service of usage and a platform license, we are actually able to expand with them in the quarter. So as we scale that motion, we expect this to improve as well. But, you know, overall, I am confident in the long-term outlook because we see the same customers increasing their usage on products and features. So even though there may be fewer seats in the renewal, their actual usage of the platform is actually improving, and we have seen several examples of that. In addition, you have seen we have really upped our focus on new customer acquisition, and that really reinforces our product leadership and our market not just in digital operations, but also in this broader, you know, new evolving category called AI ops where I think we are going to continue to be the choice of not only AI natives who can find less expensive offerings in the market, but also large enterprises that want to grow with us. So we are really focused on those large customers and making sure we can anticipate any changes that might be coming and focused on flex pricing and multiyear agreements to support them and to reduce risk over time with those longer-term agreements. Howard Wilson: Mhmm. Jeff Van Rhee: Helpful. If I could sneak one other in from a sales standpoint. Not long ago, I know you were watching the maturity of the sales reps as what you thought would be kind of a key indicator when they hit their productivity. I think 60% at that time had been there a year. And I am curious now, obviously got some new leadership relatively new in the sales or you know, when sitting in the CEO chair, you know, what are the indicators that you are watching most closely there for sales? What are you expecting? What are you looking for there? Number one is what are customers telling us? What are they telling us about their ability to leverage and get value from the platform? How do they feel about their account coverage, and continuity in terms of their engagement with PagerDuty? Are they getting the support that they need? Both pre and post-sale? And so, Todd and I have really been focused on listening to her and getting out and talking to our largest customers, and that has been not only very well received, but we have been, I think pleasantly surprised by the love people have for our products and services, but also the admission that some of the challenges with the adoption and realization is not purely due to PagerDuty's engagement model, but also the fact that their organizations are changing pretty rapidly. So they are asking for more proactive help in that area. From a field perspective, I think Alison Corley, joined us a few quarters ago as chief customer has really gotten her legs under the desk and has really gotten customer success oriented around a much deeper understanding of how customers are actually faring from a pure platform health perspective, and that has enabled us to have higher-level conversations with customers earlier in the process. But also to swarm customers with the care they need even if their organizations have changed meaningfully. And in the sales organization, Todd is really doubling down on what we call land realized and expand, making sure that our reps who have ramped, have the support that they need to really go after growth and expansion, focus on new product attachment, particularly those usage-based products, but also services attachment. To ensure, you know, faster time to value for our large customers as we close and move on. And we have seen that result in some really great wins this quarter. I talked about an automotive manufacturer that is doing some really interesting stuff with us, and that is a ramped rep who really understands the platform. But is also leaning into not just our core incident management, but our new AI and automation features. Operator: Yep. Jeff Van Rhee: Yep. Got it. Appreciate it. Jennifer Tejada: Thank you. Operator: Thank you, Jeff. Next, we will turn to the representative from RB. Could you please introduce yourself and join the call? Mike Richards: Hey, guys. It is Mike Richards on for Matt. Thanks for taking the question. I guess just to start understanding that you are making these changes to sort of get ahead of renewals moving forward. I was wondering maybe and it is early with these seat-based compressions, is there an opportunity to go back into these accounts you know, before their next renewal to offer the usage-based pricing or services where you can sort of, like, get back what you lost. Absolutely. For a minute. Jennifer Tejada: One of the benefits of long-term agreements is it gives us more time to go in during the period proactively with not only new pricing and packaging offerings, but also more flexibility to get across products and new add-ons. And, you know, we have seeded several thousand customers with our PagerDuty advance. Products and services and seeing really good engagement there. And in fact, had a lot of with our SKU that you are aware of called AI ops. Which is really about event management, event correlation, and root cause analysis. But that was our first usage-based pricing offering, and that is growing, you know, over 50% year over year, and it has been consistent growing on a solid base. It is not a small revenue product. So, absolutely, this gives us an opportunity to be more proactive. And in fact, the vast majority of customers that Todd and I have seen together are nowhere near a renewal. We are talking about you know, getting feedback on the product, how can we help them attach to uses. We have a bandwidth of trying to accomplish and telling us a lot of the same things. One, we are actually starting we are moving from experimentation to deploying AI investments, and we need to do that in a safe and responsible way, and we need your help doing it. Lot of interest in the MCP, which was released for general availability. Earlier in the quarter. And, also a lot of positive feedback in, very significant feature-based release, across our entire platform. I think this is the largest release in the company's history. Frankly. And that has been made possible for through our developer's own use. Of AI. So absolutely proactive. It is a team sport, and we have Allison Todd, and their teams along with Catherine who leads our digital first business. And all of the executive sponsors in the business really, focus on making sure that there are no surprises and we are not turning up to the party late. Mike Richards: That is great to hear. And then, Howard, just a quick one for you. Just in terms of the guidance system, assuming that the dollar-based churn that you are seeing now from CPaaS compressions is sort of stabilizing from here. Or are you assuming that it continues to worsen? Howard Wilson: Yes. So what you our guidance has factored in sort of the visibility that we have today around dollar-based net retention through Q4. And that is driven primarily by the renewal rate. And the visibility that we have around those renewals is now sort of taking us out further and earlier into the process. That gives us a lot of confidence in the guidance that we have given. So we have not provided a specific number around dollar-based net retention, but we do expect that some of the seat-based pressure that we have had will continue in Q4. Mike Richards: Thanks, guys. Jennifer Tejada: Thank you. Howard Wilson: Thanks, Mike. Operator: Thank you. Turning next to Andrew Sherman with TD Cowen. Andrew, please go ahead. Andrew Sherman: Great. Thanks. Good to see you. Much Jen, how much of the surprise in the quarter from some of the reorgs in the layoffs? It sounds like that pressured seats. How much of that do you view as, like, one-time because some big companies had layoffs and how much is like, is all this kind of out of your control or are there things that you can do to kind of pinpoint this sounds like some of the earlier renewals will help. And I know there is a big renewal base in Q4. So like how do you kinda prevent that happening in Q4 too? Agree. Jennifer Tejada: Question, Andrew. And it is nice to see the real Andrew Sherman. We see a name and then see a face. So thanks for being here today. You know, we already are making progress by being more proactive and explicit in, going to customers before they come to us to say they have problems. And I mentioned earlier that the absolute number of customers downgrading and of customers leaving the platform has improved. And has decreased over the quarter. So that is I think, a good leading indicator. We also are not waiting for to tell us that, they have got challenges. We are in there all the time asking questions with a pod model now that includes the sales rep, the solutions consulting, in some cases, their first-line managers as well as the customer success manager. And where we are engaging with premium support and, professional service that also gives us better visibility. So we do expect that to improve. You know, we are also seeing generally is just what our customers sort of refer to as being cautious about their budget because they just do not they are uncertain. About where that is going to be in the next couple of quarters. So by getting further out in advance of renewals, we also can capture budget even ahead of renewal timing. So we like I said, we do expect it to improve. I do not expect the macro to change meaningfully, and we are prepared and I think in a very strong position from a financial perspective with the durable balance sheet very strong operating margins, and free cash flow. To work through this process with our customers. Andrew Sherman: Yep. Okay. Thanks. And then on the consumption change, talked a bunch about it last quarter too, but sounds like consumption of the platform was still healthy. Was is that the case? And how are you kind of how quickly can you move to this consumption model so that the seat pressure becomes less and less of a headwind? Jennifer Tejada: Yeah. We are seeing usage go up across almost every usage metric on the platform and also that new customer growth that we talked about earlier both in terms of new loanable lands as well as net new customers. And new and free and paid customers, all growing in double digits. That is heartening in terms of demand for the product. And I would just remind you that it is not a one-dimensional shift from seat-based to usage-based because we have a lot of new customers and, frankly, growing customers that are very happy on a seat-based model where we do not see these tailwinds. We are really seeing them the most pronounced in the very largest customers. We have thousands and thousands of employees and, therefore, reorganizations that might impact thousands of employees that then cause seat-based compression for us. The other thing that I would say is as we move from single-year to multiyear, again, that gives us more time to seed some of these, usage-based products. And a number of our customers who are engaging in based have credits that they will be burning down, which we expect will then convert to ARR. So we will get some benefit as those customers spend more time and have more experience with these usage-based solutions. And with our Agentic incident management suite now in the marketplace, that gives us more surface area to grow in. Andrew Sherman: Great. And our maybe maybe just to emphasize one of the points that Jen made there. You know, when we see these customers who have the seat reductions, you know, the good thing is that they are staying with PagerDuty because they recognize us as the leader. In terms of how they manage their AI operations today. What we have seen is that as we start moving them to our flexible licensing model, they have access to more product footprint than they would have in the past. And as they have access to more of that product footprint, it allows them then to use more of the platform. And that we expect over time going to then lead to them growing with us further. So whilst their base might have shrunk for now, in fact, they are setting themselves up the foundation to really grow as they continue to scale their operations. Andrew Sherman: That is great. Thanks, Howard. Congrats, and best wishes. Great working with you. Howard Wilson: Thanks. Thanks, Andrew. Operator: Thank you. Next from Truist, have Miller Jump. Miller, come on up. Great. Thank you for taking the Howard, congrats on your next steps. Miller Jump: I am going to annoy you guys and ask another question about the seat count headwinds. But I guess the question is, really you know, it sounds like it is purely layoff driven. And from that perspective, would you characterize all these as businesses that are more challenged, or is there any evidence you are starting to see that AI is potentially pushing out investments in headcount in some of these businesses? Jennifer Tejada: You know, generally speaking, what I am seeing, you know, when if I try and correlate customers that are making changes, to what we are seeing in their earnings announcements, etcetera, there is really a focus on improving operating margin, reducing costs, and sort of rethinking how they might be attacking, you know, different efforts across the business. You know, frankly, we are also building more and more automation into the platform as well. Right, which, you know, over time means that seat-based licensing is not really as well tied to the value proposition that we are delivering. So this is a natural evolution, but it is more pronounced when you see a large customer with a significant headcount reduction, then come to us. So on one hand, it is interesting. It is kind of a dichotomy even within some of the same accounts. On one hand, we will see the rightsizing as a headwind, but the same customer will then come to us and say, our number one priority is resilient. So now that we have gotten the contract rightsized, how can you help us improve? To Howard's point, we almost see immediate growth opportunities following that sort of, resizing. And so and I think it is a temporal thing because we have seen our we have even seen customers who have significantly reduced their spend with us come back a year later and only to build back up. We are also seeing, you know, a number of opportunities where we are winning competitor replacement even where the competitor was less expensive. But not serving the resilience proposition. And, you know, if you think back just over the last eight to twelve weeks, there have been a number of public service failures where, you know, we are the only platform that is still standing in because of all of the architectural redundancy we built into the product. And so that sort of reinforces the tailwind that is you know, operational resilience as a priority. Miller Jump: Makes sense. I guess I want to ask one about the bottom line for Howard. Obviously, a big step up that you are now projecting this year. Point well taken about, you know, 30% is kind of that long-term target that you are working towards. I know you are not guiding the year ahead, but like, can you talk about trajectory at all and just the potential for these types of gains in the future versus how you would expect it to ramp? Howard Wilson: Yeah. Well, thanks, Miller. We are proud of the progress that we have made. I mean, this is our sixth consecutive year of us continuing to drive that improvement in terms of operating margin. And we also, you know, have looked across the threshold around GAAP profitability for the full year next year. So this has been like a steady program that we have been running. We are not setting expectations for next year. But what I can tell you is that, you know, we remain committed to looking at ways in which we can, you know, optimize the spend within the business and deliver, you know, good results. So we are continuing to make investments in the things that are important for in terms of our customers, our transition, and our product. And you can expect to see more of that. Miller Jump: Thanks very much. Howard Wilson: Thanks, Miller. Operator: Okay. Next, we will hear from, the representative from Morgan Stanley. Again, please introduce yourself. I you are a new face for us. Oscar Savedra: I am Oscar Savedra on for Sanjit Singh. And congratulations from me to you, Howard, as well. Howard Wilson: Thank you. Both at Oscar Savedra: you get to do some fun stuff during retirement. Guess my first question, you know, with regards to guidance for Q4 right now calling for 1% of growth at the midpoint, I was wondering like how much of that is based on what you are seeing in the pipeline in terms of the upcoming big renewal quarter versus maybe a bit more conservatism around you know, maybe the timeline to when that usage-based part of the model will begin to offset the seat pressure that you have seen. Howard Wilson: Yeah. Sure. So when we look at the guide that we provided for Q4, we have factored in the visibility we have around renewals. Q4 is our largest quarter. In terms of renewals. We do expect that as we transition customers to the new pricing and packaging model, that that will mitigate the impact of some of the contraction that we have seen. And set those customers up for growth. We are not expecting that to have a major impact in Q4. So whilst we are moving customers to this new pricing, that obviously is not something that you just turn on instantly. But we are making good progress and we are working with a large number of customers who have renewals in this quarter around moving them to that new model. But we have factored in both looking at the engagement that we are having with customers and early engagement we started with them now months ago with some of the changes we have implemented and also having a look at the customer's own state of usage and adoption of the platform to try and make sure that we can be really targeted to help drive and improve their adoption. So we are expecting some of the same that were emerging in Q3 would still persist to some extent in Q4. We are still expecting to see stabilization in that the number of customers that are downgrading or churning. We have got a good handle on that. We are looking at ways in which we can mitigate any contraction. Oscar Savedra: Got it. And maybe as a follow-up, you know, Jennifer, you talked about, you know, improvement in customer log retention and being less absolute customers in size. I was just wondering, like, if you can sort of, how do you square that with the downtick in we saw in the customer spending over $100,000 in ARR? Jennifer Tejada: Yeah. It really comes down to the just the impact of down sells at the larger end of the market. And customers, I think, are expanding at a similar rate that they have in the past, but they are smaller expansions and a little more cautious than they have been in the past. So it is on us to work with them to see the value from those investments quickly. So that they can continue to build on them. I also believe that as Allison has gotten closer to the business, she is identifying more opportunity in the base, particularly as it relates to giving customers exposure to new products and services across the platform, and that is something that we are working to do a better job of attaching. Oscar Savedra: Got it. Thank you very much, guys. Jennifer Tejada: Thank you, Oscar. Howard Wilson: Thank you. Operator: Thank you. And turning next to BofA. Again, please yourself and ask your question. George McGrion: Hi. It is, George McGrion on for Koji Ikeda. Really appreciate you taking our question today. So I wanted to ask about the AgenTex suite. And kind of the, you know, the tailwind that that might be to consumption as we kind of shift to consumption. You know, just among the products and features that are in, generally available today, MCP server, Shift Agent, you know, etcetera. Do you kind of see any difference in the way that customers that are engaging with those products are using the platform today? Maybe any increase or is that early? And then also on the other hand, just in terms of how the suite further differentiates PagerDuty from the competition, you see that kind of showing up in your competitive win rates today? Or is maybe that too early? Thank you. Jennifer Tejada: Yeah. And we are seeing thank you for the question, George. We are seeing really positive response to the Gentex suite for a couple of reasons. One, most agents that you will hear about in and around the incident management space can only work across the environments that they are built in. And because of our 700 plus strong integration ecosystem and the data that we have built over many, many years focused on incident management. Our agents are able to leverage a much broader context to determine what is truly a challenge to troubleshoot and triage that and ultimately resolve it. And with the benefit of MCP can work hand to hand agent to agent with other platforms, whether it is one of the cloud providers or hyperscalers or in the case of Glean who we mentioned earlier, where the agents are able to work together seamlessly. Right? The other thing is, our products and services have always been human in the loop or human in the lead, and so the user can see the agent at work and engage in that process, which builds trust. And what we are seeing is that then drives, more usage and more adoption and then more usage. So it is a bit of a self-fulfilling cycle in that regard. And I think from a competitive standpoint, because it is not a single SRE agent, we have an agentic scribe an agentic shift agent that takes a lot of the pain out of scheduling and escalation development. We have got an agentic analyst that helps you understand actually what is going on during an incident, what has happened in the past, and how you can apply some of those learnings very quickly, like during the incident, instanti And then, of course, the SRE who is doing some of the work. And you can imagine where this can go over time. Now that we are able to, add and scale agents on this platform. So I do believe it is quite unique in the market. And also resilient like all of our products and services are. So, so that we are really excited about. And with other usage-based products like AI ops, what we saw was a pretty steady, growth over a period of time. By first seeing the product, getting customers to try it and use it, and then getting them to consume in the case of AI more events, in the case of the Gentex suite. More credits. And so we do we do expect to see those customers grow as they get a hang of using not just the agents, but also our generative offering as well, which all lives under the PagerDuty, advance umbrella. And then to your question around, you know, why are we confident, one, it is just seeing the usage patterns even on a smaller base, healthy growth. Two, customers have helped us design these agents. So all of our PD advanced products and services started in an early design program. So they basically, were built in service of what our customers told us they needed. So we are meeting the demand in the market first in many cases. And, likewise, they are more intuitive to sell. In some cases than maybe some of our more technical automation offerings of the past. So the field is really excited learning how to talk about them, how to show customers how to try them, get them, enabled. And get customers discovering them in product. George McGrion: You very much. Jennifer Tejada: Thank you. Howard Wilson: Thanks, George. Operator: Okay, team. I believe we have one more question queued up from William Blair. Is that Jacob on the line? Feel free to turn your video on and unmute. Yes. Hi, everyone. This is Jacob Zirvan for Jacob Vares. For taking the question. You touched on the solid momentum with new logo ads this year. Could you give us some more color on how these logos are landing in terms of size relative to prior years? Especially as you are prioritizing larger deals and multiyear commitments. Jennifer Tejada: Yeah. This is one of the things that I look at every quarter. And, you know, frankly, we are seeing good new logo acquisition across all of our segments. And remember that the way we land customers is often through our digital first or self-service environment, and then they will either grow unaided within the digital first organization, or they will grow through the with the help and support of the go-to-market. So we are seeing both, you know, showing promising growth. And know, what I would say is I had a look last week at just the batch of new customers this quarter. I was really pleased to see this balanced mix between new AI natives, some of the hottest companies you are hearing about, some of the fastest scaling companies in the world. I think we mentioned, any scale you may be familiar with Ray and Perplexity. But, also, we are really continuing to see a lot of diversity across industry verticals and, you know, digital first customers as well as more traditional companies that are deep in the middle of transformation. You know, in some of our markets, we have seen some really good competitive replacements where other point solutions have not served customers as they have scaled, and we have been able to provide them with a much more resilient, broader product offering. So it really is a pretty balanced, base of customers. Howard, anything that you would add there? Howard Wilson: Yeah. And I would say that, you know, the size of land can vary, as Jen said. Like, sometimes we have small customers why where it may be a few 100 or a few thousand dollars. Within this quarter, we ask also had a few customers above $100,000. So lands that were, you know, large lands, so those tend to be in the enterprise segment. Sometimes that is also a mix that can be a more traditional type of industry, but certainly a lot of the software and technology and AI leaders also tend to come in at some of the higher values north of 50k. Jacob Zirvan: Got it. Thanks. Just one more on my end. You had a meaningful decline in stock-based comp this quarter. I guess as you are positioning for GAAP profitability, should we expect this level of stock-based comp like, a forward basis? Howard Wilson: The I you can expect stock-based comp to decline. The rate of decline, you know, will be different as we sort of move forward through, you know, through the end of this year and into next year, but that is the trend that you can anticipate. Jennifer Tejada: Yeah. And as you know, that is a lagging indicator. It is the result of pretty significant effort over the last several years that you sort of see show up in the out years, and we are continuing to be committed to managing stock-based comp effectively as part of our, you know, profitable growth ambition. Jacob Zirvan: You Thanks, Jacob. Operator: Howard, Jen, we have made it through another batch of questions. Jen, can I turn it over to you for any final remarks? Jennifer Tejada: Yeah, sure. Thank you. Thanks, everybody, for joining us today. We feel we are uniquely positioned to support enterprise resilience across customers' strategic digital and AI operations. Our product velocity and expansion into cutting-edge use cases continue to widen our competitive moat. We are central, ubiquitous, neutral, connected, and everywhere. And the strength of our P&L and balance sheet ensures that we are able to drive differentiated customer value in any market cycle. I just want to mention that we are grateful for the trust of our shareholders, the ingenuity and dedication of all of our employees, and the support from our customers and partners. And we wish you a wonderful Thanksgiving. Thank you, everyone.
Operator: Good day, and thank you for standing by. Welcome to Ambarella's Third Quarter Fiscal Year 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, we will open up the call for questions. To ask a question during the session, you will need to press 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press 11 again. Please be advised that today's call is being recorded. I would now like to hand the call over to your speaker, Luisa Hardy, Vice President, Corporate Development. Please go ahead. Luisa Hardy: Thank you, Victor. Good afternoon, and thank you for joining our third quarter fiscal year 2026 financial results conference call. On the call with me today is Dr. Fermi Wang, President and CEO, and John Young, CFO. The primary purpose of today's call is to provide you with information regarding the results for our third quarter fiscal year 2026. The discussions today and the responses to your questions will contain forward-looking statements regarding our projected financial results, financial prospects, market growth, and demand for our solutions, among other things. These statements are based on currently available information and are subject to risks, uncertainties, and assumptions. Should any of these risks or uncertainties materialize, or should our assumptions prove to be incorrect, our actual results could differ materially from these forward-looking statements. We are under no obligation to update these statements. These risks, uncertainties, and assumptions, as well as other information on potential risks that could affect our financial results, are more fully described in the documents we file with the SEC. Before starting the call, we hope to see you at one of the following investor events that we have scheduled during the fourth quarter. In December, we will be at the UBS Global Technology and AI Conference in Scottsdale, and in December at Nasdaq's London Conference. On January 6, from 4 to 5:30 PM at our CES location, we will be hosting a technology and product briefing. In January, we will be hosting more than a dozen sell-side analysts tours of our CES demonstrations, again at our CES location in Las Vegas. On January 17, at the Needham Conference in New York. Access to our third quarter fiscal year 2026 results press release, transcripts, historical results, SEC filings, and a replay of today's call can be found on the Investor Relations page of our website. The content of today's call, as well as the materials posted on our website, are Ambarella's property and cannot be reproduced or transcribed without our prior written consent. Fermi will now provide a business update for the quarter. John will review the financial results, and then we will be available for your questions. Fermi? Fermi Wang: Thank you, Luisa. Good afternoon, and thank you for joining our call today. Before we proceed, I want to let you know that last call, our co-founder and CTO, will be stepping down from the board of directors to become our chief technology adviser. He will continue to oversee our technology direction and development but without management responsibilities, and with user time commitments. Les and I have worked closely since 1994 across four companies. I am grateful that Les will continue as my close partner for over thirty-one years and beyond. He is truly the best I could wish for. I am happy he will have more time to pursue his passions, but I will definitely miss our daily conversations on various topics. Turning to our fiscal third quarter, we are reporting another strong quarter with both revenue and non-GAAP EPS exceeding expectations. We achieved record quarterly revenue of $108.5 million, slightly above the high end of our guidance range. Edge AI, which we define as a product that integrates one of our proprietary deep learning AI accelerators, was about 80% of our total revenue, representing our sixth consecutive quarter of record Edge AI revenue. We have increased our fiscal 2026 revenue guidance, which projects an all-time fiscal year total revenue record for Ambarella. With the strength in our average selling price and the breadth of demand, we are raising our fiscal 2026 revenue growth guidance to a range of 36% to 38%, or approximately $390 million at midpoint. This compares with our prior estimate provided on August 28 for 31% to 35% year-over-year growth, or approximately $379 million at midpoint. These results are very encouraging, but I am even more excited about the Edge AI activity ahead of us. There are three key factors behind our enthusiasm and our strong commitment to Edge AI. First, the breadth of applications demanding Edge AI technology in our product is expanding. Second, the AI performance requirement for our product roadmap is expected to continue to rise, driving robust new product cycles. Third, our ASP has been increasing, and in the long run, we continue to see an excellent opportunity to capture more value per design. I will elaborate on those points. First, AI at the edge is becoming more prevalent, driving an increasing breadth of applications in both enterprise and consumer-driven parts. Our Edge AI business started in enterprise security, followed by automotive safety, smart home, and telematics. More recently, the portable video market, which includes action cameras, panorama cameras, and body-worn cameras. Looking ahead, high-value shipments into the aerial drone market are expected to commence this quarter, representing just the beginning of our realization of the large robotic market opportunity. There is also strong interest from existing and new customers in our Edge infrastructure part and roadmaps, and we are committed to developing this incremental opportunity. In addition, ADAS and the vehicle economy remain large markets that can leverage our technology to a very high degree. Second, we see a large opportunity to execute at the edge with increasingly complex AI technologies currently implemented at the core of the network or in the data center. The challenge and our opportunity is that the solutions used in the network are often not suitable for the edge. With edge performance requirements rising, in each market, low power consumption, real-time processing, privacy, security, small form factors, thermal, network bandwidth efficiency, and lower price points are critical. At Ambarella, we continue to invest heavily in our proprietary Edge AI SoC technology and products to support these unique and increasing AI requirements. For example, our 10-nanometer CV2 family supports CNN networks, and our 5-nanometer embedding our third-generation AI processors is scaling our customers into more complex CNN and generative AI applications simultaneously. Third, we see an excellent opportunity to continue to increase our ASP. The shift from CPU workload to high-level over-accelerated computing or AI is well underway. The adoption of increasingly complex data center technology for the edge is another driver. Finally, the extension of our roadmap to other edge endpoints and into the edge infrastructure and auto economy is also expected, in particular, to boost our ASP. For example, our SoC branded ASP in Q3 was up about 20% year-over-year, and as our third-generation AI SoCs and other new products become a more material portion of our revenue, we anticipate further increases in the value we earn per design wins. I will now describe some of the representative customer engagements that reflect the factors I just described. In the enterprise security market, we are very pleased to share a significant milestone with our customer, Sparsh, who became India's first security camera manufacturer to receive STQC certification for its complete range. At the heart of the collaboration is our CV28. This gives us a tremendous start to accelerate our adoption in a rapidly growing "Made in India" market. Infinity, spun out of Bosch, announced their Autodome 7100i moving PTZ camera with built-in AI analytics and Ultra HD image based on CV72. They have also announced their diamond thermal security camera is based on CV22. It runs their CNN models to detect and classify objects accurately up to 2,000 feet. WCADA announced their upcoming CV75-based AM64 Access Station Pro, which enables secure physical access with AI facial recognition, touchless face unlock alongside traditional badge and mobile access methods. The company also launched a new CR63E remote security camera that leverages the power efficiency of our CV75. They also expect the CV72-based multi-sensor security camera product line, including CH53, CH63, and CY63. Motorola has developed their additional Halo 4 smart sensor on our CV25, which is an all-in-one environmental monitoring and security device that is designed for areas where cameras are restricted to detect events like smoke, fire, and audio anomalies. In the robotic and smart home market, one of our customers, Whiskers, announced the Litter-Robot 5 Pro, their first model with facial recognition and 4K night vision clip AI-powered camera based on CV28. We are seeing great momentum in our portable video market with Arash, who released two models this quarter. The X4 AIR, at just $165, is a new lightest compact 8K 360 action camera based on CV5. It is the first in a range to support 8K 30 frames per second active HDR. Arash also launched the latest version of their body-worn camera, Go Ultra, based on CV52. It captures 4K 60 frames per second video and a 50-megapixel photo with improved performance in low-light environments. In our automotive safety, ADAS, and telematics business, I would like to share some key customer wins during the quarter. Zika, a unit of GD, has evolved their in-cabin DVR system CV28 for the NIO ES8 full-size luxury model. Xiaopeng expands their global market presence. They have built all their driver management systems for all their export models on CV28. Solara, a global leader of vehicle lifecycle management, announced their new AI-powered smart camera, October, based on our CV22. In a first for Solara, the ASR5 is powered by AI plus human input intelligence, a revolutionary approach in fleet analytics that combines AI-based analysis with human oversight to improve safety, efficiency, and operations. From these representative customer engagements I just described, the strength of our current product portfolio is clearly represented. With every example from the 10-nanometer CV2 family and seven examples from our 5-nanometer generation, these products, all available today, offer customers a wide variety of options ranging from CNN to transformer network processing, one to many sensor input support, multiple sensing modalities, all at a wide range of price points. Our new product roadmap will expand this portfolio further. In addition to our comprehensive and expanding AI SoC portfolio, another important distinguishing characteristic of our portfolio is the advanced technology we offer to customers at the edge. For example, 5-nanometer-based products represent more than 45% of our total Q3 revenue, with products based on more advanced nodes in development. In summary, the first three quarters of fiscal 2026 are steps in the right direction with strong revenue growth, new product execution, profitability, and with our cumulative year-to-date free cash flow almost 14.8%. We continue to have a large edge serviceable available market over $12.9 billion by fiscal year 2031. In the early innings, we recognize the TAM market is still developing, and to successfully address this large set, we remain highly committed to our R&D investment that enables us to build upon our existing leadership position. I hope to see you on January 6 at our CES 2026 product and technology briefing, which will give you a chance to learn about new technologies and products and meet a full set of our management team. With that, John will now discuss the Q3 results and the Q4 outlook. John Young: Thanks, Fermi. I'll now review the financial highlights for the 2026 ending October 31, 2025. I will also provide a financial outlook for our 2026 ending January 31, 2026. I'll be discussing non-GAAP results and ask that you refer to today's press release for a detailed reconciliation of GAAP to non-GAAP results. For non-GAAP reporting, we have eliminated stock-based compensation and acquisition-related expenses adjusted for the impact of taxes. For fiscal Q3, revenue was $108.5 million, above the high end of our guidance range of $100 to $108 million, up 13.5% from the prior quarter and up 31.2% year-over-year. Sequentially, automotive revenue increased in the low single digits, and IoT increased in the mid-teens, with IoT growth led by the adoption of Edge AI in enterprise security and portable video applications. Non-GAAP gross margin for fiscal Q3 was 60.9%, slightly above the midpoint of our prior guidance range of 60% to 61.5%. Due to product mix, non-GAAP operating expense in Q3 was $55.3 million, slightly below the midpoint of our prior guidance range of $54 million to $57 million. Q3 net interest and other income was $2.1 million. Q3 non-GAAP tax provision was $900,000. We reported a non-GAAP net profit of $11.9 million or $0.27 per diluted share in Q3. Now I will turn to our balance sheet and cash flow. Fiscal Q3 cash and marketable securities reached $295.3 million, increasing $34.1 million from the prior quarter and $68.8 million from the same quarter a year ago. Increased cash and marketable securities primarily from operating cash flow associated with increased revenue. Receivables days sales outstanding decreased from forty-one days in the prior quarter to thirty-six days. And days of inventory decreased from eighty-five to seventy-six days. Operating cash inflow was $34.3 million for the quarter. Capital expenditures for tangible and intangible assets were $2.9 million for the quarter. Free cash flow was $31.4 million. We had one logistics company representing 10% or more of our revenue. WT Microelectronics, a fulfillment partner in Taiwan, that ships to multiple customers in Asia, came in at 70.2% of revenue for the third quarter. I will now discuss the outlook for the 2026. The breadth of our Edge AI business is expanding. Together with strong unit volume and average selling prices, as a result, in Q4, we forecast revenue in the range of $97 million to $103 million, or $100 million at the midpoint. With a higher percentage of revenue coming from our high-volume customers. Sequentially, due to seasonality, we expect a mid to high single-digit decline in both our automotive and IoT businesses. We expect fiscal Q4 non-GAAP gross margin to be in the range of 59% to 60.5%. We expect non-GAAP OpEx in the fourth quarter to be in the range of $55 million to $58 million, with the increase compared to Q3 driven primarily by employee-related and CES expenses. We estimate net interest and other income to be approximately $2 million, our non-GAAP tax expense to be approximately $600,000, and our diluted share count to be approximately 44.5 million shares. Thank you for joining our call today. And with that, I'll turn the call over to the operator for questions. Operator: Thank you. And at this time, we'll conduct a question and answer session. As a reminder, to ask a question, you will need to press 11 on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. Limit yourself to one question and one follow-up in the interest of time. Please stand by while we compile the Q&A roster. One moment for our first question. Our