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Operator: Good day, and welcome to AZZ's Second Quarter Fiscal 2026 Earnings Conference Call and Webcast. All participants will be in listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Sandy Martin of Three Part Advisors. Please go ahead. Sandra Martin: Good morning. Thank you for joining us today to review AZZ's Second Quarter Fiscal 2026 Results for the period ended August 31, 2025. Joining the call today are Tom Ferguson, President and Chief Executive Officer; Jason Crawford, Chief Financial Officer; and David Nark, Chief Marketing Communications and Investor Relations Officer. After today's prepared remarks, we will open the call for questions. Please note that the live webcast for today's call can be found at www.azz.com/investorevents. Before we begin, I would like to remind everyone that our discussion today will include forward-looking statements made in accordance with the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. By their nature, forward-looking statements are uncertain and outside the company's control. Except for actual results, AZZ's comments containing forward-looking statements may involve risks and uncertainties, some of which are detailed from time to time in documents filed by AZZ with the Securities and Exchange Commission, including the latest annual report on Form 10-K. These statements are not guarantees of future performance. Therefore, undue reliance should not be placed upon them. Actual results could differ materially from these expectations. In addition, today's call will discuss non-GAAP financial measures which should be considered supplemental and not as a substitute for GAAP financial measures. We refer our shareholders to our reconciliations from GAAP to non-GAAP measures contained in today's earnings press release. I would now like to turn the call over to Tom Ferguson. Tom Ferguson: Thank you, Sandy. Good morning, thank you for joining us to review AZZ's financial results today. Delivered solid second quarter results. Total sales increased by 2%, adjusted earnings per share rose 13.1%, operating cash flow improved by 23%. Underscoring our disciplined execution in a highly dynamic environment. Metal Coatings achieved a strong double-digit sales growth supported by higher volumes and sustained momentum related to robust infrastructure project activity. Metal cutting margins of 30.8% were down slightly as our mix of solar and transmission distribution increased. And these tend to be slightly lower margin markets. We remain confident in the strength of our core markets and the growth potential ahead for galvanized steel in construction, industrial and electrical utility projects this year. Similar to others in the industry this quarter, Precoat Metals faced some mixed market conditions, particularly in relation to tariffs. But focused on protecting margins while pursuing market share opportunities. While Precoat benefited from the tariff impact on pre-painted imported metal, they faced headwinds due to softer building construction that extended to HVAC and appliance end markets. Looking ahead, we are encouraged by Precoat's new customer wins which are generating market share gains. This is primarily due to a strong focus on key markets impacted by reduced access to imported pre-painted metal. Including the aluminum container market. Our container and beverage results continue to reach new highs during the quarter. Indicating that the shift from plastic to aluminum is gaining momentum as we ramp production at the new facility in Washington, Missouri. However, the overall demand outlook remains mixed for Precoat end markets. So we are maintaining a cautious outlook. As ongoing tariffs have contributed to customer hesitation on non-infrastructure related projects. Dave will provide more details on industry trends and AZZ's end markets shortly. Consolidated adjusted EBITDA for the quarter was $88.7 million reflecting a margin of 21.3%. The divestiture of the Electrical Products Group through the AVAIL joint venture created a modest EBITDA headwind in the quarter. Which Jason will address shortly. At our new Washington, Missouri facility, sales continue to increase and operating leverage is improving as we ramp up production. We remain confident achieving gross margin improvements as volumes grow at the new site through the second half of the year. AZZ's proprietary technology continues to set us apart. We continue to pursue technology upgrades ranging from updating system applications continuing to migrate data systems to Oracle, exploring AI opportunities, and developing new galvanizing and coding processes to drive operational efficiencies across our broad network of facilities. As is normal for our Metal Coatings team, they quickly integrated the newly acquired Ohio facility onto Oracle and DGS which is our proprietary digital galvanizing system. With that, I will turn it over to Jason. Jason Crawford: Thank you, Tom. For the second quarter, we reported sales of $417.3 million representing a 2% increase from $409 million the prior year period. Growth was led by our Metal Coatings segment, where sales increased 10.8% over the prior year's quarter. Driven by higher volumes and supported by infrastructure-related spending across our largest verticals. In contrast, Precoat Metals sales declined 4.3% due to a weaker end market environment reflecting lower volumes in building construction, HVAC, and appliance end markets. As Tom mentioned, Precoat continues to win market share in a competitive and dynamic marketplace. The second quarter gross profit was $101.3 million or 24.3% of sales compared to $103.5 million or 25.3% of sales in the same quarter of the prior year. The Precoat Metals segment margins were impacted by customer buying patterns, and the introduction of our new aluminum coil coating facility. Which when combined contributed to have a small drag in margins. Whereas in the Metal Coatings segment, product mix was slightly unfavorable comparison to the prior year quarter. Selling, general and administrative expenses totaled $32.8 million in the second quarter, 7.9% of sales. Compares favorably to last year's second quarter was $35.9 million or 8.8% of sales. Operating income for the quarter was $68.5 million or 16.4% of sales, compared with $67.6 million or 16.5% of sales in the prior year second quarter. Reflecting the strength and operational execution on lower volumes. As noted last quarter, Fernway our 60% joint venture partner in Avail, divested the majority of its electrical products business in the quarter. For the second quarter, this transaction resulted in accounting adjustments to record an additional gain on the sale. Combined with other adjustments and operating performance of the remaining businesses, reported equity and earnings of $59.3 million in the quarter. On an adjusted basis, our quarterly equity and earnings reflected a loss of $2.3 million from continuing operations. The loss in the quarter is primarily due to the excess overhead costs resulting from the divestiture of the electrical products business and the traditionally weaker summer season from our Beale's Welding Solution business. Looking ahead, regarding our 40% ownership interest in the remaining Avail business, which now consists of welding services, lighting and some international joint ventures we are forecasting equity and earnings from unconsolidated subsidiaries to be zero for the remainder of the year. Interest expense for the second quarter was $13.7 million representing a significant improvement of $8.2 million from the prior year due to a combination of debt pay down debt repricing and accounts receivable securitization facility introduced in the quarter. The accounts receivable facility has a borrowings limit of $150 million and is accounted for secured borrowings with an interest rate of one month so far plus 95 basis points. Create an expected annual interest savings of $1.4 million versus current borrowings on the term loan. During the quarter, 100% of the proceeds received from this facility were used to pay down existing debt. The current quarter's income tax expense was $25 million reflecting an effective tax rate of 21.9%. Compared to 25.6% tax rate in the prior year's quarter. The tax rate reduction in the quarter is due to an increase in R and D tax credits attributable to technology spend on our new build Washington, Missouri facility. Reported net income for the second quarter was $89.3 million compared to $35.4 million for the prior year quarter. Since our non-GAAP measure for adjusted net income excludes amongst other items, equity and earnings from the Avail divestiture, of $61.6 million AZZ reported adjusted net income of $46.9 million on adjusted diluted EPS of 1.55 This compares favorably to the prior year's adjusted net income $41.3 million adjusted diluted EPS of $1.37 increase of 13.1% compared to the same period of the prior year. Second quarter adjusted EBITDA was $88.7 million or 21.3% of sales, compared to $91.9 million or 22.5% of sales in the prior year. Excluding the impact of equity and earnings, our adjusted EBITDA for the second quarter would have been $91 million or 21.8% compared to $90.4 million or 22.1% in the same quarter last year. Turning into our financial position and balance sheet. For the second quarter, we generated cash flow from operations of $58.4 million Consistent with our capital allocation strategy, in the quarter we invested $19.3 million in expenditures for the businesses invested a further $30.1 million in the acquisition of our new galvanizing facility Canton, Ohio and increased our dividend payments to shareholders over prior year. With a slight pay down of debt in Q2, combined with our continued financial financial performance, our credit agreement net leverage ratio remained at 1.7 times. Compared to 2.7x in Q2 of last year. As communicated, we continue to maintain a disciplined approach to our capital allocation strategy transitioning our focus to investments in organic growth and strategic M and A, while returning value to our shareholders through cash dividends and share buybacks, and maintaining our debt leverage in the target range of 1.5 to 2.5 times. With that, I'll turn the call over to David. David Nark: Thank you, Jason. Let me begin with an update on the Infrastructure Investment and Jobs Act. As of August, the Department of Transportation reported that 73% of IIJA program funds totaling $319 billion had been committed to specific projects. With approximately $177 billion already outlaid. Similarly, according to the Department of Energy website, 77% or $74.9 billion had been obligated to certain projects. Both agencies are expected to continue to announce awards or initiatives throughout the balance of this year. We believe that because the current legislation is scheduled to expire in 2026 and requires projects such as utility-grade solar to be completed by the end of next year IIJA related spending is having a positive effect on demand for our Metal Coatings segment. We expect multiyear tailwinds associated with IIJA spending and we'll continue to monitor discussions regarding potential reauthorization beyond 2026 once the government reopens. During AZZ's second quarter, we continued to see infrastructure, non-building and civil works projects as a bright spot. Offset by softness in nonresidential and residential building construction. Reported end market sales for AZZ were up including utilities up 19%, consumer up 7.6% while construction sales were up by less than 1% as compared to the same quarter last year. As noted today and in prior quarters, end market growth in utilities is elevated due to IIJA related project spending, particularly solar, transmission and distribution and data center projects. As Tom mentioned, the transition to aluminum packaging in both the food and beverage sectors remains a significant growth driver for AZZ. Our container end market has sustained strong momentum this year supported by continued ramp up of the production at our new Greenfield facility in Washington, Missouri, and recent share gain activity. While we have seen increased opportunities from tariffs associated with imported pre-painted aluminum steel, weakness in both nonresidential building, particularly commercial office and retail construction as well as residential building has created some divergence in our construction end market sales. However, our teams remain well positioned to execute through the balance of the fiscal year and we are approaching calendar year 2026 with measured optimism. With that, I will now turn the call back over to Tom. Tom Ferguson: Thanks, Dave. We continue to see a strong pipeline of project-related activity driven by megatrends such as energy transition and the growing demand for electricity generation to support the rapid growth of data modernization, transmission line expansion and the integration of multiple energy sources will fuel further demand at our plants. As the country continues its journey to re-industrialize the AI boom and cloud expansion are driving massive data center projects and infrastructure development. With higher interest rates lasting longer than anticipated, new housing development and related supporting projects remain muted. Public infrastructure spending tends to be less sensitive to interest rate fluctuations as is often funded through grants, bonds or supported by subsidies. Overall, we anticipate and have planned for a multi-year tailwind in infrastructure spending. Particularly in energy and power generation capacity despite the potential for continued pressure on residential construction. For our 2026 fiscal year, we are reiterating guidance for total sales, EBITDA and adjusted EPS. We anticipate that our sales will be in a range of $1.625 billion to $1.725 billion Adjusted EBITDA will be within the lower half of the range $360 million to $400 million due to the lack of avail equity income as they continue to transition without the electric products businesses. Adjusted diluted earnings per share will be in a range of $5.75 to $6.25 which translates to an increase of between 10% to 20% over the fiscal 2025 adjusted earnings. Although markets may be choppy in the second half of our current fiscal year, which extends through February 2026, our numbers are supported by strengthened projects and structural steel demand forecasts. We continue to strengthen our operational performance and maintain disciplined execution at each of our facilities. Our liquidity position and balance sheet are strong and flexible. With a low debt to EBITDA ratio. Especially given our cash generation capabilities. We remain well positioned to pursue strategic growth opportunities, including our other capital allocation strategies as we have already discussed. Finally, industry consolidation presents ongoing opportunities for our company. And we are actively evaluating bolt-on acquisitions that are strategically aligned fit our integration playbook, and extend our market leadership in Metal Coatings. Our M and A pipeline is healthy and we plan to remain disciplined in pursuing only high-quality opportunities create long-term accretive value for our shareholders. As always, I would like to express my gratitude to our hardworking and highly talented team for executing AZZ's shared vision of growth, profitability and operational excellence. Our mission is to create superior value within a culture where our people can grow and traits matter. Our culture is built on providing outstanding quality and service as directed within our servant leader mindset. These principles continue to shape our path forward and underpin our success. I am proud of our team's execution of the fiscal 2026 plan so far this year and remain confident we are positioned for continued growth and success. We are committed to driving top-line growth, enhancing profitability and generating robust cash flow. All of which are supported by a disciplined capital allocation philosophy. Through the successful execution of our strategic priorities, we believe we will continue to deliver sustainable value for all of our stakeholders. Now operator, we would like to open up the call for questions. Operator: We will now begin the question and answer session. You would like to withdraw your question, Our first question comes from Ghansham Panjabi with Baird. Please go ahead. Ghansham Panjabi: Hey guys, good morning. I guess, first off on the Precoat market share gains that you called out, Tom, can you just give us a bit more color on that dynamic and maybe dimensionalize the boost for AZZ? And I'm just asking because obviously volumes were down in the quarter, you cited some of the obvious in terms of construction and, you know, so on and so forth. How should we think about the contribution from the share gain piece? Tom Ferguson: Yes. I think to a couple of things there. One, we picked up share gain because the and we'd referenced it. The pre-painted imports are because of the tariffs are down significantly. So that's been transitioning to domestic supply and we're painting you know, least as much as our share. If you take that, it's probably, David, what? It's about 10% on imports. So we've picking up our share of it. So we've picked up 3% or 4%. To offset the roughly 9%, 10% market decline. So it's just offsetting but it's also positioning us depending on what happens with tariffs. Hopefully, to sustain that market share and be able to take advantage of it as we go forward. As we're picking up new customers, new applications, converting that, And that's pretty much at our normal margin profile. So it's not like we've had to go aggressively discount to take that share. Is why I'm also confident that those margins will continue to flow through going forward post market softness, if you will. Ghansham Panjabi: Sure. Sticking with Precoat, so some of the challenges that you called out, you know, building construction, HVAC, appliances, they all seem sort of you know, aligned towards the same theme. It doesn't seem like there's any short-term catalyst for those end markets in terms of reversing that weakness. Would it just be the share gains and then you know, the Washington, Missouri facility that are positive offset And how do you think that nets out for segment volumes as we think about the back half of the year? For Precoat? Tom Ferguson: Yes, I'll start and then Jason can probably add some additional color. Yeah, I think you pretty much summed it up. So we're going to continue to assuming the tariffs stay in place, which looks like they will, then we should be able to sustain that market those market share gains from picking up the past imported, prepainted metal. Two, we are do we have the Washamos site? It's, you know, it's still I think we're saying it's running about 20% of its capacity or some number thereabouts. So it's still got to ramp to it as the next six months go on and pretty significantly. So that's opportunity and that is where there's strong demand. In that aluminum container market. That's our sister facility to Washmo, which is the Saint Louis which has two lines, is doing really well because of the high demand in that market. As I look at it, I think well, and then the third piece is we're also aggressively going after other conversions and chasing things. So any kind of rebound in construction. And I think we're seeing some signs of that. We had a big customer well, we had a lot of customers at our annual golf tournament. And, and they generally feel like things have bottomed and starting to come back up in certain areas of the country, particularly. So we feel good about, what we're doing, and I'd also commend the Precoat team. They've adjusted it. They're operating and shifts and times and capacity. You know, we're retaining capacity for the upturn that we hope to have as the year goes on. But also as we talk about our variable cost structure, they've been able to adjust that pretty quickly And I know this is about pre COVID, but I'd say the metal coatings side has done that outstandingly well during that same time period. Ghansham Panjabi: Okay. Very good. Thank you. Tom Ferguson: Jason, did you want to add any? No, think the only other thing you could potentially add there is that, you know, when you think about the construction, it certainly has enough impact on the HVAC and appliance, but very minimally so, if you look at those two, businesses, they're doing reasonably well. And quarter to quarter, there's an impact in terms of inventory levels and model changes, etcetera. So don't see them as being much of a drag in comparison to the construction market. And I'll also add in, we had a good solid September, so we feel good as we've kicked off the third quarter. So kind of in line with the fact that a lot of the Precoat customers are feeling like things are starting the corner is starting to turn. Ghansham Panjabi: Fantastic. Thank you so much. Operator: The next question comes from Nick Giles with B. Riley Securities. Please go ahead. Nick Giles: Yes. Thank you, operator. Good morning, everyone. Guys, still a very solid quarter here and wanted to just turn it on the guidance for a second. So you've reiterated your adjusted EBITDA guidance And just curious really what would take you to the higher low end of the range at this point? I mean, how much is end market driven versus operational? And then how much EBITDA could Washington incrementally contribute as volumes continue to ramp? Thank you. Tom Ferguson: I'll answer the first part of that and then Jason can opine on Washington. I feel like when it comes to I don't know if this has got missed or not. We've talked about it a few times. But you look at the $14 million to $15 million of avail EBITDA impact from last year versus we've signaled zero Q2, Q3 and Q4 for AVAIL. And so that's the biggest impact in terms of our EBITDA guidance. And I'd say that was, you know, harder for us to predict until now you can we can see with primarily WSI as the main asset left in Avail. And they had just gone through this summer is obviously weak because there's just not turnarounds and outages during the summer. So we've felt that. And going forward, though, they do come back into you know, so in terms of the upside. Hopefully they do have a strong fall season, which is you know, back to how turnarounds and outages run. I think interest savings is, is gonna continue. We've paid down the debt. We continue even after acquiring Canton, paid down some debt. So and interest rates have finally moved a little lower. And we've done that through our own actions in terms of repricing and the securitization. So, you know, we feel good about that. It's mostly embedded in our outlook, but you know, there's upsides to that. And then hopefully, get a deal or two done on the particularly on the galvanizing side that before the end of the year and have some impact there and because, obviously, the assets we're buying are gonna be good galvanizing assets that we hope to improve as well. I think those are all the kind of pieces. Precoat's performing well. I think they're driving know, to sustain those margins over 20%. And given the volume fall off, so as volumes pick up at all, that's that can also be upside to us. And then do believe the metal coatings folks are driving hard to sustain that 30%, 31% margin profile while taking advantage of the higher than expected growth, driven partly by regulatory changes and the threat that solar is gonna go away. So we're seeing lots of solar and pole transmission distribution kind of activity, which is we signal maybe slightly lower margin than on balance, but it's really, really good volumes. So we like that stuff a lot. And then Jason on Washington. Jason Crawford: Yeah. Certainly, Washington, you know, as we previously communicated, would be a drag in margins in the first half of the year and then start to turn positive in the second half of the year. And we're very much in line with around about $2 million of a hit to margins in the first in Q2 essentially. From a contribution margin point of view, the businesses contribute with the volume that's flowing through there. We know that's ramp up volume. But obviously, you've got the fixed costs associated with that facility and largely the fixed costs are driven by depreciation of the $125 million So it's very much in line with expectations. As you start to look at the second half of the year, then Q3, Q4, it starts to ramp. And, you know, we were very much in line with the expectation of that ramp profile. We'll start to hit capacity towards the 50% arena Q3 going into Q4, and then really see that start to pop in Q4. So very much aligned with the and very much built into original guidance and where we sit here today. Nick Giles: Tom, Jason, I really appreciate all that detail. Maybe just back on the coiled coating side. I mean, you've obviously deployed meaningful growth capital to expand capacity with Washington. But in the past, I think you have spoken about there could be some margin expansion on the coil coating side that could require some capital Can you just remind us how you're thinking about that opportunity today? What would be the timing around kind of a project like that? And how many quarters would something like that undertake? Thank you. Jason Crawford: Yes. And to be fair, I don't think there's any one big silver bullet out there. I think there's multiple projects that we've started to kick coming through the summer program that we'll start to incrementally see some benefits and, you know, we're seeing them start to kick in. And, you know, to be fair, that's applicable to both sides of the business. There's, you know, as we've highlighted our group our capital allocation is looking at outside and inside and some of the projects that sat in the sidelines, are now getting turned into execution. So you know, again, I don't think there's gonna be a big boost in terms of a step function. But we're going to continue to drive the opportunities that we see in front of ourselves. Nick Giles: Guys, thanks again. Keep up the good work. Operator: The next question comes from Adam Thalhimer with Thompson Davis. Please go ahead. Tom Ferguson: Hey, Adam, we can't hear you. You might be on mute. Operator: Pardon me. We have Timna Tanners with Wells Fargo. Timna Tanners: Hey, Timna. Import opportunity, is that fully played out? Or are we still in somewhat early innings? I know that imports only really started to drop off more recently. So I'm just wondering if we could see a bit more share gains still to come. Tom Ferguson: Yeah. It's really early innings. I think probably a, you know, a couple of months of that. So that should have a good tail to it. It just takes time to ramp up the domestic capacity, change projects we're seeing and things like that. So we feel good about that the balance of the year. I'm not sure it's fully embedded in our forecast. Jason would probably disagree with me. Probably, it is fully embedded. But I'm probably more of the optimist. And so I yeah, I look forward to that because it's we're engaging with some new customers and able to demonstrate our value add capabilities in terms of quality service and particularly responsiveness and it does impact our I would say it does have a slight negative impact on our margin profile because we're, you know, a lot of these are smaller smaller orders. And we're winning them because we can turn them quickly and give them whatever kind of color combination that they want. So we really look forward to that continuing to grow and be able to sustain it regardless of whether the imports come back up or not. Timna Tanners: Got you. Okay. Thank you. On the Washington ramp up, are you seeing any impact of reduced substrate because of the Oswego fire? Jason Crawford: No, no. I mean, certainly not from that point of view. At this point. Obviously, there's one customer supports that facility quite frankly, our you know, our production ramp is ahead of plan. Yeah. And, you know, we're executing with the material and, you know, we're out at the facility a couple of weeks ago and, you know, it's really starting to look like a coil coating facility versus a showpiece that, you know, a lot of the analysts that saw a couple of I guess, six weeks ago or so. So I think we're in very good shape from that execute through the end of the year. Tom Ferguson: There's a lot of aluminum sitting in that on that floor now. Timna Tanners: Gotcha. Okay. Alright. And then final one for me if I could. Wanted to just probe a little bit more the M and A pipeline, any updated thoughts on the economy having any impact on more or less to sell to you at this juncture? Thanks. Tom Ferguson: Yeah. I think there's you know, we're working a couple of the typical bolt-ons for galvanizing and it's one of them is actually a process, so we know that one will go forward. We can never quite predict. We tend to believe we're always gonna be a strong contender for those, and then we've got a good game plan once we do acquire them as we just did with Canton. Almost immediately ramping it up to our margin profile. So I look forward to that, and we're gonna be as aggressive as we need to be. Not seeing a whole lot shake loose because of it, which actually a little surprising. We were hoping to see maybe one of these multisite galvanizers decide to go on the market, but we haven't gotten any indication of that at this point. And then on the Precoat side, there's a couple of things out there. I think it's probably as much in our control as they can be. But once again, there the market hasn't seemed to cause them to wanna move any faster than they were before. So but it's a good pipeline. I think we've got nine good opportunities that are in various stages, not to mention a long list of other ones that we remain in contact with. So I'm hopeful we get something done before the end of the year. And maybe more than one. Timna Tanners: Okay. Thanks again. Operator: The next question comes from Adam Thalhimer with Thompson Davis. Please go ahead. Adam Thalhimer: Good morning, guys. Can you hear me now? Tom Ferguson: We can. We can. Adam Thalhimer: Great. First one, within Precoat, I think there's also a negative impact from tariffs that possibly offsets the positive impact. I was just curious if you could walk through that, Tom. Tom Ferguson: I'll let David do it. Yes. I think as you're right. As you look at the overall market, for imported steel, Adam, We know that the pre-painted imports are down 23% this year. That has been, you know, a bright spot or a tailwind for Precoat. Because that means there's less competitive prepainted steel coming in. But offsetting that, Bayer Galvalume market has been down about 50% due to the tariff impacts. So that's really the difference in the numbers and why, you know, PreCut was having some headwinds this year because normally that imported bear is volume that they would be the natural source to be selected to quote and quote that product. So, but as Tom mentioned, we think that our customers are telling us things have bottomed out. They did buy ahead and placed orders ahead of the tariffs and have been working through the inventory that they've had on the shelf. And we look forward to, to things turning around later on. Yes. And I'd add that the tariff impact is really driven, as Dave mentioned, it's just the uncertainty. So you've got projects being deferred, delayed. I'd say it's a combination of tariffs as well as the lower interest expectations as we had noted. Interest rates have stayed higher from the Fed longer than I think a lot of people And now with the government shutdown, who knows what the next step is. So I think that's just created hesitancy on non-infrastructure projects. Versus what you see on the metal coating side where infrastructure projects are going forward. And if anything on the solar stuff, it's accelerated. So on one segment, it's a positive. On the other segment, it's mixed, as you said, and probably more more negative than positive in the aggregate for Precoat. Adam Thalhimer: Okay. That makes sense. And then second question for me, I was curious on your confidence in no further losses from Avail. I'm just curious if just to be conservative, if we should model a slight loss in Q3 and then where they are in the process of monetizing the remaining businesses. Tom Ferguson: Yeah. And I we very much aligned that now you got to subscale piece of business, which is really three pieces. WSI forming by far the largest in terms of sales. But not in terms of, contribution margin. Then you got a lighting business, which is a nice little business that I think they'll get that transacted you know, hopefully this year. And then there's a Chinese. It's a Chinese joint venture, high voltage bus business that once again, I'd hope that they could get that transacted, this year. WSI is a tougher one because it's a little more impacted, in from a market perspective in terms of, refinery turns around. Turnarounds and things like that. So that's probably a prefer not, but it's probably a longer-term piece. In terms of the Q3, you know, you could I'd say it's hard for us to predict because Q3 should be typically is the fall season and tends to be a stronger one for WSI. On the other hand, as Jason alluded to, they are carrying more over that they can't get at while the TSAs with InVent are running. So, you know, on balance, I think we're pegging it at zero. And I'd say it's more likely slightly negative in Q3. The risk is probably more negative in Q3 than the upside. And then Q4, they go into the winter, but hopefully, some of these other things transact. Jason Crawford: And the only thing, I would talk about, Adam, is they they've started to digest the TSA and started to accommodate the infrastructure that they need to support that. So we are starting to see some moves in terms of, you know, realigning their core overhead costs. So you should get that pickup going into the second half and then, you know, as Tom mentioned, the seasonality impact of the WSI business. Adam Thalhimer: Good color. Thanks, guys. Operator: Our next question comes from Mark Reichman with Noble Capital Markets. Please go ahead. Mark Reichman: Thank you. Just a couple of questions. On interest expense, when we published at the September, we took our interest expense numbers down I think we were kind of landing around $49 million to $50 million for the year. And of course, the second quarter came in a little higher than our revised estimate I was just kind of curious, your guidance hasn't changed But in the past, your guidance had included $55 million to $65 million of interest expense. What would your expectations be for interest expense for the full year of 2026 for the fiscal year 2026? Jason Crawford: Yes. I mean, I think the part in terms of the interest and the picking up some favorability given that we've reduced our total debt through the Avail transaction. As you look at our interest expense in the quarter, then, you know, we certainly picked up some favorability, but it was more towards the back end of the year oh, sorry. The back end of the quarter. Given the repricing, the term loan and introduction of the securitization. So obviously, as you look at our quarter in Q2, that's what we improved in Q3 and Q4, obviously, through cost of debt. And then, you know, we will continue to pay down debt through the same half of the year, excluding any impact from m and a or any share repurchases. Mark Reichman: And the second question is SG and A, 2020, '25 ran about 9%. Of sales. It was 8.2%, I think, in the May, but dipped down to 7.9% this quarter. Are your kind of your expectations for the well, I guess, as a percentage of sales the right way to look at it? Or what would you kind of your expectations be for the remainder of the year and maybe kind of an ongoing you know, percentage? Jason Crawford: Yes. I mean, I think that 8% number is fairly representative. Obviously seasonality kicks in the back half of the year. So certainly in Q4, we're SG and A is little bit more of a fixed cost. So the number that you're seeing in Q2, there really isn't any great pluses or minuses away from that through the end of the year. So it's gotta be more of a fixed number versus a percentage as you look at Q3 and Q4. Mark Reichman: Okay. And just one follow-up to Adam's question. On the equity and earnings of unconsolidated subsidiaries. So we originally had like $1.4 million in the third quarter and I think $774,000 in the February. So what I heard from you is based basically zero in the third quarter, and kind of maybe modestly positive or close to neutral in the fourth quarter for that? And that would be a veil obviously. Jason Crawford: Yes, yes. I mean, guidance is zero for both And I think some of the discussions that we've been having is there's certainly a sensitivity around about that, but we're going get it wrong. We're going get it slightly wrong in the upside or the downside. I would say in Q3, it's probably you know, if anything, it's slightly wrong in the upside and then slightly wrong in the downside, you know, the seasonality the WSI business has got kicked in the Q4. So you know, the determining factor in Q4 is gonna be how quickly they can ramp the overhead cost to, you know, be aligned to the current business. But really, as you look at the numbers then, you know, in CD and Q3 and Q4, it should be, you know, a very minimal plus or minus roundabout zero. Mark Reichman: Okay. That's very helpful. Thank you very much. Operator: The next question comes from John Franzreb with Sidoti and Company. Please go ahead. John Franzreb: Good morning, guys and thanks for taking the questions. Actually want to go back to one of your responses to an earlier question about, Precoat doing better in September. Do you have any idea or can you give us any color as to what's driving maybe recovery in precoating during that month? Jason Crawford: The only thing I would add is, there's certainly fluctuations month to month and, you know, inventory buying patterns plays a part into that. And obviously, they're still coming through our strong construction season. So shipments versus sorry, building inventory versus depleting inventory. You're into that time period where, you know, you're starting to look at the end of the season and accommodate your inventory for that. And again, quite frankly, in September, we've seen a lot of our strength So our customers, you know, if you take that one single data point, our customers are looking for a healthy end to the season. Would be my takeaway. John Franzreb: Okay. Great. And also it also sounded like that maybe demand in the Washington facilities is maybe a little bit better than you expected. Can you kind of remind us or update us as to what the revenue contribution is in Washington that's embedded in your, full year revenue guidance? Jason Crawford: Yes. To be fair, we've not went into that level of detail. And there's still a lot of variations to take place. And quite frankly, we've got a sister facility in the simplest area and, you know, we'll use some of the volume from that to help ramp it So it's not a black and white just looking at that single facility and how it's quite playing to do it, the overall results. There's still a lot to play out here. You know, we are we started the production in April, and we're certainly progressing very, very well. But equally, we're cautious just terms of what could be around the corner. So really don't like if it's specific numbers round about it, but, you know, what we have built into the guidance, we're certainly very comfortable with those numbers. John Franzreb: Okay. Fair enough. And one last question, if I may. The zinc prices have rebounded sharply from their bottoms early in the spring. Just maybe some thoughts or commentary on what you're seeing in the zinc market that might be helpful for us? Tom Ferguson: Sure. Yes, first thing is, yes, we have seen that. Which usually makes, you know, opportunities for not that we base our price off of costs, were very value pricing oriented. But usually when zinc going up on the LME customers understand that's gonna start to affect prices, so that creates some opportunities. Two, we've got six to eight months of inventory in our kettles, so it doesn't have much impact on our margin profile the balance of the year, our costs of zinc the balance of the year, But clearly, that will start to color how we look at next year and as we're entering the process to put our plans and budgets together for, for the next fiscal year. But generally, I think it's going to continue in but I'm not sure, yeah, I'm not sure we're gonna usually, when things start to change, when you when you see some spikes, and this has been more of a gradual increase in and generally, that's very manageable for us. So yeah, minor impact on our outlook in metal coatings for this year. Clearly, as we start to put our plans together, it will be a talking point as we talk about however we end up guiding for the next fiscal year. John Franzreb: Great. Makes sense. Thanks for taking my questions. Appreciate it. Tom Ferguson: Sure thing. Thanks, John. Operator: The next question comes from Jon Braatz with Kansas City Capital. Please go ahead. Jon Braatz: Good morning, everyone. Morning, John. Tom, a couple of questions. On the metal coating business, you completed the Canton acquisition, I think July 1. How much of a contribution did Canton have in terms of revenues in the quarter? Tom Ferguson: It's revenues in the quarter million. Yes, and few 100,000 of yes, contribution margin. Jon Braatz: Okay. Okay, good. And it was like two months in the quarter, so we'll see a full quarter not yet going forward. That's right. Okay. And secondly, on the margin profile for the Metal Coating business, it's been very, very good over the last couple of years. And absent any significant change in zinc prices or the economy and so on, Is that range that you provided in terms of adjusted margin adjusted EBITDA margin for that segment. Is that 20 that low 20 that lower end of the range, is that is that still relevant? Is there a point where maybe you feel comfortable raising that lower end and know, getting closer to the, you know, 30 to 32%, something like that? Absent again, absent any any significant economic changes. Tom Ferguson: Yeah. We tend to yeah. We haven't seen that that 20 the low end of that, or even very much think one quarter, we were below 30%, which, was last winter. We had a rougher than normal Q4 last year. So you know, that was probably the only time in a while we've seen below 30% But yeah. Like, I think we're pretty confident in this, where we're at is 30% to 32%. We'll look at that as we go into the planning process. We just completed our strategic plan and we'll be you know, rolling out some communication on that as we go forward. But yeah, we're pretty comfortable with their margin profile at Holden in the 30 plus percent range. Balance of this year. So yeah, we might get comfortable to guide to a tighter range on that. So Okay. Jon Braatz: Alright. Thank you very much. Operator: This concludes our question and answer session. I would like to turn the conference back over to Tom Ferguson for any closing remarks. Tom Ferguson: Yes. Just a couple of things. I don't think we got any on share buybacks. Jason alluded to it. But we had kind of guided that we'd be buying that we what we issued 10b5-one that for $20 million at a couple of price points. Depending I think we're going to I'm confident we will get $20 million of our shares bought in over the next perhaps few weeks to a couple of months. And look forward to doing that and because we think we're still a great high value stock and business with, with an outstanding outlook, particularly as we kind of finish out the choppiness of this year and look forward to next year. So thank you for joining us. We look forward to talking to you after our third quarter results. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Richardson Electronics earnings call for 2026. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you will need to press 11 on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to turn the call over to your speaker today, Edward Richardson, CEO. You may begin. Edward Richardson: Good morning, and thank you all for joining us in 2026. We appreciate your continued support and interest in Richardson Electronics. Joining me today are Robert Ben, Chief Financial Officer, Wendy Diddell, Chief Operating Officer, Gregory Peloquin, General Manager of our Power and Microwave Technologies Group which includes Green Energy Solutions, and Jens Ruppert, General Manager of Canvas. As a reminder, this call is being recorded and will be available for playback. I would also like to remind you that we will be making forward-looking statements. They are based on current expectations and involve risks and uncertainties. Therefore, our actual results could be materially different. Please refer to our press release and SEC filings for an explanation of our risk factors. In 2026, total sales were $54.6 million, up from $53.7 million in Q1 of last year. Driven by sales growth in both PMT and Canvas, PMT delivered notable year-over-year sales growth driven by continued strength in our semiconductor and RF power segments. It's important to note that sales growth was partially offset by the inclusion of our Healthcare business in both the current and prior quarters. As a reminder, we sold our healthcare in 2025, so this will impact our year-over-year comparisons through the end of Q this year. The healthcare engineering and manufacturing team is making good progress finishing production of AltiTubes and finalizing repair processes for the Siemens tubes, which should result in positive operating contribution toward the end of FY 2026. Within our GES business unit, we're very pleased with the year-over-year growth in the wind segment. The performance provides us with growth evidence that the policies from the current administration are not hurting demand for our alternative energy solutions. We believe our wind business is protected because we're pursuing programs strictly on land-based turbines to support global customers in providing solutions that improve the performance and efficiency of the existing fleet. While overall sales were down slightly in GES, this was driven by a large one-time order in our EV rail sector in the first quarter of last year that did not repeat this year. Backing out this sale, GES would have been up quarter over quarter. The strategic priority of the company is engineered solutions, which are products we make ourselves in LaFox. The strategy focus, along with improved manufacturing utilization in the quarter, contributed to the higher gross margin versus the prior year. The long-term investment in our global footprint is also a strength, helping us better manage the tariff landscape. Finally, we're pleased to report that we generated positive operating cash flow in the quarter, marking six consecutive quarters. Our cash position remains strong at $35.7 million, providing us with flexibility to support both our ongoing operations and strategic growth opportunities. I'll now turn the call over to Robert Ben, our Chief Financial Officer, who will provide a detailed review of our first quarter results and capital position. Robert Ben: Thank you, Edward, and good morning. I will review our financial results for our first quarter fiscal year 2026, followed by a review of our cash position. Consolidated net sales for 2026 increased 1.6% to $54.6 million compared to net sales of $53.7 million in the prior year's first quarter. When excluding Healthcare, which the majority of assets were sold in January 2025, net sales increased by 6.8%. Please note that healthcare results, including prior periods, are consolidated into the PMT segment beginning this quarter. This was our fifth consecutive quarterly year-over-year increase in sales. First quarter net sales growth was led by a 2.8% increase in PMT sales. Excluding Healthcare, PMT sales were up 10.5% and were due to higher demand from the company's semiconductor wafer fab customers as well as our legacy power grid tube product lines. Canvas sales increased 8.3%, which reflected improved market conditions in Europe. Partially offsetting these increases was a 10.2% decrease in sales for our GES business unit. While revenues in the wind segment increased, they were offset by the nonrecurrence of a large EV locomotive order from the prior year's first quarter. Consolidated gross margin for the first quarter was 31% of net sales compared to 30.6% during 2025. The 40 basis point increase in consolidated gross margin was primarily due to margin improvement in both PMT and GES. PMT's gross margin increased to 31.3% from 30.1% as a result of a favorable product mix and improved manufacturing absorption. GES gross margin increased to 29.6% from 29.4% due to product mix, including a higher percentage of products we manufacture in LaFox. Lower gross margin for Canvas partially offset the improvement in consolidated gross margin. Operating expenses as a percentage of net sales improved to 29.2% for 2026 compared to 30% in 2025. As a result, operating income was $1 million for 2026 compared to an operating income of $300,000 in the prior year's first quarter. Other income totaled $1.4 million for the quarter, which was $1.1 million higher than 2025. The increase from the prior year's first quarter was mainly due to a nonrecurring gain of $900,000 from a confidential contractual settlement. Net income was $1.9 million for 2026 compared to $600,000 in 2025. Earnings per common share diluted were $0.13 in 2026 compared to $0.04 in 2025. EBITDA for 2026 was $3.3 million versus $1.7 million in the prior year's first quarter. Please note that EBITDA is a non-GAAP financial measure, and a reconciliation of the non-GAAP item to the comparable GAAP measure is available in our first quarter fiscal year 2026 press release that was issued yesterday after the market closed. Turning to a review of our cash position, cash and cash equivalents at the end of the first quarter fiscal 2026 were $35.7 million compared to $35.9 million at the end of fiscal 2025. Cash flow provided from operations was $1.4 million compared to cash flow provided from operations of $400,000 in the first quarter of the prior year. Capital expenditures of $1 million in 2026 were primarily related to our manufacturing business facilities improvements and IT systems, versus $900,000 in 2025. We paid $900,000 in the first quarter for cash dividends. In addition, based on our current financial position, our Board of Directors declared a regular quarterly cash dividend of $0.06 per common share, which will be paid in 2026. As of the end of 2026, the company had no outstanding debt on its revolving line of credit with PNC Bank. In addition, we have extended this credit agreement through October 6, 2028, with similar terms and a $20 million borrowing limit. Now I'll turn the call over to Gregory Peloquin, who will provide more details for our PMT and GES business groups. Gregory Peloquin: Thank you, Robert, and good morning, everyone. PMT and GES are key components of our multiyear growth plan. Coming out of FY 2025, we had a strong backlog, launched several new products, expanded our customer base, and advanced multiple development programs from beta testing to preproduction. Building on that positive momentum, in Q1 fiscal year 2026, PMT excluding healthcare grew to $37.8 million, a 10.5% increase over the prior year and a 5.1% increase over Q4 fiscal year 2025. GES sales were $7.3 million, up 35.5% over fiscal Q4 2025 and down 10.2% year over year due to a multimillion-dollar EV locomotive billing that did not occur this year and without which GES would have been up in the quarter versus the prior year's first quarter. However, on a positive side, the core wind turbine business grew 86.1% over the prior year and 16% over the prior quarter, supported by new customers, global expansion, and new products. Our pitch energy modules and related wind energy products lead GES quarter-over-quarter growth. We continue to gain market share with our end customers by developing new products and solutions that they are incorporating. Today, we serve dozens of wind turbine owner-operators, including exclusive partnerships with the top four owner-operators of GE wind turbines, RWE, Inver Energy, Enel, and NextEra. We also saw growth in our new multi-brand PEM turbine platforms. We continue to grow this program internationally, expanding in Europe and Asia with new products for other turbine platforms such as Suzlan, Senvion, Nordex, and SSB. We have now received orders from customers in Australia, India, France, and Italy. Our GES growth strategy centers around power management applications. We rapidly design multiple products, secured patents, and built a strong global customer base and partnerships. Our success is evident in our growing pipeline as we capitalize on numerous growth opportunities to support new power management requirements, significant energy transformation, and wind turbine repowering projects. We're entering Q2 FY 2026 with solid momentum. We've recently added key technology partners such as Kiba, Goshen, and Wulong, who will play critical roles in both wind power management and energy storage. Key initiatives include faster design-to-production cycles, supported by a new design center in Sweetwater, Texas. Sweetwater has one of the largest concentrations of power management and wind turbine engineers in North America. Expanding our design team to accelerate enhanced design cycles prior to transitioning the work to our world-class manufacturing and test group in LaFox is one of our main strategic priorities this year. We expect to have the Sweetwater Design Center operational in Q2 FY 2026. Turning to Power and Microwave Technologies Group or PMT, which includes the electron device group, our legacy tube and semiconductor wafer fab equipment business, and RF and power microwave components group, or PMG. In the quarter, sales growth was led by increased demand in both our RF and microwave components business. As we see growth in RF and wireless applications such as SATCOM, and military applications, including radar, and drone technology. We also saw continued growth in the fourth straight quarter among our semiconductor wafer fab manufacturing customers. Looking ahead, we're excited about the strategic initiatives across PMT and GES, including our ESS or energy storage system program, global expansion of our green energy products, and new technology partnerships. While we are navigating a higher degree of uncertainty associated with the impacts of tariffs and market conditions, we are pursuing opportunities that may come from these disruptions. Investing in infrastructure, expanding our design and field engineering teams, enhancing our in-house design and manufacturing capabilities to support growth demand and innovation. Our field engineering team continues to identify new customers and opportunities. Our global capabilities and global go-to-market strategy set us apart from our competition in the power management, RF microwave, and green energy markets. We have developed a business model that combines legacy products with new technology partners and solutions. Aligning with our growth strategy to deliver engineered solutions to a global customer base. This model differentiates us from our competition. Our GES products and technology partners support our niche product strategies. As it appears federal subsidies will be harder to get under this administration. Looking at our new ESS project and strategy, we are focused in key states that will continue offering large subsidies such as Illinois, Massachusetts, and California. We are expediting our efforts to expand our global market penetration of our power management products for green energy applications, focusing particularly on Europe and Asia. As currently, about 70% of our GES sales are in North America. We are working on these initiatives alongside marketing our services to companies who need partners in the US to manufacture, test, and support products currently made in other countries. We acknowledge that there are a lot of moving parts of end nodes in this market right now. But we have successfully used our global resources and capabilities to mitigate the effect of situations like this in the past. In summary, we remain optimistic about our growing project-based business even though it remains hard to forecast. We continue to increase our technology partners, design opportunities, and engineering staff. We have new technology partners that fill technology gaps. We have a proven strategy of identifying opportunities in this multibillion-dollar market reserve. As a result, we feel FY 2026 will be another growth year for both PMT and GES. And with that, I'll turn it over to Jens Ruppert to discuss Canvas. Jens Ruppert: Thanks, Gregory, and good morning, everyone. Canvas engineers, manufacturers, and sells custom displays to original equipment manufacturers across global industrial and medical markets. It is our mission to deliver high-quality display solutions tailored to our customers' needs. Canvas reported revenue of $8.3 million in 2026, an increase from $7.6 million in the same quarter of the previous year. Our gross margin as a percentage of net sales decreased to 30.9% from 34.3% in 2025, primarily due to product mix and higher inbound freight costs. The backlog at the end of 2026 remains strong at $38.4 million, providing a robust foundation for future business. During this most recent quarter, Henley secured orders from both repeat and new medical OEM customers for a range of applications. Our primary focus remains on robotic-assisted surgery, navigation, endoscopy, and human-machine interface solutions for the control of medical devices. Furthermore, our solutions are widely utilized in various commercial and industrial applications. For instance, our products enhance passenger information systems in trains and buses, and improve HMI technologies used in printing, vending, milling, and packaging equipment. Our initiatives focus on increasing Canvas' visibility and market leadership by seeking new opportunities, building customer relationships, and collaborating within the industry to drive growth. Looking ahead, while the business is still project-focused and can therefore vary quarter over quarter, we are cautiously optimistic about improving demand in our markets. Positive indicators such as increasing requests for quotes and encouraging customer feedback suggest steady growth. Our dedicated sales team continues to explore new opportunities while I focus on implementing strategic plans to ensure sustainable growth and deliver long-term value for our shareholders. I will now turn the call over to Wendy Diddell. Wendy Diddell: Thank you, Jens, and good morning, everyone. While our healthcare business is now included in PMT, I want to provide some additional color as we go through this transition period over the next several quarters. As a reminder, we sell CT tubes exclusively to DirectMed as provided under the terms of the January 2025 sale and distribution agreements. I am pleased to convey we are making excellent progress finalizing production of our Alta tubes. We've also made good strides over the last quarter validating new equipment and materials required to improve our processes for the repaired Siemens tube types. Comparable healthcare sales throughout most of FY 2026 will be lower than the prior year given DirectMed acquired the healthcare parts business. The sale concluded in January 2025, so this unfavorable comp will continue through Q3 FY 2026. We anticipate the financial impact of the retained CT tube business will turn positive in 2026 or shortly thereafter. Last quarter, after the sale of Richardson Healthcare, we discussed our focus on accelerating growth and improving efficiency. In the first quarter, we were pleased to see year-over-year growth in PMT and Canvas, as well as the wind energy portion of GES, reflecting our ongoing investments in these sectors. Of particular importance is the success we continue to see with our engineered solutions growth strategy. We also see some initial benefits from the Big Beautiful Bill. There are implications in the bill that are fostering wind turbine repowers, which lift sales of our wind turbine modules as well as sales of products from our technology partners. Wind management companies need to upgrade their towers to receive comparable tax in coming years. In the quarter, we announced our participation in the REV Illinois program, which provides significant tax credits in return for investment in alternative energy technology development in the state of Illinois. We're making progress developing a world-class battery energy storage demonstration site at our LaFox facility. As we've mentioned before, the demand for battery energy storage continues to accelerate, and our turnkey solutions position us to capitalize on that growth. Our Made in America marketing campaign recently kicked off with the addition of a dedicated business development manager. We are highlighting our capabilities on our website and through trade show attendance. In addition, we are leveraging our existing sales organization and global customer relationships throughout the company. Finally, we are seeing increasing demand for our engineered solutions in the semiconductor wafer fab equipment market. Our large customers in this segment indicate sustained growth relating to the ongoing benefit of AI on equipment demand throughout the world. Rest assured, the management team remains focused on efficiency and cash as well. The end of the significant inventory growth in support of one of our largest suppliers who will soon terminate production of power grid tubes is in sight. In this regard, we are working closely with other partners to ensure ongoing sources of supply, but we are in a good inventory position to execute this strategy over several years. Longer term, we remain committed to driving growth both organically and through strategic acquisitions. We're being thoughtful in our approach. We are looking for the right opportunities to utilize our capabilities and accelerate our growth while making full use of our global infrastructure. We believe our current strategic initiatives will drive revenue and profitability growth over the next several years while we consider longer-term strategic acquisitions that further enhance our business. I will now turn the call back to Edward Richardson. Edward Richardson: Thanks, Wendy. In closing, our results this quarter demonstrate the strength of our strategy and the resilience of our business model. By sharpening our focus on repeatable sales, driving strong cash flow, and building on diversity across power management and alternative energy solutions, we're positioning the company for long-term success. At the same time, we remain disciplined in our commitment to improving profitability. These priorities give us confidence in our ability to deliver sustainable value for our customers, shareholders, and employees as we move forward. We will now open for questions. Operator: Certainly. Ladies and gentlemen, due to time constraints, we ask that you please limit yourself to one question and one follow-up. Again, we ask that you please limit yourself to one question and a follow-up until we all have a chance. For a question, after which we will answer additional questions from you as time permits. As a reminder, to ask a question, please press star 11 on your telephone. Our first question will be coming from Robert Brooks of Northland Capital Markets. Your line is open, Robert. Robert Brooks: Hey. Good morning, guys. I wanted to ask you on where we are with the Ultra 3000s getting onto GE's approved aftermarket vendors list. On your fourth quarter call earlier this summer, you had said that you did a final test in June, and the engineering team sent it to GE Legal, and it was sitting there. But all indications were that the service agreements were not going to be jeopardized if the Ultra 3000s are used. And so I just wanted to hear where that's sitting or any new developments on that. Gregory Peloquin: Yeah. Hi, Bobby. They update me every week. We actually talk to GE about other things, this included. So we're in communication with them. Their engineering team has signed off on it, and the last communication, which was last week, was that it's final signatures from legal. They're still waiting on it. And it was promised to us here in the next week or two. That's the status of it. Once we get that final signature from their legal team, we will send them a number of units. They'll test them, mainly for safety, not for function, but for safety because their installers will be working with it. And so, once that's done, they'll approve it, and then along with that, not only are we pushing, if you will, GE, but also two of our largest owner-operators are also pushing it. Because they have both TSAs and their own repair. So the short answer, which I just went long on, is we expect it to be signed in the next couple of weeks. They'll do the audit of it for quality, safety. And we fully expect sign-off here in Q2 at some point. Robert Brooks: Got it. And then the semi fab sales were up 52% year over year, which was great to see. But I just wanted to make sure I'm thinking about it right. Wasn't Q1 last year we were at, like, a trough level for those sales? And then the follow-up is, would you expect that year-over-year growth rate to continue through your fiscal 2026 or maybe at the minimum, the nominal level of semi wafer fab sales in Q1 stay consistent through fiscal 2026? Gregory Peloquin: Yeah. You're correct, Bobby. Q1 of last year was the lowest quarter of the year for Lam. Although they recovered very well. And we don't get a lot of visibility from them. But the most recent information that they've put in the portal looks like these larger numbers they've been talking about now, which seems like a year or two, we should start seeing strong, strong growth in Q3 and Q4 of our fiscal year. But we'll kind of be at the same run rate here in Q1 and Q2. With large growth in Q3 and Q4 based on their forecast, which is a forecast. Robert Brooks: Thank you. Operator: And our next question will be coming from Anja Soderstrom of Sidoti. Your line is open. Anja Soderstrom: Hi. Thank you for taking my questions. So I'm just curious where the wind orders you noted from several countries around the world. How meaningful were they, and how do they compare to the actual opportunity there? Gregory Peloquin: Yeah. So we've launched it hard to produce this product globally with our customer base. It's a smaller market than North America, but still a very strong market for us. We've been able to do a great job in introducing four new platforms, which will be more popular in Europe than GE, Nordex, Senvion, Suzlon, and SSB. We've done already in part of Q1 alpha and beta testing with customers in Australia, India, France, and Italy. And they've approved that, and we've already received orders in our Q1 from customers in those four countries. And we look at this every week. If I look at the document that we track, all the opportunities that we're currently working on in terms of our teams worldwide, it's getting up to two or three pages. So it's active. It's just an education process for these customers that it's available. And this product is available for their specific turbines. And then, of course, like we did with North America, you'll have alpha testing, beta testing, and then final production. But I would say it's not going as fast as we'd like. Nothing ever does. But we're getting some good traction expanding this capability, if you will, outside of North America. Because as you know, 70% of our business is currently in North America, so it's pretty much nothing but upside outside of North America. Anja Soderstrom: Okay. Thank you. And what do you expect in terms of CapEx for the year given your expansions in LaFox and the Texas Center? Robert Ben: So I'll take that one, Anja. We're estimating it'll probably be in that $5 million range. So a little bit higher than last year, but last year was very low because there were some programs that were pushed into FY 2026. So, again, we'll stick with that $4 to $5 million range. Anja Soderstrom: Okay. Let me also add something. Yes. Wendy Diddell: Real quick. On the REV Illinois program and, Greg, you can jump in here. The CapEx requirements themselves are not significant in this fiscal year. What we're looking at is some equipment that will help improve our manufacturing efficiencies and position us for new opportunities primarily and particularly in the ESS solution. So what we'll be looking at, the REV Illinois program allows us to account for people, in addition to CapEx, in addition to other R&D related expenses. And that's where we're focused on right now with making sure we've got the engineering resources we need, the program managers we need, so that when we get our facility built here in FY 2026, we'll be ready to efficiently and effectively market that. Gregory Peloquin: Yep. Yeah. I mean, this good example is the demo site. That all that development and goes towards the number that we've been to attain to get all the subsidies and rebates. And just one thing in the REV Illinois program. You know, we're going to apply for every single subsidy and tax credit we can get with this green energy program. Luckily, the state of Illinois has even better than California, the most rebates and tax incentives for people doing wind, solar, energy storage, green energy itself. So we found out about this from some local contacts. We applied. You have four years to do it. And it's approximately $8 million in total investment and a number of headcount. But we have four years to do it. So we're not doing things to get that credit. We're doing things to grow the business and increase shareholders' value. But our estimate is we'll hit those numbers very easily, so we might as well take advantage of it. Anja Soderstrom: Okay. Great. Thank you. That was all for me. Operator: Thanks, Anja. And our next question will be coming from Brendan Kinney, Private Investor. Brendan Kinney: Hello. Can you hear me? Robert Ben: Yes. I can hear you, Brendan. Brendan Kinney: Hi. So just one quick question. The operating income, you know, it was mainly due to a nonrecurring gain of $900,000. Could you just fill in a bit more detail about what that was? Robert Ben: Hi, Brendan. This is Robert Ben. First of all, the operating income, as I stated in my remarks, was $1 million, and that did not include the nonrecurring gain, that's below in other income. Just to clarify. So operating income for the quarter more than tripled from last year's first quarter. But to specifically address your question on the $900,000 nonrecurring gain, you know, as I stated in my remarks, that's from a confidential contractual settlement. So, unfortunately, I'm not really allowed to say much about it other than that. Brendan Kinney: Okay. I missed that. Yeah. Thank you. Operator: Thank you. Thanks, Brendan. Star 11 on your telephone and wait for your name to be announced. Our next question will be coming from Chip Rui of Roe Asset Management. Your line is open. Chip Rui: Good morning, guys. Good quarter. I have three questions, so maybe I'll just lay them out. And you can divvy them up. First, I think the when do your comment on the repower initiatives and the Big Beautiful Bill. Could you expand on that? I think the sentiment has been kind of misplaced on you guys around wind anyway because you're not OE. You're pretty much all aftermarket. So now that there's a potential positive from the administration on repowering, I just like to dig into that a little bit more. Secondly, the operating leverage looked great. On the operating income, can you just give us some thoughts on how the rest of the year will play out? Can we continue to see muted expense growth that would contribute to good leverage to the year? And last, maybe, Edward, I'd like the comments on kind of I mean, clearly, the semi business and PMT is a really positive thing to hear. The outlook there. But maybe dig into the other side, the legacy RF business seems like it's perking up too, so maybe some details there. Gregory Peloquin: Thanks, Chip. Hey. I'll Chip, I'll just talk about the first question you had. It's a great question. So and you hit it on the head. You understand it very well that almost all of our business other than Suzlon is aftermarket. And so with this administration kind of removing a lot of the subsidies you get for new turbines, kind of like your old car in college, can't afford a new one, so you refurbish and fix up your current one. What's kind of going on, and the term in the industry is called repowering. Where they, in some cases, drop the turbine to the ground and then replace everything they can, and then they'll have a turbine that's good for another ten to fifteen years. At that time, instead of putting lead acid batteries back into the turbines, many of our customers and some of those larger orders we got in terms of our large, you know, get a 1.25 book to bill in FY 2025. With people ordering parts for this repowering program. So they will put in our pitch energy modules, which will last up to fifteen years instead of the lead acid batteries. And so that decision by the government, which is getting a lot of press, actually, in a roundabout way, supports us and hopefully will expedite some of the large orders we have on our books in terms of pulling them in over the next two to three quarters. The last thing with that and the Big Beautiful Bill, Wendy's talking about if they get it done by the end of this calendar year, they can put some of that money to the side or keep the current rebates and tax credits that they have now. So we're working a lot of our owner-operators to get their forecast between now and the end of the year. So we again, we grew 23% in FY 2025. Fully expect based on the forecast and some of these other things that GES will grow double digits in FY 2026. Wendy Diddell: And then, I guess, operating leverage. I'll take that one. Okay. So in terms of leveraging and operating expenses, you know, I'm looking at our forecast for the full year. It'll be up just a little bit, not a lot over FY 2025. As we invest in some of the programs that Greg has mentioned, you know, in terms of additional engineers, additional people outside the US focusing on green energy growth. But, Chip, one of the things we do well as a company is really managing our SG&A level and keeping that increase under control. So I would not anticipate a significant increase over FY 2025. Does that answer your question? Chip Rui: Yes. And then just thoughts on the RF side. Edward Richardson: Right. Well, our RF tube business still remains about $85 million. We're going through a period where our largest supplier is actually going to exit the business over the next three to five years. And a lot of that equipment and technology we own, so we're in the process of trying to determine if we move it back here or work with other tube manufacturers around the world. But it's put us in a position where we built up our inventory very substantially. On the other hand, that inventory tubes are like good or fine wine. You know, they under vacuum, and they last forever. So we have no issue as far as obsolescence on the tubes, but our difficulty at this point is finding other manufacturers or making a decision to bring some of that manufacturing back here. But what you'll see over the next three or four years is our inventory go down dramatically as far as that's concerned. But the business stays extremely profitable, and we're pleased to be pretty much sole source on tubes around the world. Chip Rui: Okay. That's great. Did you see I thought you said you saw a pickup in the kind of that core business in the quarter and some more positive signs. Edward Richardson: In the tube business, I think it's just about level. What we are seeing is a pickup in the semis to have equipment manufacturing business. You know, we follow Lam's quarterly vendor meetings and listen to them, and they're talking about a very positive increase in their business going forward. In the best year, we did about $40 million with Lam and people in that business. And I think right now, we're running in the low twenties, Wendy, somewhere. So we see an opportunity to grow substantially in that business going forward. Gregory Peloquin: And then on the RF solid-state side, if you bring to that because that was, you know, business that we were in before, that also grew. And we're seeing a large uptick in military defense, RF communications, drones, and