first question will come from the line of Tore Svanberg from Stifel. Your line is open. Tore Svanberg: Yes. Thank you, and congrats on another record quarter. As my first question, when we think about that, let's call it, 36% to 38% growth for fiscal 2026, how much of that is unit versus ASP because, you know, obviously, you know, Edge AI now is becoming a pretty high percentage, but even within Edge AI, obviously, you have ASP increases. So just trying to understand how much of the growth has been driven by ASP versus units. Fermi Wang: Right. So I think both of them contribute to our growth. I will say I don't have the exact number. If I have to guess, it's probably half and half. I think our unit growth definitely continues to contribute from the Edge AI side. But ASP growth is also significant, as we talked about in the script. So I think that both of them contribute to our end results. Tore Svanberg: Yeah. Thank you, Fermi. That's very helpful. And as my follow-up, you talked about the portable video market. Could you just add some more color there? I mean, it sounds like you have some new design wins. These are obviously AI-based drones. But, just you know, I know you've been in that market for a while, and, obviously, that market sort of faded. And now it seems to be coming back. So how should we just think about that market driving growth for Ambarella going forward? Thank you. Fermi Wang: Right. You talked about portable and multiple different product lines there. I want to be a little bit more specific. In fact, we talk about action sports cameras that you said we have been here for many years. And the new category is panorama cameras that Arash is famous for. And also, we talk about drones, which are also part of the portable video. But in addition to that, our wearable cameras, web cameras, video conferencing products, all of them are part of the portable device because that's where our customers are focusing on. So overall, that's an area that is providing a big portion of our growth this year. And we believe that this market is going to continue to grow. And in fact, I have to say that I'm a little surprised by the size of the market that has grown over the year. But definitely, the momentum is there. Our job is trying to not only secure our market share but hopefully grow some market share in the future. Luisa Hardy: Hey, Tore. It's Luisa. Just technically, we call it portable video and other. So there's a lot of things in there, as Fermi said. Tore Svanberg: Yeah. Thank you for that. Congrats again. Fermi Wang: Thank you. Operator: Thank you. One moment for our next question. Our next question will come from the line of Ross Seymore from Deutsche Bank. Your line is open. Ross Seymore: Hi, guys. Thanks for asking a couple of questions, and congrats to Les. I guess, first, you talked about the breadth of your business in the Edge IoT side of things or Edge AI, IoT, whatever you guys are calling it now. Can you just talk a little bit about the consumer versus kind of the enterprise side? Now, I guess where I'm going is the portable side is great. But we've seen volatility around any sort of consumer applications in years past. Cycles past. I just wondered how you're managing that in this instance. Luisa Hardy: Hey, Ross. It's Luisa. The split is roughly fifty-fifty, 50% kind of enterprise CapEx driven and 50% consumer. And then within that 50% that's consumer, you've got some kind of consumer durable things like, say, smart home cameras that get replaced every five or six years. But then you also have consumer discretionary, which I think is some of the more volatile things you were referring to. So it's pretty evenly split at the highest level between the CapEx driven markets and the consumer, but different types of consumer spending. Ross Seymore: And I guess one for John. How are we thinking about gross margin as we look into next year? Just conceptually what the pluses and minuses would be? I know you have the long-term target of the 59% to 62%. You're a little closer to the lower end of that in your fourth-quarter guide. But just running through any of the puts and takes would be helpful. John Young: Yeah, Ross. Thanks. So as you said, our long-term model is 59 to 62. And as we said in our Q4 guide, the composition of gross margin really depends on the contribution of, like, our high-cost customers. So, you know, whatever the gross margin is from quarter to quarter, that's at least in the near term, that's a primary driver. Ross Seymore: Great. Thank you. John Young: Yep. Operator: Thank you. One moment for our next question. Our next question comes from the line of Joe Moore from Morgan Stanley. Your line is open. Joe Moore: Yeah. Great. Thank you. I also wanted to ask about that gross margin target. And I guess just as you've kind of refocused the business around a lot of exciting opportunities, you know, is there any chance to really fully participate in some of the consumer markets that you might accept lower gross margin in exchange for growth? And then I guess you've talked a lot on this call about average selling price sort of what's driving that focus, you know, as ASP versus, you know, kind of gross profit dollar per device, things like that? John Young: Yeah. Thanks. So, you know, as far as the ASP goes, that is primarily a function of the technology and features that come with these more advanced technology tape-outs that we're doing and products that we're developing on our roadmap. As far as the gross margin goes, you know, like I said, 59 to 62. I think as far as consumer, on a case-by-case basis, depending on the volume that we see, the opportunities that we see, we're not opposed to gross margins that are maybe not strictly within the 59 to 62% range. But the goal at the corporate level is to, over the long term, stay in that range. Joe Moore: Great. Thank you for that. Then I guess, you know, yeah, there's a lot of enthusiasm for drones, which is a market that you've kind of been in in the past. Can you talk about, you know, what are the new elements of that market that probably, you know, might drive you to a higher content over time? You know? And what is it sort of think about delivery drones and industrial drones and things like that? Is that a pretty big category for you down the road? Fermi Wang: Right. So first of all, we were big in the past, as you said, but we were stopped in that market because of the geopolitical situation, not because of our technology solutions. And this time we came back because we continue to believe a few things. First of all, there was a dominant player, but in the US, the market is wide open at this point for everybody to fight in that capacity. So with our video technology, particularly our panorama camera that we help our customers to build, is well suited for this space. So first of all, the driver for us is to continue to provide the best video solution in the drone market. But more importantly, I think moving forward, all the drones are going to be autonomous in the future. We can't talk, say, today's drone is level two. And level three, level four drones are coming and probably going to drive faster than autonomous driving cars. And we believe that to have a level three drone, it will require a really powerful chip in addition to the video processing, and that's really played to our strength also. Our investment in autonomous driving directly applies here. So from the technology point of view, the video processing plus AI is the key driver. But as you said, today, the biggest market opportunity for us is consumer for video capture, but moving forward, we start seeing opportunities on the commercial side, which is going to continue to drive growth. So we are excited that, first of all, we have technology that we think is differentiated in this market, but more importantly, the service market for us is growing fast. So that's the two reasons that we feel excited about this market. Joe Moore: Okay. Thank you. Operator: Thank you. One moment. Our next question will come from the line of Christopher Rolland from Susquehanna. Your line is open. Christopher Rolland: Hey, guys. Thanks for the question and congrats on the results. I guess my first question is around an update perhaps for the infrastructure opportunity and the N1655? Fermi Wang: Yeah. So first of all, we announced our first design wins last quarter. And after that, we continue to see very strong design win activity and interest from different types of customers. In fact, in the last few months, we see customers who want to use video-centric products and also customers who want to use N1655 for non-video-centric products. So we are seeing a wide range of opportunities. And we are also continuing to see our chance to not only build up but also bring new designs in the near future. So we are totally committed to this market with N1655 and a new roadmap that we will talk about in the near future. Christopher Rolland: Thank you, Fermi. And perhaps if there are any updates on two other opportunities, I guess the first would be the home security market with, you know, AI feature integration. And then the second would be any kind of design activity, I know it's further out, but around humanoid robots. I think that would be interesting as well. Fermi Wang: Right. So first of all, for the home security, I think we do have design wins with our CV75 that we haven't announced yet, but definitely is in design. However, I think this is a market that's price-sensitive. So I think the progress or the movement towards this chain AI type of home security camera based on the camera solution, not the cloud solution. We really focus on just edge AI for this market. So with that, I think that market is not developing as fast as we expect, but we do have design wins. We hope we can talk about them sometime next year. From the humanoid robot perspective, I think this is a long-term market that we definitely want to participate in. However, I think it will take time to get to a humanoid robot. I think there are multiple steps for robotic from today's situation to the humanoid robot. And I think, like I said, even drones, if you treat the drone like a robotic application, there's a level two to level five. I think humanoid robots are level five of drones for different applications. But there are intermediate steps we need to go through, and we definitely have design wins and also design activities in those steps that will lead us into the humanoid. I just want to be more specific. We're offering two types of solutions to the robotics today. One is for people only interested in the video technology. So they want to have a really powerful AI that not only can see the object but also can do object detection based on CNN networks. We have that kind of solution based on our CV2 family or CV72, CV75 solutions. So that's one product line we're providing. The other product line we're providing to the robots is really a brain. Right? So our N1655 type of solution can be a central processor for any type of robotic out layer. So I think we're offering these two solutions. It will take time to develop a central domain control, like an autonomous driving car, that kind of solution will be required to do a humanoid solution in the future. Christopher Rolland: Excellent. Thanks so much. Operator: One moment for our next question. Our next question will come from the line of Suji Desilva from Roth Capital. Your line is open. Suji Desilva: Don, Les, best of luck with the step of your transition here. So, maybe in the Edge AI market, looking ahead, calendar '26 perhaps, which of the two or three segments would you describe as the highest kind of growth opportunity for you? Is it drones or other areas? Any color there would be helpful. Thanks. Fermi Wang: I think drones definitely, what you call out, are going to be a growth area for us. And I also believe that even for the edge endpoints, we continue to see multiple opportunities coming up with different types of products. For example, wearable cameras, we talked about this for many years. But right now, we are excited because wearable cameras are not only for policemen anymore. We start seeing that go to totally even for commercial use devices. So that's just another example that the technology becomes ready in a low power and also AI on the camera. All of that enables a new application for wearable cameras. That's another really high growth area that we're seeing, and it's not only what I'm saying that if you follow our customers, you'll see that our customers are saying similar things. So those edge endpoints, families, are the first area for us. But I also want to bring your attention to the edge infrastructure. We'll talk about it last quarter. I think although that not immediately, you're going to see high revenue growth, but I think long term, that will be a very important market for us. And we'll definitely cover insight into our plan, our thoughts on edge infrastructure at CES and give you more. Suji Desilva: Okay. Great. Then for me, in one specific question on drones, do you have any visibility in your pipeline beyond consumer commercial perhaps into any government programs? Or is that going to be a separate part of the market handling that versus you guys? Fermi Wang: You bet the old customer fact, it's not really us. It's all cost. All cost. Right. Right. No. I think all the customers have a desire to serve multiple different market segments. But most of them, most of our common customers, are focusing on consumer commercial, and I don't think that algorithm usage is a real focus for most of our customers yet. Suji Desilva: Okay. Great. Thanks, Fermi. Operator: Thank you. One moment for our next question. Our next question will come from the line of Martin Yang from OpCo. Your line is open. Martin Yang: Hi. Thank you for taking my question. First question on IoT, especially with growing customers like Arash, could you maybe comment on this customer's growth and its relative contribution to your overall ASP and margins? Fermi Wang: Right. So first of all, Arash is, I think, the largest customer in our top 10 list, and they're ramping roughly doubled from last year to this year. But, you know, they are using multiple chips, and if selling to multiple OEMs, it's hard for us to track exactly their revenue contribution. But we have no doubt they are the largest customer right now. Martin Yang: Thank you. Another question on drones. So when you're referring to next year's product, are those drones using your image processing capabilities, or do you expect them to deploy AI functions that relate to autonomous flying capabilities? Fermi Wang: Both. I think that, like I said, there are two types of solutions we're offering. Some of them are using just video plus AI to apply CNN-type networks for simpler AI functions. But there will definitely be customers using our AI for flying to avoid objects, to determine the flying path. So both of them. Martin Yang: Got it. Thank you, Fermi. That's it for me. Operator: Thank you. And our next one moment for our next question. Our next question will come from the line of Quinn Bolton from Needham and Company. Your line is open. Quinn Bolton: Hey, guys. I know the focus has sort of shifted to Edge AI in the future, Edge infrastructure. But in the past, you gave us sort of an automotive funnel. You haven't provided that. So just wondering how should we be thinking about how are you guys approaching the automotive market? Do you still see opportunities in Level 2 plus, or are you kind of deemphasizing some of the automotive applications? Fermi Wang: Alright. Thank you for that question because we did not decommit from that market. In fact, we continue to focus on the market. We are engaging multiple OEM tier ones at this point for autonomous driving level two, level two plus, some even level three. So from the engineering activity and business development activity point of view, we are all in on this market. Definitely, from the funnel of this discussion point of view, I said last quarter, we will provide a funnel discussion in the next quarter release. But the one modification I will do, we are stopping using probability-weighted metrics. We are going to give you just direct opportunities we're looking at. So that will be the one change we're going to offer, but we will definitely provide more guidance on how we look at this market. Quinn Bolton: Got it. Thanks for that, Fermi. And then I guess for John, just you mentioned that it sounds like the mix towards high-volume customers is pushing the gross margin down to the lower half of your long-term range. Can you give us just beyond January? Do you think that mix continues to be pretty heavy with higher volume customers? Or do you see this as sort of a temporary shift just for January and it normalizes beyond that? John Young: Thanks, Quinn. Yeah. At this point, we don't want to give a guide with regard beyond Q4. But I think, you know, that commentary with regard to Q4 is, you know, will continue to be relevant going forward. The ratio of high-volume customers to the total revenue for the quarter. Quinn Bolton: Sorry, John, cut out there a little bit. Did you say that the mix would stay pretty similar beyond January? John Young: No. What I tried to say was that, you know, we don't want to make any guide beyond Q4. But that the commentary about Q4 with high, you know, the ratio of high-volume customers to the total revenue, that dynamic will continue to be a factor going forward. So to the extent that the high-volume folks are a higher percentage of the revenue, that will, you know, have its impact. Quinn Bolton: Got it. Okay. Thank you. Operator: Thank you. And once again, that's star 11 for any questions, star 11. One moment for the next. We have a follow-up question for Tore Svanberg from Stifel. Your line is open. Tore Svanberg: Yes. Thank you. John, just a follow-up for you. So, you know, this year, you guys demonstrated some pretty good operating leverage. I'm just thinking, as we look at fiscal 2027 and OpEx growth, obviously, you're not giving a growth target per se, but we should assume that OpEx would grow at a slower pace than revenue growth for fiscal 2027? John Young: Thanks, Tore. Yeah. We're not giving a guide at this point, but I think, you know, what we have said in the past, kind of as you articulated, is that long-term, we expect to create operating leverage by having revenue and obviously gross profit outpace the increase in OpEx on a non-GAAP basis. Tore Svanberg: Great. Thank you. Operator: Thank you. One moment for our next question. Our next question will come from the line of Kevin Cassidy from Rosenblatt. Your line is open. Kevin Cassidy: Yes. Thanks for taking my question, and congratulations to Les for a legendary career. You know, again, I am interested in that, but I want to know how much of your software and development that you've been able to work on with the automobiles for L2 to L4. Can you apply, you know, is it a relatively easy market for you to transition into, or are there other software or other issues that would happen in robotics that isn't in automotive? Fermi Wang: You know, I think, Kevin, you point out that it's really a great direction because, you know, like I continue to say, autonomous driving is just a special kind of robot. And so is a drone. And in fact, if you look at the details of functions inside an autonomous driving car, you know, level three drone and also robots. IDN is really a bunch of sensor fusion. And you make a decision on your environment, then you decide money. That you control. Either a car, drone, or some mobile robots moving around performance. From that point of view, a lot of hours have a commonality. In fact, a lot of software, if you want to do all the sensor fusion side with the perception, there's a huge among all the robotic applications. So in fact, we definitely believe that a lot of our investment both on hardware and software side for autonomous driving will directly apply to all the future phone and other robotic applications that we're talking about. Kevin Cassidy: Okay. Great. Thanks. Operator: Thank you. One moment for our next question. Our next question will come from the line of Ross Seymore from Deutsche Bank. Your line is open. Ross Seymore: Hi, guys. Thanks for asking. A couple of follow-ups. On the consumer percentage being about half of your IoT business, what was that mix last fiscal year, a year ago? Luisa Hardy: I don't have that figure for you, but I would say the dominant part of our mix was enterprise. CapEx driven markets. Ross Seymore: Got it. Thanks, Luisa. And I guess the follow-up to that is if the consumer business does sound like it has increased, does that change the seasonality of your company? I know kind of the first and the fourth quarters tend to be relatively speaking the weakest sequentials, and then the mid-two quarters are the largest. Does that change at all either directionally or kind of magnitude just because consumer is a bigger portion than it used to be? Fermi Wang: Yeah. Go ahead. You know the question. Yes. That's a very good point. And the answer is yes. And I would look at, you know, the next question is what's normal. And, really, the last three, four, five years hasn't been very normal. So I'd look at the last ten years because those first five years and the ten years, over that, did have more consumer like you're asking about. So I'd look at the average ten-year period rather than just the last two or three years, which really weren't normal. Ross Seymore: And then maybe one last follow-up. How do we think about taxes, either dollars or percentages, next year and the year after? I know it kind of goes between the dollars and percentages, and the former might be more applicable. But just an idea of how we should think about that. John Young: Yeah. Thanks, Ross. So we tend to think about it from a dollar's perspective as opposed to a rate based on the way the company is structured and where the profits are located and various jurisdictions internationally. So I would expect, well, if the dollars will increase, but it won't be, you know, they'll increase with revenue. But it won't be a significant change to the story. I think on a full-year basis, if you look at the rate on a non-GAAP basis, that'll give you some indication to be able to model going forward, I would say. Ross Seymore: Thank you. Operator: Thank you. That's all the time we have for the question and answer session. I would now like to turn it back over to Dr. Fermi Wang for any closing remarks. Fermi Wang: Thank you, and thank you all for joining our call today. And I hope to see some of you during our January event at CES. Thank you. 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 day, and thank you for standing by. Welcome to the Zscaler First Quarter 2026 Earnings Call. At this time, all participants are in a listen-only mode. Please be advised that today's conference is being recorded. After the speakers' presentation, there will be a question and answer session. To ask a question, please press 11 on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. I would now like to hand the conference over to your speaker today, Ashwin Kesireddy, VP IR and Strategic Finance. Good afternoon, everyone. And welcome to the Zscaler First Quarter Fiscal Year 2026 Earnings Conference Call. Ashwin Kesireddy: Good afternoon, everyone. And welcome to the Zscaler First Quarter Fiscal Year 2026 Earnings Conference Call. On the call with me today are Jay Chaudhry, Chairman and CEO, and Kevin Rubin, CFO. Please note, we have posted our earnings release and a supplemental financial schedule to our investor relations website. Unless otherwise noted, all numbers we talk about today will be on an adjusted non-GAAP basis. You will find the reconciliation of GAAP to the non-GAAP financial measures in our earnings release. I'd like to remind you that today's discussion will contain forward-looking statements, including, but not limited to, the company's anticipated future revenue, annual recurring revenue, calculated billings, operating performance, gross margin, operating expenses, operating income, net income, free cash flow, dollar-based net retention rate, future hiring decisions, remaining performance obligations, income taxes, earnings per share, our objectives and outlook, our customer response to our products, and our market share and market opportunity. These statements and other comments are not guarantees of future performance but rather are subject to risk and uncertainty, some of which are beyond our control. These forward-looking statements apply as of today, and you should not rely on them as representing our views in the future. We undertake no obligation to update these statements after this call. For a more complete discussion of the risks and uncertainties, please see our filings with the SEC, as well as in today's earnings release. I also want to inform you that we'll be attending the following conferences: UBS Global Technology and AI Conference on December 3, Barclays Tech Conference on December 11, and Needham Growth Conference on January 14. Before I turn the call over to Jay, I wanted to share that I recently transitioned to a new role as product manager of AI security at Zscaler. So this will be my last earnings call as the IR leader. It's been a pleasure engaging with all of our shareholders over the last few years. Kim Watkins, who some of you may know from her tenure at Intuit, will be joining Zscaler in early December to lead investor relations and strategic finance. Please join me in welcoming Kim to Zscaler. Now I'll turn the call over to Jay. Jay Chaudhry: Thank you, Ashwin. We had a strong start to our fiscal year. In Q1, annual recurring revenue or ARR growth accelerated to 26% year over year, and RPO growth accelerated to 35%. Combining our strong free cash flow margin of 52%, and revenue growth of 26%, we operated at rule of 78, making us one of the rare companies consistently outperforming the coveted rule of four d metric. We are one of the only five enterprise SaaS companies with over $3 billion in ARR, growing at over 25%. The continued success of our three growth pillars—AI security, zero trust everywhere, and data security everywhere—is driving our strong top-line performance. ARR from these three growth pillars accelerated in the quarter. I'm particularly pleased with our AI security pillar, which grew over 80% year over year and has already exceeded our FY '26 target of $400 million ARR, three quarters earlier than expected. With the strong demand, I expect AI security ARR to exceed half $1 billion by the end of this fiscal year. Diving deeper into our AI security pillar, while enterprises are leveraging AI to drive innovation and accelerate productivity, the proliferation of AI is also making them increasingly susceptible to attacks. One of the largest AI companies recently reported that a bad actor hijacked its AI coding assistant to autonomously perform a large-scale cyber attack against multiple organizations. This incident highlights two important trends. First, threat actors are using AI to dramatically increase the speed, effectiveness, and blast radius of attacks. We have been predicting an increase in this type of automation by AI agents, and we are now seeing it happen. Second, just like users and organizations, AI agents are also becoming the weakest link in their security. It is only a matter of time before millions of AI agents interact with each other across enterprises. Imagine a threat actor hijacking even one of an organization's trusted agents, and thereby accessing critical corporate resources and sensitive information resulting in a serious breach. We have a long history of securing users with our Zero Trust Exchange, which enabled our customers to safely adopt the latest technologies such as mobile, cloud, and SaaS. Over 45% of Fortune 500 companies and nearly 40% of global 2,000 companies have adopted our Zero Trust Exchange and trust Zscaler to secure their businesses. With the rise of consumer GenAI applications, including ChatGPT, Perplexity, and more, security issues related to access control, data loss, and content moderation made enterprises cautious about allowing employees access to these popular apps. We extended our Zero Trust Exchange to provide visibility into thousands of GenAI apps, enabling enterprises to inspect prompts and responses and enforce proper guardrails for safe and secure use of GenAI apps. Several large enterprises adopted our GenAI solution in the quarter, including a G2K technology company, a Fortune 500 communications equipment company, and a large healthcare software provider. As AI adoption moved beyond consumer GenAI apps into building and running enterprise AI applications, we introduced solutions in three key categories to secure that. First, AI asset discovery and posture management. AI applications and agents are being developed and deployed today without full visibility for IT teams to safeguard them. To provide organizations with visibility and control, last year, we introduced an AI asset discovery solution called AISPN. AISPM can detect unauthorized AI applications, prevent over-permissions for AI agents, and strengthen governance for model deployments. In Q1, several customers, including a leading software solution provider, a global 2,000 manufacturer, and a leading insurance company, purchased AISPM from Zscaler. With our recent acquisition of SPLX, we are extending our AI SPM capabilities by unifying discovery of LLMs, workflows, and MCP servers. These capabilities enable customers to meet evolving regulatory requirements for AI to be transparent and explainable, among others. The second key area of innovation is AI red teaming. As part of the AI lifecycle, customers need to regularly test their applications for vulnerabilities. With SPLX, we now deliver AI red teaming to enable automated and continuous testing of AI apps at scale. Our AI red teaming solution integrates with customers' CICD pipelines, making it easy to test for hallucination, bias, behavior drift, and more. Several customers, including a Fortune 150 transportation company and a Fortune 100 service provider, have already deployed AI Red Team. The third area of innovation is AI guardrails. Customers need AI guardrails for inline policy enforcement for acceptable use of AI, for cybersecurity, and for data loss prevention. Inline policy enforcement is one of our key differentiators, which we seamlessly deliver through our Zero Trust Exchange at scale. As we process half a trillion transactions daily, our AI Guard solution leverages the core competency for runtime protection. Zscaler AI Guard sits between the application and LLMs, inspecting prompts and responses inline to enforce customer-defined policies. To share an example, this quarter, a leading consulting firm purchased our AI Guard to secure the use of public AI applications and their private in-house applications such as AI chatbots and AI agents. With our platform capabilities, we are securing over 90 billion AIML transactions per month. As AI and AI agents define the next era of transformation, we are further extending our platform to secure AI agents, agentic workflows, and AI applications. In addition to securing the use of AI, we are leveraging AI to deliver agentic operations, including agentic SecOps and AgenTeq ITOps. In our AgenTic SecOps, we are making great progress towards delivering an AI-powered SOC that simplifies customers' operations and hunts for threats. In August, we acquired Red Canary to combine the agentic technology with our data fabric technology to deliver actionable SOC insights for our customers. This quarter, a Fortune 500 financial services company, a global 2,000 healthcare equipment company, and a global 2,000 energy company, and more purchased our AgenTek SecOps solution. In our agentic IT ops, we are introducing several Zscaler Digital Experience or ZDX innovations to enable faster resolution to application and network performance issues. Other innovations like the ZDX CoPilot continue to resonate with customers and have driven over 80% year-over-year growth in bookings of ZDX Advanced Plus in the last twelve months. I'm very pleased to see continued momentum for our AI security solutions. As I mentioned, we are expecting AI security ARR to surpass half $1 billion by the '26. Turning to our second growth pillar, we continue to see strong momentum in Zero Trust Everywhere, which includes Zero Trust users, Zero Trust branch, and Zero Trust cloud. Three quarters ago, we introduced Zero Trust Everywhere and set a goal to secure 390 enterprises with Zero Trust Everywhere by the '26. I'm delighted to share that we now have over 450 Zero Trust Everywhere enterprises, achieving our goals three quarters ahead of our target date. Our Zero Trust Everywhere customers benefit from reduced cost and complexity by eliminating legacy network and security products. This expanded relationship through Zero Trust Everywhere also creates follow-on demand for data security and AI security. One of the key components of Zero Trust Everywhere is Zero Trust Cloud, which allows customers to eliminate VPNs, north-south and east-west virtual firewalls, ExpressRoute, and Direct Connect networks, resulting in far better cybersecurity. To share a customer example, in an 8-figure TCV win, an existing million-dollar-plus Fortune 500 healthcare customer adopted our Zero Trust Cloud solution, along with ZDX Advanced Plus, data security modules, and more. Zero Trust Cloud secures workload communication across the VPC or virtual private cloud and SAP RISE cloud-based ERP. Without Zero Trust Cloud, the customer would have had to deploy a significant number of north-south and east-west firewalls, resulting in increased cost and many months of delay. This customer told me that in the last fifteen years, they have not been so excited about the solution that not only brought better security but also was easy to deploy and operate. Just like the migration of Microsoft Exchange to Office 365 was a big tailwind to our business a few years ago, I believe the migration of SAP on-prem to SAP Rise will have a similar impact on our business. We continue to see strong interest from customers for Zero Trust Branch, which is another key component of Zero Trust Everywhere. Zero Trust Branch eliminates the need for legacy point solutions at branches, factories, and campuses. To give you an example, in a 7-figure upsell win, a global 2,000 manufacturing customer more than tripled their ARR and became a Zero Trust Everywhere customer by purchasing our Zero Trust Branch, ZDX Advanced Plus, Risk 360, and more. Moving to Data Security Everywhere, we offer a comprehensive data security portfolio with eight modules providing data discovery, data classification, posture management, data loss prevention, and more. Customers are eliminating data security point products in their environment by consolidating data security functionality on our unified platform. To share an example, in a seven-figure new logo ACV win, a large healthcare provider purchased five out of our eight data security modules for their 23,000 users. This enterprise chose Zscaler over a leading CASB vendor due to our integrated platform, which delivers data security across all channels for all types of data. I'm excited to share that our Data Security Everywhere ARR accelerated to approximately $450 million. The growth across our three pillars is powered by our strong go-to-market engine. One of the key initiatives we recently introduced was our Z Flex program, which enables customers to commit to a spend and provide flexibility to swap or activate additional modules without undergoing new procurement cycles. Z Flex is driving meaningful upsells and reduced sales cycle and is consistently exceeding my expectations. Z Flex generated over $175 million in TCV, growing over 70% quarter over quarter. To share a couple of customer examples, an existing large aerospace customer made a multiyear 8-figure TCV commitment under the Z Flex program, increasing the annual spend with us by over 40%. As part of the Flex commitment, the customer added nine new modules, including asset exposure management, identity threat detection, unified vulnerability management, email DLP, and expanded commitment for data security. In a 7-figure upsell win, a Fortune 500 business services provider more than doubled the annual spend with us as they expanded adoption of nine modules under the Z Flex program. In conclusion, our business is benefiting from the strong tailwinds from the combination of zero trust and AI security. The best AI security is built on the foundation of Zero Trust. Our clear leadership in zero trust security combined with our comprehensive AI security offerings positions us well to capture the large and growing AI security market. And with our strong go-to-market engine, we are well positioned to exceed $10 billion in ARR. I would like to turn over the call to Kevin for our financial results. Kevin Rubin: Thank you, Jay, and good afternoon, everyone. We exceeded our growth targets in Q1 and operated at rule of 78 for the quarter. We ended Q1 with over $3.2 billion in ARR, reflecting approximately 26% year-over-year growth. ARR from each of our three growth pillars accelerated in the quarter, including on an organic basis. Q1 revenue was $788 million, growing 20% year over year, 10% sequentially, and exceeding the high end of our guidance. Geographically, the Americas accounted for 58% of revenue, EMEA for 27% of revenue, and APJ for 15% of revenue. Our remaining performance obligation or RPO grew approximately 35% year over year to $5.9 billion, with approximately 47% classified as current RPO. We closed Q1 with 698 customers generating over $1 million in ARR, and 3,754 customers exceeding $100,000 in ARR, demonstrating the strategic role we play in customers' digital transformation journeys. Turning to the rest of our Q1 financial performance, our gross margin was 79.9% as compared to 80.6% last fiscal year Q1. I'd like to remind investors that we are introducing new products that are experiencing strong growth and are optimized for faster go-to-market rather than margins. This will continue to influence our gross margins on a quarterly basis. We plan to optimize new products for margins over time as they scale. Operating expenses increased 11% sequentially and 23% year over year, reaching $458 million. Operating margin was 21.8%, towards the higher end of our long-term range and growing by approximately 40 basis points year over year. Our free cash flow margin for Q1 was 52%, including data center CapEx at 2% of revenue. We ended the quarter with $3.3 billion in cash, cash equivalents, and short-term investments. Next, let me provide our guidance for Q2 and full year fiscal '26. As a reminder, these numbers are all non-GAAP. For the second quarter, we expect revenue in the range of $797 million to $799 million, reflecting year-over-year growth of approximately 23%. Gross margins to be approximately 80%, operating profit in the range of $172 million to $174 million, net other income of approximately $19 million, earnings per share in the range of $0.89 to $0.90, assuming a 21% tax rate and 170 million fully diluted shares. For the full year fiscal 2026, ARR in the range of $3.698 billion to $3.718 billion, reflecting year-over-year growth of 22.7% to 23.3%. We anticipate approximately 47.8% of net new ARR to be recognized in the first half. Revenue in the range of $3.282 billion to $3.301 billion, reflecting year-over-year growth of 22.8% to 23.5%, operating profit in the range of $732 million to $740 million, earnings per share in the range of $3.78 to $3.82, assuming a 21% tax rate and approximately 170.5 million fully diluted shares, and free cash flow margin to be approximately 20% to 26.5%. With a large market opportunity and customers increasingly adopting the broader platform, we will invest aggressively to position us for long-term growth and profitability. Before moving to Q&A, I'd like to thank Ashwin for his significant contributions to IR and strategic finance and wish him well as he transitions to his product role. I'm also excited to welcome Kim to Zscaler. With that, operator, you may now open the call for questions. Thank you. Operator: To withdraw your question, please press 11 again. Please limit yourself to one question. One moment for questions. Our first question comes from Brad Zelnick with Deutsche Bank. You may proceed. Brad Zelnick: On such a strong start to the year and hitting your Zero Trust Everywhere goal three quarters ahead is just amazing. Jay, I wanted to ask about Zero Trust Branch, which continues to hear good things about. It's showing some nice early adoption. As we look ahead, how much more work needs to be done on the product and/or go-to-market fine-tuning to see real acceleration from here? Jay Chaudhry: Thanks, Brad. We have done some amazing work on the technology side to build a Zero Trust Branch where each branch is merely an island with no lateral movement that's generally caused by traditional networking with SD-WAN and MPLS. The product is in great shape. Go-to-market, we put together a specialty team that can engage the right buyers to explain the solutions. The numbers are pretty impressive. I'll joke internally that Zero Trust Branch needs no pipeline generation effort because there's so much demand in the cost. I think we shared some numbers on Zero Trust Branch customers. We have now exceeded over 450 customers. A lot of customers start small, they do the smaller rollout, and then they move on to bigger deals. In my prepared remarks, I gave an example of a global 2,000 manufacturing customer whose ARR more than tripled. I think there are many, many such examples. We got about 4,400 enterprise-class customers. They have only gone to about 10% of them. So I see a big opportunity. I think it's an exciting area for us. And it's part of our Zero Trust Everywhere platform. Brad Zelnick: Thank you so much, Jay. Jay Chaudhry: Thank you. Operator: Thank you. Our next question comes from Saket Kalia with Barclays. You may proceed. Saket Kalia: Okay, great. Hey, guys. Congrats on the strong start to the year. Thanks for taking my questions and congrats, Ashwin. Maybe a little bit of a joint question for you, Jay, and Kevin. You know, the billion dollars in ARR that's coming from the three emerging areas is clearly outgrowing the rest of the business. In fact, I think you said it accelerated. And for good reason. But I was wondering if you could help us think about the other $2 billion in ARR. And maybe specifically, is it fair to think about that other tranche as more of a la carte Zero Trust tools like ZIA and ZPA? And maybe relatedly, how do you think about the growth rate for that $2 billion versus an emerging bucket that's clearly growing faster than the rest of the business? Jay Chaudhry: Yes, it's very true that our three buckets, a billion-dollar ARR, have been growing very well. The remaining $2 billion, yes, a big part of that is the ICPA. It has been going quite well. But the big opportunity for that business is also to emerge into Zero Trust Everywhere. Remember we said that the Zero Trust journey started with users. We're taking it to branches. We're taking it to the cloud and next to IoT OT. While other vendors who tried to claim Zero Trust tried to say we got SASE, they're merely sitting with Zero Trust trying to do for users. And we have expanded the platform to give a lot of opportunities. The core business by itself will grow at a smaller rate than the rest of the overall business. But our goal is really to take every customer to Zero Trust Everywhere. And that's what we are successfully doing. Saket Kalia: Very helpful. Thanks, guys. Jay Chaudhry: Yeah. Thank you. Operator: Our next question comes from Meta Marshall with Morgan Stanley. You may proceed. Meta Marshall: Great. Maybe just wanted to ask a question about Red Canary and just how it's kind of performing towards expectations given that you guys have been looking at a fair amount of churn within your kind of assumption for that business. Just any context around that performance would be helpful. Thanks. Jay Chaudhry: I'll start with broad comments. And Kevin can go deeper. The incubation of Red Canary at Zscaler is going very well. The GNA integration was done right away. Two other main areas were one, engineering and products. We're integrating Red Canary's agentic AI technology with Zscaler platform, doing well. Second is go-to-market. Red Canary's go-to-market team has become a security operations specialist team. It's working with our field sales organization, which is uncovering opportunity. So seeing a vast majority of Zscaler that kind of the pipeline is now coming from Zscaler customers. Kevin Rubin: Yeah. Look. I would just add that Red Canary is trending slightly better than our previous guidance. But keep in mind that, you know, we don't believe that Red Canary's contribution is material to our overall business. So as we go forward, we don't intend to provide specific color on Red Canary. Meta Marshall: Great. Thanks. Thank you. Operator: Our next question comes from Tal Liani with Bank of America. You may proceed. Tal Liani: Hi, guys. This quarter was stronger than actually you we see because if I look at the year-over-year growth in dollars, last year, first of all, 26% almost on a very strong quarter. And second, last year, on a year-over-year basis, you added between $122 million to $130 million every quarter on a year-over-year basis. And this quarter, you're adding $160 million. So that means that the growth is strong. And I'm trying to understand if you can break down on revenue level, not on ARR level, what is driving the strength. I mean, the stock is down, but the trends beneath the surface seem very strong. And I'm trying to understand what is driving it and if you can break it down, even not in numbers, if it's just qualitative to discuss what's happening in the core versus what are the key leading products that are driving this strength. Jay Chaudhry: I'll start with a broad product area. Right? As you know, we built a platform, then we're expanding the platform. The three big pillars of our platform have been Zero Trust Everywhere, AI security, and data security. All three areas are growing very well. They're actually accelerating. And that's our part of the strategy. Our strategy is if every customer starts moving to Zero Trust Everywhere, we become very, very differentiated because no one in the market is even coming close to that. They're all trying to figure out how to solve the user side of it. And the data security, our customers are basically saying, we are tired of seeing point products, so many point products in data security. We are the best platform. AI security is evolving. It's a new area for us. Agentic operations have done well for us. And security of AI products is growing pretty well. So I think they're very pleased with that. Growth we wanted from three key pillars. And it's exceeding our expectations. Kevin, you want to give him more color? Kevin Rubin: Yeah. Thanks for the question, Tal. I mean, I think that's frankly, both the qualitative and the quantitative response, which is we are seeing accelerated growth in our three growth pillars, is contributing, you know, well to the business. I also mentioned in my prepared remarks that we saw organic growth come in at similar levels to what we saw last quarter. So we are seeing very strong performance. And the business did come in better than our internal expectations in the quarter. Tal Liani: Uh-huh. And how is the core business? You have Cisco with the new product, Check Point with the new product, Palo talking about very strong growth. How is the competitive landscape when it comes to the core business? Jay Chaudhry: The competitive landscape hasn't changed a whole lot, if anything else. Our brand has gotten bigger. Most of the large enterprises know us very well. We are very well engaged here. A number of new entrants who have come in the market in the past year or so. Largely some of the firewall companies, we have hardly seen them out there. So the competitive landscape hasn't really changed much to mention. Tal Liani: Got it. Thank you. Jay Chaudhry: Thank you. Operator: Our next question comes from Joseph Gallo with Jefferies. You may proceed. Joseph Gallo: Hey, guys. Thanks for the question. Jay, I think when some look at the recent massive M&A in the space, they're fearful of the implications for underlying cyber growth. In your conversations with customers, how are they thinking about spending in calendar 2026? And what are the priority areas that they have as a part of that? Jay Chaudhry: So customers' priorities for spending? Yes. Just, you know, with the how is the fund cyber growth been? Yep. How do you expect it next year and what the priorities are? Broadly speaking, there's no significant growth in the back environment. IT budgets remain tight. There is pressure on CIOs. There is far less pressure on the cyber side of it. So cyber is under less pressure. We do see scrutiny from our deals, similar to what we shared in the past. But two areas are still of high interest to customers. One is zero trust security because all these breaches happening out there. And second is AI security because everyone is trying to do some level of deployments of AI applications because CIOs feel like if they aren't doing anything in this area, they'll be viewed as laggards. That is also mixed. Some of the customers are seeing better results than others in terms of AI. But as soon as they start thinking about doing AI applications and models, the security becomes a worry for them. So we are going in with two leading messages: Zero Trust Everywhere being one, and AI security being two. So with that, we're able to get the pipeline created. And the second part is to close deals, we must show strong cost takeout. And we can do that as we eliminate a lot of point products. So we are able to do both of those things. That's what's really leading us to deliver these strong results. And also, if I mentioned that, since our brand has become so much stronger, and we've become pretty strategic partners to customers, all these CIO, CSOs meetings I do, it's wonderful to see them. To say, hey. I mean, we moved from company A to company B. And we called your team to help us here as well. So look, we are tracking well. We're excited about what lies ahead for us. Joseph Gallo: Thank you. Operator: Thank you. Our next question comes from Mike Cikos with Needham. You may proceed. Mike Cikos: Great. Thanks for taking the questions here, guys. I just wanted to come back to the SASE market specifically. And, Jay, I know you're probably already cringing at the word SASE, but just there was a lot of security vendors out there last week discussing some success and competitive displacements in the SASE market. Just wanted to get your feedback specifically on what you're seeing as far as trends from a competitive or pricing discipline standpoint. Appreciate it. Thank you. Jay Chaudhry: Look. We demand very strong in when it comes to, I will call, the Zero Trust market. Because the SASE keyword has no meaning. Every vendor claims until to be calling SASE. For example, if you do Zero Trust, you don't do SD-WAN. And most of these SD-WAN vendors can be viewed into the SASE phase. Our expansion in our customer base is because of all the new functionality we are bringing to take Zero Trust Everywhere. Our expansion is happening as we have taken our data security platform and made it much bigger. So we've done so many innovations in so many spaces. So we think in spite of new entrants in the market, I think the market has already kind of sorted out the winners, and we are creating more distance among the number of the vendors. Well, sorry. Among the number of other vendors who are entering the space. So I feel very strong. Our pipeline remains strong. Our win rate remains strong. And you see our results, they're very, very strong. Mike Cikos: Perfect. Thank you. Operator: Our next question comes from Brian Essex with JPMorgan. You may proceed. Brian Essex: Hi, good afternoon. Thank you for taking the question. I guess, Kevin, for you, you know, just I understand that you don't want to break out Red Canary, but can you give us a sense for organic net new ARR in the quarter? And then maybe one for Jay. With the acquisition of Red Canary and what you've done with Avalor and now SPLX, love to get your sense of, do you have any sense of how you might align with the threat intelligence market and value you might be able to add given the data visibility, potential for incremental add in terms of the quality of data that you might be ingesting on the platform and ability to provide better visibility to customers on the threat intelligence side? Kevin Rubin: Of course. Thanks for the question. I'll go ahead and start. As I had previously mentioned, organic growth in Q1 was consistent compared to Q4. And again, as I said, we're very pleased that the organic business came in better than our internal expectations. Jay Chaudhry: So on the second part, we talked about two acquisitions we have had. Avalor has become our data fabric, which can ingest data from the Zscaler platform and some of the third parties to really create what we call entity relationships. And, you know, AI is only as good as data, so we're able to do some very harmful threat detection intelligence that couldn't be done otherwise. So that's the foundation of the platform. The reason for us to get into AI-powered setups is the strength of our data. Avalor gave that stuff. We have the data. Red Canary gave us a gigantic AI technology on top of it. So using some of these smart agents, we can do security operations. What security analysts need to do, so the amount of information we are getting, the meaningful intent we're getting is unbelievable. I was talking to the CSO of a Fortune 100 company recently. He said, I have a sizable security operation team, very sophisticated operations. But your solution, in this case, they're taking advantage of Red Canary working with us. It is finding things, a few things every month that we aren't able to find. That's amazing. Incremental value for them. We think this is only going to get better as our solution evolves. Your second point of the SPLX, that's accelerating our completion of solution for AI security. The market has so many point product solutions in AI security out there. And customers tell me, one, I don't want to deal with 10 vendors, number one. Number two, I don't want to share my data with a startup that started ten months ago to share with them. So they're looking for a platform. We have built a number of AI security platforms internally. For example, GenAI Security, AI Guard, AI Discovery, and SPLX brought red teaming technology to us. So it had made our portfolio pretty complete. So Zero Trust Everywhere in a very great shape. Agentic operations evolving nicely and AI security operations growing very nicely. We feel very comfortable with the portfolio built. Brian Essex: Got it. Helpful. Thank you. Operator: Our next question comes from Shrenik Kothari with R. W. Baird. Yeah. Thanks for taking my question. Shrenik Kothari: So, Jay, on the AI security tracking, $100 million, and you mentioned traction across all the modules, AI Guard, SPM, with teaming. Just can you help us unpack where there's more traction, what's currently driving in terms of use cases, are most deployments as at visibility governance via SPM, or are you seeing CSOs truly prioritizing all the runtime AI with AI Guard as well? And then I have a quick follow-up. Jay Chaudhry: Yeah. This is a very good question. About two years ago, two plus years ago, when ChatGPT came on the scene, the number one thing customers wanted to do was visibility into GenAI solutions or, sorry, applications that users are going to go to. Since we are sitting in the traffic path, very quickly we built our first product, GenAI Security. That's being used by quite a large number of these customers. Next, we launched AI asset discovery and posture management. Tons of interest because everything starts by understanding AI assets you have. Third, last summer, early summer, we launched AI Guardrails. When customers are building their internal AI applications and models, they want to use guardrails to make sure that models are protected and only the right people with the right kind of prompts can easily access them. That's an early stage, but it's growing nicely. The pipeline is growing very well. And the fourth thing we brought to the market came through SPLX acquisition. That's core red teaming technology. And as applications are being built, customers want to make sure they don't have liabilities. And we aren't stopping there. The fifth is extending our platform to enchanting exchange so we can have the right agent-to-agent to agent-to-application communication. All that is proceeding well. So I think we are very well positioned. We will keep on investing in these innovations. But we balance our investments with our operating margins. Shrenik Kothari: Very helpful, Jay. Just Kevin, a quick follow-up on your comment around these modules ramping, as Jay was saying, how are you thinking about the investment horizon overall and as you're scaling these compute-rich products, AI Guard, and how to think about the margins here? Kevin Rubin: Yes. Since the models and things they're using are really on them. On a fairly well-confined set of data, we haven't seen any massive change in gross margins. If these things change over time, I'm sure we'll let you guys know. And maybe just to continue on that thread. You know, look, for Q1, we're pleased with the margin profile. We're comfortable with the Q2 guide. And then as we look into the back half of the year, you will notice that there's margin expansion in the guide in the back half. We are orientated to growth, but you know that we're also very mindful of the financial model and operating margin. Shrenik Kothari: Thank you. Operator: Our next question comes from Roger Boyd with UBS. You may proceed. Roger Boyd: Great. Thanks for taking the questions. Jay, I just wanted to go back to Zero Trust Gateway. And I wonder if you could talk a little bit more about the demand you're seeing there. Is that product getting pulled along with increasing AI infrastructure? Some of the firewall vendors have talked about growth in software firewalls in this capacity. And how are you thinking about customer buying around this approach over kind of that approach of deploying virtual firewalls? Thanks. Jay Chaudhry: Sure. As you know, customers have traditionally used firewalls everywhere. We replaced a lot of them when it comes to user protection. And work on branch and cloud is pretty simple. When traditionally people would go to the cloud and build cloud workload, they would do left-hand shift. They have left-hand shifted, not so far, also the problem has VMs. They're lift and shifted east-side firewalls to the cloud as VM as well. We go in and say, you don't really need a lot of these firewalls everywhere. Zero Trust Cloud is almost like Zero Trust for Internet access, zero trust workload to work on communication. All the firewalls go away. Customers do not need to work with all these IP addresses and ACLs. The cloud gateway simply makes it even easier to deploy our solution. In the past, they had to deploy a piece of software we call Cloud Connector as a traffic cop. Now, we have a cloud gateway that's deployed and managed by Zscaler. With a simple config change that says, point traffic to Zscaler cloud gateway. And we enforce policies, and we do everything that needs to be done. Deployment that would have taken a few hours now can be done in under ten minutes. That's the kind of innovation we're bringing to make it easier for customers to move away from legacy firewalls and embrace Zero Trust cloud workload communication. Roger Boyd: Thank you. Operator: Our next question comes from Eric Heath with KeyBanc. You may proceed. Eric Heath: Hey, great. Thanks for taking the question. Maybe to come back to Zero Trust Everywhere just given how strong and successful it's been thus far. But I'm curious to hear how you're thinking about this going forward. I mean, is the outperformance relative to your expectations because the book of firewall business up for refresh maybe was bigger or earlier than you anticipated or do you look at the pipeline and see an even bigger opportunity of displacements looking into calendar '26? Thanks. Jay Chaudhry: Overall, our customers are looking for saving money and making it easier for them to operate and deploy these solutions. And along with that, making sure they have better cyber protection. The number one reason for customers' interest in the Zero Trust Branch is to eliminate the lateral movement which leads to all kinds of ransomware attacks. Number one. Number two, when we go in and say, by the way, it's also costing a lot more because we can eliminate multiple products in a branch. Not just firewall, but SD-WAN. Often, they got these DHCP gateways. They often got east-west firewalls. They got NAT convenience kind of stuff. All of that goes away. So cost goes down. Operational stuff goes down. That's a driver. That refresh may help, but most of the time, the deals are not waiting for Zscaler to say refresh is coming. As we present the story to our customers, they kind of say, wow. This makes sense. There's a lot of ROI to it. Get started. So tremendous interest, strong pipeline, and we've only done about 450 customers so far. There are millions of branches left out there for us to pursue. Eric Heath: Thank you. Operator: Our next question comes from Fatima Boolani with Citi. You may proceed. Fatima Boolani: Good afternoon. Thank you so much for taking my questions. Jay, I wanted to go back to a very specific remark. In your script earlier in the call. Just with respect to the migration of SAP from on-prem to SAP Rise being an opportunity that would be tantamount to the success and the tailwinds that you saw from Microsoft Exchange going to Microsoft March. And so I wanted to take the opportunity to have you unpack some of that in terms of how will that manifest in your business across the product lines today? And then specifically, you know, with the portfolio that is significantly larger today than you had when this the initial Microsoft platform migration was happening. Where do you expect to see sort of the I'll frame it as option value in some of your newer products that frankly didn't exist? In the last sort of precedent example. Jay Chaudhry: Sure. You know, the customers moved to Office March several years ago because Office moved to the cloud or Exchange moved to the cloud. But SAP has taken a long time. It's a far more complex application. But now SAP is pushing for deployment of what they call SAP RISE in the cloud and telling customers that you got to move, and they're giving some incentives as well. So if you do the old way using the legacy firewall technology and network, you move SAP RISE to the cloud, then you really then deploy all these express routes and direct connects for connectivity. And then you've got firewalls and all the stuff you deploy to access those applications, the VPN type approach. We go in and say none of that stuff is needed. No special access routes and direct connects needed. You can access SAP RISE applications with Zscaler directly over the Internet as you access Office 365 applications. It's a clean, simple, elegant architecture. So it gives us two opportunities for us. Number one, some of the cloud zero to cloud technology to make sure we got protection and communication for SAP application, SAP RISE itself. Second, for users to access SAP, with better and faster experience. Those are the two areas of growth for us. And it helps a customer deploy and get the application running faster. And it reduces cost and gets great user experience. Fatima Boolani: Thank you. Operator: Our next question comes from Gray Powell with BTIG. You may proceed. Gray Powell: Great. Thanks for taking the question. Yes, it's really interesting this quarter. I mean, I look at the numbers, and overall, everything looks good. I do think there's some confusion on just organic ARR. So I guess here's my question. You highlighted $175 million in Flex bookings this quarter. Compares to RPO bookings at about $940 million. So basically, Flex is now 20% of the mix. It almost doubled versus last quarter. Where do you see that going longer term? And then as Flex becomes a bigger component of bookings, does that give you higher visibility on future period ARR because there's just inherently an installed ramp in those contracts as customers grow out? Kevin Rubin: Yeah. Great. So I'll start and Jay can add anything that he may want to share. Look. I appreciate you raising Z Flex. It is a program that has gotten a lot of interest and traction from our customer base. To your point, we did see bookings grow over 70% sequentially. And it effectively allows customers to commit to spend. We typically see that as a more commitment than they would have made on an a la carte basis. It allows them to easily deploy additional modules without having to go through the friction of a negotiation procurement process. And then it provides them with the flexibility to swap in and out of modules as business dynamics for those customers change. And so it gives them confidence that they can make more meaningful commitments to us and generally over longer periods of time. It doesn't have, necessarily a different impact to ARR than any other type of transaction. But to your point, it does give us greater visibility over the long term. Because they are longer contracts. We do understand the nature of those commitments and how they play out in the future. And I would say, it's frankly a win-win for both the customer, and the flexibility it offers, and us in terms of the visibility going forward. So it is a very powerful tool that has gotten, you know, pretty significant interest from customers. Jay Chaudhry: Yeah. I would say our business has performed very well on all metrics. They are on cash flow, all areas. So we're very pleased with it. Operator: Thank you. Our next question comes from Joshua Tilton with Wolfe Research. You may proceed. Joshua Tilton: Hey, guys. Thanks for sneaking me in, and congrats to Ashwin. Just one for me, and apologize if this was addressed already bouncing back forth between a few calls. But, did your assumption for what Red Canary contribute to the full year ARR change at all? And if not, is it fair to assume you raised ARR by for the full year is how much you outperformed organically in the first quarter? Kevin Rubin: Yes. Thank you for the call. I did make a comment earlier. We are seeing Red Canary trend slightly better than our previous guidance. But, as a reminder, we don't believe that Red Canary's contributions to our overall business are material. So we're not going to be making color commentary with respect to Red Canary going forward. With respect to the outperformance, I mean, we did pass that through the full year guide. But I think to further clarify, you said that before. Organic growth in Q1 for us was consistent as compared to Q4. Very pleased with it. It beat our internal expectations. Joshua Tilton: Thank you. Operator: Our next question comes from Jonathan Rukaver with Cantor. You may proceed. Jonathan Rukaver: Yes. Hi. Good afternoon. Jay, I'm curious to hear your thoughts on the synergies you see between Red Canary and the, you know, the data security portfolio. It would seem that you know, you have opportunities around remediation, a possible governance layer, for DSP and DLP. Can you just provide an update on that integration strategy? And maybe just a little bit of color on how you see that driving differentiation relative to you know, all the other vendors that are targeting data security capabilities related to AI. Jay Chaudhry: Yes. Very, very good question. I would mention three points there that set us apart from many others. Number one, we have built a full portfolio of data security. There's no such thing as data security, but AI only. Data is lost in many ways. So number one, the strongest portfolio is helping us. Number two, AI is helping us doing better data classification. Which is important because better classification means better detection. Number three, the other point you made, it was a Red Canary synergy. That is the following. We are able to get all the signals from Zero Trust Exchange to our data fabric platform where we are able to potentially look for any potential threats or breaches or any of the stuff that's happened. And if they're able to do that very quickly, we can do a closed-loop feedback sent to a Zero Trust Exchange if you need to walk some kind of data loss that's happening out there. Today, data loss happens. Signals are found. Days or weeks later. This closed-loop system between our agentic operations and inline function is a clear, clear differentiator for us that should set us apart from many other vendors whether they're SASE vendors, or they are AI security vendors. Operator: Thank you. And our last question comes from Matt Hedberg with RBC. You may proceed. Matt Hedberg: Great. Thanks for taking my questions, guys. Congrats on the results, really. I wanted to follow-up on, I think it was Gray's question on Z Flex. It really does show up in checks. And I think, Kevin, you mentioned reducing friction. Additional consolidation opportunities. I realize it's difficult, but is there a way to think about what that average Z Flex upsell looks like? And then maybe just a little bit more color on how do you think about the pipeline of Z Flex deals for the rest of fiscal year? Thanks, guys. Jay Chaudhry: So first of all, Z Flex was done to give our customers flexibility. It evolved from the traditional ramp deals we had done in the past when we go after a lot of customers. They can deploy it overnight. And if they bought lots of modules, they wanted some ability to say, give me some RAM because I won't be working on it. We have been doing RAM deals for quite some time, but this creates a formal program around it. The second thing it's created for us is the ability to swap modules so they don't have to keep on testing various modules for a long time and delaying the deal. So we believe that the deal ability to close deals has gotten better. And three, the ability to do larger deals has gotten better because now they know that they can swap deals, modules, so they can go for a bigger deal. All these things are happening. I'm not sure we have quantified exactly how much impact it is happening. But we are seeing good results of it. So we are pleased with the performance. Kevin, you want to add anything? Kevin Rubin: The only thing I would, again, I guess, express is you see growth in customers moving into Zero Trust Everywhere, which you see adoption of data security everywhere and AI security, a lot of that momentum and the facilitation will come from programs like Z Flex that will make it easier for customers to adopt these technologies. And so, for us, we think it's just a stimulus to allow customers to more easily and friction-free adopt more of our technology. Operator: Thank you. I would now like to turn the call back over to Jay Chaudhry for any closing remarks. Jay Chaudhry: Well, thank you for your time. We look forward to seeing you at one of us or some of the investor conferences. Operator: Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.
Operator: Good day, and welcome to the Abercrombie & Fitch Co. Third Quarter Fiscal Year 2025 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. To ask a question, please press 11. If your question hasn't been answered and you'd like to remove yourself from the queue, press 11 again. We ask that you limit yourself to one question and a follow-up. Today's conference is being recorded. At this time, I would like to turn the conference over to Mohit Gupta. Please go ahead. Mohit Gupta: Thank you. Good morning, and welcome to our third quarter 2025 earnings call. Joining me today on the call are Fran Horowitz, Chief Executive Officer, Scott D. Lipesky, Chief Operating Officer, and Robert J. Ball, Chief Financial Officer. Fran Horowitz: Earlier this morning, we issued our third quarter earnings release, which is available on our website at corporate.abercrombie.com under the Investors section. Also available on our website is an investor presentation. Please keep in mind that we will make certain forward-looking statements on the call. These statements are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and are subject to risks and uncertainties that could cause actual results to differ materially from the expectations and assumptions we mention today. These factors and uncertainties are discussed in our reports and filings with the Securities and Exchange Commission. In addition, we will be referring to certain non-GAAP financial measures during the call. Additional details and reconciliations of GAAP to adjusted non-GAAP financial measures are included in the release and in the investor presentation issued earlier this morning. With that, I will turn the call over to Fran. Mohit Gupta: Thanks, Mo, and thanks, everyone, for joining as we head into the important holiday season. I am happy to report our twelfth consecutive quarter of growth, with sales up 7% to a record of $1.3 billion. We again delivered on the goals we outlined for the quarter, with net sales and operating margin both at the high end of our outlook, earnings per share above our expectations, and inventory levels aligned with trend. Along with these strong financial results, we repurchased $100 million worth of shares in the quarter, bringing our total to $350 million or 9% of shares outstanding as of the beginning of the year. Our team continues to stay close to our customers while reading and reacting to the current environment. In the quarter, we made further progress on key brand, regional, and foundational investments. Based on our third quarter momentum and our fourth quarter outlook, we are narrowing our full-year sales outlook towards the top end of the range we provided in August, targeting a strong finish to 2025 on top of a record 2024. Financially, in addition to record net sales, we delivered a gross margin of 62.5% and a 12% operating margin for the quarter, both of which include an adverse tariff impact of around 210 basis points. We exceeded our outlook range on earnings per share, delivering $2.36 for the third quarter. On the regions, we saw continued growth in The Americas with net sales up 7% on balanced traffic gains across channels. In EMEA, total sales increased 7% with comparable sales higher by 2%. Similar to last quarter, strong sales performance in The UK, our largest country in the region, continued to be fueled by localized marketing, inventory distortions, and strategic partnerships. Strength in The UK was partially offset by softness in Germany and the remainder of European markets. In APAC, net sales were down 6% with comparable sales down 12%. Across regions, we remain excited about the significant long-term global growth opportunity for our brands through a blend of go-to-market strategies, including owned and operated, franchise, wholesale, and licensing. Turning to the brands, in line with our expectations, we made sequential improvement in Abercrombie brands. Net sales were down 2% and comparable sales down 7%. We continue to see positive cross-channel traffic to the brand, and we managed inventory tightly, enabling improved AUR trends compared to the first half. The sequential improvement was led by Women's, where we had a good seasonal transition to cold weather categories across top, bottom, and outerwear. In Abercrombie, we continue to remain active in marketing, building on early fall denim and NFL campaigns with our recently announced collaboration with luxury retailer Kimo Sabe. Putting these two brands together was a great way to connect with new and existing customers, offering authentically crafted leather apparel and accessories, highlighting the western trend. Abercrombie Brands has inventory in the right place and a strong marketing plan heading into holiday. We've opened 30 new stores in the third quarter, aiming for a total of 36 this year. We remain focused on bringing the brand back to growth by diligently executing the playbook that has delivered a double-digit CAGR on sales from 2019 on strong double-digit AUR improvement over that time. This holiday, you'll see a lot of what Abercrombie is known for: fashion, comfort, and authenticity. And you'll continue to see it expressed through newness across categories. With this combination of investment across product, voice, and experience, we are aiming for Abercrombie brands to be approximately flat in the fourth quarter on net sales against a record in Q4 last year. We're excited to see that milestone within reach. In Hollister, we saw exceptional growth trends continue with 16% net sales growth in the third quarter. Comparable sales were up 15% on continued strong cross-channel traffic. Both men's and women's contributed to growth in the quarter, and we saw balance across categories. Consistent with our READ and REACT model, we've been keeping inventory tight while continuing to flow in newness, allowing for AUR improvement on lower promotions. Coming up with a very strong back-to-school season, I was proud of the team transition to fall and into holiday. Speaking of holiday, Hollister has some exciting campaigns and collaborations planned that will highlight some must-haves for the season. We kicked off a couple of weeks ago with six college athletes co-designing special items in our collegiate collection for football's rivalry week. And you might have seen yesterday's announcement with Taco Bell, where the brands collaborated on 90s and Y2K styles across graphics and fleece. We are just getting started. And importantly, our team has been reading and reacting and has the right product to support sales throughout the season. We're also enhancing the Hollister brand with investments in physical retail. We are on track to open 25 new stores this year while refreshing more than 35. The theme across our brand portfolio and company is consistent. We remain on offense. From both a brand and regional perspective, we are investing in marketing, stores, and talent to support sustainable long-term growth. We also continue to make opportunistic investments in digital, technology, and business infrastructure to improve the agility and speed needed to support our growing global business. These tech investments have the power to enhance the entire customer journey, especially when paired with AI. We recently deployed AI agents in customer service to improve the experience while driving scale and efficiency. And we're very excited about a new partnership we're kicking off this week with PayPal and Symbio, one of our technology partners in marketplace sales. That will enable agent-to-commerce and AI answer engines like Perplexity, where customers can seamlessly complete transactions directly within their AI conversation without even leaving the chat. As our business continues to evolve, we're making future-focused investments to deliver for customers and strengthen our operating model. And for us, that's really the story of 2025. More than three quarters in, I am proud of how the team has worked through this year, responding to the dynamic tariff environment and evolving with our customers. We are fully prepared for the holiday season, having used these past months and quarters to test and learn and build confidence in our assortment and brand positioning. We've also continued to keep inventory tight with the goal of reducing promotions and clearance selling to mitigate some portion of the tariff cost. With our holiday plans in place, we expect to deliver top-tier profitability and earnings per share, reflecting the consistency of our model. And with that, I'll hand it over to Robert. Robert J. Ball: Fran, and good morning, everyone. Recapping Q3, we delivered record net sales of $1.3 billion, up 7% to last year on a reported basis, at the high end of the range we provided in August. Comparable sales for the quarter were up 3%, and we saw a benefit of approximately 50 basis points from foreign currency. By region, net sales increased 7% in The Americas, 7% in EMEA, partially offset by a 6% decline in APAC. On a comparable sales basis, The Americas was up 4%, EMEA was up 2%, and APAC was down 12%. Across regions, the spread from net sales to comparable sales was driven by net new store openings and third-party channel performance. EMEA also benefited from favorable foreign currency. On the brands, Abercrombie brands' net sales declined 2% with comparable sales down 7%. Consistent with our third-quarter outlook, the sales decline was primarily due to lower AUR, but the AUR decline was less than the first half of the year. Hollister Brands' net sales grew 16% on comparable sales growth of 15%, with both unit growth and AUR improvement from lower promotions. The comp to net sales spread for Abercrombie brands in the quarter was driven by third-party channels along with net store openings. I'll cover the rest of our results on an adjusted non-GAAP basis. Operating margin of 12% of sales was at the top end of the outlook range we provided in August, delivering operating income of $155 million compared to $175 million last year. Adjusted EBITDA margin for the quarter was 15% of sales on adjusted EBITDA of $194 million compared to $219 million last year. The 280 basis point decline in operating margin from Q3 2024 was driven primarily by 210 basis points of tariff expense included in the cost of sales. In addition, as we forecasted in August, third-quarter marketing was up 100 basis points from the prior year. This was partially offset by leverage in general and administrative expense on lower payroll and incentive compensation. The tax rate for the quarter was below our outlook at 29%, driven by outperformance to expectations in EMEA. Net income per diluted share was above our outlook at $2.36 compared to $2.50 last year. Moving to the balance sheet, we exited the quarter with cash and cash equivalents of $606 million and liquidity of approximately $1.06 billion. We also ended the quarter with marketable securities of approximately $25 million. For the quarter, we repurchased $100 million worth of shares, ending the quarter with $950 million remaining on our current share repurchase authorization. Year to date, we repurchased $350 million in shares, totaling 9% of shares outstanding at the beginning of the year. We ended the third quarter in a clean current inventory position with costs up 5% and units up around 1%, and have seen freight and other unit cost mix normalize. Shifting to the outlook, we entered the fourth quarter with momentum, and we are narrowing to the upper end of the full-year sales expectations we provided in August. We continue to reflect tariffs and mitigation, consistent with our second-quarter call commentary, and the team continues to find cost efficiencies through vendor discussions as we plan for 2026. For the full year, we now expect net sales growth to be in the range of 6% to 7% from $4.95 billion in 2024. We've narrowed the range to reflect third-quarter performance and expected fourth-quarter sales. We currently anticipate 60 basis points of favorable foreign currency in the outlook. We continue to expect full-year GAAP operating margin in the range of 13% to 13.5%. As a reminder, this range includes the impact of the $38.6 million benefit from litigation settlement, or around 70 basis points of sales. Also, the assumed tariffs included in the operating margin carry a cost impact of around $90 million for 2025, or 170 basis points of sales. We are forecasting a tax rate around 30%. For earnings per share, we expect diluted weighted average shares of around 48 million, which incorporates the anticipated impact of 2025 share repurchases. Combined with the tax rate, we expect net income per diluted share in the range of $10.20 to $10.50. For clarity, the $38.6 million benefit included in our outlook carries a favorable impact of $0.59 per share. For capital allocation, we continue to expect capital expenditures of approximately $225 million. On stores, we continue to expect to deliver around 100 new experiences, including 60 new stores and 40 rightsizes or remodels. We also expect to be net store openers with our 60 new stores outpacing around 20 anticipated closures. At the current sales and operating margin outlook, we are targeting around $450 million in share repurchases for the year, subject to business performance, share price, and market conditions. For 2025, we expect net sales to be up 4% to 6% from the Q4 2024 level of $1.6 billion. We expect operating margin to be around 14%. We continue to expect lower cost of goods sold from freight at around 150 basis points of sales for the quarter. We also continue to expect $60 million of tariff impact net of mitigation efforts, or around 360 basis points. Operating expense will be around last year as a percentage of sales. We see opportunities to incrementally invest in marketing, but this will be largely offset by leverage in other areas. We expect a Q4 tax rate around 30%. We expect net income per diluted share in the range of $3.40 to $3.70, with diluted weighted average shares expected to be around 47 million, including the anticipated impact of around $100 million in share repurchases for the quarter. To close things out, we entered the fourth quarter ready to compete, with inventory aligned with trend and the right composition. We have great