then, of course, SATCOM, globally, to get 5G to all these remote areas. That's the business that picked up, and that's where the growth was on the solid-state side. Chip Rui: Okay. That's what I was asking. Thanks for the clarification. And that sounds like that sector, the defense side, it's pretty hot across the board. Do you see kind of accelerating participation into that end market? Gregory Peloquin: Yeah. And it's, you know, because of this global infrastructure that Edward put in place decades ago, it really is a benefit to a company like us. We're seeing a lot of the drone manufacturers are in Europe, and we have a great team there. But, you know, it's military too, but what we're seeing also, you know, urban development, homeland security, disaster management, forest fires. I mean, drone technology is expanding very, very fast, and we have some of the, if not the best, technology partners like 3R Wave that have great products for that. So we're participating in it, and that's where the growth is on the solid-state RF and microwave side. Chip Rui: Okay. Thank you. Operator: And I would now like to turn the conference back to Edward Richardson for closing remarks. Edward Richardson: Well, we want to thank you very much for following our progress and growth. We're really pleased with the performance of the company, and if you have further questions, please feel free to call us at any time. Thank you very much. Operator: And this concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Greetings. Welcome to Helen of Troy's Second Quarter Fiscal 2026 Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. Anyone should require operator assistance during the conference, please note that this conference is being recorded. I'll now turn the conference over to Ann Racunis, Director, External Communications. Thank you, Ann. You may now begin. Ann Racunis: Thank you, operator. Good morning, everyone. Welcome to Helen of Troy's second quarter fiscal 2026 earnings conference call. Before I review our agenda with you, I'd like to welcome our new Chief Executive Officer, Scott Azel, who joined the company last month. The agenda for the call this morning is as follows. I will begin with a brief discussion of forward-looking statements, Scott will then share some of his initial thoughts and areas of focus. Brian Grass will provide a high-level discussion of the quarter and our progress on key initiatives. Tracy Shereman, our assistant CFO, will then provide an overview of financial performance in the second quarter and provide commentary on our expectations for the full year fiscal 2026. Following our prepared remarks, we will open up the call for Q&A. This conference call may contain certain forward-looking statements that are based on current expectations with respect to future events or financial performance. Generally, the words anticipates, believes, expects, and other similar words are words identified in forward-looking statements. Forward-looking statements are subject to a number of risks and uncertainties that could cause anticipated results to differ materially from the actual results. This conference call may also include information that may be considered non-GAAP financial information. These non-GAAP measures are not an alternative to GAAP financial information and may be calculated differently than the non-GAAP financial information disclosed by other companies. The company cautions listeners not to place undue reliance on forward-looking statements or non-GAAP information. Before I turn the call over to Scott, I would like to inform all interested parties that a copy of today's earnings release and related investor presentation has been posted to the company's website at helenoftroy.com. And can be found on the investor relations section of the site or by scrolling to the bottom of the home page. The earnings release contains tables that reconcile non-GAAP financial measures to their corresponding GAAP-based measures. And I will now turn the conference call over to Scott. Scott Azel: Thank you, Ann, and good morning, everyone, and thank you for joining today's call. It is a great honor to speak to you as the CEO of Helen of Troy. Before I begin, I would like to thank both Brian and Tracy for their leadership these past few months. I'm so pleased they've agreed to continue helping me lead this company as chief financial officer and assistant CFO. I've enjoyed the opportunity to become acquainted and collaborate closely with them since I've joined. Their company knowledge, industry insight, and enterprise leadership are immensely valuable, especially as we make a smooth transition to our future. As this is my first earnings call since joining the company last month, let me share a little bit about me and why I'm enthusiastic about the future of Helen of Troy. I most recently served as corporate vice president and general manager of Nike North America, and I was a member of the Nike executive leadership team. Prior to this role, I was the president and CEO of Converse Inc. for four years, where I led a turnaround. A turnaround built on placing the consumer at the center of the enterprise, investing in new product innovation and brand building, and empowering our teams around the world to win in the marketplace. I look forward to getting to know many of you during the weeks and months ahead. But as you get to know me, you'll discover first, I'm extremely curious. I'm always looking at how things work and looking around the corner for the next key consumer behavior and category shift. Second, I'm a relationship builder. I enjoy meeting people and getting to know people. It makes me a better leader. And finally, I'm incredibly competitive. And I want to win. These three characteristics have been a fundamental part of my DNA both professionally and personally. The reason I chose to join Helen of Troy is simple. I love trusted brands. I love thoughtful product solutions and working with teammates that are passionate about consumers and solving consumer problems. I'm excited about the opportunity in front of us to engineer a great comeback story. We have the ability to reverse Helen of Troy's recent underperformance and restore this company's reputation for consistent growth by providing world-class innovation to our consumers. But let's be clear. I am clear-eyed about the challenges we are facing. I embrace the opportunity to reverse course. Occasionally, companies need to go through renewal, and at Helen of Troy, that renewal has started. It's underway. Our focus is to invigorate the exceptional assets we have, to leverage our leadership brands and talent within our organization to win in the marketplace and to win in the workplace. There are many areas for enhancement, but no quick fixes. I work with great optimism, urgency, and purpose. One of my leadership traits is to inspire my team to fear staying still. Execution is the job of management, and we will be laser-focused on executing fewer, more impactful initiatives with excellence. One of my indispensable learnings for executing well is the importance of culture. This is the secret sauce that binds and fuels the enterprise ambition and drives enduring value. I believe leadership influences culture by setting a vision, and management must set the pace and speed towards a clear destination. We will reduce organizational complexity and bureaucracy that has handcuffed this organization. It takes too long to make decisions. I'm so grateful for Brian, Tracy, and other company leaders that have already started to install some of these cultural remedies. Together, we will continue to inspire right actions in our associates to accelerate the best decision-making. I intend to point and direct resources to the most innovative ideas to incubate and take hold. We will take thoughtful and swift actions to simplify our business and drive transparency and accountability across the company. We will empower nimble and more concentrated teams that can make decisions quicker and closer to the consumer in the marketplace. I imagine one of the big questions on your mind today is, tell me more about your long-term strategic plan. It is the right question to ask. It is just a bit too early for me to provide all the details. But let me share with you four of my initial thoughts. First, I want to reenergize this company, its brands, and its people. Although we've slipped recently, the categories we compete in demonstrate genuine growth potential. Going forward, our plan is to focus our attention and investments in a disciplined manner to those brands and opportunities that have the most promise. Helen of Troy has a firm foundation with the opportunity to get back to industry-leading margins and strong cash flow. We have the flexibility to invest in our future to create more competitive advantage and still deliver a strong financial profile. Second, we will position our corporate structure to place the consumer at the center of everything we do. We will place resources and talent closer to the consumer in the marketplace. Our associates want to establish a closer connection with our marketplace and our consumers, which will enhance their engagement and create a distinct presence as we win in the marketplace. My early observation is we have talented people across this enterprise. They just want to win. With that in mind, nothing we will do is more important than developing our people and adding more top talent. At the end of the day, I place my bets on people, not on strategies. Third, I want to strengthen the broader portfolio for predictable volume and profit growth. In my experience, best brand innovations always win. It is especially important that we refocus our creative engine to amplify building best-in-class devices and complementary consumables. There's a solid foundation in place already. Our platform is valuable and durable. We have maintained leading market share positions in key categories. We have begun making necessary adjustments to our product roadmap so that we're positioned to make more best-in-class products while staying laser-focused on execution and ensuring they're in the market on time. However, I want to underline that there is not a quick fix. Our goal is to continue to be the brand solution of choice for our consumers, and this will require us to become even better at design, engineering, and marketing, anticipating the needs of our consumers. Finally, I want to improve asset efficiency and maintain our shareholder-friendly policy. On the asset side, our emphasis will be on improving working capital efficiency and more broadly, balance sheet productivity. On the capital side, we will use cash flow generation of our business to invest in our core business first, reduce our debt, and then search for accretive acquisitions in the future, and then consider return of capital to our shareholders. I plan to continue Helen of Troy's practice of proactive investor outreach via investor meetings and attending relevant investor conferences. In summary, we earned our way into a difficult period, and clearly, we need to behave our way back to high-quality sustainable growth. Over the next few months, we will be working on a long-term plan which will provide a roadmap for our growth ambition. We operate like we are wearing bifocals with vigilance on the near term, but always maintaining a primary focus on maximizing sustainable long-term value for our stakeholders. I will not be satisfied until we place the company on a sustainable path to further increasing market share, growing revenue, and delivering consistent returns for our shareholders. If we do this, I believe we can regain the trust of our stakeholders. With that, I want to turn it over to Brian. Brian Grass: Good morning, everyone. For joining. I'd like to start by welcoming Scott to the company as our new CEO. I believe his experience, business philosophy, leadership style, and strategic vision are a perfect fit for us as we enter the next phase of our evolution. After only a little more than a month, our associates have been energized by his commitment, passion, growth mindset, and people-first approach. I'm confident his leadership will help us deliver stabilization and reliability in our shorter-term results while we continue to rebuild our platform for sustainable long-term growth. As Scott joined us after the end of the quarter, Tracy and I will take the lead on discussing our results and outlook for the remainder of the year, but I know Scott is eager to take questions regarding his experience, why he chose Helen of Troy, and what he sees after five weeks at the company. Turning to the second quarter. We are not at all satisfied with our results, but we believe we took a step in the right direction with net sales and adjusted EPS at or above the high end of our outlook ranges. Highlights include double-digit revenue growth for Hot Tools, Curlsmith, and Osprey. Growth in both point of sale dollars and units for Braun, Osprey, Olive and June, and OXO. Olive and June revenue and profitability that continues to exceed expectations, DTC revenue growth of 15% year over year, and positive free cash flow of $23 million fiscal year to date despite a cash flow drag of approximately $34 million from higher tariff payments. Looking more broadly, during our last call in July, we identified five key priorities to rebuild our platform for profitable growth and shareholder value creation. One, restoring confidence with key stakeholders. Two, improving go-to-market and operating effectiveness. Three, refocusing on innovation for more product-driven growth. Four, focusing on the fundamentals and fully leveraging the unique strengths of our brands, and five, reinvigorating our culture with resilience and an owner's mindset. I'm pleased to share that we made meaningful progress across all five priorities since our last call. I'm most encouraged by the work we did to improve our go-to-market and operating effectiveness. We recognize that some of our past strategies and execution have fallen short, impacting our credibility with key stakeholders. We've made meaningful modifications to course-correct our structure, strategy, execution, and approach, which we believe will improve the reliability of our operating results in the near term and lead the way towards growth and consistent shareholder value creation in the longer term. As part of our effort to improve go-to-market effectiveness, we realigned our commercial triangle of product, sales, and marketing within each division, putting our brands at the center. And rebuilt our organizational structure with single points of accountability under our segment leaders to deliver business results. We have seen immediate benefits in terms of alignment, communication, clarity, efficiency, speed, and ownership of results. We are also making progress toward our goal of sustained operational excellence across the enterprise. As examples, our distribution operations are now hitting service level targets and nearing peak efficiency levels, and we've made improvements to our direct-to-consumer platforms, digital assets, and overall consumer experience. We helped drive double-digit DTC growth for the '26. While our second quarter results reflect the early impact of our focus on fundamentals, simplifying operations, sharpening our priorities, and increasing agility, they also highlight that we remain in a transition period with further improvement still needed. I thought it'd be beneficial to give continued perspective on tariffs. As the macro environment remains complex with tariffs continuing to influence our operations and impact our financial performance. As most are aware, in April, the US government implemented a broad set of tariffs aimed at restructuring trade relationships, particularly with China. Since then, we have experienced significant increases in tariff rates, which have created immediate and ongoing revenue, earnings, cash flow, and balance sheet impacts. In response, we've taken a series of tariff mitigation, cost reduction, and cash flow preservation actions that we've outlined in previous calls and continue to build on. One, supplier diversification. We have actively worked to mitigate tariff risks by diversifying our sourcing and manufacturing footprint outside of China. Tracy will give you an update, and there's material in our investor presentation on this. Two, inventory management and SKU prioritization. We purchased targeted additional inventory in late fiscal 2025 and early fiscal 2026 ahead of potential tariffs. Subsequently, throughout April and May, we significantly reduced purchases of finished goods from China until tariff levels decreased to a more manageable level, limiting our overall exposure. Three, supplier cost reductions. In an effort to offset some portion of tariff increases, we have pursued cost reduction opportunities with our suppliers, which we have continued to stack up since liberation day. Four, customer price increases. We notified retail customers of targeted price increases with the original goal of having them in place near the end of the summer. Working collaboratively with our key retailers and in careful consideration of market and category dynamics, we have now implemented the majority of our planned pricing increases as of September. However, there are some isolated price increases that are still pending. We're holding shipments in some instances as we work toward consistent adoption across our retail customer base. We expect a slight delay in implementation and the holding of shipments to compress our operating results in the '26 as compared to our previous expectations, which has been factored into the outlook provided in our second quarter earnings release. And five, cost management. In response to tariffs and revenue declines over the past several quarters, we implemented a series of measures to reduce overall costs, optimize working capital, improve balance sheet productivity, and preserve cash flow. While tariffs present ongoing headwinds, we believe our diversified sourcing strategy, extensive tariff mitigation, and proactive cost management positions us well to continue to adapt to the disruption and that will continue to evolve. Focus remains on balancing short-term adjustments with investments in innovation and growth, ensuring the business remains resilient and healthy as we take steps toward a return to growth and long-term value creation. Turning back to our second quarter results. I'll start with our Beauty and Wellness segment. Sales declined 4%, favorable to our outlook range of a decline of 11.3% to 6.1% despite ongoing consumer pressures and continued revenue disruption from tariffs. Olive and June was a standout, delivering better than expected sales of $33.4 million. Segment organic sales declined as consumers remained cautious, tariffs weighed on direct import orders, retailers adjusted inventories, and our overall point of sale declined. Turning to international results for the segment. Remaining retail inventory from last year's weak cough, cold, and flu season, coupled with the slow start to this year's season, led to lower replenishment in the second quarter. In China, government incentives favoring localized fulfillment are driving consumer and distributor purchases away from preferred global brands like Braun, which are not sourced domestically and are not price competitive without the subsidy. Taking a step back from the beauty and wellness financial results for the quarter, I'd like to highlight some underlying bright spots we see in the business. Curlsmith recently completed a brand refresh under the campaign It's a Curls World. The update simplifies curly hair care into a three-step routine, introduces fresh new packaging for easier navigation, and brings innovation with products like the Awestruck definition cream and moisture memory release. These are designed to extend curl longevity, boost hydration, and provide customized solutions across moisture, strength, and frizz control. Shipments to retail partners, including Ulta, began in the second quarter. Olive and June continues to build momentum in DIY nail care. With innovative tools and products that deliver salon-quality results, the brand is resonating with a broad customer base. Growth this quarter was fueled by replenishment demand, new product launches, and expanded distribution. Retail partners are also expanding assortment and in-store placement, giving Olive and June even more reach in the back half of the fiscal year. We are pleased that our beauty portfolio was recently recognized by the Allure Best of Beauty Awards. Often called the Oscars of the beauty industry, they are a powerful endorsement and recognition of product excellence and innovation. This year, our brands earned five top honors: Curlsmith for best curl enhancer, Drybar Hot Toddy for best heat protector, Revlon One Step Volumizer Plus for best brush dryer, Hot Tools for best static curling iron, and Olive and June gel mani for best breakthrough. These wins underscore the strength and diversity of our beauty brands and reflect the team's outstanding work to drive innovation and execution across our beauty business. In home and outdoor, second quarter results were consistent with our expectations. Net sales declined 13.7% as the domestic market remained under pressure from the impact of tariffs on direct import orders, cautious consumer spending, and lower replenishment from retail partners as they manage inventory levels with a cautious view of the consumer environment. This was partially offset by OXO distribution gains and continued strong performance in food storage, bath, and kitchen gadgets at retail. Internationally, segment sales grew driven by Osprey. Turning to OXO. The brand's fundamentals remain strong. Consumers are responding well to Twist and Stack food storage solutions for their durability and secure sealing lids. Our rapid brewer is earning outstanding feedback for speed, versatility, and thoughtful design. And the new compact conical burr coffee grinder was recognized by Forbes as the best value pick in its category, praised for consistent grind quality and slim user-friendly design. Other recent launches continue to grow, including OXO ceramic bakeware and additions to our emerging OXO Tot feeding line, further reinforcing OXO's reputation for solving everyday problems with high-quality intuitive products. Hydro Flask highlights include the new Micro Hydro, which is proving to be highly fashionable and versatile, compact enough for everyday carry, yet functional across wellness, outdoor, and travel occasions. Early adoption has been strong, and we see the opportunity to build this into a distinct franchise. Our new 24-ounce travel tumbler and travel bottle also drove nice growth during the quarter, reflecting continued demand for performance hydration and the brand's ability to continue to expand into adjacent sizes, shapes, form factors, and categories. Osprey posted strong growth in the quarter led by technical and travel packs. In the US technical pack market, Osprey remains the number one brand with share more than three times larger than the next competitor. Consumers are rewarding the brand's sustainability leadership, including our move to 100% recycled fabrics and elimination of PFAS-based durable water repellent across all textile products. Performance remains a differentiator as well. Our new Archeon series, featuring an abrasion-resistant, 100% recycled fabric, performed so strongly in testing that our machines could not wear it down. That level of quality is resonating with consumers. The limited edition Archeon Fujin backpack, created in collaboration with Carryology, sold out in just 24 hours. In addition, new transporter and daylight travel packs grew double digits and our kit carriers gained share and grew point of sale. Despite near-term demand variability and ongoing retail inventory adjustments, OXO, Hydro Flask, and Osprey continue to show positive consumer traction. We are prioritizing innovation, brand relevance, and sustainability as core elements that will restore growth and deliver long-term value in home and outdoor. In closing, we are giving perspective on challenging external factors today. Let me be clear. It's up to us whether we grow or not. While we expect the environment to remain challenging, our north star must be to keep the consumer at the center of everything we do. Consumers are seeking a better value proposition for their limited share of wallet. We can deliver that proposition across a strong portfolio of brands with innovative products that resonate with the consumer and exceed their expectations with differentiated features, thoughtful designs, and superior performance. When we support these efforts with the right brand-building initiatives, flawless retail and operational execution, and a delightful end-to-end consumer experience, it should be a winning formula in any environment. Getting that formula right is up to us. Before turning the call over to Tracy, I want to acknowledge the dedication and professionalism of our associates. Their resilience and commitment are critical as we work through this period of new beginning. We are taking deliberate steps to strengthen our foundation, refine our strategies, improve our execution, and position Helen of Troy for long-term success. We remain focused on delivering our commitments while we rebuild our platform to drive profitable growth and value creation for our shareholders. And now Tracy will review the financials in more detail and provide our financial outlook for the remainder of fiscal 2026. Tracy Shereman: Good morning, everyone, and thank you for being with us today. I want to give Scott a warm welcome to Helen of Troy. In just a short time, I've been impressed by his leadership style and his ability to inspire and engage with teams across the organization. Like many others, I'm confident he's a great fit for our culture and the brands that define Helen of Troy as we move into our next chapter. Today, we reported results at the favorable end of the net sales and adjusted EPS outlook ranges we communicated during our earnings call in July. This result is encouraging and reinforces our commitment to maintaining focus and discipline as we implement key initiatives to strengthen our business performance. As Brian highlighted, we made further progress on our tariff mitigation strategies, including initiatives aimed at reducing costs and safeguarding cash flow. We now anticipate that we can lower our cost of goods sold subject to China tariff to between 25-30% by the end of fiscal 2026, as compared to our previous expectation of below 25%. While this is slightly higher than we originally targeted, we believe we are making the right choices to mitigate supply risk, ensure product quality, secure favorable cost, and navigate the business disruption that has emerged. Year to date, we have experienced an approximate $10 million impact from tariffs on our cost of goods sold, and we expect a reduced negative effect in the later half of the year, amounting to less than $9 million as we benefit from the price increases that Brian mentioned. Please refer to the investor presentation on our website for a complete summary of the tariff mitigation actions we are taking, as well as a summary of the gross unmitigated impact of tariffs at current rates, the amount we believe we can mitigate or offset, and the net remaining impact on operating income for fiscal 2026. Turning your attention to the results from the second quarter. Consolidated net sales decreased 8.9%. When excluding the effects of 16%. Approximately 30% of the organic revenue decline was attributed to tariff-related revenue disruptions. As expected, this primarily stems from two key factors: the pause or cancellation of direct import orders from China in response to higher tariffs and trade policy uncertainty, and changing dynamics within the China market, which include a transition towards localized fulfillment models and increased competition from domestic sellers who are benefiting from government subsidies. While we expect these headwinds to persist into the second half, their impact is expected to be less significant compared to the first half. The remaining decline is indicative of softness in certain categories and overall point of sale decline. Even if several of our brands gained or maintained market share and saw point of sale unit improvement. Category softness can be attributed to changing consumer behaviors, particularly the prioritization of essential categories amid concerns regarding future pricing pressures and overall economic uncertainty. As these trends influence purchasing volumes, retailers also continue to modify their inventory levels. Furthermore, we observed a slowdown in thermometry replenishment across the Asia Pacific region, which was a result of a less severe illness season last year. Now I would like to turn to our business segment performance. Starting with Home and Outdoor, where net sales experienced a decline of 13.7%. Approximately four percentage points of this decline can be attributed to tariff-related disruptions, which include lower club direct import orders in the insulated beverageware and home categories in response to increased tariff rates. The remaining decrease reflects ongoing broader demand weakness in both the home and the insulated beverageware categories, including continued POS decline in beverageware, due to heightened competition and net distribution losses. This softness was further pressured by retailer inventory adjustments and lower sales in the closeout channel. These challenges were somewhat mitigated by strong demand for technical, travel, and lifestyle packs, increased sales from expanded distribution in the home category, and additional sales generated from a new product launch in the insulated beverageware category. Shifting our focus to the beauty and wellness segment. Net sales saw an organic business decline of 18.2%. Approximately five percentage points of this decrease were attributed to tariff-related disruption. The decline also includes the cascading impacts of trade policy in the China market, affecting international thermometry sales in addition to a reduction in domestic sales of heaters and certain beauty products. The remaining decline is reflective of broader demand weakness for thermometers internationally, which is attributed to lower replenishment levels due to a less severe illness season last year in Asia. A downturn in beauty sales is primarily driven by diminished consumer demand, heightened competition, and a net distribution loss compared to the previous year, as well as a decrease in water filtration largely due to weaker consumer demand and intensified competitive promotional efforts. These headwinds were partially offset by incremental revenue from Olive and June of $33.4 million. Consolidated gross profit margin decreased 140 points to 44.2% due to higher tariffs on cost of goods sold, which unfavorably impacted gross profit margin by approximately 200 basis points, and higher retail trade and promotional expense in response to a more competitive retail environment. These factors were partially offset by the favorable impact of the Olive and June acquisition, lower commodity and product costs, and favorable inventory obsolescence expense year over year. SG&A ratio increased 310 basis points primarily due to increased share-based compensation expense, higher outbound freight costs, the impact of the Olive and June acquisition, and the impact of unfavorable operating leverage. These factors were partially offset by the favorable comparative impact of higher distribution center expense in the prior year period due to additional costs and lost efficiency associated with automation start-up issues at the Tennessee distribution facility. GAAP operating loss for the quarter was $315.7 million, primarily due to $326.4 million of non-cash asset impairment charges incurred primarily due to the sustained decline in our stock price, and the lower gross profit margin and higher SG&A rate I just mentioned. On an adjusted basis, operating margin decreased 360 basis points to 6.2%. The decrease was primarily driven by the impact of higher tariffs on cost of goods sold, which unfavorably impacted adjusted operating margin by approximately 200 basis points. As Brian discussed, our price increases to retailers largely became effective after the end of the second quarter, so the tariff cost impact on our second quarter operating margin was greater than what we expect on a go-forward basis. The gross margin decline was also driven by higher retail trade and promotional expense, higher outbound freight costs, and the impact of unfavorable leverage. This was partially offset by the favorable impact of the acquisition of Olive and June, lower commodity and product costs, favorable inventory obsolescence expense year over year, and the favorable comparative impact of higher distribution center expense in the prior year period as I mentioned earlier. Home and outdoor adjusted operating margin decreased approximately 540 basis points to 9.6%. This reflects the impact of higher tariffs on cost of goods sold, which reduced operating margin by approximately 240 basis points. This was partially offset by the favorable comparative impact of higher distribution center expenses in the prior year period. Adjusted operating margin for beauty and wellness decreased 130 basis points to 3.1%. This reflects the impact of higher tariffs on cost of goods sold, which reduced operating margin by approximately 180 basis points. This is partly offset by the contribution from Olive and June. Income tax benefit as a percentage of loss before income tax was 6.4%, compared to an income tax expense as a percentage of income before income tax of 22% for the same period last year. The decrease in the effective tax rate is primarily due to the tax effect of the impairment charges in fiscal 2026, and increases in tax benefits for discrete items, partially offset by valuation allowances on intangible asset deferred tax. Non-GAAP adjusted EPS was 59¢ compared to $1.21 in the same period last year. This year-over-year decrease was primarily due to lower adjusted operating income and higher interest expense, partially offset by a decrease in adjusted income tax expense. Turning to our inventory balance. We ended the quarter with $528.9 million, or approximately $59 million higher than the same period last year. Excluding inventory related to the Olive and June acquisition, and $32 million of tariff-related costs layered into inventory, our ending inventory was largely flat year over year. That said, our inventory remains higher than we'd like, and we remain focused on driving improvements in the second half of the year. Turning to our debt and liquidity position. We ended the second quarter with total debt of $893.2 million, a sequential increase of $22 million compared to the '26. Free cash flow was unfavorably impacted by roughly $27 million of cash outflow from tariffs, inventory build ahead of our peak selling season, and higher capital spending tied to supplier transitions outside of China. The borrowing availability on our revolving credit facility is $578.6 million, and the limitation on our ability to borrow based on our leverage ratio is $212.7 million. Our net leverage ratio was 3.5 times at the end of the second quarter compared to 3.1 times at the end of the '26. The increase was driven by higher net debt and lower trailing twelve-month EBITDA due to the revenue decline in the first half of the fiscal year. Looking ahead, free cash flow is expected to sequentially improve over the balance of the year, and leverage and interest coverage will remain areas of focus. At the end of the second quarter, we are in compliance with all covenants under our credit agreement. However, given the potential range of outcomes related to sales trends, tariffs, and other macroeconomic factors, we will likely proactively engage with our lender group to secure additional flexibility to ensure continued compliance. Now I'd like to turn to our outlook. Despite the ongoing trade disruption that presents a challenging operational landscape, we are encouraged by the progress we are making to alleviate the effects of tariffs and enhance our operational and financial standing. As such, we are providing an outlook for the remainder of the fiscal year. Our outlook includes our anticipation of lower direct import orders following tariff-related pullbacks, the ongoing impact from changing dynamics in the China market, lapping of tariff-related order pull forward in '25, and continued soft consumer demand. Additionally, we're observing ongoing consumer trade-down behavior as shoppers seek value and prioritize essential categories. In light of these trends, we expect retailers to remain cautious, managing inventory levels tightly amid ongoing uncertainty and inflationary pressures. We expect these challenges to be somewhat mitigated by additional revenue generated from the Olive and June acquisition, the implementation of pricing actions largely effective by September, and the cautious view of potential unit volume declines tied to price elasticity. As Brian mentioned, there are some price increases still pending, and we're holding shipments in some cases to ensure consistent adoption across our retail customer base. We expect that this will slightly compress the pricing benefits in the second half of the year as compared to our original expectations but is necessary to avoid pricing disruption in the market. On a full-year basis, we expect net sales between $1.74 billion and $1.78 billion, which implies a decline of 8.8% to 6.7% year over year. In terms of our net sales outlook by segment, we expect a home and outdoor decline of 11.8% to 9.7% and the beauty and wellness decline of 6.2% to 4%, which includes an expected incremental net sales contribution of $130 to $137 million from Olive and June. On a full-year basis, we expect consolidated adjusted EPS in the range of $3.75 to $4.25, which implies a decline of 47.7% to 40.7% year over year. For the third quarter, we expect net sales between $491 and $512 million, which implies a decline of 7.5% to 3.5%. In terms of our net sales outlook by segment, we expect Home and Outdoor decline of 12.8% to 8.7%, and the beauty and wellness decline of 2.9% to growth of 1%, which includes expected