momentum, having delivered against expectations these past three quarters on both top and bottom lines. Our brands are in great shape, with Abercrombie brands making sequential improvement and Hollister brands taking share with impressive growth. We remain on the offense, investing in marketing through key brand collaborations and partnerships, and with store expansion and digital enhancements that enable us to win in the long term. We look forward to a great holiday selling season, and we thank our teams around the globe for putting us in reach of record sales for fiscal 2025. And with that, operator, we are ready for questions. Operator: Thank you. Our first question comes from Dana Telsey with Telsey Advisory Group. Your line is open. Dana Telsey: Hi. Good morning, everyone, and so nice to see the sequential progress. Congratulations. Fran, as you think about the Abercrombie brand and the plan it's tracking to, what did you see by category, men's and women's? Does it differ by channel? How are you seeing the progress of the brand? And then just overall, international, any puts and takes on the different regions and countries. Thank you. Fran Horowitz: Sure. Hey, Dana. Good morning. So super excited about the results we just put up for the third quarter. I mean, total company twelfth consecutive quarter of growth, top line at 7%, comps at 3%. So the Abercrombie brand specifically continues to be strong. This is evidenced by a few things. Our traffic is positive. Our customer file continues to grow. We're seeing nice engagement in our digital and stores channels. Excited about where we're headed for the fourth quarter. The team has been busy at work all year, testing and learning and really reacting to what's happening. Heading into the fourth quarter, well inventoried in denim, fleece, and sweaters, very strong categories for us. As I mentioned also, 30 new stores to date, six more opening up this quarter. So we are fully prepared to compete for the fourth quarter. Robert J. Ball: Yes. Dana, I'll jump in here on the international side. So obviously, we continue to be really excited about the opportunities that we see for EMEA. We have invested in this region. We've got the infrastructure in place to take our brands to the market. This quarter, when you think about puts and takes, UK results were really strong. That's where we've been investing most to improve awareness and service our customers there. We're still in pretty early innings here in Germany and more broadly in the other European countries. We don't really have much of a presence or awareness. So we would anticipate seeing some shorter-term fluctuations here as we ramp those brands. But obviously, we see that as an opportunity to go after. On the APAC side of the house, very similar dynamics here. The market is huge. Our business is relatively small. We're focused on building our brand awareness there and building a stronger presence. So again, not surprising us to see some shorter-term fluctuations. But overall, really confident in the global opportunities that we see for our brands. Obviously committed to getting closer to those customers, deploying our playbook, and ultimately taking these brands to market and growing this business longer term. Dana Telsey: Thank you. Operator: Thank you. Our next question comes from Corey Tarlowe with Jefferies. Your line is open. Corey Tarlowe: Great. Thanks and good morning. Fran, the Hollister momentum has been really impressive. And it seems like the back-to-school momentum is continuing into holiday based on what we're seeing in stores. So just curious on how you expect to continue to build on that momentum as we look ahead and into 2026? Fran Horowitz: Hey, Corey. Good morning. Yes. Wow. What a year we're having with Hollister. Congrats to that entire team. Super excited to grow the business another 16% on last year's 14%, the tenth consecutive quarter of growth. We are seeing balanced growth, Corey, across genders, across categories. We're seeing our AUR growing on lower discounts. The customer file is growing. Our traffic is strong. Most importantly, we're holding our inventory tight so we can really read and react to the business. We've got great momentum heading into holiday seasons. Honestly, there's almost every category is working, which is super, super exciting. I'm sure you saw the announcement yesterday. You know, the Taco Bell partnership for Cyber Monday, we're excited about. So lots of good things happening as we head into the fourth quarter. Corey Tarlowe: That's great. And then just a follow-up for Robert. How best to think about traffic versus ticket as we head into holiday? And then any comments on what that could mean for next year as well? Thanks so much. Robert J. Ball: Yeah. I mean, Corey, so across our brands, when we think about tickets, I guess, touching on tickets real quick, haven't taken any sort of meaningful tickets. We've been talking about this for a couple of quarters now through the holiday season. It's a nice interplay as you think about this holiday season, the best way to drive traffic and to engage with that consumer is going to be through pricing. So our tickets are pretty stable. We have started to think through and take tickets here post-holiday. So you'll start to see some ticket increases across the assortment here with spring deliveries. But the good news is the AURs are growing. We've made sequential improvement from spring into fall across actually both brands, Hollister and A&F. And we're seeing nice positive traffic. So traffic is growing across both Hollister and A&F and across channels, which is great to see. And AURs are headed in the right direction. So customer files are growing, customers are engaged, our teams are locked in with those customer bases. We've got the right inventory here in our stores to compete for the holiday. So we're excited to push through into Q4. Corey Tarlowe: Great. Thanks so much, and best of luck. Operator: Thank you. Next question comes from Matthew Boss with JPMorgan. Your line is open. Matthew Boss: Great, thanks. So Fran, at the Abercrombie brand, could you speak to the cadence of trends that you saw over the course of the third quarter? And elaborate on trends that you're seeing so far in November? And then Robert, could you speak to the composition of inventory across both brands and gross margin puts and takes to consider for the fourth quarter? Robert J. Ball: Yeah. So I'll jump in here. So we obviously had a really strong third quarter delivering our twelfth consecutive quarter of growth, reaching the top end of our guide. Abercrombie, obviously sequential improvement here. Hollister continues to grab share with that customer. And we're excited about the momentum that we're carrying into Q4. In terms of the outlook, I think we're being reasonable, responsible here. We're happy with how the quarter has started, but as you know, Matt, all the volumes ahead of us here and we're ready to compete. As it relates to the inventory side of the house, inventory is in good shape, up 5% year over year at cost, with tariffs being about 3% of that. Units are pretty clean here and in control at up 1%. You know how we operate. We're gonna keep units tight here and aligned with our forward growth expectations by brands. We didn't provide a brand breakout, but as you'd expect, Hollister units are up more than the A&F units. And again, brands are positioned to chase to close out the year. So we feel good about where we sit from an inventory standpoint. On the margin front, gross margin puts and takes here down about 260 basis points year over year in Q3. 210 basis points of that is tariffs. We did see a benefit from freight. It was a smallish benefit from freight and AUR. Then we had a couple of offsets from third-party channels and some inventory reserves to keep ourselves clean headed into holiday. So that's Q3. And then Q4, we'll see some of those themes continue, Matt. You'll see about 360 basis points of impact from tariffs from that roughly $60 million. And then the freight tailwind, as we've been talking about for the past couple of quarters, will continue here and you'll see about 150 basis points of tailwind here for Q4. And then you know how we operate from an AUR standpoint. We've been on this great multiyear journey of AUR growth here. We had a great holiday last season. So we're going to come into the fourth quarter assuming AURs hold. So assuming AUR is flat here as we think about the go forward. Matthew Boss: Great. Best of luck. Robert J. Ball: Thank you. Thanks. Operator: Thank you. Our next question comes from Marni Shapiro with The Retail Tracker. Your line is open. Marni Shapiro: Hey, guys. Congratulations on another great quarter. Best of luck for the holidays in case I forget. Fran Horowitz: Thank you. Marni Shapiro: Can you talk a little bit about the collaborations you've been doing, the NFL, the NCAA, but you also have, you know, Kimo Sabe. You did Crocs. I'm curious, are these all global collaborations or are these specific to The US? And if they're not global, will you do global? And as we think about the brands going forward into '26, I think these pops of excitement are fun. Are they bringing new customers into your store? And should we see an increased or similar cadence into '26? Fran Horowitz: Hey, Marni. Good morning. So, yeah, you know, the collabs are our goal with our collaborations, honestly, is a real authentic branding moment. You know we talk about this a lot. You know, we stay close to our customer and we listen to them, what's important to them, happening in their life moments. That's how we make these decisions to do these collaborations so they are planned, you know, accordingly. The NFL has been very exciting. Yes, it's definitely bringing in new customers. Our goal with that, with the partnership, was about brand awareness and customer acquisition. There's a big crossover with their fandom and our customer base. And we listen to the customer. They told us several years ago how important football fandom was to them, and we took that and tested our, you know, our way into it and have seen a nice success with it. Scott D. Lipesky: Kimo Sabe is another great example. Western was happening. Our consumer was responding to it. We went to an authority in the business and made a terrific collaboration. The Taco Bell one, we're super excited about for Cyber Monday. So as far as 2026 goes, we will continue to listen to our customer. We'll look for authentic moments to make sure that we stay close to them, and we'll continue on this journey. Scott D. Lipesky: Hey, Marni. It's Scott. Just to add on here. It really speaks to where the brands are today. Each brand is in such a strong position, which is enabling us to partner with other strong and great brands. So Fran said, it's a great way to authentically connect to our customers and lots more ahead, and it's been fun for the brands. Marni Shapiro: Fantastic. Thanks, guys. Operator: Thank you. Our next question comes from Alex Stratton with Morgan Stanley. Your line is open. Katie Delahunt: Hi, thank you so much. This is Katie Delahunt on for Alex Stratton. You know, just thinking about, you know, the Abercrombie banner. I know you've all talked about sales growth being about flat for the fourth quarter, but what are the timeline you're thinking about for return to sales growth and then even comp as well? Thank you. Robert J. Ball: Yeah. So, Katie, this it's Robert. Obviously, delivering sequential improvement here in Q3, that's important for us. Teams have been focused on that customer. We're seeing improved product execution. Inventory is clean. And as Fran mentioned, we're placing our bets here for the holiday here in sweaters, fleece, denim. So we're happy about where the brand sits heading into holiday. Marketing is resonating. New collaborations that we just talked about with Marni here. Earlier. Those are great brand moments, and they're driving traffic. Our customer file is growing. We've got strong engagement across both stores and DTC platforms here. So, we're excited about this holiday season. We're aiming to continue to progress here, hold that brand flat against last year's record. Which sets us up well for next year. Katie Delahunt: Got it. Thank you. Operator: Thank you. Our next question comes from Mauricio Serna with UBS. Your line is open. Mauricio Serna: Great. Good morning. Thanks for taking my questions. First, on the marketing front, could you elaborate a little bit more about what you're doing across each brand, you know, the plans for marketing this quarter as you mentioned in the guidance for Q4, that assumes that there's more investment happening. And then maybe on the Abercrombie brands performance in Q3, could you break down like how the comps reflected AUR versus unit or total sales that would be very helpful. Thank you. Robert J. Ball: Yeah. Mauricio, let me jump in here real quick. You know, obviously, not gonna share a ton in terms of our specific marketing plans. We've got some exciting collaborations that we have either have announced in terms of like Taco Bell and you'll see the campaigns kind of continue as we move through the holiday time period. It's been effective. Our traffic is up as we've mentioned a couple of times. Pretty intentional with our marketing here. We're obviously focused on brand building, driving customer engagement, and ultimately supporting both near term and long term. So it's not all just what are we gonna see this quarter, but we're really building these brands for the long-term growth. Obviously, looking at performance as we work to optimize that spend and where we see value, we're going to lean in. And we have two strong healthy brands both exactly where we want them to be. And so we're going to keep our foot on the gas here. As it relates to ANF Q3 performance, you heard us talk about comps there. The down 7%. AUR was sequentially improved, so we did see improvement there. So if you think about the KPIs and the puts and takes, we've seen traffic on the positive side AUR was still down, but sequentially improved here from the first half into the third quarter. And then we had a little bit of pressure here on conversion as well, but conversion also headed in the right direction. So nice to see improvements in conversion, improvements in AUR and continued engagement from our customers with positive traffic. Mauricio Serna: Got it. Thanks so much, and congratulations. Operator: Thanks, Mauricio. Thank you. Our next question comes from Rick Patel with Raymond James. Good morning and congrats on the progress. Rick Patel: Was hoping you could double click on the expectations around SG&A. I know marketing is going to increase, but you touched on being able to mitigate some of that pressure through other areas. So if you can expand on that, that would be great. And then second, just on comps, wondering if there's any variability in performance to flag in The US due to the weather or any regional differences. Thank you. Robert J. Ball: Yeah. So quick on the SG&A side of things. Yeah. We'll see a little bit of increased marketing investment year over year. We've obviously been leaning into this throughout the first part of the year. That will continue, but at a slightly slower clip here in Q4. Q4, obviously, with the sales growth, you're going to see some expense leverage on the G&A side of the house. We've been delivering that throughout the entire year. And given the midpoint of our guide, we wouldn't expect a ton of leverage or deleverage in total at the midpoint of that 4% to 6%. We'll see as we have the rest of the year, as we have all year, as we outperform on the top line, you might see some leverage roll through. But again, we're going to be balanced in our investment approach and where we see opportunities to continue to invest in this business for the longer term, we will. Nothing really to call out from a regional standpoint. You know, we've got a really broad store fleet. So weather in one area, it kind of offsets across the board. Might there be a day or a week here and there that start to see little blips based on weather events when you think about the broader quarter, it kind of all works itself out. And it's been pretty consistent for us across the regions. Rick Patel: Thank you. Operator: Thank you. Our next question comes from Janine Stichter with BTIG. Your line is open. Janine Stichter: Hi, good morning, and congrats on the progress. More question about Abercrombie. It sounds like a lot of the improvement sequentially was led by women's. Can you just elaborate on what's going on in the men's side? If I recall, the comparisons there maybe weren't challenging as what you had in the first half with Abercrombie, but just help us understand what's going on with that side of the business. Fran Horowitz: Hey, Janine. It's Fran. Good morning. Yeah, led by women's, but also seeing nice sequential improvement in men's as well. You know, again, inventories are clean. Excited about where we are for the fourth quarter. Team has been busy at work, testing and learning all season, so or all year, pardon me, heading into the fourth quarter to make sure inventories are where we want them to be. Focused on categories like denim, fleece, and sweaters. So we feel good about the fourth quarter, heading into a big week, right? Excited for seeing all the excitement out there for Black Friday and ready to compete. Janine Stichter: Perfect. And then maybe one for Robert just on the tariff. I think you said $60 million in Q4. Net of mitigation. Any initial thoughts on just how to think about that in the first half of next year as you proceed with more mitigation efforts? Robert J. Ball: Yeah. So we've talked quite a while, Janine, around, you know, our source footprint. We've been obviously at work at this for quite a long time starting way back in tariffs 1.0. We've got a really well-diversified sourcing footprint here. We source from over a dozen countries, which obviously gives us a benefit both from a cost negotiation standpoint as well as speed to market, which is obviously core to our model here. I think it's important for us to take a step back real quick and think about how we're entering this next chapter of tariffs. We're coming at this from a position of strength. We're coming off 15% operating margins last year. To go along with record net sales. The teams have obviously been active. We've got a proven playbook here. So they're leveraging the playbook. They're looking at country of origin footprint as well as finding expense efficiencies. And we've touched on this earlier, but while we haven't moved tickets broadly through the holiday, we are taking targeted price increases here for the spring, so that will start delivering here post-holiday. We've done all of that as we've been navigating 2025. We've delivered record sales for the first three quarters of the year. We're positioned to do the same for the fourth quarter. And we've continued to invest in this business and return cash to shareholders. So bought back $350 million shares year to date, on track to do another $100 million here in the fourth quarter. So we're doing all this all while delivering 13% to 13.5% operating margins. Despite this 170 basis points of tariff impact. So the company is strong. We feel like we're operating and executing at a high level. We'll detail a lot of the components out and the magnitude to some of this stuff in 2026 when we get into our next call. But suffice it to say that we're confident in our ability to navigate this environment. And obviously, our goal is to meaningfully offset these tariff headwinds longer term. Janine Stichter: Perfect. Thanks for the color and best of luck. Robert J. Ball: Yep. Thanks, Janine. Operator: Thank you. Again, to ask a question, please press 11. Our next question comes from Janet Joseph Kloppenburg with JJK Research Associates. Your line is open. Janet Joseph Kloppenburg: Hi, everybody. Congratulations on the upside. I wanted to ask a few questions. I'll give them to you right now. The tariff impact will be greater in the first quarter than the fourth quarter, Robert? I'm not sure on that. And the price increases, when do you expect those to be complete? Like, will we see a big bump in the first quarter and then you'll be done? Maybe you could talk to that cadence. And on cadence, Fran, I thought that the assortments at Abercrombie started to get better in mid-October and continued. And I'm wondering if you saw some response from the consumer on that, unless I'm wrong. And then the fourth question is just on promo levels. What you saw in the third quarter year over year or what you're thinking about for the fourth quarter. Thank you. Robert J. Ball: All right, Janet. Where do you want to start, Robert? Do you want to start and take the tariff one for time? Come back. Let's just keep the tariff conversation going here a little bit. So, okay. Okay. Haven't quantified anything related to 2026. But as you think about how this is gonna cadence out, Janet, you know, for the last that we would expect that a lot of our mitigation tactics, which we've been working at, you know, nine months here, those will start to take hold heading into 2026. So, the hope here and, you know, our confidence level and obviously the pricing adjustments that we've made, which I guess is your second question. Those will start to show up here with spring deliveries. So think late December and into January. You'll start to see those tickets go up. And that'll just kind of work through as the assortments and the newness flows through into the quarter. As you think about vendor negotiations and all those pieces and parts that will also start to impact the first quarter here in 2026. So expectation would be that we would see some relief off of that Q4 tariff headwind of 360 basis points. Fran Horowitz: Thank you. Robert J. Ball: From a promo and Janet Joseph Kloppenburg: Yeah. Promos. And then Fran can talk to the A&F assortments. Go ahead. Go ahead. Finish the promo. Robert J. Ball: Yeah. So from a promo standpoint, you know, we feel good about the cadence that we've been operating under. We've obviously got a track record here of pulling back on promotions and improving AURs here wherever we can. AURs did see sequential improvements from front half into back half across the brands. Hollister is continuing to grow units on lower discounting with higher AURs. So headed into the fourth quarter, we're confident in our promotional plans. We've got the flexibility and we've got the reactivity to adjust demand as we see it come through. We're looking to hold those AURs flat for Q4. And like we do always, we'll come in every day. We'll see if we can pull back on a day of promos here, go a little bit shallower there. But it's been a nice formula for us with this multiyear AUR growth, and we're just going to keep executing that playbook. Fran Horowitz: And then just real quick on the last piece of that question. So very excited to have announced that we made the progress that we committed to at the beginning of the year, that we're seeing sequential improvement in Abercrombie, and really across the board in categories. So we're heading into the fourth quarter. We committed to having clean inventories, and that's where we are. We feel really well positioned, Janet, for the fourth quarter. We are expecting to be or our goal is approximately flat for the fourth quarter. You know, that's on top of a record fourth quarter for last year. We're happy with the start. The customer is resilient. Our file is growing, as I've said before. Our traffic is positive, and we're ready to compete for the fourth quarter. Janet Joseph Kloppenburg: You're talking about A&F? Plan? Fran Horowitz: Listen, I'm talking total company, but yes, with A&F specifically. We committed to sequential improvement, and that's what we have delivered. With a goal of approximately being flat for the fourth quarter. Janet Joseph Kloppenburg: Do you feel like the challenges that faced in merchandising in the first half at A&F are now behind you? Fran Horowitz: Yeah. We committed to getting clean. You know, the opportunities and first half, which we talked about on both of those calls, were really the opportunity that the inventory was much more balanced between sale clearance and regular price. That was something that we didn't really have in 2024. That's what drove the reduced AUR. As Robert mentioned, we've made sequential improvement in the AUR as we continue to see the customer responding to the newer product. Operator: Thank you. There are no further questions at this time. I'd like to turn the call back over to Fran for any closing remarks. Fran Horowitz: All right. Thanks, everyone. Just wishing you all a happy holiday season, and we look forward to updating you soon. Operator: Thank you for your participation. You may now disconnect. Everyone, have a great day.
Operator: Listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch tone phone. To withdraw your question, please press star then 2. Please note this event is being recorded. At this time, I'd like to turn the floor over to Gregory McNiff. Investor Relations. Sir, please go ahead. Thank you. Gregory McNiff: Joining me on today's call are Cheryl P. Beranek, Clearfield's President and CEO, and Daniel R. Herzog, Clearfield's CFO. As a reminder, Clearfield, Inc. publishes a quarterly shareholder letter which provides an overview of the company's financial results, operational highlights, and future outlook. You can find both the shareholder letter and the earnings release on Clearfield's Relations website. After prepared remarks, we will open the floor for a question and answer session. Please note that during this call, management will be making remarks regarding future events and the future financial performance of the company. These remarks constitute forward-looking statements for purposes of the safe harbor provisions of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. It is important to also note that the company undertakes no obligation to update such statements except as required by law. The company cautions you to consider risk factors that could cause actual results to differ materially from those in the forward-looking statements contained in today's press release, shareholder letter, and on this conference call. The Risk Factors section in Clearfield's most recent Form 10-K filing with the Securities and Exchange Commission and its subsequent filings on Form 10-Q provide a description of these risks. Additionally, as announced on November 12, 2025, Clearfield, Inc. has sold its Nestor Cables business. Following the divestiture of Nestor, we are reporting only on the Clearfield segment. Beginning with this release, Clearfield is reflected as continuing operations, with Nestor classified as discontinuing operations and held for sale for fiscal 2025 and all prior periods on our financials. With that, I would like to turn the call over to Clearfield's President and CEO, Cheryl P. Beranek. Cheryl? Cheryl P. Beranek: Good morning, everyone. And thank you for joining us to discuss Clearfield's fourth quarter and full year fiscal 2025 results. I'll begin with a brief overview of the quarter, discuss our decision to divest the Nestor business, share updates on our long-term strategy, and then turn the call over to Dan for a summary of our financial performance and outlook for fiscal 2026. Fourth quarter net sales from Clearfield's continuing operations of $41.1 million were up 13% year over year. For the full year, Clearfield's continuing operations net sales grew 20% to $150 million, demonstrating solid execution as we continue to focus on growing within the industry and driving market share gains. After a thorough and comprehensive review of the NEF segment, we made the decision to divest the business. This move allows us to redeploy resources toward our core North American operations and higher return opportunities. Our acquisition of Nestor was focused on gaining access to a key technology, namely the ability to manufacture our own line of FieldShield cable, and we achieved our objective. We strengthened our vertical integration and Build America, Buy America compliance through the successful transfer of cable manufacturing technology into our US and Mexico facilities. However, expanding Nestor's business beyond Finland into the European market proved to be a lower margin opportunity. Despite our efforts to improve margins through process improvements and new product introductions, it resulted in a suboptimal use of capital. The transaction resulted in a $10.4 million noncash write-down in the fourth quarter with minimal cash impact. Importantly, the operational benefits from Nestor's integration remain embedded in our manufacturing platform. This divestiture sharpens our focus, improves our long-term margin profile, and better aligns resources with Clearfield's strategic priorities. Looking ahead, our focus remains on protecting what defines Clearfield: craftsmanship, reliability, and service while leveraging our core strength and expanding into areas where we can create the most value. We continue to execute on our Better Broadband and Beyond strategy through three core pillars: protecting our core community broadband business by ensuring that the broadband service providers who have long relied on Clearfield continue to have the products, service, and support they need to succeed; leveraging our market position into new applications and environments where fiber connectivity plays a growing role, including next-generation wireless networks from the metro core to the cell site; and expanding into adjacent markets by utilizing our core competencies to allow us to reach new customers and to strengthen our leadership in broadband fiber infrastructure. As hyperscalers rely on smaller ISPs to push part of their compute workloads closer to the edge, Clearfield's position with regional providers opens a new growth vehicle to the company. This disciplined approach positions Clearfield for measured growth as the market continues to recover. As part of this next phase, Clearfield will introduce two significant new product lines. In 2026, we will launch a complete line of splice cases, expanding our offering and deepening engagement with customers who operate in environments that require splicing. After extensive review and months of successful field demonstration, we believe this new solution represents the best in class. Following that product introduction, we will release a next-generation fiber management cassette, optimized for non-hyperscale data centers, a fast-growing market where Clearfield's modular design and innovation provide a unique advantage. These launches mark the start of a new generation of innovation as we extend our reach within and beyond traditional broadband markets. Another important element of our strategy is investing in sales development and expanding our distribution channels. We have enhanced our leadership team to support the new phase of growth. Anise Kanakam, our new Chief Commercial Officer, is integrating sales and marketing to align go-to-market strategy with product innovation. Mike Ward, who recently joined as our new Vice President of Broadband Sales, and Mark Hempel, who joined as Vice President of Distribution Channels and Strategic Alliances, bring deep industry experience and will strengthen our tier one and channel sales capabilities. Together, these leaders bring renewed focus, operational rigor, and energy to the organization, positioning Clearfield for the next chapter of growth. With respect to our distribution channels, our long-standing partners remain essential contributors to our success, connecting Clearfield Solutions to broadband service providers. Building on that strong foundation, we recently added Wiremasters as a distribution partner who has begun to distribute Clearfield's fiber optic connectivity and management products globally, with an emphasis on the defense and aerospace markets. And we plan to add a wireless-focused partner early in fiscal 2026, opening new opportunities in cellular backhaul and emerging edge applications. These efforts strengthen our access to new customer groups while maintaining close collaboration with new existing partners who continue to be key to our growth. I want to briefly comment on the BEAD program. We are pleased that 18 of the 52 submitted proposals have been approved by the NTIA. Fiber remains the overwhelming medium for delivering broadband based on the proposals submitted. We intend to vigorously pursue this opportunity and will keep you updated as we approach the deployment stage. Fiscal year 2025 was a transformational year for Clearfield, one defined by strategic focus, leadership investment, and a return to growth and profitability. As we enter fiscal 2026, we are executing with confidence on our Better Broadband and Beyond strategy, driving innovation across our core markets while expanding into adjacent opportunities that enhance long-term shareholder value. With that, I'll turn the call over to Daniel R. Herzog, who will review our fourth quarter and full year results and provide our outlook for fiscal 2026. Daniel R. Herzog: Thank you, Cheryl, and good morning, everyone. I will now review our fourth quarter results, beginning with sales. This quarter marks the first period in which Nestor's results are classified under discontinued operations on our income statement. As a result, the Clearfield segment now reflects our continuing operations, and all quarter, full year, and prior period comparisons are now provided on a Clearfield continuing operations only basis to ensure clarity. Fourth quarter net sales from Clearfield's continuing operations were $41.1 million, up 13% over the same period from $36.2 million in the prior year. Gross margin improved from 26.6% to 34.6%, which was driven by better manufacturing efficiencies and overhead absorption with higher volume. Net income per share from continuing operations was 13¢ in 2025, versus a loss of 1¢ per share in the comparable period last year. For the full fiscal year, net sales from continuing operations were $150.1 million, up 20% from $125.6 million in fiscal year 2024. Gross margin expanded from 20.6% to 33.7%, mainly as a result of better overhead absorption with higher volume, lower inventory reserve charges as a result of improved inventory utilization, along with increases in production efficiency from our continuous improvement programs. While we reported an overall loss per share for fiscal 2025 of 58¢, Nestor's discontinued operations and our impairment write-down of that business contributed a net loss of $1.03 per share. This was offset by net income per share of 45¢ from Clearfield's continuing operations, which compares to a net loss per share of 58¢ in the comparable period in fiscal 2024. These results underscore the strength of our continuing operations moving forward, which continue to demonstrate solid execution and share gains. We ended the quarter with approximately $166 million in cash and investments, up from $153 million in the prior year, reflecting continued strength in our balance sheet and disciplined operational execution. This financial position enables us to invest in innovation, product development, and market expansion programs that will drive long-term value creation. The company also invested $16.5 million in repurchasing 551,000 shares during the fiscal year. In addition, our board of directors has increased our share buyback authorization from $65 million to $85 million, providing us with $28.4 million available for additional repurchases when added to the $8.4 million repurchase amount remaining on September 30, 2025. For the full year fiscal 2026, we expect net sales from continuing operations in the range of $160 to $170 million. We expect growth to be driven by steady demand for fiber connectivity with continued strength across our large regional and MSO customers. We expect the late start to the BEAD program and the recent government shutdown to pressure investments both from private funding as well as government programs in our community broadband market early in the year. We expect operating expenses as a percentage of revenue to remain consistent with fiscal 2025 and earnings per share from continuing operations in the range of 48¢ to 62¢. For 2026, we anticipate net sales from continuing operations in the range of $30 million to $33 million, total operating expenses remain consistent with 2025, and net loss per share in the range of 8¢ to breakeven. The earnings per share ranges are based on the number of shares outstanding at the end of the fourth quarter and do not reflect potential share repurchases completed. And with that, we will open the call to your questions. Operator: We will now begin the question and answer session. Gregory McNiff: To ask a question, Operator: you may press star then 1 on your touch tone phone. If you are using a speaker phone, please pick up your handset before pressing the key. If at any time your question has been addressed, and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question today comes from Ryan Boyer Koontz with Needham and Co. Please go ahead. Ryan Boyer Koontz: Great. Thanks. Good morning. I wanted to ask about your comments about the shutdown. Obviously, it may be some impacts on BEAD here, but were there other programs, subsidy programs, or customer behaviors you could point to that might have impacted, you know, either revenue or bookings or your outlook for Q4? I'm sorry. Your fiscal Q1. Cheryl P. Beranek: Mhmm. Right. Yeah. Good morning, Ryan. We saw it in everything, you know, kind of across the board, probably, you know, A chem, probably the most effective. You know, not that it's going to diminish the amount of money available, but it did affect bookings, you know, in the fourth quarter that would then both because of our short lead times, both ship in the fourth quarter and lead into first. So it's, you know, an unfortunate circumstance and one of those things that, you know, I guess we all don't even realize how much government funding and government affect us. Ryan Boyer Koontz: Do you, Cheryl, do you have a kind of a timeline when you expect that to catch up to normal? I would think, maybe over the next few quarters? Or is it just a Cheryl P. Beranek: Yeah. We'll be back to normal by the second quarter as it relates to the government shutdown. So the government shutdown did affect, you know, bookings and our forecast for a soft first quarter into next year. But I don't expect it to affect the total year. So second quarter, we should be normalized. Ryan Boyer Koontz: Got it. And specifically there then within your reported fourth quarter, Community Broadband looked a little soft. I that's what you're pointing to there? In the Yeah. The Cheryl P. Beranek: Right. The government the community broadband, it was soft, I mean, in the fourth quarter. It's actually kind of flat over last year, which is really unusual. Even down a little bit over last year. Community broadband is part of was partly the government shutdown. I would say more affected over the course of the year by the delay in BEAD. You know, certainly, the smaller the service provider, the more the delay in BEAD has affected both their deployments and their planning. You know, their engineering dollars and their engineering availability, and then, you know, financing, setting aside money to deal with BEAD. And we even saw it in private investment as well. Kind of in that smaller space because, you know, community broadband is more than just the tier three operator. It's, you know, some of the private equity money that is, you know, being used at the smaller level. And we just saw money being set it was kind of sitting on the sidelines waiting for BEAD to figure out where it's going to be deployed. Because, you know, you we don't sometimes think about that where the BEAD dollars go affects where the private investment the timing of private investment because you want to leverage the money that or the fiber that's going into a BEAD network can be leveraged for, you know, a middle mile and other work elsewhere. So it does have a follow-on or a kind of a waterfall effect. So we're anxious to get the BEAD awards out. And while it won't the 26 yeah. I think we're going to see 26 have BEAD dollars. But the biggest impact of it is going to be private money coming back because BEAD is now actually finally figured out. Ryan Boyer Koontz: Got it. Helpful. And, Dan, on the gross margin outlook there relative to where you are in continuing operations. How do you think about broadly margins going forward? Is it purely a matter of scale at this point? And you expect some modest improvements in gross margin going forward with higher revenues? Daniel R. Herzog: Yep. That's exactly how to read that, Ryan. Obviously, volume dependent. So first quarter would be looking a little bit lighter. But, and scaling, with the revenue increases from there. Mhmm. Ryan Boyer Koontz: Got it. And, Cheryl, any thoughts about industry fiber supply right now? Is that coming up much of a concern? Have you heard that from your customers at all in terms of raw fiber? Unfortunately. Cheryl P. Beranek: Over and over. And then and then in every customer regardless of the size. So the data center glut of utilization of fiber is affecting Corning's allocation. And then it affects Corning's allocation to other service providers, which in turn, you know, will affect, you know, broadband deployments. So we're aggressively help both for our own sake as well as for our customer's sake. Sourcing all of and identifying equivalent fibers that can be approved in those networks. Ryan Boyer Koontz: Got it. Really helpful. That's all I've got for now. Thank you. Yeah. Operator: Mhmm. The next question comes from Scott Searle with Roth Capital. Please go ahead. Scott Searle: Hey, good morning. Thanks for taking the questions. Hey, maybe just a couple of quick calibration questions. Dan, I'm just wondering what Nestor was in September just to kind of look at our published numbers apples to apples. And then looking into December, could you give us a little bit of color in terms of the sequential outlook by the different customer classifications? It sounds like community broadband will be under a little bit of pressure. Given BEAD and government shutdowns, but I'd love to have a little bit of color on that front. And what you need in terms of turns to get to the lower end of the range and what the visibility is in the immediate outlook? Then I had a follow-up. Daniel R. Herzog: Yes, I'll take the first one there. Nestor finished their fourth quarter with $9.4 million in revenue. So with the Clearfield being $41.1 million. So that would have put us at $50.4 million roughly exactly. Scott Searle: Helpful. And then in terms of the December outlook, Cheryl P. Beranek: Mhmm. Yes. Community broadband is definitely a bit pressured as I indicated