incremental net sales contribution of $36 to $39 million from Olive and June. We expect third-quarter consolidated adjusted diluted EPS in the range of $1.55 to $1.80, which implies a decline of 41.9% to 32.6% year over year. Our adjusted EPS outlook includes expected margin compression, reflecting growth investments to support future revenue expansion and new product development, pressures from a more promotional environment, consumer trade-down behavior within our categories, a less favorable overall product mix, higher product cost driven by higher tariffs, and unfavorable operating leverage. We expect margin compression in the '26 to be partially offset by Project Pegasus initiative and strategic price increases implemented largely by September, the comparative impact of unfavorable operating efficiencies at our Tennessee distribution facility in the prior year, and cost reduction measures implemented in the first six months and continuing throughout the year. We believe our actions to reduce spending will lead to a more normalized non-GAAP SG&A ratio in the range of 34% to 30% for the second half of the fiscal year, supported by our seasonal revenue patterns and more favorable operating leverage. Easing tariffs related to trade disruptions and the favorable impact of our price increases to retail on our SG&A ratio. In terms of our tax rate, we expect our adjusted effective tax rate to range from 15% to 16% for the full fiscal year, with third and fourth quarter ranges between 22% to 25% and 28% to 31%, respectively. Inventory is expected to decrease from current levels to approximately $480 to $500 million by the end of the fiscal year, or roughly $27 to $47 million above fiscal 2025. This increase is primarily driven by approximately $41 million of tariff-related costs we expect to be capitalized into inventory at year-end, along with inventory prebuilds related to Southeast Asia sourcing transition. We also expect to hold additional inventory ahead of Chinese New Year, which falls two weeks later than last year. As previously shared, we still expect the majority of direct tariff costs to impact the second half of the fiscal year, which is largely aligned with our pricing actions. We also expect our diversification and dual sourcing strategies to reduce supply risk and help insulate us from tariff policy changes. Related operating expenses and capital expenditures are expected in fiscal 2026, with most of the diversification benefit realized towards late fiscal 2026 and early fiscal 2027. In closing, I am confident we are well-positioned to navigate the current environment and come out stronger by focusing on a few clear priorities: strengthening supply chain diversification beyond China, implementing focused and collaborative pricing strategies, maintaining cost and cash discipline, and protecting our balance sheet. Under the guidance of Scott and Brian, and the renewed energy of our global team, I believe we're on track to begin unlocking the full potential of our diverse portfolio of leading brands and driving sustainable long-term growth. With that, I will turn it back over to the operator for Q&A. Operator: Thank you. We'll now be conducting a question and answer session. We ask you please limit yourself to one question and one follow-up. You may requeue for additional questions. If you would like to ask a question at this time, please press 1 from your telephone keypad. A confirmation tone will indicate your line is in the question queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. The first question comes from the line of Rupesh Parikh with Oppenheimer. Please proceed with your questions. Rupesh Parikh: Good morning. Thanks for taking our questions. So maybe, Scott, a question for you to start out. I know you've only been there a few weeks at this point, but just curious how you feel about the portfolio today. Are there any opportunities for divestitures? So just at a high level, your initial takes on just the portfolio as you see it today. Tracy Shereman: Yeah. Before we answer that question, Rupesh, we're gonna let clarify a comment she made in her remarks. Yeah. Thanks, Brian. Yeah. Just need to clarify my commentary related to the full-year revenue outlook by segment. So in my remarks, I provided an outlook for the incremental revenue contribution from Olive and June roughly $130 to $137 million, which is the total revenue contribution for the year, not the incremental contribution for the year. So the correct incremental contribution for Olive and June is in the range of $109 to $112 million. So this information has been provided in the earnings release, which is correct, as well as the investor presentation. Scott Azel: Thank you, Tracy. Rupesh, nice to meet you. Super excited about being here. I think to reask your question myself, you said what do I've seen after the first couple of weeks here at Helen of Troy? Why I'm excited. I tell you this. I think about first when I first investigated Helen of Troy, you know, a couple of months ago. And then as I'm looking at the background information on the company, I look around my home, and I see the Osprey backpacks that my son and I used as he was on his road to becoming an Eagle Scout or the OXO products in my kitchen. Or the Curlsmith products that my daughter uses. And I say, wow. What a collection of amazing brands that have so much promise and opportunity. Then as I did more investigation, I said to myself, you know, a company that had such an amazing path that in the most recent days have been challenged. We have so much opportunity going forward. As far as divestiture of portfolio, after five weeks at this point, you know, all of our brands, I think, have promise, but it's something that we're evaluating on a going forward basis as we think about our long-range plan and where we're going. But at this point, I can't give you a specific answer on any one brand or any decision at this point. Rupesh Parikh: Great. Thank you for the call. I look forward to meeting you. And then maybe just one follow-up question. And David, I'm not sure how much color you can provide today, Brian, Tracy, but just curious, you know, as you look at the guidance for this year as we look to next year and beyond, like, you know, do you think this is a fair earnings base you could potentially grow off of going forward? Or I don't know if there's any, like, any color you can provide and just how to think about the earnings base that we're seeing now and the ability to grow off of it in future years. Brian Grass: Yeah. I think we're not gonna wanna give specific guidance for fiscal 2027 at this point, but I would call out, you know, there's large transitory, we believe transitory impacts to both revenue and expense in fiscal 2026. And we believe a lot of those will dissipate, you know, in the second half of this year and especially as we get into next year. You know? So I would point that out as being a building block for growth next year. We'll have to, you know, finish going through our planning and size up everything in the aggregate as we, you know, get more visibility through the second half of this year. But we definitely believe there's transitory impacts that were unfavorable in 2026 that we don't believe would exist in 2027. Tracy, you wanna add anything to that? Tracy Shereman: Yeah. No. I think that's absolutely right. I think, you know, what we experienced in the first quarter and second quarter, you're gonna see that improve in the back half. I think that will help us be the building blocks as we look at fiscal 2027. Rupesh Parikh: Great. Thank you. I'll pass it along. Operator: The next question is from the line of Robert Labick with CJS Securities. Please proceed with your questions. Robert Labick: Good morning, and welcome, Scott. Nice to meet you, and thanks for taking our questions. Scott Azel: Awesome. Nice meeting you. Hey, Bob. Robert Labick: Morning, Brian. So to start, just you know, with Scott here, in your experience, you know, what does it take, and how does a company revitalize brands that were, you know, leaders, maybe still are, had really strong growth, but growing as much, maybe losing a little share here and there. What are the steps needed, and what are the biggest challenges to restoring growth to, you know, leading brands that aren't growing as much? Scott Azel: Bob, great question. I tell you from my past a couple of things. One is obsessing the consumer and consumer insights. Two is driving innovation, and then looking at the operating model and saying to yourself, what's getting in the way of decision-making so that you can go from idea to marketplace with speed. When I look at a company at our size, I see much opportunity in terms of the people, the culture, and the background that really comes down to management philosophy, management discipline, and management role modeling what's most important. The work that Tracy, Brian, and the team have done in the last couple of months to put more resources and more people closer to the marketplace, closer to the brands, closer to the consumers, it's a step in the right direction, but really creating the piping and the plumbing this becomes something we do every day. It's about growth. It's about where we're going. It's about leading the consumer. It's about building the category. When we talk about our long-range brands in the future, that's what our focus is gonna be around. Robert Labick: Okay. Great. And then just kind of for my follow-up question, I guess, Brian, can you just maybe discuss optimal leverage and capital structure for the business? And your expectations for talks with? You mentioned, obviously, you're in compliance with all covenants, but maybe looking to get some, you know, better, you know, options going forward. So maybe just give us a sense. Your relief. Yeah. Thank you. Exactly. Go forward. And just give us a sense of where, you know, your thoughts on the balance sheet and how that relief may go. Brian Grass: Yeah. I mean, optimally, in this environment, we would like leverage to be closer to two times and maybe even below that as we go forward. In terms of, you know, my view of, you know, the covenant situation and where we are, I feel really good about where we are. We've had discussions with the vast majority of our banking group at this point to make them aware of the possibility and to talk through, you know, what it means, what it'll look like, and that type of thing. And I would say every single one of those conversations has been supportive and constructive. So I expect some form of holiday in terms of those covenants and in terms of what other impacts there would be. You know, there will be fees associated with doing an amendment, but I'm not expecting any large structural changes to, you know, interest, the cost of interest, or anything else like that. So that's what I know at this point. We'll continue to evaluate the need to work through that process. And if we do need to work through that process, we'll do it swiftly. Robert Labick: Okay. Super. Thank you. Operator: Our next questions come from the line of Susan Anderson with Canaccord Genuity. Please proceed with your question. Susan Anderson: Hi. Good morning. Thanks for all the details this morning, and welcome aboard, Scott. Wondering maybe if you had any high-level views yet just on the category where you see the opportunity going forward for growth, whether that's in beauty and wellness or home and outdoor or maybe even categories that you're not in yet. Thanks. Scott Azel: Yeah. Go ahead. Susan, nice to meet you. Again, early days, but a couple of things. One, the answer is yes and yes, both in home and outdoor and in beauty and wellness. You know, as I've traveled and I still have many travels to go over the next days and weeks, whether it be the innovation I'm seeing around Osprey, I'm building the legacy and ethos of that brand in adjacent categories as well as in existing categories. A lot of upside opportunity. Curlsmith is still just scratching the surface as I talk to retailers and talk to our consumers around restaging that brand and connecting with the consumers that resonate with them. And the restage is happening as we speak. We talked about Olive and June. It's in its early days of a great book that's being written. And then OXO has an abundance of innovation that starts with authenticity and really a connection with the true chef that can't be characterized by our competition. But I can tell you that in early days that, we have a lot of opportunity to focus on fewer initiatives and drive impact with the brands that we have to fix in that foundation. And second, paying down debt. And then looking at M&A as a growth driver, which has been a part of our past going forward. But we've got to get our foundation right first. Brian Grass: I would just add, Susan, beauty, it's not one that Scott may be specifically touched on. But it is a category that we think there's opportunity in. We need to do better within the category. We realize that. We're actually excited about short, medium, and long-term innovation that we have in the pipeline there that we're going to leverage to drive that growth and perform better within that category. So, you know, it's not an opportunity at this moment, but we see it being an opportunity as we go forward. Susan Anderson: Okay. Great. And then maybe if you can give some more color just on the segments and the puts and takes of the brand the quarter, like, for instance, in beauty and wellness. It sounded like the wellness brands were kind of the weaker part of the portfolio. I'm curious how the prestige hair brands did. And then also the tools. And then within home and outdoor, it once there also sounded like home was kind of the weaker area. Curious how OXO performed. Thanks. Brian Grass: Okay. Yeah. We can walk around the wheel a little bit. I would say overall, what we saw is that sell-through sell-in is lagging sell-through for the first two quarters of the year. And, hopefully, that would be evident based on some of the disruptive factors and things like that, but I want to make sure people understand that. And I think inventory is being managed cautiously by retailers in most cases. We have one or two cases where we've got isolated higher pockets of inventory, but those are exceptions and isolated, I think. So, you know, I would say that as a broad statement. You're correct on your first statement about wellness being a little bit weaker in terms of our revenue. I think that was driven largely by direct import disruption. And we continue to see impacts of, you know, a weak cough, cold, flu season from last year and then a slow start to the season this year is kind of having a double effect in terms of the wellness business. Beauty, as you know, we kind of talked about, we're in some strong categories in beauty overall, is doing well. I think there's pockets where there is some consumer trade-down occurring and there's, you know, strong competition in the channel and some of our categories. But I feel really good about where we're going in that business in terms of, you know, the alignment we've done internally and kind of the doors that that's unlocking. And then our new product pipeline, like I said, short, medium, and longer-term, looks really good. And, you know, the all-inclusive tool that we just launched is now starting to get really good traction. So that's exciting for us. And then I think the last is home and outdoor, and I'll give Tracy a chance to weigh in after. Home was softer in terms of our shipments, but I wouldn't I think that's, again, a lot of disruption related to retail inventory adjustments. And, you know, impact of direct imports and kind of a lot of that noise. I think as we look more steady state going into the second half of the year, we feel really good about the home business. And then, you know, outdoor, and hydration, I think you know the story there. Osprey is doing really, really well, and it did well in the quarter. And we think we have the ability to continue to build on that with white space opportunities, continue new products, adjacencies, that type of thing. And then hydration, you know, we do see that category softening. What we like about it is there's kind of a pivot back to bottles where we've had historical strength. We intend to lean into that, and we're working on some stuff to kind of differentiate ourselves from the competition in the bottle space. And that will be coming out in the future. And then the last point I'll make is related to new products and category adjacencies and Hydro Flask. It's not in hydration, but as we look broadly, can Hydro Flask go? We're excited about opportunities to kind of expand it into some other areas, which will be coming soon. Tracy, anything you want to add? Tracy Shereman: I think that's a very good overview of how the brands performed. I would say for Home and Outdoor, you know, both OXO and Osprey had favorable POS within the quarter. As Brian mentioned, you know, where we're soft is in insulated beverageware. But I think the work that we're doing and rebuilding our connectivity with the consumer and our pipeline is gonna help fuel, you know, the division overall. Susan Anderson: Okay. Great. Thanks so much. Good luck this holiday. Operator: The next questions are from the line of Olivia Tong with Raymond James. Please proceed with your question. Olivia Tong: Great. Excuse me. Thanks. Good morning, and welcome, Scott. Looking forward to working with you. My first question for you is just when you look at the categories that Helen of Troy is in, where you see the greatest opportunity for innovation, and if you could layer in, you know, your past experiences driving turnarounds, where you've done that. How you think that you can bring that to Helen of Troy. And then for all of you guys, I suppose, specifically for the drinkware category, the innovation in the deck sounds very compelling. The person the better color profile, so forth and so on. But how do you balance some of the fairly heavy discounting that we're seeing both in external retailers and then on your own DTC with plans to turn around the business? And then also, can you give some broad strokes just on the category and the competitive dynamics? That is a particularly competitive category? Thank you. Scott Azel: Great meeting you. I'll take the first part. Maybe Brian and Tracy can jump in. You know, I think I see opportunity really across our whole portfolio of making innovation and putting the consumer in the marketplace kind of first and foremost like, kind of more in the DNA of what we do every day. And that comes from the way we lead from the top, the talent that we have leading our businesses, and where we place our resources and investments. So I at several weeks in, I wouldn't say there's any one category that we have to do it in. We need to do it in the categories we have strength right now today, as well as the categories that are not performing where they need to be for the future. So, that's the way I think about it today. The way I think about it from my past, it's really making sure that team talent and routines are focused around innovation in the consumer. And making sure we're acting with speed to capture consumer and category opportunities, you know, ahead of the marketplace. I've done that in the past, and it's such an opportunity for us at Helen of Troy. And it's not something that we can't do. It's just something we have to make a priority on how we operate every day. Brian Grass: Yeah. Olivia, on your second question, what we see is that the hydration category had been heavily influenced by kind of the tumbler part of that category and maybe some saturation has kind of occurred in the channel. And I think the bulk of what you're referring to in terms of discounting and kind of trying to clean a lot of that out is in the tumbler space. It's another reason why I like kind of the pivot to bottles where we have our strength. I think we're less exposed on the tumbler side, and so we're really gonna lean into where the trends are going and the kind of the pivot and form factor and try and maximize that opportunity. We also think we have distribution opportunities to maximize and improve on and we're gonna go after that. But and then, you know, thirdly, what I said earlier about kind of we think Hydro Flask can go into some adjacent categories, and we're working on that product lineup now. So we still feel good about the space. I think, you know, there's some normalization going on there, and I think that's largely concentrated in tumblers. But we'll obviously have to navigate the broader kind of dynamics going on in terms of discounting and, you know, what's kind of in the channel already that we'll have to navigate through. Olivia Tong: Got it. That's helpful. And then just following up, about tariff pressures and your level of confidence in offsetting those pressures. I know it's too early to see the impact of the pricing yet. But given the increased promotional environment and the distribution losses that you've seen, it doesn't necessarily sound like price is the most available lever at this moment. So to the extent that you can comment on other mitigation plans that you have, the conversations that you've had with retailers. I know you mentioned earlier about some of the holding of shipment that may impact the second half. What other tools do you have at your disposal should it take a little bit longer to get the price increases flowing through? Brian Grass: Yeah. I can start, and Tracy may want to build. Look. We've been working on pricing ever since liberty Day occurred. I mean, first, we had to do our internal work to assess what pricing we thought made sense, and a lot goes into that. And so we, you know, spent a period of time doing that. And then we also collaborated with retailers as to what they thought made sense and price points and all that type of stuff. And then they have that you have to work through. And then the last piece of it is you as you get it out there and you get it accepted, you gotta have consistent adoption amongst your key retailers. It doesn't work if you don't get that. And that's really where we are today. If there are any pockets holding shipments, it's to make sure that we have that consistency. Adoption, and we're going to hold the line on that to make sure. And if, you know, you're a if you're one retailer, you don't want a different adoption by another retailer. You're not gonna like that. And so it's our responsibility to get all that right. And I think we've done that for the vast majority of our pricing, and there's just a few additional things to work through. So I feel confident about the ability to have the prices in place with our retailers really, without exception, and I think that's coming very shortly. Then I think there's what do you assume in terms of price elasticity. And what we try to do is be very conservative in our assumptions about price elasticity, and I think that's it. We've done that, and that's reflected in our outlook. You might ask, well, why do the price increase if you're gonna lose a lot of it in unit volume? You're still better off, I believe, in terms of profitability. And in some cases, retailers where they have private label product, they want the price increase in market because they can't raise the price on their private label and have it bumping up against the branded product. And so, strategically, they want the differentiation there. And so from a few different perspectives, the price increase makes sense, and it definitely helps the profitability even if you lose a large part of it in terms of unit volume. So I hope that answered your question. That's kind of the way just that we look at pricing. I feel really good about getting it in place and where we are in terms of that. And then, you know, it's about what happens with the consumer and what choices do they make. You asked about other levers also. You know, pricing is a big lever, in terms of our ability to offset what we're able to. And we've pulled a lot of other levers as well, and we mentioned all of those in our prepared remarks. They're also kind of referred to in the earnings release. The ability to use those more, I would say, look. We're gonna continue to pursue cost decreases with our suppliers. And we continue to kind of stack those up. And, hopefully, those will just be upside as we're able to continue to get those. And we'll we're gonna do that no matter what happens with retail price and increases. We've pulled a lot of the other levers and made significant choices. What we don't want to do is pull so far back on our growth investment for the remainder of this year that it puts us in a bad spot as we go into fiscal 2027. So we are trying to sustain and hold the line on new product development and the right brand-building initiatives to keep our business healthy and position ourselves for growth. So we're not gonna go any further than we kind of have at this point there. In fact, we may find opportunities we want to lean into. And often cases, when we lean into those, they're incremental. So there's a cost, they're incremental, and they drive revenue. And so those are easy choices to make. And they don't all they're not all easy, but some are. And we'll lean into the ones that we think can improve both our position and drive incremental revenue for us in the second half of the year. So, hopefully, that's a little bit of flavor of how we're looking at it. I think we've pulled a lot of the levers. Feel good about where we've ended up from a price increase perspective, only thing that we're being cautious about is how the consumer responds in the elasticity of it, and I feel good about the other mitigation actions that we're taking and feel good about the position of we're only gonna go so far when it in terms of reducing our new product or brand-building investment. Tracy Shereman: Yeah. No. I think that wraps it up nicely. Brian mentioned, you know, we are just focused on making sure we can implement, you know, across, you know, our retailers and controlling our spending to make sure that, you know, we can manage to these headwinds. Operator: Thank you. And my final question comes from the line of Peter Grom with UBS. Please proceed with your question. Shiroc: Hi. This is Shiroc, for Peter Grom. Thanks for taking our question. So just two questions here. With a good part of your tariff headwinds now largely behind you and, you know, price mix expected to slow through in the second half, I'm curious, like, how much of the recovery is dependent on some level of volume stabilization? You know, you've mentioned, you know, being conservative on elasticity assumption. But to what extent does your outlook assume that volumes at least hold steady or begin to recover? And if so, do you see that being more of a full Q dynamic? Tracy Shereman: Yeah. I would say thanks for that question. I would say for the outlook, you know, we're assuming kind of the consistent soft demand trend that we're seeing in the first half. And then we took a conservative position on the elasticity. We're seeing a headwind, a tailwind in the back half. It's from the retailers rebalancing inventory and recovery of the direct imports in the second half. Shiroc: Okay. Great. And then my last question here, which is the, anything you can share on the broader consumer backdrop? I know you've mentioned some trade-down before. And are you still seeing similar things there? And then one more on beauty, we have seen some improvement there just based on what we've heard from, you know, public companies. Are you also seeing the same thing? Brian Grass: Yeah. Let me do the beauty one first. You know, beauty at a broad level there's probably not overall trade-down occurring. I think there is trade-down within certain categories within beauty, and we do see it in some of the data related to our categories, especially as it relates to the younger consumer, which is increasingly stretched in this kind of environment. But at a broad level, when you're looking at some of those other companies, you may not see it. We also see it in terms of an indication of it anyway in terms of the disparity POS dollars that we have for our products and POS units. And I'll give you an example of how it's kind of mixed. We actually saw average unit strength in Curlsmith and Hot Tools. So average unit revenue was higher in those two. And then in Revlon and Drybar, average unit revenue was down fiscal year to date for two brands. So it's a little of a mixed bag. I would say we see indications of it but would agree with you at a broader beauty level. It's not, you know, moving the needle on the overall category. I think you gotta go with a couple of clicks down to decide, okay. Is it driving this category or another category? We are seeing indications of it, but, you know, it's not an excuse. We need to, you know, adjust to the market, and I think it all comes down to new product development, how we support that new product development. And then once we get that right, all this other stuff takes care of itself. Shiroc: Got it. Thank you. Operator: Thank you. This concludes our question and answer session. I'd like to turn the floor back to management for closing comments. Scott Azel: Thank you all for joining us today. As I mentioned, I'm excited to be a part of Helen of Troy. In closing, I want you to walk away with that, we are clear-eyed about our current situation. We are focused on fixing our foundation, and we're bullish and excited about our future. I look forward to speaking with many of you in the coming weeks. Thank you. Operator: Ladies and gentlemen, thank you for your participation. This concludes today's teleconference. You may disconnect your lines, and have a wonderful day.
Operator: Good morning. Welcome to Byrna Technologies Inc.'s Fiscal Third Quarter 2025 Earnings Conference Call. My name is Donna, and I will be your operator for today's call. Joining us for today's presentation are the company's CEO, Bryan Ganz, and CFO, Laurilee Kearnes. Following their remarks, we will open the call to questions. Earlier today, Byrna Technologies Inc. released results for its fiscal third quarter ended August 31, 2025. A copy of the press release is available on the company's website. Before turning the call over to Bryan Ganz, Byrna Technologies Inc.'s Chief Executive Officer, I will read the Safe Harbor statement. Some discussions held today include forward-looking statements. Actual results could differ materially from the statements made today. Please refer to Byrna Technologies Inc.'s most recent 10-Ks and 10-Q filings for a more complete description of risk factors that could affect these projections and assumptions. The company assumes no obligation to update forward-looking statements as a result of new information, future events, or otherwise. As this call will include references to non-GAAP results, please see the press release in the Investors section of our website, ir.byrna.com, for further information regarding forward-looking statements and reconciliations of non-GAAP results to GAAP results. I will now turn the call over to Byrna Technologies Inc.'s CEO, Mr. Ganz. Bryan Ganz: Thank you, operator, and thank you, everyone, for joining us today. This morning, we filed our 10-Q with the SEC and issued a press release providing our financial results and business highlights for the fiscal third quarter ended August 31, 2025. I'll start today by turning the call over to our CFO, Laurilee Kearnes, who will review our financial results for the period. Following her remarks, I'll discuss the operational highlights that drove our 35% year-over-year revenue growth and continued GAAP and non-GAAP EBITDA profitability for the quarter. I'll then offer insights into our strategy moving forward, before we open the call up to questions from our covering research analysts. Laurilee? Laurilee Kearnes: Thank you, Bryan, and good morning, everyone. Let's review our financial results for the fiscal third quarter ended August 31, 2025. Net revenue for Q3 2025 was $28.2 million, a 35% increase from the $20.9 million reported in 2024. The $7.2 million increase was driven largely by strong chain store and dealer sales tied to our expanding retail presence, the success of our new advertising initiatives, and broader brand adoption. Web traffic began to build late in the quarter and has continued into fiscal Q4. Gross profit for Q3 2025 was $16.9 million or 60% of net revenue, compared to $13 million or 62% of net revenue for Q3 2024. Gross margin performance reflects the changing channel mix, which saw much stronger dealer and international sales for the quarter, the one-time startup costs associated with the compact launcher release, and related manufacturing ramp-up costs, as well as the start of ammo manufacturing in Fort Wayne. We anticipate that the compact launcher and ammo margins will continue to grow as production volumes increase and manufacturing processes become more efficient. Operating expenses for Q3 2025 were $14.1 million compared to $12.2 million for Q3 2024. The increase in operating expenses was driven primarily by increased variable selling expenses and discretionary marketing investment to support the growth. Net income for Q3 2025 was $2.2 million, up from $1 million for Q3 2024. This increase was driven by the overall increase in product sales. We continue to expect our effective tax rate to be approximately 23% for the year. Adjusted EBITDA and non-GAAP metrics totaled $3.7 million, which was up from $1.9 million for Q3 2024. Cash, cash equivalents, and marketable securities at August 31, 2025, totaled $9 million compared to $25.7 million at November 30, 2024. Cash has been increasing since the end of the third quarter, which primarily reflects just normal seasonal working capital timing and collections subsequent to quarter-end, as well as the planned drawdown of inventory. We expect the drawdown of inventory and increase in cash to accelerate throughout the fourth quarter. The company has no current or long-term debt. Accounts receivable on August 31, 2025, totaled $8.9 million compared to $2.6 million at November 30, 2024, driven largely by the increase in dealer sales. Inventory at August 31, 2025, totaled $34.1 million compared to $20 million at November 30, 2024, reflecting our strategic builds ahead of the holiday season and the compact launcher rollout. Mix dynamics this quarter favored the Byrna SD more than initially anticipated, leading to additional purchases of SD million parts. We saw the high point of inventory in July with the reduction since that time of over $3.5 million. We expect inventory to normalize as we move through the peak season and into fiscal Q1 2026. I'll now turn it back to Bryan. Bryan Ganz: Thank you, Laurilee. First, an advertising update. Our Q3 growth of 35% year-over-year is due to several factors, including the growth of our dealer network, the impact of our new advertising initiatives, and the growing awareness of Byrna Technologies Inc. brands. In August, our AI-enabled advertising campaign expanded our reach across new channels that up until now were off-limits to Byrna Technologies Inc. The growing awareness generated by this advertising campaign, including the now-iconic "We Don't Sell Bananas" ad, lifted average daily sessions on byrna.com from 33,000 a day to more than 50,000 a day. That momentum has carried into early fiscal Q4, with web sessions on byrna.com averaging 58,000 sessions per day in the month of September. This surge in web traffic has grown Byrna Technologies Inc.'s opt-in email list to 1.9 million subscribers. We plan to leverage this expanded audience to drive Q4 sales through targeted outreach for our October Black and Orange Sale and our Black Friday Cyber Monday promotions. The "We Don't Sell Bananas" ad was the first campaign we created with the help of AI. By combining this technology with our own proprietary processes, we can quickly generate professional-quality commercials, refresh creative continuously, and A/B test variations at scale. This has also allowed us to adapt content to the requirements of cable and streaming networks more efficiently, creating broader ad distribution opportunities and lowering customer acquisition costs. With these ads, we've also been able to secure placements on MLB, Major League Baseball streaming services, and NFL airport displays, among other networks. These mainstream opportunities on highly visible platforms have elevated brand recognition and acceptance. As these placements demonstrate our credibility and normalization of our product category, we fully expect that they will open the doors to additional mainstream networks with comparable demographics, further amplifying reach and conversion over time. As expected, the added visibility and higher web traffic from these new ad campaigns initially lowered conversion rates. Traditionally, we have seen a 45-day average purchase cycle from initial exposure to the Byrna Technologies Inc. brand; most customers engage with us multiple times before making a purchase. Now that we are in our third month of running the new advertising campaign, conversion rates are starting to tick up, and we expect to see continued improvement throughout the quarter as we trend back to our historical 1% mean. Overall, this expanded media presence is fueling growth in both our e-commerce and retail channels. Speaking of our retail channels, we are excited to now be in more than 1,000 stores nationwide, including our big box partners, premier dealers, and our own retail stores as we gear up for the holiday season. As our brand awareness has grown, we've also seen steady growth with our retail partners, particularly those partners that provide a shooting experience. The benefit of our expanding physical presence is clear. When customers have the opportunity to fire the launcher, conversion rates improve dramatically. What's particularly interesting is the Byrna Technologies Inc. compact launcher, first released in May, has gained much greater traction in these experiential settings as customers can see and feel the difference in size and power. This has resulted in our brick-and-mortar partners selling a greater percentage of CL launchers than SD launchers, while the opposite is true for our online sales. At the same time, our company-owned stores, most of which opened earlier this year, are also performing in line with our expectations. For the month of September, our five retail stores operated at an average annualized run rate of $725,000, with our Salem, New Hampshire store slightly edging out our Las Vegas location to take the number one position. Interestingly, our Fort Wayne, Indiana location, our smallest and most remote store, ranked third at an $800,000 annual run rate. These results validate the strong performance we saw at our first Las Vegas location and confirm that our retail model is resonating across diverse markets. The quick ramp-up in sales across multiple stores reinforces the effectiveness and scalability of our approach as brand awareness continues to grow. For comparison purposes, it's important to note that last year, our retail store sales were included in our e-commerce figures as transactions were processed through Shopify. This year, we developed and implemented our own proprietary POS system built in-house with the help of AI, allowing retail stores to be recorded separately. We chose to develop our own POS solution after determining the available off-the-shelf third-party systems could not truly meet our operational requirements. The successful development of this system highlights how AI has dramatically reduced the cost and time needed to develop in-house apps and accounting systems. While we don't have immediate plans to expand the company-owned retail model broadly, we see additional long-term potential in select flagship markets. These stores also serve as hubs for training, community events, product testing, and direct customer feedback, and they help foster grassroots engagement and word-of-mouth momentum around the Byrna Technologies Inc. brand. To support our demand, we've been carefully monitoring production and inventory levels. As Laurilee mentioned, we've seen a shift in our launcher sales mix. With the initial launch of the compact launcher in May, where there was a pent-up demand for the compact launcher, the SD has now become about 50% of our sales, and the CL accounts for around 30% of our sales. Beyond its lower price point, the SD performs well on Amazon, thanks to its long-standing presence and more than 1,000 reviews. As a result, we've increased our orders for SD parts to be adequately prepared for the holiday season. We expect our inventory levels to reach a more normalized level after the peak season. We also recently implemented a new proprietary shop floor management system at our factory designed to enhance factory efficiency and strengthen first-pass yield. With the introduction of the new Byrna Technologies Inc. compact launcher and the startup of our Fort Wayne ammo manufacturing facility, we experienced the typical short-term inefficiencies that come with ramping new products and operations, which temporarily reduces gross margins in both our ammo and launcher production facilities. However, by developing and deploying our own extremely robust shop floor factory management system, which, again, was built entirely in-house, we were able to virtually eliminate labor and overhead variances in the month of September. As these efficiencies continue to flow through, we expect to significantly reduce the unfavorable labor and overhead variances we experienced in Q3 as we drive gross margin percentages towards our target of 63% to 65% next year. Byrna Technologies Inc. has always been at the vanguard of innovation when it comes to the CO2-powered less lethal launcher market. The company is breaking new ground with the development of products that will take Byrna Technologies Inc. beyond simply being a less lethal weapons company. In fact, we have modified our mission statement to reflect this broader focus. Our mission statement now reads: to provide civilians and security professionals with safe, reliable, and effective less lethal alternatives to traditional firearms that will allow Byrna Technologies Inc.'s customers to protect and defend themselves, their families, and their communities without the need to resort to lethal force. And to provide them with the technology-based systems and solutions that will help protect them in their homes, their vehicles, and when out in public. We strongly believe that by combining recent advances in the area of SOS alert capabilities, along with the intended development of compact communication and recording devices, and the advances in AI, with the incredible stopping power of Byrna Technologies Inc.'s launchers and sprays, we can provide additional protection and functionality to our users. Today, there are many devices that have SOS alert capabilities. Yet in those critical situations where someone needs to protect themselves against an immediate threat, an SOS alert system by itself is not enough, as even in the best of circumstances, help is many minutes away. In these instances, you must be your own first responder, which highlights the need for tools that both contact the authorities and provide the proven ability to protect oneself and one's family when the situation calls for it. Accordingly, we see tremendous opportunity to combine existing SOS alert technology with Byrna Technologies Inc.'s proven safe, reliable, and effective launchers and sprays, giving customers the ability to both neutralize a threat and contact help. We believe that integrating SOS alert technology with Byrna Technologies Inc.'s suite of self-defense devices through products that either fit on the Picatinny rail or are built into our spray or alarm devices, these connected devices will dramatically enhance the value proposition for Byrna Technologies Inc.'s customers. By giving them the ability to summon help if they are under threat, this should not only serve to deter any would-be attacker and provide valuable third-party corroboration of the threat but also defend themselves and their family should the situation demand it. This evolution of our safety devices to include the ability of alerting authorities and capturing the events will strengthen the Byrna Technologies Inc. ecosystem, increase customer engagement, and create the foundation for new technology-driven recurring revenue streams. At the same time, this initiative has the potential to broaden our already large addressable market by reaching into the population of tens of millions of firearms owners, many of whom may be interested in connected less lethal safety solutions that they can easily affix to the Picatinny rail of their firearm when they feel that they may need that extra layer of protection. Even modest adoption within this group could meaningfully expand awareness and usage of Byrna Technologies Inc.'s technology. Together, these efforts could create a compelling entry point and an expanded opportunity for the adoption of Byrna Technologies Inc.'s technology. We have been working on this project for almost a year, and we are steadily advancing the development of our connected safety platform. It is an effort that continues to build momentum as we move closer to bringing this vision to market due to recent AI-driven advances in coding. Our success in developing several proprietary programs, including our own POS application and our shop floor factory management system, reinforces our confidence in our ability to develop the apps needed to be able to have our devices communicate with established SOS alert systems that have become so popular in recent years. In addition to this connected platform opportunity, Byrna Technologies Inc. is also developing the next generation of products that extend beyond our current lineup and address accessible to a broader audience, including a younger demographic and more cost-conscious consumers. As part of this strategy, we plan to introduce a value-focused 61-caliber launcher in 2026, targeted at budget-minded consumers and first-time buyers exploring less lethal protection. We also expect to launch a simplified, highly portable protection device in 2026 that marries the form factor of Byrna Technologies Inc.'s iconic launchers with the stopping power of Byrna Technologies Inc.'s line of BGR self-defense sprays. These two products are designed to expand Byrna Technologies Inc.'s reach to customers that may not be able to afford Byrna Technologies Inc.'s existing range of launchers while maintaining our core focus on safety, reliability, and effective less lethal protection. On the consumable side, we plan to expand upon this theme of making our products available to more cost-conscious consumers through our ammunition offering by introducing more affordable inert and kinetic practice rounds to both compete against cheap foreign imports and encourage frequent training and repeat purchases. We will, of course, continue to offer our premium ammunition lines for professional and enthusiast users. We believe that this balance between accessibility and performance ensures that we are meeting the needs of every customer, from those just discovering less lethal options to experienced users demanding top-tier accuracy and dependability. Byrna Technologies Inc. has proven that we are the leader in providing safe and effective, very reliable, less lethal protection for consumers. We are still in the very early innings of penetrating this market. As we continue to make inroads, it is essential that we offer a variety of less lethal products at a range of price points that meet the needs of a diverse customer base and provide Byrna Technologies Inc. with the opportunity to generate recurring revenue over time. Looking ahead, we are confident that our new advertising programs and our expanded retail footprint position Byrna Technologies Inc. for a strong finish to the year. September sales were strong, and that momentum, combined with the upcoming holiday shopping season, supports our expectation for full-year fiscal 2025 revenue growth to be between 35-40%. The timing of this year's Black Friday and Cyber Monday sales, which fall over the final weekend of our fiscal year, with Cyber Monday landing at the start of fiscal year 2026, is expected to drive exceptionally high order volume. These sales days consistently generate strong demand, with Byrna Technologies Inc. shipping thousands of packages a day during this period. With the fiscal year ending on Sunday after Thanksgiving, the precise timing of order fulfillment will determine whether certain sales are recorded in Q4 or Q1. But, either way, we expect this activity to contribute to a strong finish to 2025 and also set the stage for a fast start to fiscal year 2026. The strong results so far this year demonstrate both our effective execution and the scale of the opportunity in front of us. The continued expansion of our launcher customer base is a critical foundation for our larger vision of building a personal safety platform that extends our model with services and connected capabilities that complement our best-in-class less lethal launchers, sprays, and alarms, with recurring service-based revenue as we look to integrate Byrna Technologies Inc. more deeply into consumer safety routines. We believe that we are only at the beginning of penetrating a large and expanding market. We are laying the groundwork for sustained multiyear growth, and we look forward to updating you on our progress against this roadmap in the quarters to come. This concludes my prepared remarks. Operator, Operator: Thank you. The company will now be taking questions from sell-side analysts. If you would like to register a question, please press. Our first question is coming from Jeff Van Sinderen of B. Riley Securities. Please go ahead. Jeff Van Sinderen: Good morning, everyone, and great to hear of the continued business momentum. Bryan, maybe you could just touch on thoughts on adding new influencers. I know that's something that has been discussed. Maybe touch on areas of focus there? Bryan Ganz: Okay. So in 2023, we kicked off our celebrity influencer campaign with Sean Hannity. And since that time, it's expanded to approximately a dozen conservative radio talk show hosts. We believe that at this point, we have a sufficient number of conservative radio talk show hosts, and we are looking to expand beyond that universe. Towards that end, you may have noticed that we recently brought on board a new director by the name of Adam Roth. Adam was head of sales and marketing for Nike North America before he retired. And he brings with him a wealth of knowledge regarding celebrity influencers or what Nike called brand ambassadors. In fact, I was just on the phone with Adam yesterday as we are putting together a plan and pitch deck for going after a whole new host of brand ambassadors or celebrity endorsers for Byrna Technologies Inc. that will help us expand beyond our existing customer demographic. At this point, I cannot share with you the names of anybody that we're talking to. But we are well into this process. Jeff Van Sinderen: Okay. That's great to hear. And then maybe if you can just touch on the latest, I think there's another CL launcher that's planned. And then also just give us an update if you could on the lower price point unit that you plan to roll out? Bryan Ganz: Yeah. Jeff, I'm not sure what you mean by another CL launcher that's planned. The next new launcher going to be coming out will be the 61-caliber price point launcher, which will come out sometime next year. And it will be largely based on the CL design. It'll be similar in size to the existing CL. But there are no different variations of the CL that are going to be coming out. In terms of the basic box, the price point launcher that we brought out, interestingly, it has not been as popular as we would have expected. We still sell both the basic box configuration, which is just the launcher by itself with no accessories, as well as what we call the universal ready kit, which comes with CO2 and ammunition and an extra magazine so that you can buy simply the ready kit and you are ready to use it. That is still probably 90% of our sales. So, you know, initially, we were concerned that maybe the price point was too high. The market has clearly voted with their and said, no. You know, your $540.99 price point is perfect. Jeff Van Sinderen: Okay. That's an interesting development. So one other thing if I could squeeze it in. Just wondering how ByrnaCare adoption is running in the early days. Bryan Ganz: ByrnaCare adoption is running in line with expectations. We have not yet been able to adopt our website to ask for people to buy ByrnaCare at the end of every purchase. This requires a little bit of additional coding, and we think that we'll have even greater impact. But it's in line with expectations. Jeff Van Sinderen: Okay. Thanks for taking my questions. I'll take the rest offline. Bryan Ganz: Thank you. Thank you. The next question is coming from Jeremy Hamblin of Craig Hallum. Please go ahead. Jeremy Hamblin: Thanks and I'll add my congratulations. I want to come back to the success that you're seeing with the advertising campaign, the momentum you have with web traffic in particular, and just a commentary around expectations on conversion rates. You know, with the, you know, what, 70%, 75% increase in web traffic that you are seeing sequentially, can you just discuss a little bit more in terms of conversions that you were seeing? And whether or not this campaign is reaching maybe a customer set that is outside of your traditional customer set given kind of the viral nature of the campaign? Bryan Ganz: Jeremy, thank you for the question. And honestly, that's the question we're asking ourselves every day as well. As we expand the demographic that we're speaking to, will we see the same conversion rates? And the answer simply is that we don't know. What we do know is that the conversion rates will climb significantly from where they are. Because it does take some period of time for people to make a purchase. They come back to the website on average five to seven times before making a purchase. So, you know, we know that the first time we see incremental traffic, it's not going to result in incremental sales. We have started to see a climb in a climbing conversion rate. But interestingly, we're also continuing to see a climb in web sessions. Yesterday, our web sessions were 70,000 sessions, I think, for the third day in a row. So as we're starting to see higher web sessions, we are, again, getting more and more new consumers on. So it is having a dampening effect on the conversion rate, while at the same time, those new consumers that came a month ago, two months ago, are having a positive effect on conversion rate. Last year during the months of October, November, our conversion rates approached one and a half percent. They're always higher during the holiday season. We don't need anything close to one and a half percent this year when we're generating 70,000 sessions a day to hit our numbers. So to answer your question, is it going to get back to exactly where it was? We don't know. But we do know that it will be significantly higher than where it is currently, and we are already seeing that trend. Jeremy Hamblin: Great. That's helpful. And then just in terms of what you expect on channel mix here in Q4, you've obviously had significant expansion in the number of wholesale doors you're selling into. But given this lift that you're seeing in traffic both at byrna.com and on Amazon, how should we be thinking about the mix of business here in Q4? Laurilee Kearnes: Hi, Jeremy, it's Laurilee. Yeah, I mean, we will still continue to see strong dealer and chain store sales. We see additional orders coming in as they're ramping for the holidays as well. So we still expect to see that strength there. That being said, we expect our DTC channels to be a higher percentage of overall sales than they were in Q3. Jeremy Hamblin: Got it. Helpful. And then just last one for me. In terms of thinking about kind of the expense leverage that you're getting in the model, saw, you know, OpEx, you know, really well contained here in the third quarter. As we look ahead, you know, you saw about what $7.3 million year-over-year growth in sales, but OpEx was only up $2 million year-over-year in Q3. Should we expect that kind of expense leverage ratio to maintain here both in Q4, but then as we think about kind of projecting out in 2026 and beyond? Laurilee Kearnes: Yes. I mean, I think in Q4, it'll be close. We do ramp up some additional marketing in Q4 from Q3. So we will continue to see that leverage maybe not quite to the extent. I mean, Q3 was a great quarter for us on leverage. Going into next year, there will be some additional for new positions, some things we're hiring. But for the most part, we'll continue to see that leverage as we move forward. And really, this quarter, it was really just it was marketing expense, and variable selling expense was really the increase. Everything else held pretty steady. Jeremy Hamblin: Great. I'll hop out and congrats and look forward to seeing the development. Thanks, Jeremy. Operator: Thank you. The next question is coming from Matt Koranda of ROTH Capital Partners. Please go ahead. Matt Koranda: Hey, guys. Good morning and thanks for taking the questions. I guess you sort of tangentially addressed it earlier, Bryan, but I just wanted to put a finer point on sort of how the guidance fits with the 70% lift that you've seen in web traffic. I guess if I just look at the midpoint of your guide, and it would suggest about 25% growth in sales in the fourth quarter, but the web traffic numbers are pretty substantially above that. So maybe just fit those two things together. Assume the answer is generally conversion and being conservative there, but just a little bit more color on that would be great. Bryan Ganz: Yeah. As we said before, it will take us some time for our conversion rates to get back to a mean of 1%. And we have seen this happen time and time and time again. Where we see a significant spike in web sessions and it takes some period of time for the conversion rate to catch up. But in every case, it ultimately does catch up. So we don't believe that we're going to get back to our normal conversion rate in Q4. And in fact, you know, web sessions are growing daily. But we do expect that it will occur over time. And I think, you know, we have to be cognizant of that, you know, it's going to take some time for that to happen. Matt Koranda: Okay. And then maybe just a tool at your disposal would be promotions. So just any thoughts that you have heading into the holiday on sort of the promotional posture that we're considering? Any shift in strategy that we might consider to drive improved conversion that would sort of help with the web traffic you're seeing. Bryan Ganz: Every year, at this time of year, we have two separate sales. We have kind of an early Black Friday sale, which is our Byrna Technologies Inc. Black and Orange Sale that happens at the end of October, and there's always a big conversion during that period of time. And then we have the traditional Black Friday, Cyber Monday sale that happens starting the Wednesday before Thanksgiving. This year is a little bit of an issue because this period of time, these six days, represent 40% of our sales in November. So it's an enormous amount of sales that are happening in the last six days of the month, one of which is Thanksgiving, and we're closed. And then when we come back for three days, we're going to have to get something like six or 7,000 packages out the door. So, you know, my only concern is, you know, how many of those packages can we get out the door and what, you know, ends up falling into Q1. Matt Koranda: Okay. Understood. Maybe just curious for an update on how to think about the wholesale expansion into the end of this year and next. I know you mentioned a thousand doors, I think you're in as of the end of the third quarter. Where do you think things will shake out by the end of this fiscal year? And do we have any kind of stretch goals for next year in terms of doors that we'd enter? Laurilee Kearnes: Yes. Hi, Matt. So where we are right now, we think we're pretty well positioned. You know, we want to make sure we don't become too saturated. So we're probably mostly holding where we are on our current retail footprint. We'll continue to work with all of our partners to make sure we help them with better conversion, better tools, and I think we'll hold at that point. Perhaps there will be more later. You know, as Bryan said, we may look for special markets where we put additional corporate stores in some of those markets. But, right now, we feel pretty good as far as where we are on the retail store. Bryan Ganz: If I can just add, Matt, I think, you know, our team has done an amazing job working with our partners. And I think at this point, we have a very, very good footprint of stores. There are, as Laurilee says, certain areas where, you know, we're not as represented as well as we should be. And we will likely open up Byrna Technologies Inc. retail stores in those areas. But I think the bigger issue for us and our focus for 2026 is going to be expanding our existing relationships. We have seen Bass Pro, for example, increase the number of SKUs that they're offering. They're offering additional colors. They're offering additional models. And this is having a significant impact on their weekly sales. This is what we need to do with all of our partners to make sure that they're doing as well as they can in each store. And I think there's huge opportunities for growth within the existing footprint. And not that we will not take on more partners. We will, but we need to be very selective about it because putting two stores right next to each other is not helpful. Matt Koranda: Okay. Makes a ton of sense. Maybe if I could just sneak one more in. You mentioned the SOS and connected platform, which sounds really exciting. And I'm curious, when do you think loosely that could become sort of commercially available to consumers? Would that be a next year event, or is that something like a more like a 2027 event? Bryan Ganz: No. It will be a next year event. But keep in mind that it is going to be phased. So that and let me just say, all of this technology exists. These SOS alert systems, RapidSOS, Noonlight. There's a lot of these services out there already. The hardware technology already exists. What we are doing is packaging it in a format to work with Byrna Technologies Inc.'s products. So there are some things that we are very far along on that will certainly be released in 2026. There are other sort of more aspirational products that we have that may, you know, not come out until 2027. But unlike the development of a brand new launcher where there's a lot of technology that has to be developed from scratch, this is really taking existing technology and adapting it for use with Byrna Technologies Inc.'s suite of products. So this will happen much more quickly than traditional development projects. Matt Koranda: Okay. Great. I'll leave it there, guys. Thank you. Bryan Ganz: Thank you, Matt. Operator: Thank you. Our next question is coming from Jon Hickman of Ladenburg Thalmann. Please go ahead. Jon Hickman: Jon? Oh, hello. I just wanted to maybe just a follow-up from one of the last questions. But how are you could you elaborate on how the whole Sportsman's Warehouse? Are you complete with them? Are you still rolling out stores? Are you adding more shooting lanes? Can you talk about that a little bit? Laurilee Kearnes: Hi, Jon. It's Laurilee. Yes, I think we're on track with where we expect to be with Sportsman's. They have a mix of, you know, different presence in different stores. They're working through some of their stores and their markets to determine what works best. What we found is these stores where we put the shooting pod seems to help drive additional demos, additional conversion in those stores. So that's really something that's driving well. Now that doesn't fit in all of their stores, due to, you know, their footprint, and what works in different markets. So continuing to support them. We feel great about the partnership with them. And, you know, like I said, we've got a various mix, but we're on track and well positioned. Jon Hickman: How many SKUs are they carrying? Laurilee Kearnes: They carry most of our SKUs. You know, there are obviously a few accessories and things that they don't. But they carry all of the various launchers. They carry ammo. They carry CO2 and a number of accessories. And sprays as well. Jon Hickman: Okay. Okay. Know the exact number, but it's pretty much our full product line. Bryan Ganz: Yeah. And Jon, I think that the big takeaway from that Laurilee said is that this shooting pod has proven to be very, very effective. Now we have an agreement with Sportsman's where this is exclusive to them. So, you know, unfortunately, we don't have the shooting experience in some of the other partners that we work with. But these shooting pods have been very effective, and the stores that have the pods have done extremely well. Jon Hickman: I don't know. Maybe you can't answer this. Are you in Cabela's or are you trying to get into Cabela's? Laurilee Kearnes: Yeah. Cabela's is part of Bass Pro. So last October, we actually went on a national basis with Bass Pro Cabela's. So we are in all of their stores. Jon Hickman: Okay. All my other questions were basically answered. So great. Thanks so much, Jon. Operator: Thank you. This concludes our question and answer session. I'd now like to turn the call back over to Mr. Ganz for his closing remarks. Bryan Ganz: Donna, thank you very much. And I just want to thank everybody on the call for taking the time. And we will, of course, keep everybody apprised on these very exciting new projects that we're working on. Thank you very much. Operator: Thank you. Thank you for joining us for today's Byrna Technologies Inc.'s fiscal third quarter 2025 conference call. You may now disconnect.
Operator: Today's call is being recorded and will be archived at www.pepsico.com. It is now my pleasure to introduce Mr. Ravi Pamnani, Senior Vice President, Investor Relations. Mr. Pamnani, you may begin. Ravi Pamnani: Thank you, Operator, and good morning, everyone. I hope everyone has had the chance this morning to review our press release and prepared remarks, both of which are available on our website. Before we begin, please take note of our cautionary statement. We may make forward-looking statements on today's call, including about our business plans, guidance, and outlook. Forward-looking statements inherently involve risks and uncertainties and only reflect our view as of today, 10/09/2025, and we are under no obligation to update. When discussing our results, we refer to non-GAAP measures, which exclude certain items from reported results. Please refer to our third quarter 2025 earnings release and third quarter 2025 Form 10-Q available on pepsico.com for definitions and reconciliations of non-GAAP measures and additional information regarding our results, including a discussion of factors that could cause actual results to materially differ from forward-looking statements. Joining me today are PepsiCo's Chairman and CEO, Ramon Laguarta, and PepsiCo's Executive Vice President and CFO, Jamie Caulfield. We ask that you please limit yourself to one question. And with that, we will turn it over to the operator for the first question. Operator: Thank you. First question comes from Bonnie Herzog with Goldman Sachs. Your line is open. Bonnie Herzog: Alright. Thank you. Good morning, everyone. I had a question on the volume pressures you continue to face in both your food and beverage businesses. I guess, can you give us a sense of how much this is being impacted by your pivot to smaller pack sizes? You know, maybe versus category trends, soft or potential market share losses. Essentially, how should we think about these volume declines? And then how should we think about volume growth moving forward? Is it realistic to assume that volumes could start to inflect, especially considering the robust innovation pipeline you've highlighted this morning? Ravi Pamnani: Thanks. Morning, Bonnie. Yes. Let me start with beverages. In beverages, the masks are easier when you take out the case pack water kind of divestment or new business model we have. Beverages actually grew volume in the quarter. So we are very happy with the performance on the beverage business. Especially some of the larger brands like Pepsi, grew volume, grew net revenue, grew share. So positive development in beverages. In foods, we changed the promo strategy in the summer, and you know, we went rather than very deep on a particular brand as we did in 2024. We tried to provide everyday low value or better value across all the brands. That impacted the volume, better revenue realization, so probably a more balanced growth of the category and our competitiveness in the category. So that explains a little bit the Q3 volume. Going forward, we're optimistic as you said, both improvement of the basic performance, we had some service level issues early in the year as systems transition now that's behind us, service levels are very high. On both businesses in the '97, '98. That's being well appreciated by our customers. And we're seeing much better fill rates and much better execution point of sale that's driving growth. We're seeing, as you're saying, some of the innovation rolling out and that will give us volume growth. But I think we should think about the top line of the business at a balance between volume growth and price realization going forward. And we'll should see an acceleration in PBNA, continued acceleration of net revenue in PBNA. And the same with the food business, should be very close to flat this quarter in food. Actually, we're very optimistic that the business actually grew in the last four weeks, the last quarter, and the last period that we closed. So optimistic about the top line growth on both businesses and the acceleration. And with regards to international, we had a bit of a weaker summer because of some weather and some other elements in some of our large markets. September was also very good in international, so we see that as the summer a bit of a blip. And international is back to mid-single digit, high mid-single digits performance in the last month that we closed. The other thing I'd add, Bonnie, is as we lap some of these acquisitions, if you look at Asiete, Poppy, the Alani New that's not included in organic. So as we anniversary those, volume and net revenue is going to be reflecting the organic sales growth. Operator: Thank you. One moment for our next question. Our next question comes from Dara Mohsenian with Morgan Stanley. Your line is open. Dara Mohsenian: Hey, good morning. Ravi Pamnani: Hey, there. Dara Mohsenian: The commentary was helpful on top line growth. I guess, just looking out more to 2026 and longer term, obviously, a lot of work's underway to reinvigorate top line growth. Clearly, the heightened innovation focus, focus on permissible or more functional benefits in terms of products. Portfolio reshaping, price back architecture, from home, etcetera, etcetera. So just when you bring it all together, Ramon, which areas do you think are most impactful as we think about potentially accelerating revenue growth in 2026? Can you give us a little more asbestos on when you think we'll start to see material progress on that front? And do you think there's a line of sight to returning potentially the long-term top line growth your long-term algo at some point within 2026, just when you wrap all these efforts together? Thanks. Ramon Laguarta: Yeah. Thank you, Dara, for the question, and it's super critical. Right? We're acting with a lot as you can as you saw and you said, with a lot of sense of urgency on how we reignite top line growth, a growth across the business. And, yes, we see a clear line of sight to going back to algorithm. We'll see. But, clearly, I'll tell you about the why. Throughout '26. Now is it Q3? Is it Q4? We see that happening during the year. The first one is being brilliant at the basics, and that is something that we're focusing on. As I said earlier, the right price points, the right service levels, the right execution, the right service to our customers, the right customer plans, and we feel very good about how, you know, our customer plans are starting to shape up. Know, and we're late. Already quite advanced in the process with our larger customers. So that's being clear at the basics. Then we're making some big interventions in big brands. I said Pepsi is growing globally, and we relaunched Pepsi a year and a half ago. Now we're going after three of our top brands, Lace, Tostitos, and Gatorade. We're relaunching three of our top brands in The US and globally and that is going to drive growth in the core of the business, which is essential to your point on what's going to drive future growth. Now, that is happening as we speak, with Liz and Tostitos, and it's happening with Gatorade a little bit later in the Q1 to Q2 time frame. The other element we're focusing on is really accelerating the platforms that are growing. And you mentioned some, away from home is growing very fast for us in The US and it's gonna be a focus for us. It's growing like, two to three times the retail business. We'll continue to focus its execution of existing products and then some innovation special for away from home more moving towards meals, a more elevated experience. You mentioned permissible snacks. We have a very strong portfolio of permissible snacks. In The US and zero sugar across the world that will continue to be a focus of our innovation, and that will drive growth. And then we have in functional hydration, we have a superior portfolio with Propel and the enhancers and tablets, growing very fast. Those will be platforms of existing parts of the portfolio that will put a lot of investments that will drive growth. Now, innovation is critical for us and we've been working with real sense of urgency on new platforms to capture segments of the market that are you know, disproportionately growing within our, you know, somehow low growth categories. So you mentioned protein. So there are a lot of innovation on protein, the relaunch of muscle milk, a Starbucks and protein. We know in the morning consumers are looking for protein as well. Doritos protein, Quaker protein, We're having a good warrior meat snacks. With our artificials, and then a new development from PROPEL for GLP-one consumers that will have a special type of electrolytes high content of fiber and good levels of protein. So that in the protein space, which, as you know, is driving a lot of growth. Now the move to nonartificial impacting all our brands, Lace and Tostitos now, but the rest of the portfolio throughout 2026. And a new platform, we call it Naked, that will have no colors and no artificial. We'll see how consumers react to their same great flavors with no colors. The customers are really very excited. We're also excited. Let's see if we can take consumers along in which would be a great development for the for the category. We're launching products with higher fiber. I think fiber will be the next protein. Consumers are starting to understand that fiber is the benefit that they need. It's actually a deficiency in US consumers' diet. And that will be elevated. And then we're also innovating in new oils. Some of our platforms, especially in potato, you will see us coming with avocado oil versions, and olive oil. So a very strong innovation pipeline, which we think will help us capture pockets of growth in our categories, that will drive growth. And then the last element as Jamie was saying, we made some acquisitions that are very strategic in how we reshape the portfolio. We divested some, we acquired some, We're very optimistic how Poppy is now in our system and we're already seeing benefits of the physical availability of the product. We're seeing growth with CSA, we're seeing growth with Sabra, and we're going to incorporate Alany new into our portfolio later in the year. So those are new platforms that we'll continue to accelerate the portfolio. Some of that will be organic, some of that will be non-organic. But that's how we see the portfolio moving towards positive growth, in some parts of the portfolio, the total company going towards within our long-term net revenue growth target within next year. And, obviously, we're working to do it as soon as possible. Operator: Thank