both from the government's and, you know, and the private money that goes around it. We continue to be extremely pleased with our work in the large regional group as well in the regional MSO markets. They now comprise about close to 40% of our business. And, you know, that really is a means of leveraging our existing sales channel in that, you know, the large regional and the regional cable operator, typically, and we'll have deployments in the same neighborhoods as the community broadband team. And so our work, our reputation, and our sales channel excuse me, in community broadband is what we're able to leverage for that MSO in large regional markets. Anyone knows our larger customers, than the community broadband team. Is, and it means we'll get some larger orders some opportunity to scale with it. So, with community broadband coming back, in fact, let me look through for a second. I mean, the MSOs were up for the year close to 40%. Large regionals for the year were up close to 60%. So with that momentum and with community broadband, hopefully, we anticipate coming back in the second quarter. We could have, you know, a really strong, bill season for next year. I just wanted to go back a little bit to the lack of fiber that Ryan brought up earlier. And that's one of the reasons that we're if people look at our long-term annual forecast, our annual forecast is guided by what we can see. That's part of our record reputation, as a company is to be, I wouldn't say conservative, but I would say deliberate about our forecast. And with the lack of fiber, being outside of our control, that could be one of the contributing factors of our long-term numbers. Scott Searle: Great. Thank you. And Cheryl, if I could, just to follow-up in terms of the annual outlook, starting the year slow, but it sounds like you start to see normalization in the second quarter. The math on the $160 to $170 million range implies kind of mid-forties through the rest of the year, so I assume that's kind of ramping. But I'm wondering what you're factoring into that forecast. Is it just normalization of the existing customer base and spending patterns? Much are you factoring in for BEAD? And if you got some new products, seem like they're kind of intriguing in terms of your next-gen splicing and data center. I'm wondering how they fit into the equation well. Cheryl P. Beranek: Right. We are not identifying a significant amount of revenue for new product introductions. Only a few million dollars because, typically, you know, you need a full especially for outside plant products, you need a full year for them to go through an outside weather cycle before you have a long-term commitment from, for, you know, high high-end revenue. We see high the new product splice case and really excited about the NextGen, cassette line. As being more significant revenue in '27. Scott Searle: Very good. And just in terms of how you're thinking about BEAD, in that numbers, in that $160 to $170 million? Definitely. Yeah. I would say the we're looking at, you know, probably Cheryl P. Beranek: less than $10 million, and that's going to be remember, they gotta build first with passing home, with kind of middle mile stuff and the actual construction of placing cabinets is probably gonna be in our fourth quarter, and that's one of the things that we have to remember for our numbers is that since our numbers end in September, we tend to miss some of the fall numbers, in the bill season. So as best with would you so next year's fourth quarter and first quarter will be significantly stronger than what we're seeing here. Scott Searle: Great. And Leslie, if I could, new products what does that do to your addressable market? You know, because ettes, I'm sure, is just extending your existing position. But is what does the data center do? And I'll get back in the queue. Cheryl P. Beranek: The next generation cassette line is all about new customers, as well as being, eventually, there'll be transformational back to our existing customers. So the, as we talked about the next center, to go after the non-hyperscale data center is a I use the word disciplined approach. Because we could go after hyperscalers, and we would lose. Because, you know, that's a high volume, low mix solution That's not the way Clearfield is designed. It's not the way our manufacturing lines are set up. We compete aggressively in a low volume, high mix world. And so data centers at the edge that push to the edge where we're gonna see our customers and smaller data centers picking up the compute power requirements, you know, from the big guys as they move out that's where we're really gonna have a significant opportunity. Because it's our space. It's a space in which that high volume manufactured doesn't work. You gotta be able to do a lot more you know, push and pull. And so the new data center cassette is gonna allow a lot of unique configurations inside of a particular nine-inch panel, and so that you can design by cassette. So you can expect to see that launched around BICSI in January, and it'll be fully on debut and on display in that January show. Scott Searle: Great. Thanks so much. I'll get back in the queue. Operator: As a reminder, if you would like to ask a question, The next question comes from Timothy Paul Savageaux with Northland Capital Markets. Please go ahead. Timothy Paul Savageaux: Hey, good morning. I want to stay on the BEAD theme here. With a couple of questions. First, we've seen some of your peers in the access system space talk about receipt of initial orders for BEAD. I think historically, maybe you have some correlation there on the cabinet side, but you know, it sounds like you're talking about an overall uptick in activity with these approvals. There was maybe some delay from shutdown. But can you talk to when you expect initial orders, or have you seen them yet for BEAD? Cheryl P. Beranek: Right. You know, because of our short lead time, you know, what we're seeing is quoting activity, but not necessarily, you know, shipping, you know, activity associated with it. You know, we know pretty much what customers have been identified as anticipating to be receiving money. And so that's freed up some planning dollars. I would expect we'll see but we I don't think we'll see significant revenue until the summer construction season, so third and fourth quarter. Timothy Paul Savageaux: Yeah. It makes sense. And just to get a sense of the magnitude of that opportunity, We had a recent you know, big round of approvals I think that was maybe $9 billion in the aggregate. And I think the total is beyond that. I think you mentioned it earlier. And you know, in terms of opportunity for Clearfield, total award value. I used to I think we used to talk about maybe four to 5% of that As addressable by the company. Does that remain the case? And you know, because just on that recent round of approvals that, you know, get you close to $500 million, which is, you know, pretty relative to what you're doing now. So are those metrics we can still think about? Cheryl P. Beranek: They absolutely are. So four to 5% of the cost of deployment are products that we offer. We increasingly are working to become that portfolio of supplier so that we would get, you know, the solutions of both being able to pass and to connect the home. The full line and next generation of splice cases is a part of that strategy, keeping our portfolio customers out away from our competition and being able to give those customers who are using our competition splice cases a reason to be able to come back, you know, to our generation and fully being, you know, integrated into our world. You know, every time we place a patch only cabinet, somebody else's splice case was being used, and then previously somebody else's vault. So completing out our product line is really a defensive, more aggressive move in order to put that together. You know, our competition likes to you know, Adtran said, you know, they're gonna get 25% of the BEAD market. Calix put numbers out there with big numbers. You know, we could tout $500 million, and that's accurate. But remember, this is a four to five-year build. So we want to make sure that we don't get everybody's you know, their eyes bigger than their stomach. You know, we think we're gonna get a big part of that share, but it would be irresponsible for me to give you a particular number. Timothy Paul Savageaux: Got it. Very much then. Good and helpful color. Cheryl P. Beranek: You're welcome. Operator: This concludes our question and answer session. I would like to turn the conference back over for any closing remarks. Cheryl P. Beranek: Yes. Well, thank you so much for the opportunity to, you know, to speak with you this morning. Our apologies that our numbers were delayed by a week, but you can understand with the divestiture of Nestor that we had a few numbers to be able to tie out and put together. We wish our friends at Nestor well. We think the opportunity to focus, you know, having been able to bring that infrastructure into our world, be able to transform Clearfield into a vertically integrated supply chain is really exciting for our potential gross margin and our ability to be that portfolio supplier is exciting. We like I said, we wish Nestor well. We think the transformation of Clearfield into being a bigger, broader supplier with a fully integrated line as we move forward will be opportunistic for our world. And '26 will be transformational putting us together for that long-term strategy plan of Better Broadband and Beyond. Thank you for our world. I'm grateful to you now at Thanksgiving time, and I wish you the best and the most joyous of Thanksgiving holidays. Enjoy your families. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Welcome, ladies and gentlemen, to Embecta Corp.'s fiscal Fourth Quarter 2025 Earnings Conference Call. At this time, participants are in a listen-only mode. Please note that this conference call is being recorded and a replay will be available on the company's website following the call. I would now like to hand the conference call over to your host today, Mr. Pravesh Khandelwal, Vice President of Investor Relations. Mr. Khandelwal, please go ahead. Pravesh Khandelwal: Thank you, operator. Good morning, everyone. And welcome to Embecta Corp.'s Fiscal Fourth Quarter 2025 Earnings Conference Call. The press release and slides to accompany today's call and webcast replay details are available on the Investor Relations section of the company website at www.embecta.com. With me today are Devdatt Kurdikar, Embecta's President and Chief Executive Officer, and Jacob P. Elguicze, our Chief Financial Officer. Before we begin, I would like to remind you that some of the matters discussed in the conference call will contain forward-looking statements regarding future events as outlined in our slides. Such statements are, in fact, forward-looking in nature, and are subject to risk and uncertainties, and actual events or results may differ materially. The factors that could cause actual results or events to differ materially include but are not limited to, factors referenced in our press release today, as well as our filings with the SEC which can be accessed on our website. In addition, we will discuss certain non-GAAP financial measures on this call, which should be considered a supplement to and not as a substitute for financial measures prepared in accordance with GAAP. Reconciliation of these non-GAAP measures to the comparable GAAP measures is included in our press release and conference call presentation. Our agenda for today's call is as follows. We will begin with an overview of Embecta's fiscal year 2025 performance and discuss progress across our strategic priorities. Jacob will then review the financial results for the fourth quarter and full year 2025 and share our preliminary thoughts for fiscal year 2026. Following these updates, we will open the call for questions. With that said, I would now like to turn the call over to our CEO, Devdatt Kurdikar. Devdatt Kurdikar: Good morning, and thank you for taking the time to join us. During fiscal year 2025, we achieved several key milestones. We made the decision to end our batch pump program and we executed a restructuring plan aimed at enhancing our profitability and free cash flow. We completed the implementation of our own ERP system and operationalized a new distribution network and shared service capabilities in Latin America and India, marking the completion of a major complex multiyear standard program. With this, 100% of our revenue now flows through our systems, and all TSAs and LSAs that we had at spin have been exited. We substantially completed our brand transition efforts in North America, with more than 95% of our US and Canadian revenue now converted to the brand. This was carefully managed to ensure continuity for customers and patients. With this foundation in place, we have now commenced the next phase of the initiative globally. Transition activities have already begun in certain international markets, and we expect to be significantly complete in most regions by the end of calendar year 2026. Together, the completion of these separation and stand-up activities have freed up capacity which we are now devoting to initiatives that we anticipate will help transition the company towards long-term sustainable growth. Supporting this goal, we advanced our GLP-1 strategy meaningfully during fiscal 2025. We are now collaborating with more than 30 pharmaceutical partners to co-package our pen needles with generic GLP-1 therapies. Several of these partners have already signed agreements and placed purchase orders. Our products are included in multiple GLP-1 managed regulatory submissions expected to lead to commercial launches. Our generic GLP-1 partners are anticipating launches in Canada, Brazil, and India during calendar year 2026. While we do not control the timing and content of the company's regulatory submissions, nor the timing of their launches upon receiving regulatory approval, we are encouraged by their momentum and remain ready to support our partners by providing them with our pen needles. In parallel, we are continuing to expand the availability of pen needles in consumer-friendly small packs for the Canadian and select European markets. These small packs are targeted specifically towards out-of-pocket customers like GLP-1 users. Taken together, we continue to believe that the use of our pen needles with GLP-1 represents at least a $100 million annual revenue opportunity by 2033. We anticipate that this will be a growing contributor to our results over the next several years. We also initiated new product development programs for market-appropriate syringes and pen needles aimed at strengthening and expanding our portfolio with the goal to maintain our leadership position in our core product categories. These programs are important because we believe they will allow us to expand our reach into market segments that we do not significantly participate in. We continue to prioritize financial discipline and debt reduction. Throughout the year, we generated approximately $182 million in free cash flow, and we paid down approximately $184 million of debt, exceeding our original fiscal year 2025 target of $110 million. With leverage now at 2.9 times net debt to adjusted EBITDA, we continue to create financial flexibility to invest in potential organic and inorganic opportunities that can reshape Embecta's long-term growth profile. In summary, fiscal year 2025 was a year of solid execution on multiple fronts, while outlining and initiating a new strategic direction for the company. From the standpoint of our financial results, we exceeded our previously provided fiscal year 2025 adjusted gross margin, adjusted operating margin, and adjusted EBITDA margin ranges, while our adjusted diluted earnings per share was at the top end of our previously provided guidance range. As we move into fiscal year 2026, we remain focused on the priorities and the long-term financial targets outlined at our 2025 analyst and investor day. Now let's review our revenue performance for the fourth quarter and full year. During 2025, Embecta generated $264 million in revenue, reflecting a 7.7% decline year-over-year on an as-reported basis, or a 10.4% decline on an adjusted constant currency basis. Within the US, revenue for the quarter totaled $142 million, reflecting a year-over-year decline of 15.2% on an adjusted constant currency basis. The year-over-year decline was primarily driven by an unfavorable comparison to the prior year fiscal fourth quarter, which benefited from additional distributor orders that occurred because of the then-looming US port strike totaling approximately $10 million, as well as the unwinding of the favorable order associated with the July 4 holiday, that positively impacted our 2025 results, totaling approximately $7 million. Additionally, year-over-year price in the US was unfavorable by approximately $7 million, primarily due to milestone payments made to a large US pharmacy customer. Turning to our international business, revenue for the fourth quarter totaled $122 million, representing an increase of 2.8% on a reported basis but a decline of 4% on an adjusted constant currency basis. This decline was anticipated and primarily due to lower volumes and year-over-year pricing headwinds within China. This was driven by heightened competitive intensity in China, fueled by the growing preference of local Chinese brands amidst an evolving US-China geopolitical and trade environment. This was partially offset by performance in other emerging markets. While from a product family perspective, during the quarter, adjusted constant currency pen needle revenue declined approximately 13.9%, syringes declined by approximately 4.5%, safety products grew approximately 3.7%, and contract manufacturing revenue grew approximately 8.5%. The year-over-year decline in pen needle revenue was driven by the same factors that impacted our US and international results. Turning to our syringe products, the decrease was primarily due to ongoing end-market volume declines within the US. This trend is not new and has persisted over the past several years and is consistent with the decrease in prescriptions for insulin vials as compared with insulin pens. This decline was partially offset by improved pricing. Finally, our safety products grew 3.7% primarily due to improved pricing. For the full year, Embecta generated adjusted revenues of approximately $1.08 billion, which represented a decline of 3.9% on an adjusted constant currency basis. US revenues totaled $579.1 million, which is a decrease of 4.6% on an adjusted constant currency basis. The year-over-year decline in the US was largely due to the aforementioned advanced distributor ordering that occurred in Q4 of fiscal 2024 associated with the potential port strike, as well as the continued end-market declines in syringe volumes. Meanwhile, international revenues totaled $501.3 million, which equated to a year-over-year adjusted constant currency decline of approximately 3.1%. The decline in international revenue was primarily due to lower revenue contribution from China. Turning to our product family revenue performance, globally, our pen needle revenue declined approximately 7.1%, totaling $784.1 million. Fiscal year 2025 pen needle revenue reflects the confluence of several transitory factors, including advanced distributor ordering in the prior year, lower China revenue, and pricing headwinds in certain markets. Turning to our syringe products, revenue grew year-over-year by 1.7%, primarily driven by improved pricing, while our safety products grew 6.3% due to a combination of improved pricing and volume increases. Lastly, contract manufacturing revenue grew approximately 53.9% as compared to the prior year. With that, let me turn the call over to Jacob P. Elguicze for him to review other financial highlights as well as to provide our preliminary financial guidance for fiscal year 2026. Jacob? Jacob P. Elguicze: Thank you, Devdatt, and good morning, everyone. Given the discussion that has already occurred regarding revenue, I will start my review of Embecta's fourth quarter financial performance at the gross profit line. GAAP gross profit and margin for 2025 totaled $158.5 million and 60%, respectively. This compared to $173.8 million and 60.7% in the prior year period. While on an adjusted basis, our Q4 2025 adjusted gross profit and margin totaled $159.5 million and 60.6%. This compared to $178.3 million and 61.4% in the prior year period. The year-over-year decline in adjusted gross profit and margin was primarily driven by the lower year-over-year volume and mix and price that Devdatt mentioned earlier, as well as the negative impact of foreign currency translation. These headwinds were partially offset by manufacturing cost improvement programs, the favorable impact of net changes in profit and inventory adjustments, and lower freight costs. Turning to GAAP operating income and margin, during the fourth quarter, they were $56.5 million and 21.4%. This compared to $26.2 million and 9.2% in the prior year period. While on an adjusted basis, our Q4 2025 adjusted operating income and margin totaled $66.7 million and 25.3%. This compared to $61.2 million and 21.1% in the prior year period. The year-over-year increase in adjusted operating income is primarily due to lower R&D expenses associated with the discontinuation of our insulin patch pump program, as well as lower year-over-year SG&A expenses due to the restructuring initiative we announced earlier this year coupled with no TSA expenses within the current year. This was partially offset by lower revenue and gross profit as compared to the prior year period. Turning to the bottom line, GAAP net income and earnings per diluted share were $26.4 million and $0.45 during 2025, as compared to $14.6 million and $0.25 in the prior year period. While on an adjusted basis, during 2025, net income and earnings per share were $29.4 million and $0.50 as compared to $25.9 million and $0.45 in the prior year period. The increase in year-over-year adjusted net income and diluted earnings per share is primarily due to the adjusted operating profit drivers I just discussed, as well as a reduction in interest expense. This was offset by an increase in our adjusted tax rate from approximately 9.5% in 2024 to approximately 25% in 2025. Lastly, from a P&L perspective, for 2025, our adjusted EBITDA and margin totaled approximately $89.9 million and 34.1%, as compared to $73 million and 25.2% in the prior year period. Turning to our full year results, GAAP gross profit and margin for fiscal 2025 totaled $676.8 million and 62.6%, respectively. This compared to $735.2 million and 65.5% in the prior year. While on an adjusted basis, our 2025 gross profit and margin totaled $687.3 million and 63.7%. This compared to $740.7 million and 65.7% in the prior year. The year-over-year decrease in adjusted gross profit and margin was primarily driven by lower year-over-year volume and mix, and an unfavorable year-over-year impact from profit and inventory. This was partially offset by manufacturing cost improvement programs. Turning to GAAP operating income and margin, during 2025, they were $242.1 million and 22.4%. This compared to $166.8 million and 14.9% in the prior year. While on an adjusted basis, our 2025 adjusted operating income and margin totaled $337.7 million and 31.3%. This compared to $296.9 million and 26.3% in the prior year period. Similar to the comments relating to the fourth quarter, the year-over-year increase in adjusted operating income and margin is due to similar factors that impacted the fourth quarter. Those being the lower R&D expenses associated with the discontinuation of our insulin patch pump program, as well as lower year-over-year SG&A expenses due to the restructuring initiative we announced earlier this year coupled with a reduction in TSA expenses. This was partially offset by lower revenue and gross profit as compared to the prior year. Turning to the bottom line, GAAP net income and earnings per diluted share were $95.4 million and $1.62 during fiscal 2025, which compared to $78.3 million and $1.34 in the prior year. While on an adjusted basis, net income and earnings per share were $173.9 million and $2.95 during fiscal 2025. This compared to $143.1 million and $2.45 in the prior year. Like my comments relating to the fourth quarter, the increase in year-over-year adjusted net income and diluted earnings per share is primarily due to the adjusted operating profit drivers I discussed, as well as lower year-over-year interest expense resulting from a reduction in outstanding borrowings under our term loan B facility as we continue to pay down debt. Somewhat offset by an increase in our adjusted tax rate from approximately 20% in 2024 to approximately 25% in 2025. Lastly, from a P&L perspective, during 2025, our adjusted EBITDA and margin totaled approximately $415.3 million and 38.5%. This compared to $353.4 million and 31.4% in the prior year. Turning to the balance sheet and cash flow, during fiscal year 2025, we generated approximately $182 million in free cash flow. Additionally, during the year, we repaid approximately $184 million of outstanding debt and ended 2025 with a net leverage level of approximately 2.9 times as defined under our credit facility agreement compared to our covenant requirement of below 4.75 times. And finally, we recently executed an agreement with a third party to sell certain intellectual property rights and long-lived assets associated with the discontinued patch pump program for $10 million. This transaction occurred subsequent to year-end and therefore had no impact on our fiscal fourth quarter results. That completes my prepared remarks on our fourth quarter full year 2025 results. Next, I'd like to discuss our preliminary 2026 financial guidance and certain underlying assumptions. Before I go into all the details surrounding our fiscal year 2026 guidance, let me remind you that in May 2025, at our Analyst and Investor Day, we laid out our long-range plan through fiscal year 2028. Those expectations included that our revenue growth CAGR would remain flattish on a constant currency basis from fiscal year 2026 through 2028, with modest declines of approximately 1% to 2% in core injection and contract manufacturing revenue over the LRP period, offset by contributions from new revenue streams, including GLP-1 opportunities and distributed product partnerships that were expected to build as we move through fiscal years 2026 through 2028. Additionally, the financial targets that we provided at our Analyst and Investor Day anticipated adjusted operating margin to be between 28-30% by fiscal 2028, as R&D expenses were expected to increase from 2025 levels as we support key value creation initiatives through 2028, while SG&A expenses were expected to remain flattish as compared to 2025 levels. Despite a dynamic geopolitical and trade backdrop, I'm pleased to say that we believe our initial fiscal 2026 financial guidance is well aligned with the expectations established in our long-range plan. Beginning with revenue, on an adjusted constant currency basis, we currently anticipate that our revenues will be flat to down 2% as compared to 2025 levels. At the high end of our constant currency revenue range, we have factored in modest volume declines within our core injection business, primarily related to syringe declines within the US, that reduced contract manufacturing revenues contributed to approximately 50 basis points of the decline, that pricing is relatively flat year-over-year, and that the contribution from new revenue streams contribute positively by approximately 100 basis points. While at the low end of our range, we are assuming that volumes within our core injection business contribute to approximately 150 basis points of the decline, that reduced contract manufacturing revenues contribute to approximately 50 basis points of the decline, that pricing is relatively flat year-over-year, and that the contribution from new revenue streams is negligible. Turning to our thoughts on FX, our initial guidance calls for a foreign currency tailwind of approximately 1.2% during 2026. This assumption is based on foreign exchange rates that were in existence in the early November time frame. Somewhat offsetting FX is an estimated 0.1 year-over-year headwind associated with the Italian payback measure, primarily driven by the favorable adjustment recognized in fiscal year 2025. On a combined basis, our as-reported revenue guidance calls for a range of between negative 0.9% to positive 1.1%, resulting in an initial revenue guide of between $1.071 billion and $1.093 billion. Turning to adjusted operating margin, our initial guidance range calls for a range of between 29-30%, or lower by approximately 180 basis points at the midpoint as compared to 2025 levels. The expected decline at the midpoint is due to two factors contributing equally. First, adjusted gross margin is expected to decline due to increased cannula costs. While in terms of tariffs, based on current information, we expect incremental tariffs to have a negligible impact as compared to the prior year. Second, we anticipate R&D expense to approximate 2% of revenue, as we continue to invest in the development of market-appropriate pen needles and syringes, and advance our efforts to qualify and onboard alternate cannula suppliers. SG&A as a percentage of revenue is expected to remain relatively consistent with fiscal 2025 levels. All totaled, our initial guidance range for adjusted operating margin aligns with the margin framework outlined in our Analyst and Investor Day and reflects our disciplined approach to balancing reinvestment for growth with sustained profitability as we advance through the next phase of our transformation. Moving to earnings, during 2026, our initial guidance calls for an adjusted diluted earnings per share range of between $2.80 and $3, and it's based on a weighted average diluted share amount of approximately 60 million shares. Our initial adjusted earnings per share range includes an assumption that during 2026, we will repay approximately $150 million in debt and that our annual net interest expense will be approximately $93 million. While from a tax perspective, our initial adjusted earnings per share range assumes that our adjusted tax rate will be approximately 23% as compared to approximately 25% in fiscal year 2025 due to tax planning initiatives we put in place, US tax reform, and lower interest expense. Before I turn the call over to the operator, I'd like to highlight some considerations regarding the cadence of quarterly revenue during 2026. Moving forward, we may not provide any further commentary concerning the quarterly cadence of revenue on an ongoing basis. During fiscal year 2025, we generated approximately 48% of our adjusted revenue dollars during the first half of the year, with revenue split roughly evenly between the first and second fiscal quarters. During fiscal year 2026, we currently expect something similar to occur. Finally, during fiscal 2026, we expect to generate between $180 million and $200 million in free cash flow, which includes using approximately $20 million of cash for capital expenditures as well as approximately $30 million of cash on one-time spend primarily focused on advancing the global brand transition program, which remains on track to be substantially complete by the end of calendar year 2026. Importantly, the free cash flow that we expect to generate during fiscal year 2026 keeps us firmly on pace with the commitment we outlined at our Analyst and Investor Day to generate approximately $600 million of cumulative free cash flow from fiscal 2026 through fiscal 2028, and demonstrates the strength of our cash generation model and reinforces our confidence in achieving our long-term deleveraging and investment objectives. That completes my prepared remarks. At this time, I would like to turn the call over to the operator for questions. Operator? Operator: Thank you. Star one one on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. Our first question comes from the line of Marie Yoko Thibault with BTIG. Your line is now open. Marie Yoko Thibault: Good morning. Thanks for taking the questions. I wanted to start here and see if I could learn a little bit more about the GLP-1 partnership that you have. Can you just give us a little more detail on how many partners you have signed POs with? And anything on timing, how they might be ordering ahead of any approvals that they get on their side, just so we can sort of get a little more detail on how this might impact fiscal year 2026, of course, understanding that it's not being assumed in your revenue guidance. Devdatt Kurdikar: Yeah. Good morning, Marie. Thanks for the question. So we are in discussions with 30 plus potential GLP-1 entrants. And as you remember, this is all about co-packaging of pen needles. They are moving through various stages of discussions. You can imagine, you know, we go through quality agreements. We talk about MSAs. The orders that they provide, and a handful of them have already provided orders, and we've actually shipped product during 2025. Much of the volume, I would say, is for their own development purposes. As they work out, you know, what data they need beyond the data we supply for their regulatory submissions. Several of them have actually submitted to the regulatory authorities. Now they control the timing and the content of the submissions, and these submissions, we believe, include many of them will include specs that our product satisfies. Now, obviously, timing of commercial quantities is contingent on when they get approval, which one of them get approval, when they get approval. As you might have heard, publicly, generic GLP-1s could be available in calendar year 2026 in China, India, Brazil, and Canada. So there is obviously some uncertainty associated with timing, but overall, we are very, very pleased with the progress that we made in fiscal 2025. I mean, you might remember a year ago, we were just starting discussions, the team has made tremendous progress. And we continue to remain confident in the opportunity for us by 2033. in the assumptions that we had laid out or the estimates that we had laid out during the Analyst Day of this being, you know, over a $100 million opportunity. Jacob P. Elguicze: And Marie, this is Jake. I'll just jump in regarding guidance. I think the low end of our guidance range assumes really a negligible impact in terms of new revenue streams, mostly associated with GLP-1s. While from a high end of our revenue guidance range, we assume that new revenue streams, again, mostly coming from GLP-1 additional revenue, would contribute positively by about 1%. So we feel, we feel very good about where the, where this is all going. Devdatt mentioned that over the longer term that we feel that this can be at least a $100 million, you know, annual product revenue for Embecta through 2033. And we feel like we're well on our way towards achieving that. Marie Yoko Thibault: Okay. Thank you for that clarification, Jake, on the guidance as well. I guess I'll ask my follow-up here on China. You referred to it at the beginning, you know, some of the geopolitical tensions. What are you seeing on the ground in China in terms of consumer willingness to buy non-Chinese products? Of course, the product is made in China, but not a Chinese brand, I suppose. So any further updates on how that dynamic is playing out? And thanks for taking the questions. Devdatt Kurdikar: Yeah, Marie. On that, first, let me just say China in Q4 2025 performed very close or almost exactly in line with our expectations. So, you know, our thoughts when we formulated or revised our FY 2025 guidance incorporated a significant year-over-year decline, you know, partially because of the pressures that you mentioned, partially because of some inventory rebalancing. And Q4 2025 played out exactly as we thought it would. We've certainly taken steps to stabilize the situation, including reorganizing our sales team, we've actually introduced a more price-competitive pen needle which also has a lower manufacturing cost. Our guidance for 2026 does incorporate some expectations around headwind in 2026 compared to 2025. But our current expectation is that it's gonna be much less as compared to what we experienced in 2025. You know, as we all read in the press, I mean, the situation continues to evolve. But certainly, we are focused on controlling what we can control to stabilize the situation there as quickly as possible. Maybe just one final comment. Over the long term, you know, we still continue to believe that this is gonna be an important market for us. The market itself is growing mid-single digits. As you know, we have strong commercial and manufacturing infrastructure in China. You've heard us refer to the development of a market-appropriate pen needle. In fact, that pen needle is being developed by our team in China and I'm quite hopeful that it will serve a segment in China that we don't serve today. As well as you asked about GLP-1s earlier. You know, there are generic GLP-1 companies in China that have global aspirations that obviously we wanna serve as well. So over the long term, we still think it's gonna be an important market for us. And we'll find a way to weather through the evolving landscape over there. Operator: Thank you. Our next question comes from the line of Michael K. Polark with Wolfe Research. Your line is now open. Michael K. Polark: Hi. Good morning. Thank you for taking the questions. Two smaller ones for me. I'm interested in the cannula comments. You talked about increased costs there, and an effort to source alternate, alternative suppliers. So maybe can you just unpack that for us a little bit? Why are the costs up? And what does the opportunity set look like to find other sources to mitigate that creep? Thank you. Devdatt Kurdikar: Yeah. Good morning, Mike. Maybe I'll kick us off just as a reminder. So the entire supply of cannulas that we get is from our previous parent BD. And we have a cannula agreement with them to supply those cannulas that goes until 2032. So it's sole source from BD right now. And you can imagine, that we do want to have an alternate supplier for cannula. Our team has been working on this for the last couple of years. We've identified a couple of alternate cannula suppliers, and the team has made significant progress, including running some trials with alternate cannulas and doing some development work. So you know, I feel confident that certainly, you know, we have our current supply of cannula to 2032. But the team is making remarkable progress, and I feel reasonably confident that we are gonna have at least one alternate supplier here qualified certainly well before our current cannula agreement runs out. With that, obviously, that allows us, you know, an alternate supply with a different cost profile. Because since we became independent, the increase in cannula cost to us has been a significant contributor to the pressure we faced on gross margin. Jake, anything you'd like to add? Jacob P. Elguicze: Yeah. Devdatt, so just to maybe add a little bit more, you know, Devdatt had mentioned sort of what the margin profile of the company sort of looked like at the gross margin line kind of pre-spin as to sort of where we were during say 2025 and exiting 2025. And pre-spin, gross margins were sort of or right at spin, right around, let's call it, 67%. This year for 2025, our adjusted gross finished just under 64%. And really, Mike, the entirety of the decline over those years really came down to just increased cannula costs. It really is important for us to find an alternate provider, both from a risk mitigation standpoint and you never wanna be beholden to one sole source. And then also to drive some price decreases in the future as well, which we would certainly hope to do. In terms of our fiscal 2026 guidance in relation to 2025, we talked about our adjusted operating margins being down about 180 basis points at the midpoint compared to 2025 levels. About half of that is in the gross margin line entirely due to increased cannula costs, and the other half of that is just increases in terms of R&D expense as we, you know, need to make some investments in order to come to market with an alternate cannula provider as well as some of those market-appropriate low-cost products for pen needles and syringes to service some of the emerging markets. Michael K. Polark: Helpful color. For the follow-up, I wanted to ask on one of the comments about the fourth quarter performance. I heard, price unfavorable year on year in the US, $7 million. Mention of milestone payments to a large US pharmacy customer. I just wanna make sure I understand what that is, what you're saying there. The word milestone specifically tripped me up. So if you can add any color on that dynamic, I'd appreciate it. Thank you. Devdatt Kurdikar: Yeah. Mike, I'm happy to. Obviously, I won't talk about this specific contract, but you know, our contracts with the US change, you know, there is a rebate level. Right? There are sometimes marketing spend items that we contribute to marketing of our products. And finally, on achievement of certain volume levels typically, there is an additional payment, and we often refer to them as milestone payments. At the end of the day, it all comes down to price. But depending upon the timing of the payments, it can lead to, you know, year-over-year unfavorability or favorability during the course of a quarter. Operator: Thank you. Our next question comes from the line of Anthony Charles Petrone with Mizuho Americas. Your line is now open. Anthony Charles Petrone: Thanks, and good morning, everyone. Happy early Thanksgiving here to everyone in the team's family. Maybe start on GLP-1 and the generic contracting phase. I'm wondering, Devdatt, and or Jake, if you could talk a little bit about how those contracts are gonna be structured here. So typically, when we have, you know, drug-device combination solutions, you're in the clinical phase. But if you get to market, you know, essentially get written into the drug master file and the instructions for use, and that can be a multiyear contract. So how does contracting work with the generic GLP-1 providers in the clinical development phase, and what will those look like once we get with success to a commercial phase? How long will they be? Will there be minimum quantities baked in? How do the economics work over, let's say, a medium-term contract? Then I'll have a couple of follow-ups. Thanks. Devdatt Kurdikar: Yeah. Anthony, so you know, I don't wanna get too far ahead of myself with respect to commercial quantities and commercial contracts until, you know, some of these generic manufacturers get approved. But