you. One moment for our next question. Our next question comes from Lauren Lieberman with Barclays. Your line is open. Lauren Lieberman: Great. Thanks so much. Good morning. Wanted to talk a little bit or a little bit about the cost associated with a lot of these innovations and the, you know, plus protein, better for you, cleaner labels, etcetera, that you've run through. Would think that these come at a higher cost of goods. I know you've talked a lot about cost savings as well, but I think you, you know, you're gonna wanna reinvest. So talk a little bit about margin structure or how to think about the cost implications of taking the portfolio and your big core brands. In this direction, and also, you know, what you do to make sure sufficient brand support for these relaunches, particularly as we look into 2026. Thanks. Ramon Laguarta: Yeah. Good. I the overall company we think that we'll continue to improve margins going forward. And we're with, again, with a very high sense of urgency, we are attacking the cost structure in the different businesses with different tools. In particular, you already saw probably today in our remarks how we are attacking the deleveraging Frito Lay with very, you know, would say, intentional and active actions around the supply chain and the go-to-market fixed cost and that's happening. Total company, Lauren, we see we see the margin improvement next year. Again, driven by the continuous acceleration of international, international is accretive to the company and continues to scale and becoming more profitable, that will continue in 2026. We see PV and A continue to expand margins at a good pace. You know, the Q3 was impacted by tariffs which we already in Q4 an expansion of the margin again to complete a positive margin expansion for the full year. And we see Frito Lay or the foods business in North America also starting to bend the curve, after, you know, all the interventions we're making in the fixed cost structure, The truth is that we invested a lot in Frito Lay in the last few years, some of that was under investment, some of that was expanding capacity, The demand signal we had in '23 is different from the demand signal we have in '25, So there's some adjustment we're making to the both the assets and the and the headcount in in the business to make sure that we have the right cost structure to navigate the coming quarter. So think about expansion of the margin for total PepsiCo with the drivers that I said, The portfolio as you mentioned, cost of goods, yes, but also price will be higher. So you should see the innovation as accretive to the business. And the A and M we're making obviously internal reallocations to make sure that the new platforms have the right money. And also some of the costs that were taken out from our fixed cost structure, we will put it back into A and M. To accelerate growth in the coming quarters. Operator: Thank you. One moment for our next question. Our next question comes from Steve Powers with Deutsche Bank. Your line is open. Steve Powers: Great. Thank you, everybody. Ramon, maybe picking up on that thread with respect to productivity. Could you just give a little bit more detail on where the interventions are specifically in and a you're making to right size that kind of fixed cost structure? And how far along you think you'll be at the end of the end of '25? Do you think you'll have rightsized that business relative to the current demand signal, or is there more work to do in '26? If I could, you know, one of the things that I didn't see in today's remarks or release is, is any difference to One North America, which obviously was a big point of focus last quarter. So maybe you could talk about if that omission was intentional or just kinda where we are with 1 North America as well. Thank you. Ramon Laguarta: Yeah. Good. So I'll let me cover both. On Frito, I'll give you yeah. We're clearly, you know, going after some manufacturing nodes that are not needed anymore. These are normally the least efficient older manufacturing nodes that we have in the system, and as we've increased capacity throughout the system in the last few years, those nodes can go away. We're also rationalizing our warehouse infrastructure both in the context of some automation decisions that we're making and also know, some combination with the beverage business in some parts of the country. There is a rightsizing of our go-to-market as we see the labor market stabilizing some of the excess labor that we had in go-to-market. Now we can probably live without those extra coverages. So those are the three main areas. There's the global levers of, you know, we're servicing PepsiCo from global capability centers and some of the changes we're making in how we service the company that it's also a continuation that applies to a free lay. Now the good news in Frito Lay is that when we see the productivity per FTE, is now at the levels of a couple of years ago. So we've been able to get to those metrics with the reduction of fixed cost that we've done in the last six, seven months. There will be a continuation of those interventions in the balance of the year. And I think they will continue, they will have additional productivity interventions in 2026, because we need to invest in affordability and we need to invest as was previously mentioned, in some of the new platforms to drive growth. So you should expect that in the coming months. Now I don't know, Jamie, if you wanna add something to the productivity. Jamie Caulfield: The only other thing I'd add is the pace of productivity built as we went out went through the year and we took some of these incremental cost resizing actions. So as you go into 2026, we're going to have a pretty significant carryover benefit of those actions, particularly in the first half of the year. Ramon Laguarta: Yeah. On North America, we continue to you know, as we look at all the different opportunities to reduce costs, improve margins, drive growth, we're looking at 1 North America as one of the options, we're testing that in Texas, is probably the state where we have the biggest opportunity given our low share in beverages, high share in snacks. When we put those businesses in the same warehouse and we serve the customers from one point of distribution this is giving us a lot of benefits. So we will see. We're testing our learning in Texas and from that, we will make decisions on how we expand it to the rest of the country. The end solution will not be a one size fits all for the whole country. So it will be more of a nuanced solutions depending on the market positions and the market size and the where the population is the different parts of the country. So we'll keep updating you on the decisions in that space. Operator: Thank you. One moment for our next question. Our next question comes from Filippo Falorni with Citi. Your line is open. Filippo Falorni: Want to talk about the international business. Ramon, you mentioned the quarter was negatively impacted by poor weather, but you saw a nice improvement in September, which is pretty encouraging. But some of your peers have talked about, like, some more macro pressures in regions like Latin America, Asia Pacific, including India. Maybe can you give us a sense of the health of the consumer in some of those countries? What are you seeing? And what gives you the confidence in the acceleration? Ramon Laguarta: Yeah. That's great, Filippo. I think listen, when it comes when it know, talking about Q3, I think most of the deceleration are linked to mostly weather Filipino, in some of the large markets. And the good news, as I said, is that September was strong, and we feel good about the balance of the year. Going back to the mid to high single digits for our international business. Now overall, the consumer is you know, I would say is stressed all over the world. We see the consumer making very choiceful decisions in many parts of the world, in China, for sure. And China is a big market. For us. Not so much in India, we're seeing growth in India. India was more impacted by weather, and there's some competitive situation in the beverage category that will impact the growth maybe for a few quarters but coming back strong. We're seeing good growth in The Middle East. Consumer in The Middle East probably feeling good. Eastern Europe, better than Western Europe. I would say. And then, yeah, Mexico is somehow connected to The US. Right? And you know, however The US goes, that impacts Mexico quite a lot. Clearly, the Hispanic cohort in The US is being impacted by all these decisions, and we see remittances impacting Mexico in a way, and that will continue probably for the next few quarters. Brazil continues to be strong for us. Close to double digit in September and a good summer. Their summer. I mean, our summer. And so good I would say, you know, we see the consumer in different parts of the world, different realities. But overall, we're managing to compete well, and we're managing to keep consumers in our brands and developing the per caps, which is a big idea for us internationally. Operator: Thank you. One moment for our next question. Our next question comes from Michael Lavery with Piper Sandler. Your line is open. Michael Lavery: Just wanna come back to brand Pepsi, you know, seeing its better improvement, mean, its better momentum and improvement in The U.S. And even from a share performance perspective, And just curious, maybe some of what's been driving that, how much is it just a changing of the messaging or maybe an increase in marketing? And also, when you talked about optimizing marketing spend as one of the ways to drive better ROIs, is there cuts to the marketing spending that's planned? Do you believe you can be more efficient? Maybe help us understand just how to think about that language there as well. Ramon Laguarta: Yeah. I think, as I mentioned, the Pepsi brand has been a success for us. The relaunch we did think, about a year and a half ago in The U.S., about a year a bit more in international. Has been a great success. And we're seeing momentum in the Pepsi brand in many, many markets. I would say internationally, it is driven by the nonsugar success. I think zero sugar, nonsugar max in Europe. It is driving consumers to the brand. It is keeping consumers in the brand and continue to be very for us from the market share, but also the overall non-sugar segment growth. We're very pleased with that. In The U.S., multiple factors, as I said, there is a focus on away from home and food disorders, Pepsi. I think the meal location is critical for beverages. It's very important for cola. And we are focusing more and more in gaining points of access to the brand and linking the brand to that particular occasion in a culturally relevant way, no different types of foods for different types of consumers and good execution. Thought, investing a bit more in the brand. And that is relevant, as you said, from the marketing point of view. There are two platforms that are growing faster than the rest. One is Zero Sugar. Which is consistent with our international growth. Story. And the second one is flavors. And flavors especially wild cherry and cream, but some others, are bringing new consumers to the brand, younger consumers to the brand, and that is positive news for the development of Pepsi. So we feel good. We'll continue with those drivers. We'll continue to investing in what is our clearly, our most important brand in the beverage portfolio. And for next year, we're assuming that Pepsi will continue to grow, and we'll be able to add some new layers of growth with Mountain Dew and Bajablast is a very solid platform, a billion dollars in retail value when you include both our sales and Taco Bell sales. So it's a very strong consumer platform. We're adding now a new platform with Dirty Do, so kind of a creamy flavors to the Mountain Dew platform. I think that will continue to expand the brand into more consumers. And then as I mentioned, the relaunch of Gatorade, which is critical for us we're leaders in a category that needs to grow faster. So we're working on value for Gatorade. Most importantly, we're working on your point of marketing, on superior hydration. We know we have proven superior electrolyte combinations. That deliver both faster hydration better hydration, longer hydration. And we're working on different parts of the portfolio to convey that message to the consumer. And we're optimistic about how that will play out for us. Operator: Thank you. One moment for our next question. Next question comes from Peter Grom with UBS. Your line is open. Peter Grom: Thank you. Good morning, everyone. So was hoping to follow-up on the prior commentary to I think it was Bonnie's question. So, Ramon, I think you mentioned an expectation for PF and A to get back to kind of flat organic sales performance in the fourth quarter and that you actually saw the business return to growth in the last month. Just as you look at what happened over the last month, is that simply a function of what you were lapping, or is it more related to the actions around innovation and everyday execution? It's just not something we've seen yet. In the data. So just any color on what happened in the last month and how that drives the confidence on the path to work. Thanks. Ramon Laguarta: Let's say, I mean, listen. Clearly, there is sequential improvement in the business. And at this point, I would say it is more related to being brilliant at the basics. So doing better the core things that drive our category. Service, price, execution, customer space, etcetera. So the key drivers of our category. I don't think it's one off. I would see a better customer engagement, customer relation as our service levels became better following the system transition early in the year. And that should be sustainable. Now I don't want to like, things can change, things can evolve, but clearly, the direction of the business it's in the right direction, and we're seeing signs that make us feel optimistic. Operator: Thank you. One moment for our next question. Our next question comes from Andrea Teixeira with JPMorgan. Your line is open. Andrea Teixeira: Thank you, and good morning, everyone. So my question is how to think about the headwinds of the SKU rationalization impacting your organic growth? And two clarifications, Ramon, for PFNA, can you comment on the results of the price reinvestments, in particular in core brands at the entry-level price points? And then second, I think you and Suboni and Peter a bit on the volume inflection. Is that a commentary in the you said volume effected positive in the last four weeks. Is that for a total company or specific to some regions? I'm assuming specific some regions in areas where you're seeing that service level coming back. So where are you seeing if that's the case, where are you seeing the volume inflection? Thank you. Jamie Caulfield: Andrea, pardon me. It's Jamie. On the SKU rationalization, I mean, there's a lot of benefits that come from cutting the long tail. And as we analyze the portfolio, there's a lot of overlap on those very small volume items with some of our larger parts of our portfolio. And as you cut that long tail, you create a lot of operational efficiency that leads to better customer service, and that you know so that you're not losing a lot, and there's a lot to gain through the and improved, improved service. Ramon Laguarta: Yeah. Andrea, on the entry price points, can you just restate your question on that? We didn't quite capture it as you were cutting off there a little bit. Operator: Her line has actually left the queue. So give me one moment. I cannot bring her back. Okay? Ramon Laguarta: K. Not a big deal, operator. Either way. Okay. One moment. Operator: And your line is open again, Andrea. You can repeat the question. Andrea Teixeira: Thank you. So just for the PFNA, if you're thinking like the pricing investments that you made in some of the core brands and entry-level price points, can you comment on how those results have been coming out? Or it's more coming from the permissible area of the business. How we should be thinking about the price reinvestments you've been making for I think, more than three quarters for now. Jamie Caulfield: Yes. So I view them as two fairly separate. The permissible subcategory is doing well. Our permissible portfolio continues to do well. Know, we look at the entire portfolio for price tag architecture. Opportunities. I think the bigger opportunity is in some of what I'll call more of the mainstream, in take-home, and we've been refining as we've moved through the year. We'll continue to refine as we get more and more data on how the brands and the packs are interacting with each other across the competitive set. And, yeah. So that's the priority is to make sure that we've got the pricing very sharp to help drive demand. Operator: Thank you. One moment for our next question. Our next question comes from Peter Galbo with Bank of America. Your line is open. Peter Galbo: Hey, Ramon and Jamie. Good morning. Ramon Laguarta: Hey. Peter Galbo: Ramon, one of the areas where you a lot on in the prepared remarks within PBNA, was on protein. I guess I just want to understand a little bit more on the decision of kind of using the in-house brands like Muscle Milk or Propel to address, you know, protein in a bigger way. Versus other subcategories like energy or prebiotic where you've either bought or partnered. So maybe just if you can expand a little bit on the decision to go more organic versus acquisition or partnership we think about protein and beverages going forward? Thanks very much. Ramon Laguarta: Thank you. Yeah. No. Listen. We always try to leverage as much as we can our existing platform is a cheaper is a better business decision. I think muscle milk you know, is a great brand that as we improve the product and we you know, we're very proud of the product that we've been able to our r and d teams have been able to develop. Will be a great tasting. High levels of protein, good mouthfeel, and no artificial. I think it will clearly serve a lot of consumers that are looking for protein drinkable solutions to replace meals or snacks throughout the day. I think muscle milk can stretch is a brand that has the potential. We'll reposition it. We'll communicate a bit different. The packaging will be very it's very modern. And updated. The same with Propel. Propel is a great platform. He has a high penetration in female and it's been growing at a double-digit CAGR the last five, six years. It has a lot of credibility in hydration. But I think he can expand into more. So this is why we think that we can take it into more of a functional hydration plus platform with Propel, focused on females, but not only. Both in powders and in liquids. And I think that that will have a multiyear innovation opportunity for us as we see consumers looking for more functional solutions in drinks that are not even available right now in the market. So it's always a better ROI for the to develop internally than not. In some of the examples that you put with Poppy and some others, we didn't have the platform to go after those opportunities. And the marketplace had already some scale players that it was a better return for us to go on and acquire. And we'll continue to do both as we go along in innovate internally, take some of our big brands into new spaces, rejuvenate the portfolio under the big brands, at the same time, look outside for tuck-in acquisitions that might give us head start or additional scale in segments that are growing faster. You know? So as you know, we're looking at portfolio transformation with a sense of urgency. And we're making, I think, the right moves as you see from our innovation pipeline some of the m and a's we've made in the last six or seven months. Yeah. Operator: Thank you. One moment for our next question. Our next question comes from Robert Ottenstein with Evercore ISI. Your line is open. Robert Ottenstein: Great. Thank you very much. So Ramon, kind of a two-part question. The first part is, you know, you talk a lot about rightsizing the cost structure, aggressively attacking costs. But at the same time, getting back to algorithm. Suggesting that perhaps the top line isn't the problem, but maybe it's the type of cost that you have. Perhaps too many costs in The U.S. in certain assets and certain brands, but you're gonna make up for that. In growth internationally and then innovation in The U.S. Which may require a more complex cost structure maybe smaller runs, different sorts of supply chains, and a whole different way of looking at the cost structure. So number one, is that assessment roughly right? And then connected to that, very big announcement on the CFO side. Congratulations to everybody. Could you talk a little bit about that decision to go outside of the firm, to a very well-respected leader at your biggest customer. And how you see him driving through that vision. Thank you. Ramon Laguarta: That's good. So listen. I think it's an on It's not an either or. So for us to be fit for the future, we're gonna have to transform the portfolio, and we doing that with the center of urgency. That will drive growth. As we are more on consumer trend and we're more in spaces of the category that are growing. So that I think we spent quite some time. But also, we need to address the cost structure of the business because we need to continue to be extremely competitive and we know consumers are looking for value. And value will be critical going forward. Being at the right price points, competing with competitors, but also private label that will have, you know, their offering. So clearly, there is a need for us to reduce the cost, also change the type of cost. We need to be much more agile. We need to be much more flexible, have optionality, invested a lot in technology in the last five years it is in our P and L, it's been a cause for us for the last five years. Now we can benefit from applying technology to everything we do applying AI, overlaying intelligence, to the infrastructure of data we've created and that will give us optionality, agility, and flexibility, which is probably what the market requires given the continuous pivot from the consumer and from our partners, our customers. So that's how we're thinking. So you'll see us going with a big sense of urgency against portfolio transformation and against cost transformation. With decisions on assets but also applying technology to our business at a very, very fast pace, and we're ready for that probably will become a competitive advantage for us versus other companies given the investments we've made. Now with regards to the CFO transition, press, first let me thank Jamie for all the thirty-five year, Jamie, or thirty-three? Thirty-three year thirty-three years in the company. He's been an amazing partner. We worked together for some periods. I mean, I was in Europe. He was here, but we knew each other for a long time. And we've been doing a lot of work together. Now Jamie expressed his desire to retire some time ago, I started looking for a CFO for the future to help me execute the strategy 2030. Steve is an incredible leader, as you said, the right experience, the right skills, proven record, the right culture fit in the company, and I'm looking forward to welcoming Steve in the next few weeks and, you know, continue to accelerate the transformation of the company to the highs that we know this will achieve. Operator: Thank you. One moment for our next question. Our next question comes from Kaumil Gajrawala with Jefferies. Your line is open. Kaumil Gajrawala: First of all, Jamie, thank you for all your help over the guess, what's now been decades. And, Ramon, a question on asset base and sort of following on with some of the answers to your questions on one, North America maybe being regional. A focus on agility, a focus on being fat. There's a lot going on. Terms of innovation and rightsizing. To what degree are you open to the idea of franchising some of these operations on the beverage side, particularly maybe just from a regional perspective because it feels like many of the intentions of what you're looking to accomplish. Some of it could be moved along by pushing a sort of a refranchising initiative. So curious what you think about that. Thanks. Ramon Laguarta: Yeah. Listen. We're come on. As I said, we're going after growth and margin with high speed and a very strong center of urgency. We are at this point, we're open to all the ideas. And we appreciate all the perspectives to create shareholder value. So you know, we'll listen. We'll do what's best for PepsiCo, but as I'm thinking about this or we think about this space of supply chain go to market, as I said earlier, the solution for this country, talking US, will not be a one size fits all solution. So there'll be Nuance, there will be potential different geographical solutions that will be the best fit for that market given our market position, starting market position, the partners, and everything else that we can do. Now as I'm thinking about this topic, there are three things that we're taking into consideration, and I'd like for you to be aware. One is the we're trying to solve for the demand of the future. Not the demand of the past. And the demand of the future will be much more concentrated in a few retailers or customers. And we need to assume the consumer will be looking for pickup of delivery and digital much more than it is today. It is today very high. It will be even better. So we need to solve for that demand of the future that will be different from the demand of the past. The second is technology and the investment we've made in technology over the five years allows us to do things that were unthinkable five years ago. If you think about a lot of the basic processes of the company from order taking to transportation towers to how we can do, you know, manufacturing or warehousing. Is totally different than the past. So we can manage complexity different. We can eliminate some of the human bottlenecks in ways that we couldn't do before. So technology, demand of the future, and the third point is I'm trying to optimize the full PepsiCo p and l. Not just one or the other. So as we think of that, we will have for sure a Nuance solution. We will be driving different solutions different parts of the country, and we'll be looking for what is the best for PepsiCo long term. We'll listen to every perspective. We'll have constructive dialogues. And I'm sure we'll come up with the best solution for this company going forward. Operator: Thank you. One moment for our next question. Our next question comes from Chris Carey with Wells Fargo Securities. Your line is open. Chris Carey: Hey, everyone. So, yeah, most ground has been covered. So maybe just to take a step back, Ramon, I'd love to get your thoughts on something around cyclical versus structural, but really by geography. I think in North America, there's an ongoing debate about how much of this is the consumer shifting preferences you know, toward, you know, healthier eating, Obviously, there's a cyclical component as well with value seeking. Can you compare you know, the consumer behavior in The U.S. this cyclical versus structural dynamic, versus what you see in the international markets? Is the consumer there behaving in similar ways you know, both from an economic perspective, number one, but also are the preferences for the international consumer outside The U.S. shifting and evolving like they are in the North American business. So I'd love to get any, you know, context or additional color on how you see that interplay. Thanks. Ramon Laguarta: Yeah. So listen. Clearly, it's a very it's a complex topic, but I'll give you my point of view on a couple of areas. There are things that are clearly structural in the way, which is think about consumers all over the world. Think consumers are moving to digital purchasing in a very structural way, and that will change the dynamics of the industry. In both the assortment, what they buy, how they buy, and what they expect the delivery method to be. I think consumers are gonna expect different ways of how goods are delivered to them. So that is a very structural change, and that's happening across the world with different speeds. But I think it's clearly a global trend. The second, I would say, in terms of the consumers are much more informed about the food and the drinks the ingredients in the foods and the drinks, and I think it's a secular trend as well that consumers will be more making choices based on clean labels, based on the ingredients in the food and not only the taste, but also the type of food that is in the brands. And, therefore, some of the relaunches of the brands that we're making whether it's Lay's or Gatorade or Tostitos, take that into consideration because I think they're very relevant going forward. And then affordability is also a reality. I think when you look at low-income households or middle-income households, they're very stretched. Fixed cost, of living are going up around the world. And that will create the need for affordability and value and price points and cost consciousness also for the foreseeable future. So those are trends that they will go up and down notches in the curve, but I think the curve is going in the same direction probably in the majority of the markets. And that's my point of view. That's how we're thinking about the future, and that's why we're moving the portfolio quickly in those spaces. We're looking at the cost structure to be able to compete both on the cost side, but also on how we serve our customers in this future of demand that will be very different from today. Operator: Thank you. One moment for our next question. Our last question comes from Robert Moskow with TD Cowen. Your line is open. Robert Moskow: Hi. Thanks for the question. You know, a few weeks ago, an activist investor announced a stake in your stock. And published a long list of recommendations. So I wanted to know your willingness to engage with them and if there's any ideas in there that you think are particularly important for your strategic direction. One in particular I wanted to know is establishing a margin target for Frito Lay know, it's been discussed in the past. I just want to know, that something that you consider constructive for setting a path for the future? Or you just look at the business and what it needs to do differently than that? Thanks. Ramon Laguarta: Yeah. Listen. Few questions on your question. So our engagement with Elliott has been you know, we had a couple of interactions. Very constructive and collaborative, and we're trying to understand each other. I think we're aligned on one thing, which is critical which is Pepsi goes undervalued. And there's a lot of opportunities to improve the valuation of the company by making a few interventions with a sense of urgency and the way we're doing. So I think we both wanna create shareholder value. We're as interested as any of our investors to do this. So we're aligned. Now of all the ideas that Elliot mentioned in their document, most of them are included in our strategy 2030, and we're acting on it. So I think we're acting with a sense of urgency on both portfolio transformation, simplification of the portfolio, cost reduction to invest in future growth, etcetera, etcetera, etcetera. A lot of positives, There's a few areas where you know, we need to probably educate each other a bit more. Gonna have conversations in the coming weeks and months. And I'm sure we'll reach a point where, you know, they will listen to their perspective. They will help us in our decisions to make PepsiCo a better company and to create value for the long term. So yeah, good collaboration and I'm optimistic about how this will drive sense of urgency and will drive positive change for PepsiCo. Ravi Pamnani: Good. Okay. So this concludes the meeting. Thank you very much. To everybody for your engagement. And again, I would like to thank Jamie for, you know, the incredible work for PepsiCo for thirty-three years and support he's given me and the management team you know, for all those years, but in particular, last two years. So you, and Jamie. I don't know what wanna say. Anything to the team here. Jamie Caulfield: No. Just thank you. It's been a terrific run, and this is a great company. I continue to believe our best days are ahead of us. Ravi Pamnani: Thank you. Operator: Thank you. Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day. Ravi Pamnani: Thank you, Kevin, Josh.
Operator: Good day, ladies and gentlemen. And welcome to the Levi Strauss & Co. Third Quarter Fiscal 2025 Earnings Conference Call for the period ending August 31, 2025. All parties will be in a listen-only mode until the question and answer session, at which time instructions will follow. This conference call is being recorded and may not be reproduced in whole or in part without written permission from the company. This conference call is being broadcast over the Internet and a replay of the webcast will be accessible for one quarter on the company's website, levistrauss.com. I would now like to turn the call over to Aida Orphan, Vice President of Investor Relations at Levi Strauss & Co. Thank you for joining us on the call today to discuss the results. Aida Orphan: For our 2025. Joining me on today's call are Michelle Gass, our President and CEO, and Harmit Singh, our Chief Financial and Growth Officer. We'd like to remind you that we will be making forward-looking statements based on current expectations, and those statements are subject to certain risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties are detailed in our reports filed with the SEC. We assume no obligation to update any of these forward-looking statements. Additionally, during this call, we will discuss certain non-GAAP financial measures that are not intended to be a substitute for our GAAP results. Definitions of these measures and reconciliations to their most comparable GAAP measure are included in our earnings release available on the IR section of our website, investors.levistrauss.com. Note that Michelle and Harmit will be referencing organic net revenues or constant currency numbers unless otherwise noted, and the information provided is based on continuing operations. Finally, this call is being webcast on our IR web and a replay of this call will be available on the website shortly. Today's call is scheduled for one hour, so please limit yourself to one question at a time to give others the opportunity to have their questions addressed. And now I'd like to turn the call over to Michelle. Michelle Gass: Thank you, and welcome, everyone. What I'll share today builds on the themes I've been emphasizing this year as we pivot to become a DTC-first head-to-toe denim lifestyle retailer. The consistent execution of our strategic priorities is driving a meaningful inflection in our financial performance. And today, I'm pleased to share that we delivered another very strong quarter with upside across the P&L, giving us the confidence to raise our full-year revenue and EPS guidance. In Q3, we delivered our fourth consecutive quarter of high single-digit organic revenue growth. Strength was once again broad-based across our business, including DTC and wholesale, international and domestic, women's and men's, and tops and bottoms. Our growth was led by continued strong sales and profitability in our direct-to-consumer channel, up 9%, fueled by strong comp growth as well as solid performance in global wholesale. Our largest market, the US, grew 3%, and our international business was up 9%, led by an acceleration in Asia. And we continue to see robust performance in our core as well as outsized growth in our key focus areas like women's and tops. The results we've delivered this quarter against an increasingly complex backdrop are yet another proof point that our strategies are working. Looking ahead, there are several factors that give me even more conviction that our momentum will continue. First, our narrowed focus enables us to maximize the full potential of the Levi's brand. We will continue to build momentum through impactful marketing campaigns, strategic partnerships, and innovative collaborations, ensuring that the brand remains firmly at the center of culture. Second, the total addressable market for denim is large and growing, as consumer preferences continue to shift towards casualization. As the definitive market leader, we are well-positioned to take advantage and drive growth. Third, our denim leadership puts us in a prime position to define and own head-to-toe denim lifestyle, further expanding our addressable market. As we drive this momentum forward, we'll continue to deliver an innovative and robust product pipeline across genders and categories. Fourth, our DTC-first strategy is bringing us closer to the consumer and generating consistent and significant growth, while we have also stabilized and grown our wholesale business. Both channels are seeing strong improvements in profitability. Fifth, while international already comprises nearly 60% of our total business, there are still untapped opportunities for us to grow, particularly in Asia where our business has momentum, and the opportunity for continued expansion is considerable. Underpinning all of this is our culture of performance, with a sharpened focus on operating with rigor and executing with excellence, from go-to-market efficiencies and more productive store operations to end-to-end supply chain improvement. I will now turn to highlights from the third quarter in the context of our strategies. All numbers that Harmit and I will reference are on an organic, continuing operations basis. Let's start with our first strategy, being brand-led. Levi's had another strong quarter of growth. In the quarter, we launched the final chapter of the reimagined campaign with Beyoncé. This campaign delivered as intended, fueling momentum across the business, specifically driving growth in our Levi's women's business up 12% year to date. In August, we debuted our new global campaign starring Shabu, underscoring our relevancy and authenticity with men. The campaign showcases our most iconic products, the 501, the trucker jacket, and the western shirt. And we're pleased with how this campaign is being received by our fans. In addition, we also cultivated enthusiasm for the brand