let me at least provide additional color. Right? So as we go through the contracting phase, you can imagine the early discussions and the initial discussions. We get NDAs in place. We get qualified as a vendor in our system that includes providing some data on our product from a quality standpoint, from a regulatory standpoint. We have quality agreements in place. Then we start talking about contracting, get a contract complete. But the commercial contract, I think we'll talk about once some of these drugs are commercial. The quantities that they are ordering now are really to do their own development work. And you can imagine, the way this is all going to play out is we will be supplying bulk pen needles to these manufacturers. They are going to co-package our pen needles with their pen injector. And then they will be the ones to market that combined product to patients. They also, as I think you implied, are going to be responsible for the regulatory submission for the whole package. That includes the drug and the device. Certainly, we'll help with providing data but they are responsible for that submission and our pen needle will get specked in. Now, obviously, once you are part of that combination, that imparts a level of stickiness to the product. But beyond that, since they are going to be doing the co-packaging, you know, the co-packaging lines will be configured, if you will, to be accepting of our pen needles. And that provides some additional stickiness, if you will, to our product as part of that combined package. But perhaps most importantly, you know, I wanna point out something that might seem obvious. We have a long history in demonstrating reliability of supply. And if you are a generic manufacturer that's introducing a generic GLP-1 drug, I would think that you would want your pen needle supplier to be somebody you can depend upon and has that generic has that long demonstrated reliability of supply, not to mention our pen needles are already approved in markets where you would expect generic GLP-1s to launch. With respect to profitability, what I would also say is that these are, as pointed out, bulk pen needles. We don't expect to spend any significant CapEx in meeting this demand, and so we would expect there to be, you know, some incremental margin drop through as compared to our corporate averages of gross margin. You know, obviously, I won't comment on pricing. Maybe one final comment. Because we've established these conversations now with generic drug companies, we are also expanding the conversation to work with them on potential supply of other devices that they may use. And I think on analyst day, I said, you know, the most sort of nearest adjacent device to us would be a pen injector. So I'm hopeful that supplying devices to generic drug companies for their generic GLP-1 drugs is just the start as we transition from, you know, pure injection delivery for insulin company to a broader-based medical supplies company. Hopefully, that was helpful, Anthony. Anthony Charles Petrone: No. Very helpful. And provide some color as we think about the, you know, next few years ahead. And then the follow-up here will just be on capital deployment. You mentioned a little bit of CapEx here, but the leverage ratios are coming down. You know, the company in the past has talked about potentially forging additional partnerships perhaps outside of GLP-1 or being a little bit more focused a little bit on tuck-in M&A. So just a little bit to take the temperature on capital deployment outside of GLP-1 and the CapEx needs immediately. Do you see any tuck-in M&A opportunities over the next couple of years? Thanks. Devdatt Kurdikar: Yeah. Thanks, Anthony. First, let me just say I'm very pleased with how our profitability metrics ended up. With respect to our guidance, as you saw, we sort of exceeded the top end of our gross margin, adjusted EBITDA margin, adjusted operating margin, and that really allowed us to pay down significantly more debt in 2025 and brought our net leverage down, as you pointed out, to 2.9. Our capital allocation plan, you know, remains unchanged from what I said on investor day. You know, we think $600 million in free cash flow over the two years. Most of that will go to debt pay down. We, you know, pay a dividend at this point. We are not considering changing that. And our highest priority still remains paying down debt. But as our leverage comes down, certainly, it's already below three and we drive it down further in 2026. We are very open to organic and inorganic investments. And so M&A by obviously, its very nature, is very opportunistic. We will continue to, you know, to be alert and aware if such an opportunity arises. And we feel that it is gonna be value accretive to our company and help transition the company towards long-term sustainable growth. We certainly will be ready to act on it. Anthony Charles Petrone: Thank you again. Operator: Thank you. Our next question comes from the line of Gracia Leydon Mahoney with Bank of America Securities. Your line is now open. Gracia Leydon Mahoney: Hey. This is Gracia on for Travis. Thanks for taking the questions. I just wanted to ask a follow-up on in your prepared remarks, you mentioned selling certain intellectual properties of $10 million associated with the patch pump subsequent to year-end. So just wondering if you could add any more details around this and what's baked into your assumptions moving forward that is associated with this? Devdatt Kurdikar: Yeah. Gracia, thanks for the question. Yeah. We did sell certain intellectual property and associated assets to a buyer for $10 million. We are pleased to be able to monetize these assets from the patch pump program that we discontinued about a year ago. I'll let Jake comment on. This is a Q1 event really for 2026 for us. But I'll let Jake comment on how you should expect to see that run through the financials. Jacob P. Elguicze: Yeah. So, obviously, Gracia, it'll obviously be an increase to cash from a guidance standpoint. This isn't going to impact our adjusted results that we provided guidance metrics for today. There'll be a gain most likely on the sale of these assets. And as a result of that, we're just going to normalize that for our adjusted operating margins or earnings per share. Gracia Leydon Mahoney: Great. Thank you. And then maybe just one follow-up on the pharmacy closures that you saw earlier this year, and then you had the stocking dynamic in for July 4 and ahead of the brand transition. So a lot of one-time benefits. Can you just speak to any more details on how you saw that play out in '25? And maybe if there's any sort of visibility on that into 2026 on how the pharmacy volumes are moving forward. Thanks. Devdatt Kurdikar: Yeah. So, you know, as you pointed out, earlier in the year, we had commented on, you know, plans to closure, store closures at a major US pharmacy chain. We don't sell directly to that pharmacy chain. We sell to a third-party distributor that also serves other customers. But I think as I said at that point, you know, our product is medically necessary. So what happens is if a chain if a store closes, patients will shift to other chains or the sources to procure product. And as expected, we saw strength at some other chain outlets. And we incorporated our thoughts around, you know, what the impact of that closures will be into our 2026 guidance. You know, in the guidance that Jake went through, he talked about, you know, a 100 basis point range in the volume assumptions. That includes our thoughts on what might happen with the US pharmacy volume as well. You know, maybe one just final point on how 2025 played out. You know, we had started the year with the original guidance. And actually, as the year played out, we did see what I'll say China year-over-year headwinds that were not incorporated in our original guidance. But actually, the year played out including the impact of store closures with us being within the range of our original guidance had it not been for China. So I think the store closures are playing out as we thought they would, patients will move to other outlets and will see strength, and we incorporated our thoughts in the 2026 guidance. Thanks, Gracia. Gracia Leydon Mahoney: Thank you so much. Operator: Thank you. And I'm currently showing no further questions at this time. I'd now like to hand the call back over to Devdatt Kurdikar for closing remarks. Devdatt Kurdikar: As we close the call, I just want to express my sincere gratitude to all my colleagues at the company around the world. Fiscal 2025 represented a meaningful milestone as we completed the first phase of our strategic roadmap, standing up our core systems and infrastructure needed for the next stage of growth. And despite a complex trade and geopolitical backdrop, we continue to perform well and strengthen our operational foundation. We enter fiscal 2026 confident in the direction of the company. Our focus remains clear: maintaining leadership in our core categories, advancing our innovation programs, and delivering strong profitability and cash flow in order to execute on the commitments we outlined at our 2025 analyst and investor day. Thank you for calling in for your interest in Embecta, and happy Thanksgiving all. Operator: This concludes today's conference. Thank you for your participation. You may now disconnect.
Dominic Blakemore: Good morning, and welcome to our full year results. 2025 was another great year for Compass. We delivered strong organic growth and margin progress with profit up nearly 12%. Cash conversion was also very good as we generated $2 billion of free cash flow for the first time. Net new business, the cornerstone of our growth was 4.5%, underpinned by strong new business wins and client retention of over 96%. This was the fourth consecutive year we've delivered net new growth within our 4% to 5% target range. This performance, together with a significant market opportunity, reinforces confidence in the sustainability of our growth algorithm and our ability to deliver long-term compounding shareholder returns. I'll talk more about this later. But before I do, first over to Petros to give you more details on the financials. Petros Parras: Thanks, Dominic. Good morning, everyone. We've made good progress across all our key metrics as we delivered profit growth ahead of revenue growth. Importantly, free cash flow was also strong, growing faster than profit. Let's start by looking at revenue growth. Net new business continues to be in the middle of our 4% to 5% target range with pricing and volume growth consistent with the first half of the year. With our disposal program now complete, acquisitions are contributing to growth. Operating profit increased nearly 12% to over $3.3 billion. Interest was $315 million, reflecting higher debt due to acquisitions. For fiscal year '26, we expect an interest charge of around $350 million, reflecting the purchase of Vermaat, subject to regulatory approval. As anticipated, our effective tax rate was 25.5%, and this is expected to be the rate in 2026. Importantly, earnings per share were up by just over 11% in constant currency. And turning to cash, CapEx was 3.3% of revenue. Consistent with our guidance, we expect CapEx to be around 3.5% of revenue this year. Working capital improved in the second half, in line with our normal seasonal profile and was broadly neutral for the year. We expect a similar profile in 2026. As a result of our strong cash management, free cash flow conversion improved to 88%. Turning to the regions. In North America, organic revenue increased by over 9%. Operating profit was up nearly 11%, reflecting margin progress. In International, organic revenue growth was nearly 8%. Operating margin was up 20 basis points to 6.1% as the region benefited from overhead leverage, resulting in strong profit growth of nearly 13%. Group organic revenue growth was nearly 9%, with the fourth quarter particularly strong as we benefited from increased catering and hospitality events across certain sectors. Excluding these one-off factors, our underlying Q4 growth was around 8%. We expect this to moderate further in 2026, reflecting a lower inflation. Group margin increased to 7.3% in the second half of 2025 with our unit margin now fully recovered. Looking forward, we are confident of further margin progress whilst balancing growth and investment. We see opportunities to improve margin in both regions and to leverage group overhead. We expect to continue to make incremental gains in North America as we continue to improve productivity across our MAP framework and better utilizing tech and data. In International, as you are aware, we've invested in sales and retention to drive higher net new business growth. We expect faster margin progress in this region as we leverage these investments and benefit from M&A synergies. Dominic will talk about this later. Turning to the balance sheet. Net debt-to-EBITDA was 1.4x. As you are aware, last year, we acquired high-quality businesses, including Dupont and 4Service to capitalize on attractive growth opportunities through further subsectorization. This year, we expect to complete Vermaat along with other bolt-on deals. As a result, leverage is likely to be above our target range in 2026, peaking at the half year. However, our capital allocation model remains unchanged, and we expect to deleverage in 2027 as the business grows and we deliver the M&A synergies. With our disposal program now complete, M&A is contributing to profit. Including Vermaat, we expect acquisitions to add around 2% to profit growth in 2026. Now turning to fiscal year '26 guidance. We expect operating profit growth of around 10% on a constant currency basis, driven by organic revenue growth around 7%, around 2% profit growth from M&A and ongoing margin improvement. Now back to Dominic. Dominic Blakemore: Thanks, Petros. As you've seen, the business continues to perform well and is in great shape. We're often asked, what's the secret to our success and continued market outperformance. There are 2 key factors. First, we have a unique sectorized business model, which is decentralized with many of our brands still led by the original founder owner entrepreneurs. This model, which was strengthened through M&A over many decades, is incredibly difficult to replicate. And second, we combine the advantages of this localized approach with the benefits of scale, particularly in food procurement and technology. In short, we combine the best of both worlds. We operate in a hugely attractive market with a significant runway for growth, which is continuing to expand. We're investing organically and in M&A to provide us with additional capabilities to accelerate sub-sectorization. For food services alone, our addressable market is worth around $360 billion, of which we have less than 15% market share. And in addition, we see further growth opportunities in targeted high-value support services, where we estimate the market could be worth at least $800 billion. It's worth remembering we're already one of the world's leading support services businesses, generating more than $6 billion of revenue. The business and industry segment of the food services market is worth around $130 billion on its own. You may think as the most outsourced sector, it would have one of the lowest growth rates. In fact, the opposite is true. This year, B&I is our best-performing sector with organic revenue up 11% and the highest net new business growth. We continue to invest in this hugely innovative and dynamic sector, increasing our addressable market by entering new subsectors or through flexible offers such as vending. Our experience in B&I bodes really well for the rest of the group. Our volumes are benefiting from increased participation in our restaurants as we deliver an even more attractive food proposition. The advantages of our business model mean we can provide a high-quality offer at a superior value compared to the high street. As a reminder, we typically don't pay many of the expenses that retailers do as we operate on client premises. We also leverage our procurement scale and have more menu flexibility, allowing us to change ingredients more easily to help mitigate inflation. Our clients also recognize the importance of food and often subsidize our offer. They are hosting more events on site and increasingly use food as a cultural glue and a key enabler for networking and team collaboration. Acquisitions enhance our capabilities and accelerate subsectorization. Targets are usually sourced locally and have been known to us for several years. We look for exceptional businesses with entrepreneurial teams and attractive returns. And the businesses we acquire benefit from continued autonomy under our decentralized model. We provide them with access to Foodbuy as well as global best practice sharing. Having completed many acquisitions over the years, we've established a proven track record of successful M&A. In vending and micro markets, we've been operating a rollout strategy of many small bolt-on deals in North America. Together with strong organic growth, Canteen has now grown revenues to over $4 billion. These acquisitions are hugely value accretive to Compass with returns typically above our cost of capital from year 1. We're also investing in GPOs and recently acquired Regency Purchasing in the U.K. As well as scale, we've benefited from their technology and systems, helping build out sectorization. Regency volumes have doubled since we bought the business with double-digit ROCE in year 2. And most recently, we acquired 4Service in the Nordics, accelerating access to the multi-tenant building subsector in particular. Integration is ahead of schedule, delivering high single-digit growth with financials ahead of our investment case. We've also recently agreed to acquire Vermaat, subject to regulatory approval, a truly exceptional premium food services provider with a market-leading presence in the Netherlands. Vermaat will further improve our ability to deliver tailored on-site concepts and innovative retail solutions as well as providing us with outstanding talent. Once approved, we expect Vermaat to be margin and EPS accretive to Compass in our first full year of ownership. As Petros said earlier, over recent years, we've invested in technology and data to support our sales processes, procurement functions and to drive operational efficiencies. We think of it as benefiting both growth and margin as well as automating some daily tasks for our colleagues. For example, we're optimizing every stage of the sales funnel by using improved processes and data. We now have more visibility of future gross new wins by more accurately tracking the size of the pipeline, our probability and win rates. We've increased the use of automation tools for bid writing to improve their quality and to reduce preparation time. Tech and data are also transforming the client and consumer experience. We have a strong competitive advantage in this space, having invested in digital for many years with around 1,600 people now working in this area alone. With hubs in the U.S., U.K., France and India, we share innovations and best practice across our businesses, leveraging our breadth and our scale. We're using AI to improve our customer proposition using proprietary analytical tools to optimize our product mix and pricing. This helps us to better match our offer to changing customer demand as well as benchmarking pricing in our sites with the local high street. And finally, when it comes to our frontline colleagues, we're increasingly using AI to automate day-to-day tasks such as recruitment. In the U.S., we streamlined our hiring process and reduced the number of recruiters. In Japan, we've implemented an AI chatbot for our frontline colleagues, which answers any queries they may have in seconds, delivering impressive productivity gains. In summary, 2025 has been another strong year for Compass as we continue to deliver on our growth algorithm. We expect to sustain this performance in the long term, delivering high single-digit profit growth with the building blocks being mid- to high single-digit organic revenue growth, ongoing margin progress and contributions from bolt-on M&A now that our disposal program is complete. For 2026, profit growth is expected to be even higher at around 10% as we benefit from the Vermaat acquisition. Now over to Q&A. The operator will share instructions on how to ask questions. [Operator Instructions] Operator, over to you. Operator: [Operator Instructions] Our first question comes from Jamie Rollo from Morgan Stanley. Jamie Rollo: Three questions, please. First of all, could you talk a bit about what drove that very strong fourth quarter for organic sales, about 9%. I think you said 1% was from sort of one-offs. Maybe talk a bit about what those were. I think we saw a similar thing a year ago and even the year before that, the sort of one-off benefits to keep happening. But also the 7% guidance looks quite conservative even in the context of an underlying sort of plus 8% exit rate. So how should we think about the sort of cadence of organic sales through the year? Secondly, again, it's a question on the guidance, but on the margin side, so 1% profit growth from underlying margins, about 7 basis points, again, looks a little bit conservative. I think for that alone adds about 5 basis points to the group because it's double-digit margin. So could you talk about the upside to margins? And also, how should we think about that 200 basis points gap between North America and International sort of closing, if at all? And then finally, you've given us sort of lots of the AI benefits to the business and your clients on Slide 24. Could you talk a bit about how you might mitigate against sort of the impact of job losses driven by AI on sort of office meal demand in general, please? Dominic Blakemore: Jamie, thanks for your questions. Let me hand over to Petros for the first 2 questions on run rate and margin guidance, then I'll pick up on the AI point. Petros Parras: We feel our Q4 underlying rate is about 8%, as you said. We had particularly strong volumes in B&I, Education and Sports & Leisure that we're pleased with. Some of this, we believe it's a onetime in nature. And practically, we have taken this in our guidance for '26. If you think about what has changed as we move to '26 versus '25, it's to do with inflation. We're seeing inflation slowing down a fraction faster than what we thought last year, end of the last year. Spot rate and inflation about 4% blended. We believe it's going to be close to 3%. And we mitigate part of this for our clients. So when you consider our guidance for next year, it assumes a lower rate of inflation within the 7%. It assumes a 4% to 5% corridor in a fifth consecutive year of delivering our strategy and a net positive contribution for volume. When it goes to margin, I think you give us too much credit of being able to forecast 7 basis points or 10 basis points on a going-forward basis. I think our approach there is profit has to grow faster than revenue, call it the 10 basis points on average. What is interesting is our unit profit margin has exceeded what used to be pre-COVID, which gives us sound financials within the units in operations. We benefited from overhead leverage, and we expect to make consistent margin progression going forward. We do not see a ceiling to it. You will continue to see international business to grow faster with some group overhead leverage and some marginal gains in North America. I'll take a pause, and I'll pass to Dominic. Dominic Blakemore: Very good. Thank you, Petros. Jamie, when it comes to AI, I think in summary, we see it as a net positive for the business. As you rightly say, we shared some examples today of where we're deploying data and AI within the business, most specifically around our growth processes where we think we can get better outcomes on the pipeline build, the preparation for meetings and the conversion into growth. So we're very, very excited about what we're seeing there. We're also very targeted around purchasing and the value we can derive from our purchasing processes and the efficiencies we can introduce for our frontline teams to enable them to dedicate more of their time to their consumer and their clients. When it comes more specifically to the question you raised around net employment numbers, I mean, first of all, just a reminder, B&I is our fastest-growing sector as a group and also both within North America and international. Over 50% of that growth is coming from first-time outsourcing, which is very exciting. And as you've heard Petros say, we had strong volumes in quarter 4 within B&I. So we think our B&I sector is in rude health right now. When it comes to AI, look, we're seeing new clients emerge, particularly on the West Coast, where we've got a number of smaller start-ups, which we are serving through our commissaries and SME type offer. We're seeing some of those scale into significant clients, and we're excited by that. When we talk to our clients in the technology sector, they're very focused on talent retention and attraction, particularly as they seek to get the right capabilities to be best placed with AI. And I think we have a very important role to play there in them helping address that. And then lastly, we're seeing new subsectors emerge like data centers. So with regard to data centers, there's an opportunity for remote feeding through the construction phase. And then once in operation, there's an opportunity for us to provide on-site services, either in the form of restaurants and cafeterias or micro markets. And of course, there's a whole range of different FM services that we're well placed to provide to them in an environment where those services are very highly valued. So right now, we are seeing it as an opportunity, both in terms of what it's bringing to our business and the opportunity it's providing within our client estate. Operator: We now take our next question from Kate Xiao from Bank of America. Kate Xiao: My first question is also on AI. I guess thanks for explaining all of the benefits. I guess, any way you could help us quantify the positive impact on the business, either on the revenue enhancement side or cost savings? Any kind of examples or quantification you could give there would be really helpful. And then my second question is on your secured new business, $3.8 billion. That's up 11% year-on-year, which is very, very encouraging. I guess, could you elaborate a little bit on this number? I think the definition is the new business wins over the past 12 months. So would some of the business already be in the FY '25 revenue number already? Or is it mostly the pipeline for FY '26 growth? Dominic Blakemore: Thank you, Kate, and welcome. I think this is your first call with us. When it comes to quantifying AI, look, we don't think we're in a place to do that right now. I think like many things we see, we see puts and takes that drive volumes and new business opportunity. At the moment, on the sort of volumes and new business side, as you heard me say, we think it's a net positive. And then with regard to the savings that we're generating within the business, I think what we're seeing most of all is an opportunity for greater effectiveness and the ability to redeploy our people's time on more value-creating opportunities. We're certainly seeing that within sales. And what would I say, maybe we're generating 15% to 20% time efficiency, which can be redirected into more value-creating preparation for meetings and bid preparation, for example. So that's really how we're thinking about it. It's how do we redeploy effort and time into the bigger opportunities. And then specifically on the new business ARO, yes, $3.8 billion. We're super pleased. We need to continue to grow that relentlessly year in, year out. Our pipelines look very attractive. More importantly, almost than the gross new business wins, our pipelines are growing at the rate we need to see them grow. You've seen us speak today to the increase in the market that has come by way of some of the acquisitions we've made, which opens the total addressable market up for us. So we've now got a market which is over $360 billion. That's what's really exciting. The more we can target sectors and subsectors of opportunity where our operating model is best placed to win, then the more sustainable we believe the growth is. As you heard Petros say, we're super excited that this is 4 years now reported within 4% to 5%. We're well placed to see another year of growth within the 4% to 5%. And our objective is to continue to build our TAM and our processes deploying AI such that we can sustain those growth rates and those retention rates over the long term and deliver within the growth algorithm that we've shared with you. As you rightly say, some of that business will have deployed in financial '25 and will be rolling into '26 on an annualized basis. Some of it will be yet to deploy in '26. And the odd contract would have been one which will deploy in future years as we've also witnessed in the past where we've got some business that comes online. So the correlation between new business won and the in the year benefit within that 4% to 5% range is rolling. But we're really pleased that we've delivered that 11% increase year-on-year, which gives us every confidence that we can sustain the 4% to 5% as the business scales and the absolute numbers get bigger. Operator: And our next question comes from Simon LeChipre from Jefferies. Simon LeChipre: Three as well, if I may. First of all, on the $3.8 billion new business wins, I'm not sure you mentioned the mix of FTO within this number. I think it was 48% by Q3. So keen to get an update on this. Secondly, on net new, just wondering if net new was also within the 4% to 5% range for the international region. And lastly, I mean, in the U.S., you mentioned some opportunities in data centers. But more broadly, do you believe you could benefit from different investment plan going on like the Infrastructure investments, CHIPS Act and so on. Just wondering if it's something relevant for you. Dominic Blakemore: Thank you, Simon. Yes, let me pick up on your third question, and then I'll hand the first 2 to Petros. Absolutely, we're super excited by investment in new -- all new forms of technology, and we see those as opportunities for us. So I obviously referenced data centers, but yes, semiconductor manufacturer where it's been onshore in particular, is presenting opportunities for us. We're seeing data centers all around the world as an area of opportunity for us. And particularly where we see the build of new energy technology, those present opportunities for us. So there are -- as we've always witnessed, there are new sectors and subsectors of business and industry that emerge at pace and scale. And we believe that we've got a range of offers that can play into those, which means we've always got what the client is looking for. What's really important is that we're spotting these trends. We're moving quickly, and we are building an offer that is compelling for the client in their needs. Petros? Petros Parras: On the $3.8 billion Dom referenced, it's growing 11%. FTO around 45%, which is very pleasing to see. If you go back to pre-COVID, it was about 1/3 of our source of new business wins, continues to be elevated, which plays back to the complexities of the clients and our ability to serve and solve some of the challenges. I would say it's broad-based and represents a fair share of our sectors. And as Dom referenced, particularly with B&I continue to have great momentum within this $3.8 billion. When it goes to net new international, let's take a step back here. And if you look at from 2019 all the way back, international was nearly flat. We have 4 years of consistent good growth. We have 4 years of elevated net new for this part of the business. And the most pleasing thing for us is retention. You look at retention, we used to be in the low 90s. We are mid-90s sustainably. We would like to do better as we move forward in international business. We have opportunities. If you look in North American business, retention, some of our international business, the more sectorized we become, the more GPOs we deploy the Compass full toolkit, we should be in a position to drive marginal gains in international business. But we recognized consistent and good growth, and we're working towards sustaining this good growth in international part of the business. Dominic Blakemore: Yes. I mean I would probably just add to that. If there's anything that pleases me most about the business, it's the performance of the international region. We've seen an acceleration in our net new and improvement in our retention. As Jamie pointed out earlier, there's still a couple of points difference between the margins of North America and International. We see an opportunity to close that gap over time. We think the North America margin will continue to nudge forward. We see an opportunity for the international margin to grow faster as we make margin-accretive acquisitions, as we move toward GPOs in each of the individual international geographies, we see a good opportunity on margin there. There's still a delta in retention between North America and international. We think we can close that gap too as we deploy our processes, and we're seeing consistent improvement. What's most important, though, is the sustainability and consistency of that. And we're starting to build a bit of a track record, as Petros said, over the last few years, and we need to sustain that going forward, and we're confident we can. Having said all of that, I'd also just like to remind us that the North America performance was extremely strong last year, and we're incredibly proud of that. We think that we have every reason to believe that, that's sustainable, too. Operator: And our next question will come from Jaafar Mestari from BNP Paribas. Jaafar Mestari: I have 3 questions, if that's okay. Firstly, because you've provided this all-in guidance, which includes M&A and Vermaat, just a couple of questions on this. One, what timing of the Vermaat consolidation have you assumed in the guidance? And two, how should we look at the $350 million net finance cost guidance in this context? Is it $300 million run rate until the Vermaat consolidation and then it's $350 million as you pay for it? Or does the financing that you have in place mean that it's $350 million regardless of the exact timing of the deal closing? And then more fundamentally, one of your competitors has announced they would be investing in sales force -- in their sales headcount in at least one large U.S. vertical because they signed so little. Another one of your competitors paid their sales team $25 million extra bonus because they signed so much this year. How do you keep and motivate your hunters? You've talked about the founders involvement. Could you give us some more color on the sales teams themselves who bring in $3.8 billion? How many are they? What sort of background? What sort of support do they have, how they run and how they paid? Dominic Blakemore: I'll speak to the question on our sales resource, and then I'll hand over to Petros for the first 2 questions around Vermaat. Look, I think the first thing to say is the consistency of our track record. You've seen us deliver the new business growth now globally across North America and international, as I said, over 4 years. We've got great line of sight of the fifth year. More importantly, we've been doing that in North America for certainly the 13 years I've been with the group and probably over 20 years. So there is a consistency to our process and execution that I think is critical to the strength of our performance. We've got longevity and tenure in many of the people who work with us. Our organization, as we talk about often, is designed around sectors and subsectors. So we have dedicated sellers for each of the offers that we provide to our clients. We have dedicated sellers who are focused on the first-time outsourcing opportunity. Often that's a longer sell. And so we are incentivizing them over multiyear rather than individual year's performances. I won't speak to the independent -- the individual reward structures, but we have processes that have worked for us repeatedly. Our pipeline looks out 1 and 3 years, and we're excited by that. When you speak about the different competitive pressures, again, having been around this business for a while now, I've seen the competitive pressures ebb and flow. I see no real difference today to that which we've experienced previously. I think it's really important that we keep doing what we're doing. And that starts with expanding the TAM so that we've got ever more opportunity, being relentlessly focused on what the pipelines look like 1, 2, 3 years out, being relentlessly focused on our retention and how we secure and preempt to minimize the retention risk. We've seen a consistent improvement in retention. We put that down to our SAG processes, our non-SAG processes, which we're getting more dedicated to all of the time. And actually, the use of data around consumer NPS and our client feedback on an anonymized basis is allowing us to make even better decisions around that. So we just remain relentlessly focused on doing what we're doing on sharing our best practices and scaling our teams. We're always adding sellers into the business to ensure we can continue to grow at scale. But what I come back to is how important it is to continue to expand the TAM to give us the marketplace to grow into. And again, elevating the conversation, we have a 15% global market share in an industry that's still 50% self-op. There's huge runway for all of us to grow into. Petros Parras: On Vermaat, just to remind everyone, it's still subject to regulatory clearance. We have taken an assumption on contribution as of the first quarter of '26. We have line of sight we are in the final stint of this being closed, and we remain very excited to welcome the Vermaat team within the Compass Group family. When it goes to the interest expense for next year, about $350 million. This assumes Vermaat including the numbers and a bit of [ in-field ] M&A that we'll continue to invest in the business as we move forward. Jaafar Mestari: So just to be clear, it's going to be $350 million regardless of that timing? Petros Parras: Yes. Jaafar Mestari: Can I have a short follow-up on this, please? What's your assessment of the EPS accretion of the deal? You said positive for this year because you're presumably closing it late in the year, but you immediately have that higher finance costs. It doesn't look like we can justify even a decimal upside to consensus EPS. But if we annualize this on the full year, what sort of accretion do you think this deal if everything happened at the same time, interest costs and consolidation, please? Petros Parras: I think in Dominic's script, I think we say it's going to be accretive on EPS and a full year of ownership. You have to appreciate depending on when this deal is going to close, there is a different contribution of profit vis-a-vis the interest cost, will be accretive to growth as it closes. And importantly, with the synergy cases as we go in delivering good growth and some synergies on the cost lines, we should be able to drive further EPS accretion on a year 2 and year 3 basis. Operator: Our next question will come from Leo Carrington from Citigroup. Leo Carrington: If I could ask 3 as well, please. Firstly, on the North America H2 margins, which were flat despite the organic growth. Is there anything to call out as weighing on the margins this year, possibly the $440 million of M&A spend -- anything there would be useful. Secondly, I do appreciate the focus of yours is on B&I today. But in health care, your U.S. peer on a big multisite contract. Is this part of an acceleration in outsourcing in North America healthcare segment that you can also see or something of a one-off? And then lastly, I was interested in the Slide 29 showing the guidance evolution pre post pandemic. What exactly do you attribute the improvement, the increase in like-for-like volume growth to that you expect to see? Dominic Blakemore: Okay. Thank you, Leo. Why don't I take your second and third question and then Petros can speak to North American margins. Look, first of all, yes, I mean, the health care sector remains incredibly exciting for us. It's one of the sectors with the most significant first-time outsourcing opportunity, both in North America and international. We are seeing contracts come out on a multisite, multiservice basis, which are first-time outsourcing opportunities. So whether we would call that an acceleration or it's the normal trend, I think we'll determine as we go. But there are some very exciting opportunities in the sector, and that's been the case both in North America and international. And I could say the same for higher ed as well. So look, our sectors remain vibrant. We see lots of opportunities, not just in B&I, but across all of the sectors and really informs our sort of confidence today in sustaining our net new growth algorithm and the ever-expanding TAM. And then when it comes to like-for-like volume growth, look, I think there's quite a few puts and takes that we could pull apart, whether it's sort of return to office over time and so forth. But I think the biggest single trend to me is the one that we sort of called out in the slides today. And that is, I think, the greater appreciation of the value that we offer relative to the high street. I'm very confident that the quality of what we offer is on a par. I think we've got some exceptional consumer offers now within our estate, but we're providing that to our consumers at a very, very significant discount to the high street. And through this period of elevated pricing, that delta has become ever more. We talked about why that is. Obviously, it's the fact that we typically aren't paying utilities on site. But I think our scale of purchasing is just so much greater than the high street competitor set. That provides advantage and our menu flexibility is so much greater. And I think therein lies a huge opportunity to create value for our consumer. That combined with the opportunity or the case where many of our clients are partially or fully subsidizing the offer. I think that's meant that we are capturing more people on our estate and they're having more daypart occasions with us. And I really do believe that, that is what is behind our successful volume growth. And I think you can see that in a number of our sectors. And then when you think more about where you've got the type of consumer that would be within the sort of Sports & Leisure, the event sector, I think we've got even better at retailing, understanding per capita spend, consumer trends. We've got data analytics businesses that are helping us drive an understanding of those. And we're working very closely with our clients because the clients see it such an important part of their hospitality performance to be able to drive that. And hence, we benefit from that, too. I think you see that in the Q4 volumes, where we have a positive calendar of events, we're also performing positively on volumes. Petros Parras: On North America, we're really pleased on what the business has achieved. If you really step back and you look at North America operating margin is fully recovered to pre-COVID. Within '25, there was noticeable margin progress as this business grows. I want to remind you, business is 65% bigger to pre-COVID and enjoying this elevated growth and still delivering margin progress is quite remarkable for our teams, I think. On a going-forward basis, we will expect still to do some marginal gains as we grow, more of an overhead leverage. And we remain positive on the trajectory of this business. If you're referring to the half 2 versus half 1, we made progress versus both halves of last year. And as we came to a fully normalized world on recovering the margin, there is some seasonality in there. North America has always been stronger margin in the first half to second half. Dominic Blakemore: Yes. I would add on margins as a group, I probably feel as confident as I've ever been that we will see steady, consistent incremental margin progress in North America and International. Why is that? Just remind ourselves of the portfolio work we did where we exited a number of the more volatile markets. I think we've got much more consistent business now. We've got a much more sustainable foundation and base, and I think we can grow from that consistently from here. So that's what's informing our confidence both in North America and International that we should see consistent, steady margin progression. Operator: Our next question will come from Estelle Weingrod from JPMorgan. Estelle Weingrod: I've got a first question on North America. You talked about the very good performance of B&I. Can you give us an update on other segments, in particular, higher education? Any indication on the full terms enrollment numbers? And the second question on Europe. Can you provide a bit more granularity on the underlying momentum? You mentioned B&I and Sports & Leisure. Can you be more specific perhaps on a country basis or at least any country you call out underpinning this solid momentum? And have you noticed or have you witnessed any signs of a softer macro in some countries in Europe, like in France impacting volumes? Dominic Blakemore: Petros, do you want to take the North American higher-ed question, and I'll speak to Europe. Petros Parras: So North America, as Dominic referenced, very strong B&I, low double-digit growth, broad-based across all subsectors. If you look in the rest of the sectors, we're in the high single-digit growth territory, which is quite pleasing. It's what we call broad-based growth. And actually, if you look at our sector footprint, we expect to be this way as we are fully sectorized and we're winning good businesses within every sector. When it comes to education, I think enrollments came in good, in line with our expectations, continues to have some good momentum in the education business as we move to the fiscal year '26 year. Dominic Blakemore: And with regard to Europe, yes, I mean, actually, Estelle, you spoke to it. We are 2/3 of B&I business in Europe. So for us to grow, we need to be seeing positive growth in B&I, which is the case. We've got a very exciting pipeline. We've won some really nice opportunities in the Nordic region, in France, in Germany, we continue to perform extremely well in Spain and in Turkey. So we've got a strong portfolio of countries that are all growing together. Importantly, and going back to the earlier conversation, what's really stepped up has been our retention performance in Europe. Again, if we compare it to the years that Petros described when we were sort of flatlining for growth, the real difference there is that 3 percentage point improvement in our retention rates, which we believe are sustainable. We've got very rigorous retention processes that we've trained out and we're managing through the region, and that gives us good confidence in momentum. We've got a very exciting pipeline for Europe. And I think the other feature is, for example, we've launched our Levy Sports & Leisure brand into Europe, and we're managing that across all of our international markets now actually. And we're seeing good momentum as we start to win our first accounts. Obviously, we talked about not in Europe, but the Australian Tennis Open, which was won last year. But also we're seeing our first ones in the sports areas in Europe, which is exciting. And then lastly, obviously, the acquisitions we've made 4Service in the Nordics and others are starting to give us access to new subsectors within B&I, which gives us even increased confidence on sustaining those growth rates in Europe. So look, we think that it's an ever-improving performance that we can expect in Europe, and we'll continue to nudge up within our net new growth range of 4% to 5%. On the macro point, sorry, at this point, we aren't seeing any degradation on our volumes from the macro, but we remain watchful. And look, I know there's some concern out there about are we likely to enter any recessionary conditions across the piece. I think a reminder, first of all, we're not seeing it. And then secondly, we do believe that the resiliency of this business can demonstrate itself in those times. First of all, our clients look for value and cost savings. And whenever there's been a tighter macro, we've seen an acceleration in first-time outsourcing and also in rebidding of contracts for more value. And I think we're very, very well placed there. And then secondly, if the consumer is looking for value in tougher times, then I think everything I said about what's driving the volume performance will stand us in incredibly good stead. So look, I think we feel well placed whatever may be ahead of us. Operator: The next question will come from Ivar Billfalk-Kellyfrom UBS. Ivar Billfalk-Kelly: You've mentioned FM a couple of times in passing on the calls, where it usually feels like we go several quarters without it being mentioned at all. Can this be an indication that it's a bigger focus going forward? And can you talk about the relative margin contribution of FM services compared to the traditional food service and the outlook for growth? Secondly, you're investing in M&A and GPOs in the U.K. You still don't have much in the way of GPOs in the rest of Europe. What would realistic time lines be for rollout of GPOs in your Continental European operations? And what's actually needed for them to be successful? And thirdly, on the health care in North America, as I understand, a lot of the U.S. health groups already have their own GPOs. And since GPOs are a key element of your offering, what is your relative positioning compared to your peers, given I understand the GPOs in health care actually like you to use them rather than your own procurement. Any comments there would be helpful. Dominic Blakemore: Thank you for those questions. Actually, really interesting and thoughtful. First of all, FM, yes, look, we're predominantly a food services group, 85% of our business is food. But look, that 15% that we deliver support services across a spectrum of different services in FM is $6 billion. That makes us the fifth or sixth biggest support services company globally. We also operate support services with great capability in many markets. We've quietly got on with that. It's been growth neutral. So it's been growing at par with our food service business and actually is also margin neutral, so on a par with our food services business. So it's a good business for us. Where we sell it alongside our food as a multiservice offer or an integrated offer, it can be very sticky with clients. Typically, we've seen it in the defense sector, the remote sector, the health care sector and increasingly within the education sector. Within B&I, it's often sold separately rather than as an integrated offer. But look, we think it's an attractive market that in a number of countries, we are well placed for. We quantified the market today within our slides $800 billion. It's very fragmented. So there's a long runway for opportunity for growth. We're clearly not prioritizing that over our food service business, but we will consistently execute. And we really just wanted to remind everyone today of the scale of that business and the capabilities that we offer. And that I think if you're very selective in the services you provide and where you work with clients, then it can be an attractive adjacency to food. On the M&A for GPOs, you're absolutely right. We've been building out our U.K. Foodbuy business very successfully over time. We gave some great examples today, particularly Regency. Our U.S. Foodbuy business continues to be incredibly accretive for us and an important part of our portfolio. We have a Foodbuy business in Canada, Australia and the U.K. We already operate GPOs today in some of our European markets. So we operate them in the Scandinavian area within Belgium. We haven't yet built those out in some of the other bigger individual countries. It is an area of focus for us. You asked what is the sort of recipe for success. Actually, when we take a step back, what enabled both the U.S. and the U.K. to build credible and scale Foodbuy offer was first acquiring the capabilities of a GPO and then bringing the Compass volumes into that GPO to get aggregate scale and then to franchise the capabilities and the services alongside the scale into the third-party market so that we can grow disproportionately with our own estate, our acquisitions and the third-party growth. And we think that really is the sort of the recipe for success in other markets, and it's one that you should expect to see us pursue over time. And then finally, with regard to the North American health care GPOs. Yes, we partner with many health care GPOs that operate for themselves across their own health care estate. Remember, they're typically buying pharmaceuticals, equipment, linen and other nonfood categories where they've got significant scale, actually bringing their food volumes into our significant food buying volumes can yield even more value for them. So we think there's a really interesting and exciting way to partner with the North American health care GPOs to give them more value and bring more volume into our model. Operator: We have time for one final question today. Neil Tyler from Rothschild. Neil Tyler: Just a couple of quick follow-ups actually to previous questions. Firstly, just touching on the last question around FM support services. In your prepared remarks, I may have misheard, but I think you mentioned that you would consider adding to those services through M&A. I just wanted to make sure I understood that correctly in isolated instances, obviously, but if you could clarify there. And then secondly, Dominic, going back to the point or the focus you put on the expanded addressable market, the additional sort of $40 billion or so. Can you just talk a little bit more about where that's come from? You mentioned it's come through the acquired expertise over the last 12 months or so. And are there opportunities to continue to replicate what's happened over the last 12 months through further M&A? Dominic Blakemore: Yes. Thank you, Neil. Look, on the first point, I think we'll consider tuck-in bolt-ons wherever appropriate within our portfolio to ensure that we've got the right offer for our clients and that we can continue to either defend our estate or to grow the TAM. And that would apply within bolt-ons within FM and Support Services as necessary. Separately, your question on the TAM, yes, I think it's been a really positive feature and one of the driving reasons for the M&A that we've done over recent years. If you think about 4Service, it's given us access to the multi-tenant market where previously we would seek to win business through our clients, we now partner with the real estate owners as they construct new facilities, which are multi-tenanted and multiservice. It's an exciting segment that we weren't previously as exposed to and didn't necessarily have the capabilities for. It's a trend in the Northern European countries, and it gives us the capabilities that we can build into other European markets. I think that's a great example. We've done a number of micro market acquisitions in the U.K. to build a canteen type micro market offer in the U.K. That comes first with technology and then by building a regional presence such that we can offer our clients national coverage with a technology-enabled solution. That's opened up the micro market and vending subsector in the U.K. to us where we previously didn't have the capability or range of services to deliver that, that's something that we feel we can replicate in other international countries, given the learnings that we've had in the U.S. and Canada, in particular. The HOFMANN acquisition gave us access through a high-quality frozen offer into SMEs where we can deliver in at a lesser scale, a consistently high-quality offer that can be frozen and used over time. That's an exciting part of the market that we previously didn't necessarily access. And with Vermaat, although not yet closed, they have an exciting joint program, which is a sort of technology-enabled delivered in solution, which, again, we can leverage and learn from. So I think all of the M&A, we talk about giving ourselves access to capability, both in terms of the business model and offer, but also the people running the businesses. And I think those are great examples of that and where we'll focus as we go forward. Operator: With this, I'd like to hand the call back over to Dominic Blakemore for closing remarks. Over to you, sir. Dominic Blakemore: I mean just quick to say thank you all for joining us today, and we look forward to hosting you with the first quarter results in February next year. In the meantime, wishing those of you a happy Thanksgiving or happy Christmas holidays. Operator: 6 Thank you. This concludes today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.
Operator: Good morning, and good evening, ladies and gentlemen. Thank you for standing by, and welcome to Tuya Inc.'s Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please be informed that today's conference is being recorded. I'll now turn the call over to your first speaker today, Ms. Regina Wang, Investor Relations Senior Manager of Tuya. Please go ahead. Regina Wang: Thank you, operator. Hello, everyone, and welcome to Tuya's Third Quarter 2025 Earnings Conference Call. Joining us today are Founder and CEO of Tuya, Mr. Jerry Wang; and our Co-Founder and CFO, Mr. Alex Yang. The third quarter 2025 financial results and website of today's conference call are available on our IR website at ir.tuya.com, and a replay will be posted shortly after our conclude. Before we continue, please note that our safe harbor statement in the earnings press release apply to today's call as we may make forward-looking statements. With that, let me now turn the call over to our Founder and CEO, Mr. Jerry Wang. Jerry will deliver his remarks in Chinese, which will be followed by a corresponding English translation. Jerry, please. Xueji Wang: [Interpreted] Hello, everyone. Thank you for joining Tuya's earnings call for the third quarter of 2025. In the third quarter, the external environment remains volatile, continuing the trend seen since the beginning of the year. The global consumer electronics industry experienced an uneven recovery with customer demand becoming more cautious in the ongoing macro uncertainties. In addition, the high base from the same period last year created added pressure on year-over-year growth. Against the backdrop, our total revenue for the quarter reached approximately USD 82.5 million, marking our ninth consecutive quarter of year-over-year growth and underscoring the strength of Tuya's business model. Gross margin remained above 48%. This result further reflects the resilience of our business structure and the steady improvements we have made in product mix and operating efficiency over recent quarters. In terms of profitability, supported by an improved gross margin profile, greater expense efficiency and sustained scale leverage, our non-GAAP net margin reached 24.4%, while GAAP net margin was 18.2%. Notably, GAAP net margin expanded by more than 23.6 percentage points year-over-year. Overall, while maintaining key investments in business development, we have continued to optimize our expense structure, enabling incremental revenue and gross profit to translate more effectively in operating profit. At the same time, on the strategic execution front, we continue to fully embrace AI and deepen its integration across our ecosystem. As of the end of Q3, smart devices equipped with AI capabilities accounts for 93.99% of total shipments, an increasement from the previous quarter, demonstrating that AI is swiftly becoming the default configuration from smart devices. On the user side, AI adoption is also scaling quickly. AI has clearly moved beyond single category features like AI voice to a broader spectrum of product categories. Tuya's AI agent service now handle 135 million daily interactions for global users, supporting diverse scenarios such as AI node, AI translate, AI health, AI energy, AI pet care, AI [ play ], AI gaming, AI secure [indiscernible] and AI robotics. AI continues to penetrate a broader range of daily devices and [ lab ] scenarios, laying the foundation for large-scale product innovation and long-term valuation creation. During the quarter, we also began global beta testing of our new AI agent app with Tuya ecosystem users, aligned with our Smart Life smart living mission, we are currently developing a universal AI life assistance for global users, which is scheduled for official release at the CES show in the United States in just over a month. Now let me turn the call over to our Co-Founder and CFO, Alex Yang, who will share more details about our financial performance and business progress. Yi Yang: Hello, everyone. This is Alex. I will now provide more details on the third quarter's results. Please note that all the figures are in U.S. dollar based and all the comparisons are year-over-year based. And we delivered a total revenue of approximately USD 82.5 million in the third quarter, representing a 1.1% year-over-year increase. Despite a strong comparison base last year and continued caution in external demand, we achieved our ninth consecutive quarter of year-over-year growth, underscoring our resilience and stability in our business. With the total revenue, our PaaS business delivered strong results, generating USD 59.2 million, a 2.4% year-over-year increase, driven primarily by our strategic focus on the customer demand and product optimization. In Q3, the number of PaaS premium customers reached 280, further strengthening our core customer base. In addition, fueled by growth in the cloud software products revenue, the SaaS and others business showed consistent expansion, generating USD 11.5 million this quarter, a 15.4% increase year-over-year. This momentum was driven by continued rise in installed devices and a high proportion of recurring revenues. Revenue from Smart Solutions reached USD 11.8 million during this quarter. We strategically scaled by lower efficiency projects and prioritize scalable high-value solutions such as AI energy management solution and spatial AI solution to further improve overall gross margin and cash recovery efficiency. From a regional perspective, in China market, AI Toy continued to show healthy growth in the third quarter. More than 50 customers, including brands, channel partners and solution providers, they launched products powered by Tuya and key product capabilities also continue to advance such as multimodal interactions, long-term memory and emotion expressions with several connectivity versions coming soon as well. These improvements further strengthened the foundation of expanding into new product categories and regional markets. In the European market, demand from AI-powered solutions such as AI cloud storage and AI energy saving solutions continue to rise. At the same time, we added several new industrial clients in the energy and HVAC sectors during this quarter. In Asia Pacific, deployment of Cube, the privatized platforms for several Southeast Asian telecom operators are scaling rapidly with additional cities entering the delivery phase. The Singapore HDB, Housing & Deployment Board of Singapore projects also progressed into implementation with the first bench of the hardware and software solutions delivered and installed in this quarter. In North America, AI-enabled products such as smart bird feeders continue to record healthy growth. The strong adoption validates the commercial potential of niche scenarios that integrates emotional values, frequent content interactions and long-term subscription model and underscores the structural growth opportunities for AI products in mature consumer markets. In summary, despite pressure in the global consumer environment, Tuya leveraged its diversified product portfolios and strong software capabilities to achieve a structural growth. Those trends further strengthen our resilience against external macro volatilities and uncertainties. Moving to gross margin. Our blended gross margin for Q3 in 2025 was 48.3%. Total gross profit reached approximately USD 39.8 million, representing a 6.1% year-over-year increase. This growth was primarily driven by concurrent improvements in both our revenue mix and cost structure. By segment, the PaaS gross margin rose to 48.8%, continued to upward trend from the second quarter of 2025. SaaS and others maintained a strong gross margin of 70.8%, remaining above 70% level. Smart Solutions posted a gross margin of 23.8%, slightly higher than last year's 23.5%. Overall, our Q3 performance in line with our expectations and continue to reinforce the profitability foundation at this stage. On the expense side, we continue to maintain prudent and disciplined financial management. Even as both our scale and profitability expanded, total operating expenses declined to $36 million. down 34.1% year-over-year. GAAP operating margins improved significantly to 4.6% and GAAP net margins increased 23.6 percentage points year-over-year to 18.2%, while ensuring that R&D investment in key AI initiatives and platform development remain intact, and we continue to exercise strategic cost control to balance growth quantity and profitability. On the cash flow front, operating net cash flow continued to grow steadily this quarter, reaching USD 30 million, a 25.7% increase year-over-year. Our cash collection cycles remain stable and cash flow quantity materially improved. At the end of the Q3, our net cash balance stayed above USD 1 billion, giving us ample flexibility to balance shareholders' returns, manage external uncertainties and support long-term strategic investment. Next, I'd like to briefly highlight some recent progress in our AI capabilities and developers ecosystem, which serves as a crucial foundation for Tuya long-term growth. At the end of the Q3, Tuya's platform had 1.62 million registered developers, representing a 23% year-over-year increase. AI adoptions across smart devices also continue to accelerate. Commercial AI developers have collectively created more than 12,000 AI agents on the Tuya platform, covering a broad range of smart products categories, including toys and pet products, electronic, home appliances, IP cameras and wearables. Meanwhile, we continue to deepen and strengthen our AI developer ecosystem, anchored by TuyaOS, TuyaOpen and the T-Series AI Developer Board. On the open source front, TuyaOpen has seen steady growth in both documentation and code engagement. Since the beginning of this year, the GitHub repository star count has increased by about 80%. To date, over 2.3 million lines of codes have been contributed to open source projects. Beyond the rise of the Tuya developer participation, the overall quality of the ecosystem is also improving significantly. In summary, despite the prevailing external uncertainties, we still demonstrate strong resilience and operational agility, achieving solid financial growth and impressive profitability, which steadily advancing the AI plus IoT developer ecosystem across our core business segments. Thank you, all. Operator. We can begin Q&A session right now. Operator: [Operator Instructions] Our first question comes from the line of Yang Liu from Morgan Stanley. Yang Liu: I have one question regarding the business outlook with more and more trade deals settling down in the international trade market, what is the business outlook going into fourth quarter this year, which is the peak season? And also, what is your early look for customers' demand going into 2026? Yi Yang: Thanks, Liu. I'd like to share 3 points. So the first one is that this year, we still see that with the kind of the softened demand on the growth side. And because of the uncertainties on the global macroeconomy situation this year. And so this year, the Q4, we'll see that the regular promotion season will be kind of the soften versus the last year. So we will keep a closing eye to review that while we already have the stable -- kind of the stable turns across multiple countries that whether the demand will be going to return steadily on December. So that will be the short term. And for 2026, what we see here is that because like Jerry shared earlier before, that all those kind of AI features and smartphone portfolios become more and more inevitable trend for the entire sector. So which means that more and more consumers are already starting to familiar with this type of products, they really become the beginning users of these type of things. And all the major brands and the players, manufacturers in industries are already starting to enter these sectors and bring that into their growth factors. So those type of trend will never stop. So in 2026, we'll have a very positive outlook about the growth -- keep growing the entire business sectors. And the third one I'd like to share is that by reviewing all the technology improvements in the past decade, and we review AI will be one of the booster that bring the IoT experience into next level because in the past, the smart home experience is majorly focused on the connectivities, some automation and control. But while coming out with the AI capabilities, the user experience will come to a next level to more friendly, more easy to use and more smart. And so that's why we decided to provide a new AI assistant for life, which connecting all the home scenarios and to ordinary people and have more people be able to enjoy the smart devices experience. So that will lower another bar for the entry user. So combine that 3 together, the short times, we will see that 2025, there is still some uncertainty and pressure on that. But it's become more and more inevitable and become a default options for major brands and players there, and we're trying to bring the bar lower for more users who are not become the smart devices user as well. So I think that will be the overall -- it's very positive in the long term and [ constant ] in short term. Operator: Our next question comes from the line of Timothy Zhao from Goldman Sachs. Timothy Zhao: Congrats on the solid results. I have 2 questions here. One is regarding the AI home agent that you just mentioned. Just wondering if you can share more color on the detailed specs and the use case of these AI agents that you are going to officially release at CES next month? And how do you think about the impact on the overall business of Tuya with this new product? Secondly, is about the AI overall impact on your PaaS and SaaS and smart solution business. Just wondering for example, for the segment growth this quarter, would you please break down in terms of by volume and by pricing? Has AI brought any positive impact on the overall pricing of your product and services and also the impact on the gross profit margin? Yi Yang: Okay. Thank you, Timothy. So the first one is that -- so we define this as AI assistant. So it's bigger than agent. And because we think that if we review the live scenarios, even only for home that you find that you have multiple things you want someone to help you with. So this is AI assistant come with multiple agents that can help you to do almost everything you need in a home. So that's the first one. That's how we design this new assistant. And the key value for the other part, we believe in 2 things. The first one is that while coming out with the adaptions of the GenAI app, including the GPT, including like the Gen-1, et cetera, you found that the AI can help you to do a lot of things, a lot of tasks on the software side. But there's no assistant focus on home. That's what you need for your home and how you want to taking care of the home. So for us is that we design the different type of agents and capabilities focus on those scenarios people want to interact and people want to have a better life quality or easier life experience in home. That's the first one. And the second one is that the key differentiation of this assistant among any generic assistant is that this assistant will naturally be able to interact with the physical scenarios through the hundreds of millions of the Powered by Tuya devices. So which means that we're trying to bring kind of science fiction to come true, like the JARVIS in Iron Man's house, every people appreciate that. Every people, I mean, admire that, but there is no that type of JARVIS yet. So we want to create that type of experience for the global people. So that's how we define the key features and value for the user side. And I think the -- what does it mean for the ordinary users. I think the key part is that right now, we found the smart devices is still kind of complicated. They become way more easier than 10 years before, but still kind of complicated to -- I mean, to learn to use, to interact with by many nonuser, I mean, for those beginners. So those bar is still there. But coming out through the assistant, so you don't have to learn to use the app anymore. And you don't even need -- you just need to know how to speak, right? Like how you can tell the housekeeper to do something, how to tell a servant to do something, it's same like the assistant will be able to take the orders and to do all those kind of complicated operation for you. So we believe that will lower the bar significantly to the -- for the new users for home. And right now, we see that while the penetration of even smart home is still in the low digits and by the entry bar, we'll be able to open more doors for those new users while they found that the smart devices will be accessible for them to use. So that's for the AI assistant part. And the second part -- second question is for the AI. And so first one is that this year, we consider the beginning year of the AI device. So we are very happy to see that finally, our education to the market, to the developers, to the customers are already starting to offer some feedback. So like the numbers we shared before, by end of the Q3, over 93% of the products we shipped this year already been turned on some AI capability. So which means that my customers, my developers are already very actively to try whatever AI features or capabilities they can provide through their devices, even their existing devices. So that's the first one. So we really have a lot of innovative developers trying to try the ideas and try to educate the end users and test end users' feedback. And we believe that will be a very, very typical starting point for any new technology adoption. And so we really have that kind of scale test field taking places. And the second one is that we still provide the AI seamlessly through our 3 business model. So including the PaaS, including the solution, including the SaaS, right now, we have different type of AI offering in different business model as well. So which means that for my customer side, on the procurement perspective, so they don't have to learn how they will be able to purchase something from Tuya differently. It's a similar like offering, but come with different features. And maybe come with a different pricing, maybe not. So for that part is that we try to open -- have almost all my customers defaultly be able to try AI -- try to bring AI into their existing products and solutions. And through that seamless integration into my existing business models, we believe that, that will help in 2 things. The first one is that coming out with a new feature set, any new feature set will bring new demand. So that will be able to speed up the penetration and adoption of the entire market. And we're looking forward to have the AI coming as a booster. And the second one is that with some really new feature set that we reprice that and that will improve our GPM as well. But we're looking forward to have the GPM impact coming very soon because it's still in the beginning. So we try to promote the market. We try to incubate the market in the beginning, but not running very aggressively on the profitability side on that type of niche sector. So that's the overall outlook, Timothy? Operator: Our next question comes from the line of Mingran Li from CICC. Mingran Li: Congrats on the solid results, and 2 questions from my side. First is that following adjustment of recent global tariff policy, could management share more color on the downstream order recovery progress in your overseas market, especially in North America? My second one is that could management share the latest progress on the AI technology, particularly in terms of commercialization? Yi Yang: Yes. So the first one is that a couple of weeks ago that we get a temporary 1-year terms between China and U.S., right? And so which means that all the merchants importers right now, they have stable cost levels at a specific timing. And so that will be the good things, at least we get some certainty. But the promotion for this year will be pretty locked in. So those kind of new terms will be able to impact for next year's demand. So we're looking forward to have that to be a positive impact. And right now, on the customers and importer side, they still kind of review, okay, what will be the tune for next year and they'd like to review what will be the turns of sell-throughs for this promotion season starting from this week, right? We have the Black Friday this week. So we're looking forward to have more feedback in December, like I described. And while people already know that what cost they're going to get for next year over a year and what will be the demand looks like and then how they set the [ teams ] for the new projects and the new sell-in reordering. So that's the first one. So still under review. And the second one is for the AI. I think that I already answered part of that to Timothy earlier for the earlier questions. So the first one is that right now, we're offering AI across almost all my categories. We have some generic AI capabilities, can work on anything. And we also have some differentiated vertical AI capability for specific type of the products. But all those kind of offerings are seamlessly integrated into my existing 3 services, the PaaS, the solution and the SaaS. That's the first one. And in this year, on the new device side, including the PaaS and solutions, we're really happy to see some breakthroughs into some new sectors like the toys, and we shared that earlier last quarter as well. So this will be 2, 3 new vertical categories come up with a large total addressable market size and that we didn't touch before. And the IoT never get be able to enter that sector. But coming out with AI, so right now, we'll open the door. And in this year only, we're running 3 quarters only, that's many of the key players in the industry, starting from China in the toy industry and already starting to profit with us. And in Q3, we already helped the customer to launch a lot of use cases to test the demand. And it turns out that the end users love it. And so I would say the trial sales for many of the customers works out. So we're looking forward to continue to improve the experience and also the customers starting to reordering and running a new type of promotion across its all sales channels to scale it. So that's why we see that the AI open new doors. So that's the second one. And the third one is that not only upgrades, kind of upgrades on existing categories and open new categories. So the third one we try to open is the 2C experience. So we're looking forward to using the new AI assistant to open all the new home users doors, especially for those ones who still don't have any smart devices, they still consider that type of devices will be kind of complicated for them. So we're using assistant to help them up. That's it. Operator: Our next question comes from the line of Matt Ma from Jefferies. Matt Ma: So I just have one question regarding smart solutions. So the smart solutions revenue declined by around 14% in third quarter. Just wondering what is the reason behind it? And then could management provide any growth outlook for the segment in 2026? And also any thoughts on product category expansion going forward? Yi Yang: Yes. So I think the first one is that in 2026, we're looking to have a better year versus 2025 because we should have less turbulence for the macroeconomy side on a global basis. And so like I described that the customers right now in many vertical sectors, the customers already think that the AI features or AIoT features will become more and more default for them. So like some categories that every single new project they've been doing, they have to come along with the AIoT. So we become to take a larger portion in their pie. So that's the first one. So we will see that the penetration will grow. I mean, for the overall industries, we continue to grow steadily, no matter what. It's only a matter of speed, which year will be the tipping point. And -- so that's the first one, 2026, and we keep closing eye. We think that we can share more colors around the second half of December, while the customers have more feedback on the end demand side and while they're starting to set the tunes for 2026 because they don't like to run in a very conservative operation base for a long time. They're really running for 2025. So that's -- I think that's for the first one. And the second one... Matt Ma: The second one is also regarding -- yes, it's also regarding smart solutions. So just want to understand what is our thoughts on product category expansion for smart solutions going forward. Yi Yang: Sorry, I missed one part. And so I think that for smart solutions, and we're very carefully looking for the expansion to new categories because we're already learning that business model for over 2 years. So I think for smart solutions, we still kind of focus on some strategically highly value categories. And for those ones that the AI can bring a total difference, like to bring some innovative idea to come true without the AI, it never exists and also to some categories that we're really helping customers to do a differentiation to help them out. So usually, the solutions is the one we design for the customers for their flagship model. So that's what we put out. So right now, the solutions, the major categories will be the video and related multimodeling capabilities, the control panels that's super comprehensive interactions on the touch panel side and including the gateways focused on specific scenarios and energy. So I think that for the middle term that we continue to put focus and scale those kind of verticals unless we see some opportunities with the scalabilities in some new vertical categories. Operator: There are no further questions at this time. I'll now hand the conference back to the management team for closing remarks. Regina Wang: Thank you, operator, and thank you all for participating on today's call and for your support. If you have any further questions, please feel free to reach out to our IR team. We look forward to speaking with you at our upcoming investor event. Thank you, everyone, and have a great day. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect your lines. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]