through a broad range of collaborations, including a joint collection with Nike, fusing Levi's heritage denim craftsmanship with Nike's athletic sneaker culture. Our collaborations generate brand heat and introduce Levi's to new consumers. And just this week, we launched a special collection with Toy Story, in celebration of their thirtieth anniversary. Turning to product, our evolution to a head-to-toe denim lifestyle retailer continues to gain momentum, all while strengthening our position as the global authority in denim. Our Levi's women's business continues to deliver outsized growth, up 9% in Q3, while our leading Levi's men's business grew a solid 5%. Driven by our diversified fit, we saw strong growth in our bottoms business, which was up 6%. We're continuing to inject newness into the looser fit trend, with the new baggy utility silhouettes for him, and the launch of our baggy dad barrel for her. And we're driving a revival in low rise with our low and super low collection of fits, which are delivering strong growth. As we evolve into denim lifestyle, we're making meaningful progress on our seasonally relevant assortments as consumers look for more buy now, wear now products. Following last year's reset, tops continue to drive notable growth, up 9% with strength across women's and men's. For the quarter, our shorts business delivered strong growth across genders. We continue to infuse newness into the assortment through fit and fabric innovation, from our linen blend styles to the launch of the 501 curve. And with respect to our premiumization efforts, we began to roll out our elevated Blue Tab collection to Europe in early September, following a successful launch in Asia and the US earlier this year. Blue Tab merges Levi's iconic aesthetic with a refined quality and thoughtful Japanese craftsmanship. Looking to the holiday season, we are well-positioned with the right merchandise assortment and the right marketing campaign. We're expanding the range of occasions and amplifying the many ways that fans can embrace our denim lifestyle assortment through elevated fabric, textures, and embellishments. We're excited to showcase Levi's through a fresh lens that reflects the season's full spectrum of style. Now shifting to our strategy to be DTC-first. Global direct-to-consumer sales were up 9%, driven by strong performance in both our stores and online. We generated high single-digit comp growth fueled by higher UPT, AUR, and full-price selling as our expanded denim lifestyle assortment continues to resonate with our consumers around the world. And as we continue to grow our DTC channel, we remain focused on doing so profitably, with our productivity initiatives resulting in more than 400 basis points of margin expansion in the quarter. We're pleased with the strong results from our store optimization initiative, which have improved both the consumer experience and store productivity. We've enhanced our in-store lifestyle merchandising to make the environment more inspiring and shoppable, highlighting our broader assortment of head-to-toe looks. We've also been focused on improving our assortment planning and life cycle management, resulting in lower promotions and higher full-price selling. Additionally, we're in the process of rolling out a new global selling model for our store team. Which coupled with our enhanced labor scheduling system, is improving the consumer experience and delivering operational efficiencies. We had another quarter of very strong growth in e-commerce, up 16%, driven by an increase in traffic across all segments. We expect e-commerce to continue to be our fastest-growing channel on the path to comprising 15% of our total business, up from just 9% today. In our wholesale channel, net revenues were up 5%, reflecting growth across all segments. In the US, the Levi's brands were up 2% as we continue to invest in top doors and expand and elevate our assortment. Western Wear is core to who we are, and we're pleased to have recently expanded our product assortment with Boot Barn and gained new distribution at Cavender's. We also see opportunities to increase our penetration with premium and specialty accounts as we broaden and elevate our lifestyle assortment. Now turning to our third strategy, powering the portfolio. Our international business grew 9% in Q3. Asia accelerated in the quarter, driven by double-digit growth in key markets like India, Japan, Korea, and Turkey. I recently visited several stores across India, Korea, and Japan, and it is clear that consumers are responding to the work we've done to ensure the best expression of our denim lifestyle assortment. Japan, in particular, is a market with a very high bar for denim. We've been investing in Japan over the past decade, transitioning the market from primarily a wholesale business to now close to 75% DTC. Walking our stores in Nagoya, Shinjuku, and Harajuku, some of our highest volume stores in the world, you'll see the fullest and most premium expression of the Levi's brand. Up almost 50% since 2019, and continuing to gain momentum, we remain optimistic about future opportunities in Japan, and we will replicate our successful playbook in this market across the globe. Beyond Yoga was up 2%, and DTC was up 23%, driven by comps, new doors, and e-commerce. Growth in DTC was offset by a decline in wholesale as the team focuses on higher quality sales in the channel. Looking to Q4, we have additional stores opening in Boston, Houston, and two more stores in Northern California, bringing our total store count to 14. We expect Beyond Yoga to end the year up low teens versus prior year. In closing, we delivered another standout quarter with sales and earnings growth that positions us to increase our outlook for the year. We are fully prepared and well-positioned for holiday, as we enter the season with momentum despite an increasingly uncertain external backdrop. We have several tailwinds that give me confidence in not only delivering a strong finish to 2025 but also another strong year in 2026. Finally, I'd like to thank our incredible, talented, and passionate team for driving our transformation into the world denim lifestyle leader and delivering outstanding service to our fans every day. And with that, I will turn it over to Harmit to provide a financial overview of the quarter and our expectations for the remainder of the year. Harmit Singh: Thanks, Michelle. In quarter three, we delivered strong financial results, exceeding expectations across sales, gross margin, EBIT margin, and EPS. We remain focused on establishing a strong track record of consistent execution and results. The strategic transformation across our organization has enabled us to evolve into a higher-performing company with stronger revenue growth, expanded margin, improved cash flows, and higher returns on invested capital. Given the outperformance in quarter three and continued strong trend, we are also raising our revenue and EPS outlook for the year, despite incorporating higher tariffs than assumed in our previous guidance. Now turning to our quarter three results. Net revenue grew 7%, reflecting the power of our diversified business model. International markets drove approximately 75% of our growth, and the US contributed 25%. This international strength reflects our continued expansion and brand resonance in key markets globally, while our US business maintains solid underlying momentum. By channel, growth was evenly balanced between wholesale and direct-to-consumer, each growing and contributing roughly 50% of our revenue increase. This balanced performance underscores the success of our DTC-first strategy while maintaining strong partnerships in wholesale. By gender, women's contributed approximately 40% of our growth, with men's accounting for the balance. We continue to execute against our strategy to capture greater share in our underpenetrated higher gross margin women's segment, while a large men's business continues to generate solid growth as we fuel momentum in the category. Turning to gross margin performance. We delivered another strong quarter with a quarter three record gross margin of 61.7% of net revenue, expanding 110 basis points versus the prior year, more than offsetting 80 basis points of tariff headwind. Three key drivers fuel the continued expansion. First, our structural business mix continues to evolve favorably with the accelerating shift towards higher margin DTC, international, and women's category. Second, targeted pricing actions we have taken across our assortment, as well as higher full-price selling and reduced promotional levels in our direct-to-consumer channel as consumers continue to gravitate towards newness. Third, approximately 50 basis points of the upside in gross margin was driven by foreign exchange. While we are judicially approaching pricing opportunities across our business, in quarter three, we saw a significant increase in units, demonstrating healthy underlying demand for our brand. I'm pleased to report that our adjusted SG&A performance came in line with our expectation, representing less than 50% of total revenue, over a 150 basis points improvement from our first half run rate. The primary factors contributing to the increase in SG&A dollars include higher performance-based compensation, given the momentum in our business, costs associated with our store opening, as well as expenses associated with the transformation of our distribution network. The combination of robust gross margin and our disciplined approach to SG&A management delivered an adjusted EBIT margin of 11.8% and generated 34¢ of adjusted diluted EPS, both ahead of our expectation. Our focus on profitability as we accelerate growth has enabled us to grow both adjusted EBIT and adjusted diluted EPS up approximately 25% to prior on a year-to-date basis. Now let's review the key highlights by segment. The Americas net revenues were up 7%. Our US business was up 3%, delivering a fifth consecutive quarter of strong growth. DTC grew 6% and now represents over 40% of the US market. US wholesale net revenues were also up despite the challenges posed by the transition of our US distribution centers, driven by broad-based strength across the region. LatAm has seen several consecutive quarters of double-digit growth, including Q3, which was up 23%. America's operating margin expanded 50 basis points driven by gross margin and revenue leverage. Europe's net revenues were up 3%. All key markets delivered growth led by very strong performance in the UK. While weather impacted footfall in June and July, we exited the quarter with strong performance in August, and we continue to expect mid-single-digit growth in Europe for the year. Operating margin grew 80 basis points versus the prior year from strong gross margin expansion. Asia's net revenues accelerated to up 12%. The segment saw double-digit growth in both DTC and wholesale. Operating margin increased 50 basis points to prior year, Asia is up 8% on a year-to-date basis, and operating margin for the year is up 40 basis points to prior year. Turning to our shareholder returns program and the balance sheet. In the quarter, we returned $151 million to shareholders, a 118% increase versus last year. We've also closed the first phase of the docket sale. And with the proceeds, we have implemented a $120 million accelerated share repurchase program and retired approximately 5 million shares, with the remaining shares to be settled by 2026. We have returned $283 million to shareholders year to date, which is substantially higher than our annual cash payout target. And for Q4, we declared a dividend of 14¢ per share, which is up 8% to prior year. We ended the quarter with reported inventory dollars up 12%, driven by purposeful investment ahead of the holiday and higher product cost than a year ago due to tariffs. In unit terms, inventory was up 8% versus last year. As of today, we have 70% of the product in the US needed for holiday. Before turning to guidance, let me briefly share our updated assumptions around tariffs. Our updated guidance reflects the latest tariff rate, which includes 30% for China, and an increase to approximately 20% for the rest of the world, compared to 50 basis points previously. However, given the Q3 results, we continue to expect only a 20 basis points impact to gross margin. This translates to a 2 to 3¢ impact to adjusted diluted EPS. Unchanged from last quarter's guidance. As respects to quarter four, this equates to an 80 basis point headwind to gross margin and a 3¢ impact to adjusted diluted EPS. Looking to 2026, we are continuing to take actions to offset the impact of tariffs. As a reminder, these mitigation initiatives include promotion optimization, targeted pricing action, vendor negotiation, and further supply chain diversification. Now I will turn to our outlook for Q4 and then cover the full year. While we are taking a prudent approach to our outlook, given the complex macro environment, and the absence of the fifty-third week, which contributed four points to the top line in 2024, we remain confident in the underlying strength and momentum of our business. In quarter four, we expect organic net revenue growth to be up approximately 1%. And on a two-year stack, this equates to 9% organic growth. Reported net revenues are expected to be down approximately 3% because of noncomparable items, including the fifty-third week, denizen, and footwear, which are no longer included in the revenue base. Gross margin is expected to contract approximately 100 basis points in quarter four, driven by tariffs as well as the impact of the fifty-third week. And we expect adjusted EBIT margin to be in the range of 12.4% to 12.6%. We expect the tax rate to be in the low twenties, higher than a year ago. And adjusted diluted EPS to be in the range of 36¢ to 38¢. For the full year, we are taking our revenues up by approximately a percentage point and EPS by 2¢. We now expect reported net revenue growth of approximately 3% for the year. And we have increased our expectations for organic net revenues to approximately 6% up from prior year. We now expect gross margin to expand 100 basis points for the full year, up from the 80 basis points stated in our prior guidance, including the incremental drag from tariffs. We continue to expect adjusted SG&A as a percentage of revenue and adjusted EBIT margin to be in the range of 11.4% to 11.6%. by 2¢ to a dollar 27 to a dollar 32 for the full year. In closing, our four consecutive quarters of high single-digit growth and raised revenue expectations underscore the strength and resilience of our business. As we accelerate profitable growth, we are transforming into a best-in-class DTC-first denim lifestyle retailer, unlocking new opportunities and delivering greater value for our shareholders. Our disciplined execution and agility have enabled us to deliver 14 consecutive quarters of DTC comp sales, expand margin, drive cash flow, and return significant capital to our shareholders, including the recent ASR. I will now open up the line. Operator: Due to time constraints, the company requests you ask only one question. If you have an additional question, please queue up again. If at any point your question has been answered, you may remove yourself from the queue by pressing star 11 again. Our first question comes from the line of Laurent Vasilescu of BNP Paribas. Please go ahead, Laurent. Laurent Vasilescu: Oh, good afternoon, Michelle and Harmit. Thank you very much for taking my question. I wanted to ask about your European momentum. We had a major US brand caution about the European marketplace the other week, again, around increased promotionality. Curious to hear what you're seeing in this important marketplace. How do you how are your European pre-books look for next spring? And then, Harmit, just on the Q4 guide, the gross margin down 100 basis points. Can you maybe just unpack that a little bit more, what the fifty-third week impact on the GM? And what are the positive offsets? Thank you very much. Harmit Singh: Sure. Laurent, thanks for calling in. So Europe was up 3% for the quarter. You heard in my prepared remarks about the weather impact. But as soon as the weather cooled, we saw Europe accelerate to double-digit growth, especially as we exited the quarter. There was some shifting in July and August, but September remained strong. We've seen growth in the quarter across both channels. DTC was up four, Wholesale was up 2%. Some key markets really performed. UK was up, you know, high mid-teen. And high single-digit growth in Germany and Italy. If you think across men and women, women continues to be strong in Europe. And the consumer is gravitating towards a broader assortment, looser fit, 501, tops, which is our fastest-growing category. So our view is unlike the other major brands, that you mentioned, we expect to end the year up mid-single-digit, and this is accelerated substantially relative to a year ago. September is off to a good start. Our pre-book for spring is up mid-single-digit. Having said all that, our operating margins were also up 80 basis points. So I think that is working its way through it. On your question, I can broadly talk Q4 guidance, and then I'll talk gross margins in a minute. But on Q4, we expect the momentum of our business to continue. We do have an incremental headwind on tariffs. It's impacting gross margin first unmitigated by 130 basis points and mitigated by about 80 basis points. And EPS by three ten. Had it not been for tariffs, our gross margins in quarter four would have been up. I mean, it's it's it's pretty fractured. And then we're just taking a conservative approach to the quarter given the complex macros, you know, the status and maybe potential impact on demand. We are not seeing it as we close out September. And the continued transformation of our distribution center. The way to think about it, folks, is our we're raising our full-year top-line guidance to 6% organic. And you think of the last three years, 23 organic growth was flat, 24 was about over close to 3%. And this year, 6%. So as I said in the prepared remarks, the solidly on track to be a mid-single-digit growth company. And EBIT margins should end the year in the mid-eleven percent nine in 2023. They're close to nine. So we've steadily improved that. Higher gross margin efforts on SG&A and flow through onto EBIT margin. Laurent Vasilescu: That's great. Well, yeah, best of luck with the holiday season. Harmit Singh: Thanks. Thank you. Thank you. Operator: Our next question comes from the line of Matthew Boss of JPMorgan. Your line is open, Matthew. Matthew Boss: Great. Thanks. So, Michelle, could you elaborate on the momentum that you cited entering the season? Maybe what are you seeing in the denim category or from the consumer broadly? And then Harmit, so have you seen any material change in demand trends in September or October globally? Or is it just prudent planning for the remainder of the quarter that's driving the moderation that's embedded in your fourth quarter organically? Revenue guidance? Harmit Singh: I'll answer your second first because I'm sure it's top of mind for folks. No. It's just being the prudent guidance is just being you know, conservatism on the max. We're not seeing any underlying change in trends as that reflected. I think we're really well set for holidays. And Michelle can give you a perspective on the category and the consumer. Michelle Gass: Sure. So, Matt, thanks for the question. First, let me let me talk about the category. We're really excited. I mean, the denim category is accelerating. Both here in the US and globally. And as the definitive market leader, we are very well positioned to take advantage of that. And of course, as the leader, we help fuel the growth, and we're seeing that happen. Just to remind everyone, we are the market share leader across men's and women's globally, and we continue to maintain our number one share of position in the US as well for both men and women. I'd say most recently, we're really thrilled to see that we're gaining share in youth premium, and with our signature business. So when we think about our business from a segmentation standpoint, doing really well with Red Tab and for those consumers who are more value-oriented, we saw our signature business up double digits this quarter. What's driving that for our business in terms of market share gains and again, as the leader, helping to fuel the momentum on the category overall, I mean, it starts with product. We're bringing a lot of newness and innovation into our business through fits, fabrics, silhouettes. A lot of that's still happening with boots and baggy. But we're really seeing strength across the board. And importantly, not only is it continuing to be the leader in denim bottoms, but we're really expanding our addressable market as we think about going from denim bottoms to head-to-toe denim lifestyle. And, you know, we're seeing that momentum in categories like tops. So when take a step back, I mean, we've been around many decades. We really built this business on denim, but we're building our future on denim lifestyle. So feel good about the category, our position. Now more broadly, to your question on the consumer, I think kind of building on Harmit's comments in mine, our consumer continues to be resilient, and we're seeing that around the globe. I mean, it starts with the business, our fourth consecutive quarter of high single-digit organic growth globally. And I think it's important to make note that this for the quarter, this business was driven largely through unit growth. Right? So it's unit growth that's really fueling that momentum. And we saw broad-based strength across geographies, across categories, that's both men's and women's tops and bottoms. And both DTC and wholesale. So consumers responding, our strategies are working. I mentioned the denim category accelerating. I mentioned really kind of being relevant across these various consumer cohorts. And we get that we're operating in a complex environment here in the US. We're staying close to it. But when you think out about the Levi's brand, in times of uncertainty, consumers turn to brands that they know and trust. And Levi's certainly one of those brands. So we're optimistic as we enter the fourth quarter. We expect the health and the momentum of our business to continue. We've been planning for holiday all year. And I would say we have our most robust lifestyle assortment we've ever brought to the consumer with lots of seasonally relevant product across really all categories. And again, we continue to make progress on this head-to-toe, so you'll see lots of the fashion bottoms as well as tops and outerwear, third pieces. And I think products that really go sort of from day to night at work to evening events, especially during that holiday season, but there's a lot of newness and that will also be fueled by tremendous marketing. We've had a great year of marketing with Beyoncé. We got Shaboozy right now, and you can expect us to continue to connect in a relevant way during the holiday season. Matthew Boss: That's great color. Best of luck. Michelle Gass: Thanks, Matt. Operator: Thank you. Our next question comes from the line of Ike Boruchow of Wells Fargo. Please go ahead, Ike. Ike Boruchow: Hey. Thanks. Let me add my congratulations. Maybe, Harmit, just to focus on margins specifically, can you comment on two things? One, within the SG&A cost line, you a little bit about it earlier, but the distribution line is around is running around 7% of sales right now. I know can you remind us the moving pieces on the warehousing and DCs? You have going on? A year ago, it was around 6%. I think historically, it's been 5%. How quickly does that margin start to benefit you guys as you go into next year? And then to that point, are you comfortable, beginning to lay out a timeline on the return to 15% margin you guys kind of put back on the table several quarters ago as the momentum picked up. Thank you. Harmit Singh: Cool. So let me Ike, I'll start with gross margin and give you some color about what happened in Q3. So people and yourself understand. Then I'll go quickly into SG&A and distribution. Think of gross margin in quarter three, up 110 basis points, higher than what we had expected when we talked about this a quarter ago. Three basic factors. One is the structural mix, which is higher women's DTC and international that we think continues for a long, long time. The second is we have taken moderate pricing, and we're driving higher full-price sales. And the third is the FX benefit, which we had called at about 50 basis points. This more than offset about 80 basis points of headwind from the tariffs. And so that's why, you know, a, we were ahead of last year and the over-delivery was affected. Difficult to predict. We haven't predicted FX for quarter four as an example. And full price, you know, it's it's something we're focused on. It's difficult to forecast that. So those are that's gross margin. Then you think about SG&A. Our SG&A, you know, for the quarter, was below 50%. If you think the first half of the year, it was higher than 50% of revenue. Higher than you know? So the run rate was lower than the first half of the year, which was higher. The way we think of SG&A, I mean, there are two ways to look at it. A, our gross profit dollars are growing at a faster pace than SG&A. So if you think of year to date, our gross profit dollars are up $220 million, and SG&A is up $126 million. So clearly driving high flow through. If you look at it just as a revenue to SG&A, SG&A is up 6%, and revenue is up 8%, so clear leverage. As we think we end the year, you know, if 6% is the revenue guidance organically, SG&A is probably in the mid-single digits of this year leverage. On that. And this quarter, our you know, SG&A, being up relative to a year ago, there's performance comp which is a big piece. We're having a good year. Distribution cost, which I'll come to in a minute, so I'll answer your question. You know, we opened on a gross basis 14 new stores. I mean, you know, and that's really, you know, the trifecta factor in DTC. Is driving the result. Especially as we market expenses marketing expenses moved a little bit between Q4 and Q3. Launched the Shibuzi campaign and some foreign exchange headwind. Your question, Ike, about distribution, Overall, as you know, we are remapping our distribution network to more of a hybrid network built for omnichannel. From a manual network that is built for wholesale. So there are clear benefits that we will see over time. In the short term and transformations obviously have a short-term impact, Over the short term, you know, we've in the US, we've been running parallel DCs as we ramp up the new DC that's run by a third party. If you think of distribution cost about 7%, and they've increased from from a year ago, I would say about half of that is the reclass and distribution expenses from selling to distribution for e-commerce. And the other half is equally split between volume, which is driving, you know, more distributed expenses and the cost of parallel running. Our expectation is that parallel running of DC because good news is there's demand is pretty robust. So as we make this transformation, we have to do it in a way that we not only fulfill the demand for customers and consumers, but also ramp up and close this DC. So our view is and it's, you know, it's art and science. So we're working through that. But I think by the end of quarter one 2026, is when we probably ramp down parallel running of the DC. So early 2026. And when we report results, for quarter four. In early 2026, we'll give you a perspective on distributed expenses. But over time, long term, we should reduce cost per unit and the cost of running parallel DC. Does that help, Ike, answer your question? Ike Boruchow: Yes. And I'm just curious timeline on the 15%. If there's anything you can share. Harmit Singh: Yeah. I think, you know, you're you're asking for a quick review on to Investor Day or or preview on that. But I think the way to think about that, I is you know, our our EBIT margin should end the year about in the mid-eleventh. Right? And, you know, and they've grown nicely over the last couple of years. I think the basic building blocks are the following. The gross margin expansion continues. I mean, our view is that the structural piece continues, say and, you know, if you take probably a five-year period, you can say that 200 basis point you know, that should help EBIT. The SG&A leverage if you have you know, as we get to mid-single-digit growth company, I think the SG&A leverage is about 200 basis points. We may amp up advertising a little bit, you know, given the wonderful programs, our chief marketing officer, and these are are invoking. I think that helped drive the brand, make the brand stronger. And importantly, drive revenue. I think that's probably a 50 odd basis points of headwind, and that will come with revenue. So I think that's your building blocks. So you think of gross margin expansion SG&A leverage, and a little bit of reinvestment in advertising gets you to 15%. Ike Boruchow: Got it. Thank you. Operator: Thank you. Our next question comes from the line of Paul Kearney of Barclays. Paul Kearney: Thanks for taking my question. Within the wholesale business growth, can you speak to how much was driven by maybe new points of distribution or expanded assortment versus like for like on stronger sell-throughs? And how would you categorize inventory levels within the retail channel, setting in the holidays? Thank you. Michelle Gass: Sure. Paul, thanks for the question. So as we said in our earlier remarks, we're quite pleased with the continued growth that we're seeing in the channel. This is now four consecutive quarters with this quarter at 5%. We do expect the year to be slightly positive in the wholesale channel for the entire year, which was actually up from our prior expectation, which we had said previously flat to slightly up. We saw positive growth in this channel across all segments. We saw particular strength in US Wholesale. We saw it in Asia, Latin America, and in the signature business, which is more for that value consumer. The growth is largely being driven with existing accounts as their consumers are responding to our fashion fits, women's especially is outperforming, and lifestyle. So while we, yes, we are bringing in some new accounts like Western Wear, got new distribution, and Cavender's were expanding in Boot Barn. The growth is largely coming from our execution with our existing partners. Paul Kearney: Great. Thank you. Best of luck. Michelle Gass: Yeah. Thank you. Harmit Singh: Thank you. Operator: Our next question comes from the line of Oliver Chen of TD Securities. Please go ahead, Oliver. Oliver Chen: Thanks. Hi, Michelle. Hi, Harmit. Regarding Americas, the low single-digit growth, is your expectation that that's continues in Q4? And on the wholesale side, it's been a little more challenging channel, but do you think it'll remain sustainably positive, or will that be potentially volatile? Second, there's a lot of great initiatives and partnerships with part of the thesis is also, like, amplify to simplify with inventory management. And SKU rationalization. So how do we reconcile those two in terms of where where you are in that journey? Michelle Gass: Sure. Thanks, Oliver, for the question. You know, as it as it relates to The Americas, or I can speak to the biggest part of the business, which is The US, we're really proud about how the team has been executing in that market. This is our fifth consecutive quarter of growth. And because you all know, it's our largest, most mature, most competitive market. And both channels, DTC was up 6%, wholesale up 2%, and we continue to see long-term growth opportunities in both those channels. So I think about the DTC business here in the US, we have the potential to even double our store count and further accelerate e-commerce on the back of the momentum we have. And on wholesale, which I was just talking about more broadly, global wholesale, but wholesale in the US remains strong. And our key partners are responding and their consumers are responding to our expanded product pipeline across men's, especially women's, where we continue to be under-indexed, in particular in the wholesale channel, and then that head-to-toe lifestyle. As we look forward, I'll just say that we as we look Q4 in the US and in The Americas, we expect the business to remain healthy against executing the same strategies we've been talking about. Leaning into DTC, you know, driving units per transaction, driving conversion, driving greater full-price sell-through. As I was mentioning earlier, though, a lot of our growth is coming off of units. So while we are seeing that enhanced AUR, we're also driving a lot of volume growth. And but I will say as it relates to US wholesale, while we expect continued positive growth in DTC, for the fourth quarter, we do expect in US wholesale to be down given that we're lapping a very strong quarter last year, and we had that fifty-third week. So as we lap last last quarter's fourth quarter, strong results, the fifty-third week, and just frankly, be continuing to be prudent as we think about this channel given the complex macro environment we're operating in in the US. So Oliver, does that fully answer? And then you had part two of the question. Let me answer that, and I'll come back and make sure I've fully answered. But then part two, I'm glad you asked the question about SKU rationalization because we continue to make really good progress there. So while we talk about expanded assortment, lifestyle, we are also at the same time reducing SKUs. And we've decreased our SKUs by about 15% compared to last year, and this has been an ongoing journey over the last eighteen months or so. So we're continuing to raise the bar there. And what's really enabling us to do that is through a tighter globally common or globally directed assortment. So just for perspective, if we think about the season we're in right now, the 2025, 40% of our SKUs are globally common. That's up from a couple years ago. Where it was under 10%. So that allows us to make sure, again, that we can get the breadth and the lifestyle where we're getting significantly higher productivity per SKU. And and that metric just for fun is is up 20% on a on a SKU productivity. So, it really speaks to how the team is leaning in with a much stronger merchant mentality and operating like a retailer. That's helping us drive those tailwinds that we're seeing in the business overall and especially in DTC. Oliver Chen: Yeah. Thanks, Michelle. That's really helpful. This is quick. Think, Harmit, are there any gross margin comparisons we should be aware of as we anniversary, them this year and and think about next year? Harmit Singh: So last year was fifty-third week. This year, I think the only piece will be, you know, we probably see tariff impact in the in the second half of this year. Next year, and the first half. The way we think about gross margin and I think you're asking for high-level framework. For '26. And I and it's a good question. Let me just talk about it because as we build up plans for next year, the tailwinds that we that we think probably help gross margin accretion. One is we're looking at pricing opportunities, again, targeted not only in the US but globally given that 60% of the business is global. Is outside the US. Structured improvements of DTC international women's continues. We continue to focus on full-price selling, and it's not anywhere close to 100%. So there's clearly opportunity there. The other piece is as we think about product cost, you know, Michelle talked about the simplification of SKUs. We're looking at a shorter go-to-market calendar. And cotton commodity is is is in a better spot today than it was a year ago. We've broadly locked in product costing for the first half. We're the process. By the time we report and guide Q26, we'll probably have locked in the second half. So stay tuned. And the headwind is largely tariffs. And so you've seen some impact in the second half of this year. You offset the first the quarter three working you know, to try and do what we can for quarter four, but I've guided you the appropriate numbers. And so those are the tailwinds and the headwinds that you think about. Gross margin. Michelle Gass: Thank you very much. Paul Kearney: Thank you. Operator: Our next question comes from the line of Dana Telsey of Telsey Advisory Group. Please go ahead, Dana. Dana Telsey: Hi. Good afternoon, everyone. As you think about the lifestyle offering, Michelle, with tops and with bottoms, and jackets outfits, what did you see in the growth rates of the different categories? And given the marketing that you've been doing in the collaborations, how do you think of the AUR opportunities going forward? Thank you. Michelle Gass: Great. Thanks, Dana, for the question. You know, we're we're really pleased with the progress and the acceleration in our TOP business overall. And I like to say, while we're pleased we're not satisfied, and, there's a ton of upside because top represents just currently 22% of our business. But as we shared earlier, our tops grew 9% overall for the quarter, 10% year to date, and we're really seeing the strength across channels and genders. So if you double click underneath that, men's up 10%, and we're really seeing popularity in things like western tops, button downs, polos, wovens. You know, as we think about our top strategy and denim lifestyle, we do start closer to closer to our core. So, you know, really injecting light into, like, the western shirt, which is being advertised in our campaign right now with 20%. Similarly, women's tops up 8%, seeing it across both channels. Denim tops, they'll start there, up 12%. Wovens, including things like blouses, fashion, button downs, up 37%. And then the category we're really expanding in to expand her closet, dresses and jumpsuits up nearly 20%. I think importantly, as we drive all this newness and excitement, in head-to-toe dressing, we're seeing both growth in newness and in our core, which is really important, to continue to support both. Kind of back to the opportunity, if you think about our business today, again, while we're making progress, there's so much upside. Our ratio of bottoms to top is three to one. Now that's up significantly from years ago where from years ago where it was seven to one or five to one. But our goal is to get to one to one, and, I'm very confident we will. And as we drive TOPS, it's a UPT driver. It can be a traffic driver, and it really kind of completes this mission we're on to have Levi's stand for head-to-toe denim lifestyle. So hopefully that addresses your question, Dana. Dana Telsey: Yes. Thank you. Michelle Gass: Great. Thanks. Operator: Thank you. Our next question comes from the line of Aditya Kakani of UBS. Your line is open, Aditya. Jay Sole: Hi. I think this is Jay Sole, and hopefully, you can hear me. But my question is that sounds like you took some pricing in Q3. Harmit, I think you said one of the gross margin drivers Q3 was pricing. Was that in response to tariff in Q4? Sorry, before that, the consumer, it sounds like responded well to those price increases. Did you see any resistance in Q4? Do you plan on accelerating the price increases? And therefore, do you expect the consumer to react differently if you increase prices in the fourth quarter? Thank you. Harmit Singh: So, Jay, we did. We took, you know, a little bit of pricing in Q3. It was not an MSRP because you know, the goods are already been ticketed. This was in the sell-in to our customers. In the US. I'm talking about. And, you know, we do it thoughtfully. We have really great momentum as you mentioned, driven by demand. But to answer your question, no impact on demand. We're not seeing any impact on demand either from the customer. Or the consumer. The other piece that's really working for us is our new products. Because and so as we think longer term, pricing through innovation, is is is one is one lever. We are also taking a hard look at our promotion, you know, and minimizing this as we focus on higher full-price selling. Will also you know, be something that probably continues into into '26. So we're we're thinking about pricing, it's more important to think about what's the price value equation for our products relative you know, to the marketplace, and that's an important consideration set. The other piece that's important, Jay, is the segmentation of a product. So if you think of the value consumer in the US, we offer signature product. It's a great price point. It's offered through Walmart. And it had a great quarter. It's up double digits. We've just also introduced Blue Tab, which is a premium product. It's it's premium position. It's one and a half times to two times the price of Red Tab product. And offers real value even when you benchmark that. It's a limited offer. We hope to scale it. It's doing really well. So that's how how one is thinking through it. And there's a little bit of pricing in other parts of the world. But it's not, you know, something that we've done globally. So when we talk about '26 and guide '26, we'll give you a perspective on the pricing actions we have taken or our teams have taken around the world. Jay Sole: Got it. I mean, thank you so much. Harmit Singh: Thanks, Jay. Operator: Thank you. Our next question comes from the line of Paul Lejuez of Citi. Please go ahead, Paul. Tracy Kogan: Thank you. This is Tracy Kogan filling in for Paul. I just had a follow-up on the last question. I think you said, from what I understood, that you only raised prices on sell-ins to your partners. So have you actually had time to see the consumer response to these higher prices, or were you only saying that your partners haven't had any hesitancy to buy at these higher prices? And then just more broadly, I was hoping you could comment on the US wholesale business, how sell-ins are comparing to sell-outs. Thank you. Harmit Singh: Generally, Tracy, good question. I think it's a combination of both, you know, because, you know, the pricing initiatives have been now there through the quarter. You know? A, the customers are not we don't see any demand contraction you know, given the marginal pricing that has been taken or consumer reaction. The consumer generally resilient, you know, so far. And and that's how we're approaching the pricing plus the full-price selling has been there for a while. And given that the consume that the product is very relevant, and hitting the mark. You know, we're not seeing any consumer pullback. I think that was your first question. What was the second one, Tracy, again? Tracy Kogan: I was hoping you could just comment more broadly on how the sell-in to your wholesale partners are comparing to the sell-outs. Are they being more cautious than maybe the end consumer might indicate or or something like that? Harmit Singh: No. The the set truths have been very consistent with the sell-in. And and that's why you know, we are, you know, optimistic about ending the year strongly and then maintaining the momentum as we begin '26. Tracy Kogan: Gotcha. Thanks very much. Harmit Singh: Thank you, Tracy. Operator: Thank you. At this time, I'd like to turn the floor back over to Michelle Gass for any closing remarks. Madam? Michelle Gass: Yes. Thank you, everyone, for joining the call, and we will look forward to talking to you at the end of Q4. Operator: Thank you. This concludes today's conference call. Please disconnect your lines at this time.