Operator: Welcome, everyone, to Accsys Technologies plc Interim Results Presentation for the 6 months ended September 30, 2025. Today's speakers are Dr. Jelena Arsic van Os, Chief Executive Officer of Accsys Technologies; and Sameet Vohra, the company's Chief Financial Officer. Jelena and Sam will take you through an overview of the business and financial performance for the year before we open the floor to questions. Please note that we will prioritizing questions from analysts. [Operator Instructions] With this, I would like to pass over to our speakers. Jelena Arsic Os: Good morning, everybody, and welcome to Accsys' interim results presentation for the 6 months ended September 30, 2025. I am very pleased to report that we have delivered an excellent first half with a significant improvement in profitability. Our growth across all regions is beating the underlying market trends, showing our FOCUS strategy is effective and that the company is delivering on its promises. Accoya has seen strong growth across its sales regions with a 22% increase in total sales volumes, gaining market share from competitive and alternative materials. Our premium market positioning is proving resilient against continuing macroeconomic challenges. Group revenues increased by 23% on a like-for-like basis compared to the prior year. This comparison adjusts for the transfer of North American sales from the group to Accoya USA, our joint venture with Eastman Chemicals after it commenced operations toward the end of H1 last year. Accoya USA has had an excellent H1 performance. It has shown rapid volume growth with North American sales up 61% and positive momentum throughout the period. This demonstrates the strength of our technology, the Accoya brand and our customer relationships in the sizable North American market. Joint venture reported close to breakeven EBITDA for H1. This translates to Accsys joint venture equity accounted a modest EBITDA loss of EUR 0.3 million. This marks substantial progress compared to the equity accounted losses of EUR 4.3 million last year, and we are all excited about what's to come. Accsys maintained gross margin above our target of 30%, maintaining pricing discipline. We also continue to maintain cost discipline and have retained EUR 2.3 million in benefits from the business transformation program that we began in FY '24. We increased adjusted EBITDA for the half year by 160% to EUR 10.4 million. This is just slightly lower than the EUR 10.8 million we reported for the full financial year 2025. With our EBITDA margin at 11.6%, Accsys is almost at the level of our Phase 1 FOCUS strategy target. Crucially, we have made solid progress on deleveraging the balance sheet, a key strategic priority. Net debt has decreased by EUR 2.8 million since 31st March 2025, driven by improved operating cash flow, and we have improved our leverage ratio from 2.5x to 2.1x at September 30, 2025. During the period, we achieved operating cash flow of EUR 8 million. In October 2025, outside of this reporting period, we successfully negotiated new improved terms for financing our debt with ABN AMRO and HSBC. This refinancing strengthens our capital structure and further derisks our profile, positioning us to execute our strategy with greater confidence. Our good performance is a clear signal of our continuous progress. Accsys is delivering on its commitments and is laying a solid foundation for further growth. I want to take this opportunity to sincerely thank the entire team across Accsys and Accoya USA as well as our customers and partners. Thank you for your dedication. Your efforts continue to drive our success and position us very well for the future. We are progressing our FOCUS strategy, transforming Accsys into a fundamentally strong operationally efficient, customer-centric united, safe and sustainable business. Together, these efforts are creating a strong and lasting platform for growth. Compared to the first half last year, we have significantly derisked the company, having no exposure to large unfinished CapEx projects and significantly improved financial performance. The company now operates 3 production sites, Arnhem, Barry and the Accoya USA and has secured future growth funding on improved terms with the extended maturity to October 2029. We are operationally more efficient with like-for-like gross margin improvement of 1.1% compared to the prior period, driven by efficiency measures, amongst them, improved utilization of acetic anhydride in production. In addition, we have retained EUR 2.3 million of benefits from the business transformation program. As a growth company, we nevertheless continue to invest in volume expansion. We are investing in a new acetyl storage in Arnhem and have more than doubled our Accoya Color capacity in Barry from 6,000 to 14,000 cubic meters. Accsys aligns all its initiatives, investments and growth plans around maximizing customer value. With our fantastic products, we have customer centricity at our core and we continue expanding Accoya availability, adding 3 new distribution partners in the period, and Accoya projects continue winning awards, like a recent DNA Paris Design 2025 award for Casa Angra coastal home in Brazil. Accoya is gaining market share globally despite relatively soft overall market sentiment in the building material industry. An organization is only as strong as its talent. We are strengthening our workforce across sites through ongoing investments in revenue-generating commercial head count and strengthening our site teams. Last, but certainly not least, in the first half, we invested in health and safety and environment, improving working conditions in our Stacker hall in Arnhem. We also established our sustainability strategy, staying true to our purpose and values, and reaffirmed our commitment to building a better, more sustainable future. Accsys Cares sustainability plan introduced our first decarbonization commitments and targets, enhancing the already strong sustainability credentials of our products and our business. Before I hand over to Sam to discuss our financials, I wanted to share a short video of one of our projects highlights from this period, Accoya being used for the new roof and public space at a landmark NEMO Museum building in Amsterdam. [Presentation] Sameet Vohra: A truly remarkable project. Thank you, Jelena. Over the next few slides, I'm going to talk you through the financial results for the half year in more detail. This slide summarizes the strong financial performance for the first half of the financial year. I'll go into more detail on the financial performance in the next couple of slides by highlighting some of them now. Group sales volumes were up 1% to 30,575 cubic meters compared to the prior period. However, when you exclude the 3,802 cubic meters of sales made by the group to North America in the prior period before the Accoya USA joint venture commenced operations, the group sales volumes were up by 15%, with strong demand in all regions. Total sales volumes, which includes all of the sales volumes from the JV and more clearly shows global demand for Accoya increased by 22% to 38,618 cubic meters with 8,043 cubic meters coming from the JV. Group revenue increased by 5% to EUR 76.1 million for the first half of the year. However, like-for-like revenue, which adjusts for the group North America sales made in the prior periods increased by 23% year-on-year. Aggregated revenue, which includes 60% of the revenue of the JV was up 21% to EUR 89.9 million. Gross profit was EUR 1 million higher than the prior period at EUR 23.2 million, and the gross profit margin remains above our target level of 30%. Underlying EBITDA, which excludes the results of the joint venture increased by 29% to EUR 10.7 million compared to EUR 8.3 million in the prior period with a 260 basis point increase in the underlying EBITDA margin to 14.1%. This reflects a strong sales volume and revenue growth, maintaining a gross margin above 30% and the tight cost control discipline we have over operating costs. It was really pleasing to see that the Accoya USA JV was close to EBITDA breakeven for the first half of the year compared to a loss of EUR 4.3 million in the prior period. Sales are accelerating in North America, and we expect the joint venture to be EBITDA positive for the financial year. Adjusted EBITDA on a profitability performance measure was up by 160% to EUR 10.4 million, with an impressive 620 basis points increase in the margin to 11.6%, which is just below the target that we set for the end of Phase 1 of our strategy. The EUR 10.4 million adjusted EBITDA is also slightly lower than the EUR 10.8 million that we reported for the whole of the last financial year. Net debt at 30th of September 2025 stood at EUR 39.8 million, lower than the prior period and the figure at the end of March 2025. The leverage ratio improved to 2.1x. I'll discuss the changes in revenue, profitability and net debt in more detail in the coming slides. Going into more detail on our revenue performance for the year. As I previously mentioned, group revenue increased by 5% to EUR 76.1 million in the prior period, excluding the EUR 10.3 million of revenue from sales made to North America before the joint venture starts operations, like-for-like revenue growth was 23%. The sales growth we've seen in H1 across all regions has fully replaced the North America volumes transferred to the JV. Despite the challenging macroeconomic environment, we have maintained strong pricing discipline with a 1.7% increase in average Accoya sales price for the period. As Jelena previously mentioned, we doubled capacity in our Barry Color facility during the period due to increased demand for our color product. We saw a favorable product mix effect for this with the Accoya Color now making up a high proportion of group sales volumes through the prior period. Accoya Color also undertakes tolling for the JV and sales in the period increased by EUR 2.8 million from this. License fee and royalty income from the JV was EUR 1.6 million higher than the prior period as the group receives a royalty based on sales made by the JV. The final license fee payment was also received during the period, following successful completion of the performance test of the Kingsport plant, thereby granting exclusivity for the North American market to the joint venture. Other represents Tricoya panel sales and sales of acetic acid which are broadly in line with the prior period. Aggregated revenue, which includes 60% of the joint venture's revenue, increased by 21% to EUR 89.9 million. On a constant currency basis, aggregated revenue grew by 23%, given the weakness of U.S. dollar against the euro. On the face of it, the gross margin decreased by 20 basis points to 30.5% for the period. However, the prior period includes sales that were made to North America prior to the joint venture commencing operations. These sales amounted to 3,802 cubic meters, which represented 13% of group sales volume in the prior period. They contributed EUR 4 million of gross margin in the prior period and EUR 2.9 million of EBITDA as the average sales price in North America is higher than all other regions. Therefore, a more representative way to look at gross margin progression in the first half of this financial year is to exclude the EUR 4 million from the comparator, resulting in the like-for-like gross margin improving by EUR 5 million to EUR 23.2 million and 110 basis points to 30.5%. This EUR 4 million gross margin reduction has been offset by sales volume growth, favorable sales mix and higher average sales price from other regions, together with the receipt of royalties and license fees from the joint venture. Our main production costs related to raw material spend on raw wood and net acetyls. Raw wood costs are in line with the prior period as higher appearance grade raw wood costs have been offset by lower wood chip grade costs. We saw an improvement in gross margin arising on net acetyls from improved utilization of acetic anhydride in the production process, change in the supply mix and favorable FX as the U.S. dollar weakened against the euro. The increase in other costs reflects the investment in talent and headcount in operations to support sales growth, the effect of the annual salary increase and higher inventory handling costs. The gross margin at 30.5% continues to remain above our strategic level of 30%. This slide shows the adjusted EBITDA progression during the year, reflecting the strong financial performance. From an overall perspective, we saw a 160% increase in adjusted EBITDA from EUR 4 million to EUR 10.4 million and a 620 basis point increase in the adjusted EBITDA margin to 11.6%. This is already very close to the 12% target that we set for the end of Phase 1 of our FOCUS strategy, and it's very encouraging to see. The gross margin benefit to EBITDA amounted to EUR 1 million or EUR 5 million on a like-for-like basis, and we tightly controlled operating costs, which only increased by EUR 0.2 million compared to the prior period. EUR 2.3 million of the benefits from the business transformation program in FY '24 have been retained even after the investments we've made in sales and marketing and operational headcount and strengthening local management teams in key areas. There are no further costs associated with Hull after the business was placed into liquidation in December 2024. The joint venture is close to EBITDA breakeven for the period with our 60% share of the EBITDA loss amounting to only EUR 0.3 million as the Kingsport plant ramps up with accelerating North American sales growth. This is an improvement of EUR 4 million compared to the EUR 4.3 million loss recorded in the prior period. From a segmental perspective, EBITDA from our Accoya segment increased from EUR 10.7 million to EUR 12.7 million with healthy margin of 16.7%, up from 14.8% in the prior period. This growth is primarily due to the strong sales growth, the improvement in gross margin and tight cost control discipline on operating costs. Corporate costs amounted to EUR 2 million and were EUR 0.4 million lower than the prior period. Therefore, underlying EBITDA, excluding the joint venture increased by 28% from EUR 8.3 million to EUR 10.7 million. The margin improved by 260 basis points to 14.1%, reflecting the strong underlying profitability of the group. As I mentioned before, adjusted EBITDA increased by 160% from EUR 4 million to EUR 10.4 million. This slide shows the evolution of net debt during the year. Net debt at the end of September 2025 stood at EUR 39.8 million, a decrease of EUR 2.8 million compared to the start of the financial year. Debt reduction and deleveraging the balance sheet remains a key priority for us, and net leverage reduced from 2.5x to 2.1x at the end of September 2025. We experienced an increase in net working capital of EUR 4.2 million in the period, which is primarily related to higher inventory levels. This increase in inventory was planned to ensure product availability to support strong demand and customer service as well as building up inventory ahead of the annual maintenance stock, which took place in Arnhem in October. Accordingly, operating cash flow conversion was 75%, in line with our Phase 1 target. Tight working capital management remains a key area of focus for us. CapEx is EUR 2.9 million during the period, and this included expansionary growth CapEx on increasing our acetyl storage and making health safety and environmental improvements in the Stacker hall in Arnhem. Interest paid and accrued amounted to EUR 2.3 million, of which EUR 1.1 million related to accrued interest on the convertible loan notes. Tax received was EUR 0.7 million in respect to previous tax years. We recently completed the refinancing of our debt facility with a new EUR 55 million facility with ABN AMRO and HSBC on improved financial terms. The refinancing strengthens our capital structure, enhance its financial flexibility and further derisks our profile, positioning us to execute our FOCUS strategy and growth plans with greater confidence and resilience. The refinancing demonstrates continued strong support from ABN AMRO, and we are delighted to partner with HSBC, a bank of significant strength and reputation. So in summary, we've had an excellent first half of the year with a significant improvement in profitability. We saw strong total sales volume growth of 22%, with accelerating sales in North America, which increased by 61%. The joint venture was close to breakeven EBITDA in H1. Adjusted EBITDA was EUR 10.4 million, with a 11.6% margin, close to our Phase 1 target of 12%. We have continued to focus on deleveraging the balance sheet with net leverage decreasing to 2.1x and the recently completed refinancing strengthens our capital structure and enhances financial flexibility on improved terms. I'd like to now hand you back to Jelena, who will take you through the business review. Jelena Arsic Os: Thank you, Sam. In January 2025, we set out our FOCUS strategy, which will be delivered in 3 phases. The first phase to FY '27 focuses on resetting operationally, maximizing returns and cash flow from our existing operations and reinforcing the fundamentals, including reducing the debt and optimizing our capital structure. Our half year results demonstrate good progress against our Phase 1 targets. Our strong sales growth put us on a good trajectory to meet run rate target of 100,000 cubic meters by the end of FY '27. We have also significantly improved profitability moving from 5.4% in adjusted EBITDA margin from last year to 11.6%. We are very close to our adjusted EBITDA margin target of 12%. We are also in line with our operating cash flow conversion at 75%. Importantly, we are deleveraging and derisking the business, placing the company in a stronger position for growth. Our successful October refinancing gives us more favorable payment terms with a reduction in quarterly repayments going forward. Global demand for our products has been strong. We had outstanding growth in the U.S., which I will provide more details on in the coming slides. We saw very good growth in our key European markets despite continued macroeconomic uncertainty. The European market landscape reflects a mix of cautious recovery signals and ongoing challenges across key regions, shaped by economic pressures, regulatory changes, and involving demand in the construction and timber industries. Europe grew 22% in the reporting period. We saw growth in Germany, driven primarily by strong demand in the outdoor living market, high energy costs and slowing housing permits weigh on German outlook, but commercial and renovation segments remain more resilient. European growth was also supported by a good performance in Benelux where we had positive momentum in Belgium after onboarding a recent distributor. Government initiatives for energy-efficient building materials continues to favor sustainable timber products. We achieved 14% growth in the U.K. and Ireland, our most established market as we continue to build a strong reputation for joinery applications and gain more facade specifications. The softwood market in the U.K. remains weak with subdued import volumes and merchants limiting stock positions, pending market clarity with the U.K. budget approaching. The U.K. budget is being announced tomorrow with uncertainty of governmental measures to address the fiscal gap that is estimated between GBP 20 billion and GBP 50 billion. Across the rest of the world, we saw 28% growth with bright spots in Australia and New Zealand, as our partnerships with our distributors continue to develop and expand our presence. Accoya for Tricoya sales grew at a more moderate pace, with sales weighting towards the start of the period. Finally, we will be launching a new finished decking products in the second half with a phased market rollout. This will be the first time that we offer a finished product to the market and is an exciting new development for Accsys. We also continue to see Accoya specified for incredible projects worldwide. The start-up of Accoya USA last year was a significant milestone for Accsys. And I am very proud to share that it has got off to an excellent start. In North America, the joint venture grew sales volumes by an impressive 61% with sales acceleration across the period, driven predominantly by our existing distributors, many of whom we have a long-standing relationship with. The local availability and production provide them with the confidence to run faster. While a 10% tariff was announced in October on imported lumber, we have taken proactive steps to manage the impact of this going forward. So let's look at the more detail at the U.S. market developments. Our sales in the U.S. are outpacing overall market growth, allowing us to gain share from competitors. With forecast indicating strong and sustained demand for modified wood over alternative materials, we are confident that Accoya USA will continue to expand its presence in the growing market. Our main drivers in the U.S. are cladding and decking. These markets both have strong growth rates for modified wood with double-digit growth forecast for decking. Traditional timber products are seeing sharp declines in demand as customers opt for higher performance modified and engineered solutions. Furthermore, increased regulation on the import of hardwoods ipê and cumaru from Brazil has had a positive benefit for Accoya in the U.S.A., and it has limited the supply of these woods. As you can see in the table, the hardwood market for decking is expected to contract. Our growth in the U.S. predominantly came from our existing distributors. In addition, we have added 3 new distributors in the period, including one of the largest in the U.S. hardwood specialty products, GMX Group, a wholesale distributor with a focus on retail customer, and our first Mexican direct distributor, Klinai and expect to see these new channels contribute strongly in H2. We continue to strengthen our relationship, both with the direct distributors and our approved manufacturing partners. Our products are extremely well regarded in the marketplace, that this testimonial from Delta Millworks featuring the owner and CEO, Robbie Davis, and Baker Donnelly, regional sales manager, one of our long-standing Accoya manufacturing customers testifies. [Presentation] Jelena Arsic Os: This fantastic Delta video highlights value that resonates strongly with us: quality, performance and the long-term reliability. These principles are at the core of how we strive to build and maintain our customer relationship, and they are something I'm incredibly proud of. A big part of our FOCUS strategy is to maximize returns from our existing assets, driving sustainable profitable growth from our core sites in Arnhem and Barry. During this period, we have invested EUR 2.5 million in Arnhem to expand our acetyl storage capacity. From December 2025 onwards, we will gain improved logistical flexibility and increased uptime, enabling us to complete more batches per month. Furthermore, our logistical costs will reduce as we can now unload more acetyls during the week rather than in the weekend. On top of that, we are less vulnerable to interruptions in the chemical supply chain. In Barry, in response to strong demand for Accoya Color globally, we have taken steps to double our capacity. This includes introducing the second shift, expanding our own storage capacity and outsourcing some external drying. This builds on the planning facilities we added last December to be able to produce finished decking boards. We expect Accoya Color and finished decking boards to continue to be important demand drivers. Growth for this product range, including volumes sold out to the joint venture showed an increase of 56% year-on-year. We are very proud today to launch Accsys Cares, our first sustainability plan, which aims to deliver long-term value from all of our stakeholders. The plan highlights our commitments across 4 key pillars: people, planet, profit and governance. It introduces our first decarbonization commitments and targets, further enhancing the already strong sustainability credentials of our products and our business. Finally, wrapping up today's messaging, we have delivered a strong H1 and we entered the second half of the year from a position of strength. Our trading remains robust going into H2, supported by sustained global demand for our premium differentiated products. We expect continued sales acceleration in North America, and notwithstanding the impact of the recently announced tariffs, we expect the joint venture to be EBITDA positive for the financial year. While noting continuous macroeconomic challenges, the Board is confident the company will continue to deliver further growth and profitability improvements for the year ahead, consistent with expectations and to make further progress towards our strategic targets. Looking ahead, we remain confident in the long-term potential of our technology and strategy. We have a clear road map, market-leading products in attractive growth markets and a fully funded manufacturing base that position us to deliver significant shareholder value. I continue to be very excited by the prospects for our business. We are transforming we are delivering, and we are growing. Thank you all for your attention. With this, I will hand over to our operator now for the Q&A session. Operator: [Operator Instructions] We will now take the first question from the line of Martijn den Drijver from ABN AMRO. Martijn den Drijver: I have 4 questions, and I'll take them one by one, if I may. To start off on the U.S., just to give us a bit of a sense on where the existing -- so not the 3 new ones that you mentioned, but the existing distributors, can you give some color on where they stand in terms of ordering levels versus assumed potential? Just give us a sense of what -- with the existing distributors, what type of growth lays ahead? Jelena Arsic Os: Well, Martijn, our existing distributors are already active in the U.S. for a very long time. And as we know, the Accoya sales are pretty technical sales. You need to pursue the market that you do have, by far, the best product in terms of performance, stability and the long-term durability. We are seeing in this period significant growth. Most of the U.S. growth that you are seeing in this result is actually coming from our existing distribution partners. They are today placed on the East Coast of the U.S., West Coast and in Texas. We are working on increasing our presence in the Texas area because there, we do have big OEMs like Delta Millworks that you just saw the video about, they are located in Texas. But we do believe that, that area could provide us some more opportunity to grow. So new distributors that we put in place in this half of the year, they are all starting to take the inventories and to push the market predominantly gaining the market share and not fighting for the same business that our existing distributors are already having. So there is a lot of efforts from our side going into education, specification selling and helping the new distributors predominantly to actually focus on the new business generated and creating the Accoya pie to be bigger in this very sizable and profitable North American market. Martijn den Drijver: Just 1 follow-up, Jelena. The total distributors now, how much do you think you need more in terms of distributors to have a full national coverage, perhaps both in the U.S. and in Mexico? Jelena Arsic Os: I think in Mexico, this Klinai is quite a large player. So I believe we are going to give them an opportunity to deliver what we think that they can deliver. In the U.S., we do believe that today, we have a quite good mix of large regional players, and they have also quite a good network of secondary distributors that are working with them. So we do not expect that we will be adding a large amount of new distributors in the U.S. We would like the distributors that we already now appointed to actually prove that they can deliver on the expectations. And so we have a quite defined KPIs in place that we follow very, very clearly. So for the next half of the year, we are going to give the existing and the new ones chance to fully deliver. Martijn den Drijver: Got it. Got it. Then the second question on the U.S. for Sam. The breakeven has been achieved faster than expected. You're now guiding for profitable EBITDA levels for the full year. Does this have an impact on the planned/forecast equity injections from the group into the JV? I seem to remember that where guidance was still for EUR 4 million in fiscal 2026. Does that still stand? Or should we assume a different amount now? Sameet Vohra: Yes. Thanks, Martijn. Good question. So yes, I mean, as you saw the JV was very close to breakeven for the first half of the year, and we do fully expect it to be profitable for the full year. Our initial expectations were and in terms of what your modeling has in terms of capital injections going into the JV, that's all to do with growth. We -- the business needs wood and it effectively needs a high level of working capital to meet that significant level of growth that we're seeing, not just for this financial year, but also coming financial year because really, our strategy is about filling up that plant, and having it operating at full capacity within the 5 years of our strategy, so by the end of Phase 2. So any additional capital injections that we may need to put into the business will be all to do with providing it with additional working capital to fund growth. Martijn den Drijver: So it might actually end up a little bit higher than the initial guidance. Sameet Vohra: No, I don't think it will be any more than EUR 4 million that you've already got factored in. Martijn den Drijver: All right. Then moving on to Europe. I was just wondering, you mentioned good developments in the Benelux, Germany, already very strong in U.K. and Ireland. But you mentioned plans to support France. Can you elaborate a little bit on your plans in France? And perhaps on Germany, what type of -- where does Germany stand relative to prior sales levels? Are they approaching it? Or are they still far away from it? Jelena Arsic Os: Well, we saw -- as I told you, the levels in Germany are increasing. Of course, if you look from the period of a couple of years ago, we still have a space to develop. But if you look at the previous year, we do have quite a significant growth, and this is coming predominantly from the demand coming from outdoor living markets and with the outdoor living market, that is really decking, what we are seeing that it is taking off with our Accoya Color range being available in Germany. So we are continuing to work with our existing -- we have a very large distributor in Germany. We are continuing to work with them, but we are also working on expanding that distribution network as we go into H2. Looking at France, we are predominantly now looking to strengthen our team in France, and we need to add commercial headcount to help us to cover this quite large and still unexplored market for Accoya. We had a couple of very nice projects that we deliver in the country, but certainly with the size of France, there is quite a large opportunity to grow there. So we have good distributors in place, but we are adding a headcount -- commercial headcount in the region to help us grow this market share. Martijn den Drijver: Great. Then one final question on Color. Can you shed some light on what you produced in H1 in Color, given the capacity expansions that would probably help us to understand what could be expected going forward? Jelena Arsic Os: Well, what we said, we actually increased almost more than a double capacity of Color in Barry, starting from 6,000, what we had last year, and now we should be having certainly capacity of -- we could be able to produce up to 14,000. We do believe that in the -- given the good strong demand for Accoya Color, we certainly could be doubling what we actually produce, so 6,000 to up to 12,000 in this financial year. Of course, decking season is a seasonal -- so demand is quite seasonal. We do see that the season starts in spring and our distributors are starting to build inventories starting from beginning of our Q4. So that's why also our Q4 is one of the larger quarters that we have as a company due to this specific effect. Martijn den Drijver: All right. And my really final question is on your EBITDA -- adjusted EBITDA margin, close to your FOCUS one target already. If I look at Bloomberg consensus, it's considerably higher for fiscal '26, '27, around the 16% level. Is that something you feel comfortable with given these very positive developments, both in Europe and the U.S.? Sameet Vohra: Sorry, can you just repeat that percentage that Bloomberg is showing? Martijn den Drijver: Yes. Bloomberg is -- I think it says it's not quite clear whether that is now group or adjusted, but it's 16% level. Sameet Vohra: Yes. I mean, that's probably around group. I mean, we're already at group level. We are already -- I mean, as you saw for H1 at 14% underlying margin with the group at what adjusted being just over 12% target. So I mean, we're very confident, and we firmly believe that we're on track to deliver the margin targets that we laid out in our Investor Strategy Day earlier this year by the end of Phase 1 of our strategy. Operator: We will now take the next question from the line of Johan van den Hooven from Edison Group. Johan van den Hooven: Only 3 questions is for me for now. If you look at the volume growth was, of course, strong. We already talked about U.S.A Looking at the volume growth of Accoya for Tricoya that is, well, only 6%. Is there a special reason that there's a bit of a slowdown or is it just a mix effect or a different focus on the U.S.? That's the first question, and we'll do the others later. Jelena Arsic Os: Yes, you're absolutely right, Johan. As we reported, Accoya for Tricoya volume grew 6.4%. This is also lower than percentage-wise, what we also put in our market update in September, where we saw at the time, 25% growth of Accoya for Tricoya. The reason for it is basically slower demand from our customers for Tricoya that is also linked to the season, but also overall subdued soft market sentiment in the -- they all operate in that MDF space. So we are seeing this demand increasing and starting to pick up as of December this year. So they were really running through the inventory reduction going towards the end of the calendar year. And now we are seeing the order book for Tricoya starting to fill in as we go into December. Johan van den Hooven: Okay. That's clear. Another question about your sort of guidance for EBITDA. EBITDA for the full year is in line with your expectations. But I seem to remember that previously, sometimes we refer to consensus or in different words, is it too simple to just double the EBITDA of the first half -- for the full year, I mean? Sameet Vohra: So I think when you look at seasonality in terms of our business, quarter 4 is our largest quarter by sales volumes really because from a decking and cladding perspective, a lot of sales take place ahead of that spring season. So quarter 4 being our largest by volume, quarter 3 ultimately being our smallest because you've got the effect of December, our customers effectively stop ordering and taking collections just after mid-December, the Christmas shutdown. And then obviously in October, we have the annual maintenance stop in Arnhem, where we're selling out our finished goods. So you could think -- despite that revenue and volume seasonality, I mean, profitability is going to be very similar to 50-50 between H1 and H2, and that's why we're seeing it in line with our expectations. Johan van den Hooven: Okay. But then -- okay. So we can look at the doubling. But in the first half, of course, you had EUR 2 million license income, which might not reoccur in the second half, which also then not helps EBITDA? Sameet Vohra: No. I mean, you've got -- I mean, it's not just license income. You also get the royalty. The largest part of that EUR 2 million is actually the royalty that we get from Accoya USA sales. So we get a fixed percentage on their revenue. So as you've seen, as their sales are accelerating, we're getting a higher royalty fee from them. Johan van den Hooven: Yes. Last question for now, just about the import tariffs. It's only 10%, and you've said you've taken some actions, but can you tell us a bit more? Is it just raising prices, lowering costs or a mix? Jelena Arsic Os: Well, it is predominantly raising the prices, Johan. We already put it in place and we didn't receive too much of the pushbacks from our customers. I think everybody in the U.S. market is now getting accommodated to the tariffs having impact on the price inflation of overall materials, if you like. So we put a price increase in place starting from 1st of November. And we also have, of course, an ongoing dialogue with the sawmills where we are actively tracking what is the sentiment in the U.S. market and also looking with them how we can, if you like, share the pain, if that pain become larger. But so far with the 10%, we do believe that we can manage this quite well. Operator: [Operator Instructions] Our next question comes from the line of Alastair Stewart from Progressive Equity Research. Alastair Stewart: Two or three questions. First on the U.S.A., given that you've now got what tends to be a very solid distributor base and enthusiastic uptake by customers, have you any sort of -- can you give us any sort of guidance when you could be looking at further reactors from the U.S. facility? So that's the first question. Secondly, interested to see a new distributor in Mexico. But what sort of size do you think that -- what proportion of U.S. output could Mexico be? And is that -- is it in a similar sort of mainly decking and cladding markets? And looking above the bar, are there any plans for Canada or any indications of how Canadian uptake could develop? Jelena Arsic Os: Yes. Thank you, Alastair. Thank you very much. Good questions. So if you look at our distribution base in the U.S., we do believe that with capacity of the plant today at 43,000 cubic meters, we do have enough capacity for at least next 2 years to feed demand and growth in this region. So we are focusing the organization, and we are focusing basically everybody to get more returns from the existing assets in the next year or 2. So this is -- this was a part of our Phase 1 of the FOCUS strategy. So we just continue working on it. Now we are going to see in next -- in the next half of the financial year and also in the beginning of the financial year '27, which is a key year for the company because this marks end of our Phase 1 FOCUS strategy, how things are developing. And in order to start talking about second reactor, you need at least 12 to 16 or 18 months from the design to basically ordering the equipment and putting it in place. Today, we have enough space in the U.S. and already a foundation put in place for the next reactors. So that should speed up that process when the time comes. So we do have enough space in the U.S. to put additional 6 reactors if that is necessary but I would like to really spend next year, 1.5 years, next 18 months, utilizing what we already have. And we do believe that we have enough capacity to meet the demand from a broader North American market, not only U.S. but also talking about Canada and Mexico as well. Now your comment on -- does this answer your question? Alastair Stewart: Sorry, I would just add -- I was asking about Mexico again, sort of potential growth there. Is it the same sort of end market that decking and cladding -- and while I'm on also, it was interesting to hear about France as well. They seem to be slightly late to the party as it were. What's driving the uptick in demand from France? And that will be all my questions. Jelena Arsic Os: Okay. So let me go back to Mexico and Canada because I think that those were the other 2 questions. So the Klinai is a quite a large distributor that also have significant milling capacity. So they are also capable of making some of the end products. So they will be focusing on cladding and decking predominantly. And the market in Mexico is large. We also are supporting the Caribbean region from the U.S. So -- and we do have already a couple of very nice projects that are happening there. Is Mexico going to be bigger than the U.S.? I don't so. Alastair Stewart: No, I don't think I was suggesting that, but how big could it be as part of the U.S. output? Jelena Arsic Os: Well, we do have a quite ambitious expectations from them, but we just signed off that agreement with Klinai. I would like to give them at least half a year to see what they can deliver in order to start shaping an expectations and certainly communicating those expectations internally. They are quite capable professional company with the milling capacity that could be important for us. But for us, our U.S. market, is by far the fastest growing, the most profitable and certainly more than 90% of the Accoya USA sales should come from the U.S. itself. Looking at the Canada, we do have one of our largest -- well, actually, the largest distributor we have in the U.S. is a U.S. Canadian company with the roots in Canada. So we do sell Accoya in Canada already for some years. With the tariffs, import tariffs from Canada and between Canada and the U.S., some of the trade is being slowing down. But nevertheless, we also have an opportunity, if necessary, to ship smaller amount from Europe directly to Canada, if that is going to serve customers better. So as said, we do expect U.S. plant predominantly to serve U.S. market, but we do have now today established partners in Canada, Mexico and Caribbean as well. So in France, also decking and cladding market, we had a couple of good projects that were done in the country. And we also have a good collaboration with the architects in France. But you know, it is a huge country and with Accoya Color now being more available, also coming with the new decking collection, we do need more feet on the ground to educate and push growth to the faster pace. So predominantly, cladding and decking and Accoya Color is one of the most wanted products we see in France. Operator: We will now take the next question from the line of Adrian Kearsey from Panmure Liberum. Adrian Kearsey: Well done on a good set of results, guys. A couple of questions for me, although I have some more, but most of them have been asked already. Could you perhaps give us sort of a bit some more color in terms of the pricing environment across different territories? Are we seeing greater pricing in certain territories rather than the others? And then to go back to the question on distributor relationships. Would you be able to sort of give some indication about how conversations are progressing in certain territories with signing additional distributor clients? Jelena Arsic Os: Yes. So pricing, as we already reported today, the average sales price in the reporting period went up with 1.7%. We are not reporting specifically per country or per region. But in average, this was the good, I would say, marker for you to look across -- both across Europe and the U.S., very, very similar price increase. We do -- of course, we are very careful, and we know that what we are selling is the value. So we are very careful of keeping that premium place in the building materials. So we are reacting on the tariffs in the U.S. We are reacting on the inflationary pressures in Europe and U.K., and we will continue to do that. And it looks to us that market is actually accepting that as well. Looking at the distributors, adding new distributors across the region. As I already mentioned, we are talking with the distribution partners in Germany. We are also talking with the new distribution partners in Central and Eastern Europe. I'm not ready to announce anything yet but we do expect that we will be expanding our distribution base predominantly in the next half year in the markets where Accsys is providing Accoya and we do believe that as of today, the number of distributors and coverage in the U.S. is good, and we want to give our new distribution partners chance to actually deliver on the expectations that we have for them. I hope this answers your question, Adrian. Operator: I would now like to turn the conference back to Dr. Jelena Arsic van Os for closing remarks. Jelena Arsic Os: So thank you very much. As I said in the last page of our presentation, we are remaining confident in the long-term potential of our technology and strategy. Company is transforming. We are growing, and we are delivering, and we have a very clear road map in front of us with a market-leading product in very attractive growth markets. So we will continue to do what we are doing and then hopefully, next half year when we hear each other, we will just confirm the expectations that we all have. So thank you very much. And with this, we will close our results call for today. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.