Operator: Good afternoon, and welcome to Applied Digital Fiscal First Quarter 2026 Conference Call. My name is Constantine, and I will be your operator for today. Before this call, Applied Digital issued its financial results for the fiscal first quarter ended August 31, 2025, in a press release, a copy of which has been furnished in a report on a Form 8-K filed with the Securities and Exchange Commission or SEC and will be available in the Investor Relations section of the company's website. Joining us on today's call are Applied Digital Chairman and CEO, Wes Cummins, and CFO, Saidal Mohmand. Following their remarks, we will be opening the call for questions. Before we begin, Matt Glover from Gateway Group will make a brief introductory statement. Mr. Glover, you may begin. Matt Glover: Thank you, operator. Hello, everyone, and welcome to Applied Digital's Fiscal First Quarter 2026 Conference Call. Before management begins formal remarks, we'd like to remind everyone that some statements we're making today may be considered forward-looking statements under securities laws and involve a number of risks and uncertainties. As a result, we caution you that there are a number of factors, many of which are beyond our control, which could cause actual results and events to differ materially from those described in the forward-looking statement. For more detailed risks, uncertainties, and assumptions relating to our forward-looking statements, please see the disclosures in our earnings release and public filings made with the SEC. We disclaim any obligation or any undertaking to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made except as required by law. We also discuss non-GAAP financial metrics and encourage you to read our disclosures in the reconciliation tables to the applicable GAAP measures in our earnings release carefully as you consider these metrics. We refer you to our filings with the SEC for detailed disclosures and descriptions of our business as well as uncertainties and other variable circumstances, including, but not limited to, risks and uncertainties identified through the caption Risk Factors in our annual report on Form 10-K and our quarterly reports on Form 10-Q. You may access Applied Digital's SEC filings for free by visiting the website at www.sec.gov. I'd like to remind everyone that this call is being recorded and will be made available via a link available in the Investor Relations section of Applied Digital's website. Now I'd like to turn the call over to Applied Digital's Chairman and CEO, Wes Cummins. Wes? Wes Cummins: Thanks, Matt, and good afternoon, everyone. Thank you for joining our first quarter fiscal 2026 conference call. I'd like to begin by expressing my sincere appreciation to our employees for their continued dedication to our mission. Delivering purpose-built infrastructure for the rapidly expanding artificial intelligence and high-performance computing sectors. Their commitment remains foundational to our success. Before I turn the call over to our CFO, Saidal Mohmand, I want to highlight several key developments across the business beginning with our HPC data center hosting segment. This quarter, we expanded our long-term lease agreements with CoreWeave, a publicly traded AI hyperscaler. Previously, we had 250 megawatts under contract at our Ellendale, North Dakota campus, Polaris Forge One. That agreement represents approximately $7 billion in contracted revenue over fifteen years. CoreWeave has since exercised its option, and our leases now cover the full 400 megawatts of capacity currently under construction at Polaris Forge One, increasing the total contract value to approximately $11 billion. In addition to the underlying leases, CoreWeave has engaged us to perform the tenant fit-out for the first 100 megawatts of the 400-megawatt campus. This further deepens our operational integration and demonstrates the added value we bring as a strategic partner to our tenant. We will continue to invest in new technologies and continue to grow our technical expertise as we believe that we can replicate this value-added business model to other tenants. As a reminder, we believe Polaris Forge One has the potential to scale beyond one gigawatt starting in 2028 to 2030 when new transmission capabilities are expected to come online. We also broke ground on a new campus, Polaris Forge Two near Harwood, North Dakota, where we are initially constructing two buildings totaling 300 megawatts of critical IT load. Over time, we believe this campus can scale to one gigawatt as additional generation capacity is added to the grid. We are already in early discussions with multiple partner parties to support that expansion. Initial funding for Polaris Forge Two has been secured by our financial partner, Macquarie Equipment Capital, and construction is underway. We expect the first building to start coming online in late 2026 and reach full capacity in 2027. With that, the campus is designed for future expansion. The initial development cost is projected to be approximately $3 billion with potential to increase as additional power becomes available. We remain in advanced discussions with an investment-grade hyperscaler regarding a lease for this campus. We have also entered negotiations with two additional locations. Across the industry, the scale of investment in AI infrastructure is unprecedented. Publicly traded hyperscalers are projected to invest over $350 billion in AI data centers this year alone. To put this in historical perspective, the US Interstate Highway System launched under President Eisenhower in 1956 cost approximately $500 billion in inflation-adjusted dollars but took thirty years to complete. The Apollo program cost roughly $150 billion to send to the moon and spanned more than a decade. In contrast, public hyperscalers are projected to invest over $350 billion in AI infrastructure in just a single year, an extraordinary concentration of capital that rivals the scale of America's most ambitious infrastructure efforts, but compressed to a fraction of the time. This surge in demand has made speed, reliability, and readiness absolutely critical. The industry has come to recognize that the limiting factor in AI deployment is no longer GPU availability but the lack of data centers capable of supporting those GPUs, commonly referred to as AI factories. Simply put, the supply of suitable data centers which can handle the technical requirements of the most advanced AI silicon is falling short of demand. We feel Applied Digital is uniquely positioned to meet this challenge. We were among the first to break ground in 2023 on next-generation data center designs capable of supporting the advanced power and cooling requirements of modern GPUs. We secured construction crews early, assembled a team with deep expertise in power, land, and supply chain logistics, and built strong relationships with local communities through proactive engagement and education. We also recruited top-tier data center talent well before the industry recognized the limitations of legacy designs. During the construction of our first 100-megawatt data center, leading hyperscalers sent teams to evaluate our campus, working alongside us and ultimately validating our approach through what we believe was the most rigorous technical due diligence in the industry. At the same time, we cultivated relationships with major financial institutions like Macquarie Management who had a front-row seat to these milestones. As a result, we built trusted partnerships with the largest buyers and users of data center infrastructure in the world. We've also demonstrated our ability to deliver scalable power-dense facilities just as demand for our services has accelerated dramatically. While our pipeline spans multiple states and regions, I want to emphasize the strategic advantages of our northern campuses in the Dakotas. We believe these campuses have the ability to offer abundant, low-cost energy, a supportive regulatory environment, and more than two hundred days of free natural cooling annually. Our proprietary design is engineered for a projected PUE of 1.18 with near-zero water consumption. These innovations are not only intended to deliver efficiency for hyperscale customers but also minimize our environmental footprint and help us ensure we grow responsibly in every community we serve. We believe that a hyperscaler lease for Polaris Forge Two would be a significant milestone for Applied Digital and the state of North Dakota. We think the two anchor customers under multibillion-dollar long-term contracts would be a meaningful step toward reaching our goals, strengthening our position in the market, and also establishing the region as a major hub for hyperscale infrastructure. These long-term contracts should provide our company with exceptional visibility and a clear path to long-term growth. Lastly, while the availability of power has been the primary focus for the overall market, we feel it is becoming a secondary focus for us. With four gigawatts in our active development pipeline and more under review, our primary focus has become scaling development and construction. As I stated on our last call, we've been able to shorten our construction timeline to twelve to fourteen months from twenty-four months, which was an important step. We have now scaled to develop multiple campuses in parallel. This has resulted in us now having 700 megawatts currently under construction. We are seeing that our proven ability to design and build at scale has resulted in an influx of power opportunities from third parties that have power and land but don't have the ability to design and build to meet the stringent demands of hyperscalers. We expect to proceed with at least one of these third-party projects this year. Turning to our blockchain hosting business. We continue to operate 286 megawatts of fully contracted capacity across our two North Dakota locations. Bitcoin prices remain strong, which is a positive indicator for our customers, and we remain optimistic about the business and its future. Next, I'd like to address our cloud services business, which provides high-performance computing infrastructure for AI applications. As announced on our prior quarterly call, our Board of Directors initiated a strategic review of this segment and their financial results are classified as held for sale. That process is ongoing. We will hold off on providing further updates until we have a definitive disposition plan to share with our shareholders. With that, I'll turn the call over to our CFO, Saidal Mohmand, for a detailed review of our financials. Saidal? Saidal Mohmand: Thanks, Wes, and good afternoon, everybody. Let me begin with the recent announcements regarding our financing. We secured an initial $112.5 million draw from a $5 billion preferred equity facility with Macquarie Asset Management to advance construction of Polaris Forge One. This structure is designed to fully finance the build-out and materially reduce future equity requirements across our platform. Importantly, securing capital at the asset level provides financing alignment and an asset-heavy business like ours ensures the completion of the Polaris Forge One campus while also establishing a clear framework to scale additional campuses. We also remain on track in our project financing process as previously mentioned as well. Beyond Polaris Forge One, as we previously announced, we secured funding from Macquarie Equipment Capital, another branch of Macquarie, to launch construction of Polaris Forge Two. We intend to tap our preferred equity facility with Macquarie Asset Management to continue equity funding of this project. We are now advancing project financing for this campus as well to support the full build-out. We remain relentlessly focused on a few core objectives. First, securing capital at the lowest possible cost. Building repeatable financing structures, and positioning the company to scale data center development across the United States. These are not easy undertakings. Yet our team has executed with remarkable discipline. As reflected on our balance sheet, we have now built and funded more than $1.6 billion in property and equipment. The fact that we began as a small Bitcoin hosting center business, and are now executing transactions with the world's leading hyperscalers, banks, and infrastructure partners underscores our essentiality to the intelligence era. That said, we want investors to understand that these investments are just the beginning to generate returns and have yet to be reflected in our income statement. The first 100-megawatt building is nearing completion. And as Wes mentioned, CoreWeave engaged us to perform the tenant fit-out for this facility. This marks the initial phase of preparing the building to generate lease revenue. This quarter, the CoreWeave fit-out revenue contributed around $26.3 million in revenue. And while we expect that figure to ramp significantly over the next quarter. While this is a one-time low-margin business, approximately mid-single digits, it is strategically important. We feel it demonstrates that companies like CoreWeave can rely on us for end-to-end services required to deploy state-of-the-art data centers. As we complete the fit-out over the calendar 2025 year, we expect a significant increase in revenue from that work. This will then be followed by the starting of the recognition of the lease income for the first 100-megawatt building as it comes fully online towards the end of this calendar year. Let's turn to the quarter. Please note that unless otherwise specified, the figures we are about to discuss reflect continuing operations only and exclude the cloud services. Revenues for 2026 were $64.2 million, up 84% from $34.8 million in 2025. The increase was primarily due to the $26.3 million of revenue generated from tenant fit-out services associated with our HPC hosting business. The remaining $5 million increase in revenue is related to the data center business and is due to performance improvements compared to the three months ended August 31, 2024. Cost of revenues were $55.6 million compared to $22.7 million. Approximately $25 million of the increase in cost of revenue was associated with tenant fit-out services for our HPC hosting business. While the remaining increase was associated with our data center hosting business and other expenses directly attributable to generating revenue. SG&A was $29.2 million compared to $11 million. This increase was due to increases of $16.6 million in stock-based compensation due to accelerated vesting of certain employee stock awards, and $3.9 million in personnel expenses for employee costs and other costs attributable to supporting the growth of these businesses. These costs were partially offset by a $2.3 million decrease in professional service expenses primarily related to a decrease in legal services. Interest expense is $3.9 million compared to $3 million and our net loss was $27.8 million or $0.11 per share. Adjusted net loss was $7.6 million or $0.03 per share while adjusted EBITDA was $5 million compared to $6.3 million the prior. Moving to our balance sheet, we ended the first fiscal quarter with $114.1 million in cash, cash equivalents, and restricted cash, along with $687.3 million in debt. Note, this does not include $362.5 million in proceeds from our financings that occurred subsequent to the quarter end. Now with that, I'll turn over the call to Wes for closing remarks. Wes Cummins: Thank you, Saidal. In closing, I want to emphasize that as we add a second location with Polaris Forge Two, we expect to see a significant increase in our net operating income anchored by long-term contracts with hyperscale tenants. Applied Digital is operating at the center of one of the most capital-intensive infrastructure build-outs in modern history with hyperscalers expected to invest approximately $350 billion in AI development this year alone. We're not just participating in it. We are enabling it. With the CoreWeave lease supporting roughly half a billion in annual net operating income and Polaris Forge Two poised to significantly increase that figure, we are laying the foundation to reach our stated goal of $1 billion of NOI run rate within five years. And this is just the beginning. The Department of Energy estimates power shortfall for data centers in the range of 40 to 50 gigawatts, while experts like Eric Schmidt from Google suggest it could exceed 90 gigawatts. We are developing a robust multi-gigawatt pipeline that is growing. While we've been selective in disclosing details, for competitive reasons, we recognize the importance of communicating our power position to the market. We believe our pipeline is as strong or stronger than most of our peers, and we plan to continue to expand this in future updates. We are actively evaluating new sites across additional states and regions, and we're moving quickly to meet the accelerating demand. On a personal note, as we review potential sites this mission carries deep meaning for me. I grew up in a small town in Idaho, and saw firsthand how major cities flourished through access to jobs and technology while rural communities were left behind. That's why I'm especially proud to partner with towns like Ellendale and Harwood. In most cases, when a company brings billions of dollars in construction to a region, it's the result of intense competition and aggressive tax incentives. In our case, we're choosing to invest in these communities because we see their potential and want to be part of their long-term success. And this is particularly meaningful to me and my family. These projects represent more than infrastructure. They offer transformative opportunity from job creation to economic momentum that impact is intended to be felt for generations. We also committed to minimizing our environmental impact through the latest design innovations, including strategies to reduce water usage and preserve local resources. In addition, we are investing in infrastructure upgrades to help minimize our impact on local utilities and manage the electrical demand required for each location. By proactively enhancing grid support and optimizing power distribution, we aim to ensure our development strengthens, not strains, the surrounding communities. Our vision is for Applied Digital to be known as a job creator, tax contributor, and trusted community partner because we believe growth only matters if it's done the right way. We've invested in housing, built community centers, participated in local events, and supported initiatives in hopes to make these towns stronger. At the end of the day, this is the legacy I want our company to be remembered for. This is only the beginning for Applied Digital. We're positioned at the convergence of unprecedented demand and proven execution capability. We have a design that has been approved by four hyperscalers. We have secured critical supply chain. We have scaled construction to 700 megawatts and we have put capital partnerships in place to fund our rapid expansion. With hyperscalers racing to deploy infrastructure and our platform already delivering, we believe the opportunity ahead is not only massive, it's accelerating. We remain confident in our strategy, our partnerships, and our ability to lead this next chapter of digital infrastructure. Welcome your questions at this time. Operator? Operator: Thank you very much. Question and answer session. You will hear a prompt that your hand has been raised. If you'd like to withdraw from the polling process, please press star followed by number two. If you are using a speakerphone, please make sure to lift your handset before pressing any keys. Your first question comes from the line of Nick Giles from B. Riley Securities. Please go ahead. Nick Giles: Thank you very much, operator. Good afternoon, everyone. My first question was just on the project financing. I think last quarter, you outlined a pathway to having it announced in the near term. And obviously, we've seen the initial Macquarie draw here, but you know, what are the largest remaining factors? And can you just remind us if we should expect financing for the first 150 or if we should look for something that could be all 400? Thanks very much. Wes Cummins: I'll let Saidal take that. Saidal Mohmand: Thanks for the question. Yeah. So in terms of the project financing, I would expect just given both buildings coming on over the next, call it, year, we're going to have the project financing entail both buildings. This is unique. Generally, it's building by building. But given the size and timing to market, we thought it was appropriate to have both buildings on the same process. Note that this is one of the largest CoreWeave as a tenant-backed financings occurring in the market. So we are finalizing, working through all the credit agreement docs, all the paperwork, and what we're aiming for is having a facility in place that's in line, if not more optimal than what was currently announced from some of their competitors. Nick Giles: Thanks, Saidal. That's helpful. My next question was just switching gears to Polaris Forge Two. Can you just remind us what's currently in place from just a power infrastructure perspective? Is the location coming online in '26 and fully online in '27? Wes Cummins: Got it. Guys, I'll turn it over. Thanks a lot. Operator: The next question is from the line of Rob Brown from Lake Street Capital Markets. Please go ahead. Rob Brown: Hi, good afternoon. Wanted to follow-up a little bit. You talked about a couple of new hyperscalers in new locations that you're starting to look at. I know you can't give too much detail, but what's sort of the timeline there and potential that they could start to take action here and move forward? Wes Cummins: It's a good question, Rob. Thank you. So we've started negotiations. I think what's important here, Rob, is we're getting into a place where I think we're gonna constantly be in negotiation with new customers or existing customers for expansion at new and existing locations. And those will start, those will run through their process, and some of these could be ninety days or a hundred and twenty days from start to finish. But I think the expectation, Rob, should be that this is gonna be a constant for us. So we move from Polaris Forge One where we're executing to Polaris Forge Two where things we'll have a contract in place in the very near term. And then we have more campuses that we're working through, as I mentioned, a four-gigawatt active pipeline that we're working on and then more outside of that. But it's just gonna be a constant, and we've seen a big acceleration in our business, and I think some of that's the market and some of that's the progress that we've made over the past three months, and we just need to make sure that we're in a good position to meet as much of that demand as we can meet. Rob Brown: Okay. Great. And then I think you talked about expanding the Polaris Forge One and Two to up to one gigawatt. What's the limiting factor there? What would you need to add that much power to those sites? Wes Cummins: So as typical with most sites, even very large sites, you see announced. One of the things in the industry is there's no uniform way for you to comp me versus someone else for the power because there's not all the details of what the timeline of that power is. But generally, at locations like this, you have initial power, and then you scale over time. What we're trying to match with, so in Ellendale, we think now that that'll go to about 1.4 gigawatts of total utility power. A little over a gigawatt in Harwood of total utility power. And it has to do with the infrastructure that transmits the power in some locations and then others it's about adding additional generation capability to the grid at large. There. So not necessarily directly at that location, but the grid overall coming online in the areas that we needed to come online to match the power ramp with our ability to build. At Polaris Forge Two, we're building 300 megawatts. And when we're wrapping that 300 megawatts up, the hope is that we've matched well where we can start our next, you know, it's 100 megawatts or they're 150-megawatt buildings. So at least one more of those buildings with power to be delivered as that building is finished and the same at Ellendale. Right? As we run through '27, and then we'll have new power coming there in '28. By, you know, early to mid-twenty-seven, we're building for that '28 power so that our building is ready when that is available to be delivered. Rob Brown: Okay. Got it. Thank you. On all the progress. I'll turn it over. Thanks, Rob. Operator: The next question comes from the line of Mike Randolph from Northland Securities. Please go ahead. Mike Randolph: Hey. Thanks, guys. And congratulations on the $5 billion MAM financing. Can you talk a little bit about what that does the MAM financing does for you on a go-forward basis? Wes Cummins: Sure, Mike. So Macquarie's is the ability for us to scale much larger. We're looking more into the future and putting a mechanism in place that the dilution at the public company for a set amount at the subsidiary for Macquarie. And this allows us to go forward. You know, the Macquarie Capital $5 billion of capital really unlocks $20 to $25 billion of total capital for us when you include project finance, and that allows us to build a significant amount of capacity. And now our shareholders and yourself as an analyst, you know what the structure is for us, know what the dilution looks like. We have the dilution down at the subsidiary from Macquarie, and it really eliminates the need for us to just constantly be going to the market to raise capital to build these facilities. Mike Randolph: That's helpful. That's helpful. And then you guys have talked about the project financing and the progress you've made there for the Ellendale 400 megawatts. Do you have any rough expected terms on that project financing you can kind of talk about at a high level? Saidal Mohmand: Mike. This is Saidal. Yes. So to provide a little more color, and not much has changed since the prior quarter. In terms of LTCs for CoreWeave-backed leases, we expect it to come around the 70% LTC range. We've seen anywhere from 70 to 80%. 80% tends to be a little bit of a higher cost given the structuring. In terms of pricing, we've seen anywhere from 400 to 450 basis points. I think one of those facilities slightly higher at 475. We hope and expect to come in between the 400 to 450 basis points that's out there in terms of the spread over SOFR. And then how it's bifurcated is very interesting too. So what we've seen in the market, there's a bifurcation with if take for instance, a 70% LTC loan. You'll have 50% of that facility structured as a mortgage. Generally a lower price, call it 300 to 335 basis points over SOFR. With the excess cash flow from the campus, basically sweeping down the principal. And then the other 20 points of LTC is generally structured as a second lien or mezz facility, you know, anywhere from, you know, call it 10%. So blends into that s plus 425. It's a very efficient structure, and it's a unique way to finance high-grade tenants that right now are currently that's what we're seeing, and it's a dynamic landscape, and we expect to have it completed within the quarter. That's no guarantees, but we're making great progress. Mike Randolph: Cool. Cool. Okay. Hey. Thank you. Definitionally speaking, talk to how you define active pipeline. Like, is that perspective exclusivity developmental? Like, where in the food chain does that four gigs fall? Wes Cummins: Yeah. So, Darren, we look at so if I looked at what we have for four buckets, it's, you know, would be operating, under construction, active pipeline, and then pipeline. And so operating is zero right now, and this quarter will drop a 100 megawatts into operating. We have 700 megawatts in construction right now. Those are pretty easy to define. And then as you go active pipeline, these are things that we feel could move into that construction pipeline or into the construction box in the next six to twelve and some of those could be even sooner. So those are things we're actively working on with permitting, with power, with all of those pieces that we think in the next six to twelve months can move into the construction pipeline. And then you have a further out pipeline that are things that we're, you know, we're constantly looking at. But, you know, we're saying that I don't think that that can necessarily move into the construction pipeline within that time frame. Mike Randolph: That's helpful. And then I guess with doing multiple sites at once, obviously, you have the capital piece ironed out. But in terms of, like, human capital and people, like, how do you balance that? Is there enough resources for you guys to do that? And is your, I mean, you guys typically are operating on a pretty aggressive time frame of twelve months. Like, what are any headwinds potentially that would, you know, deter that twelve-month time frame that you guys are hoping to achieve on these sites? Wes Cummins: Yep. So there's a couple of things on the human capital side. So inside the company, we've been working on this, you know, pretty aggressively for a while. To get ourselves in a position to be able to scale. So, you know, the company had been focused on that's building that first building, getting a customer. Now that's three buildings. We have a customer for the three buildings. And then internally, we've been okay. We see what the demand looks like. We've been cultivating a very large power pipeline. And then we have thought about how do we scale this to multiple campuses at the same time. And we've put almost all of that in place internally that we need. One of the big items there in that is a big issue, and it'll start to become more and more of an issue, supply chain. So we've put the supply chain in place. I've talked about this before. We did this, you know, some time ago where we've landed with these key partners. We've narrowed down the number of SKUs that we use on-site. We have a couple of key partners that we use on supply because we need to be able to ramp supply chain along with just having power and land isn't enough. And so we've been able to do that. And then so we're doing it in The Dakotas right now. The key question, you know, for me is how can we do think we can at least do one more campus in The Dakotas in parallel. Can we do two more in The Dakotas in parallel? Because then you start getting into the localized labor force of work, and then, you know, you can obviously pull from other areas. You should expect us to do some campuses in other states where we can pull on a different local labor pool to really execute on this. But those are the key items. And then, you know, what we're seeing because we have this ability to do the design, to do construction, we have supply chain, we have all of these pieces, we've been getting flooded with power opportunities. So I would say in the last four weeks, we've seen over 50 different sites, and I think we'll see a lot more of these where people have, you know, there's been this big grab for power and for land, and people have run out and grabbed power, and it's valuable to have power, then they don't know what to do with it from there. And so where we're stepping in is looking at these sites. They're being shown to us, and we're, you know, we're having a really stringent selection process on picking the right sites that are great locations for us that diversify our locations geographically and then make sure that we can build for the right customers with the supply chain and the resources that we have. Mike Randolph: Great. Super insightful. Thanks, Wes. Wes Cummins: Absolutely. Operator: Your next question comes from the line of George Sutton from Craig-Hallum. Please go ahead. George Sutton: Hey, guys. You have Logan on for George here this afternoon. First one for me, I noticed in the press release, you're calling out that it sounds like the late-stage discussions with the customer at Harwood, they would get a roofer on the full gigawatt there. I'm curious. Is that kind of becoming a requirement for hyperscalers across the board? Like, if they're gonna become a customer at a site, are they looking for, you know, basically, line of sight to a gigawatt or some big amount of power? And I guess, you know, when we think about those other two sites that you called out, we're also in discussions are those anything you can give us about what power is in place there? And are those also sites where you have sort of expansion capability down the road? Wes Cummins: Yeah. That's a great question. So what we're seeing generally is the ask is how fast can I get 200 megawatts, and then the site needs to scale to a gigawatt? And so that's what we're providing in the majority of our discussions. So, you know, it's been kind of need 26 power now. We're, you know, really moving into 27 at this point. And so that's our focus is that, you know, how fast can we get at least 200 and then scaling to a gigawatt. And so the sites that you know, that we talk about generally can all do that type of scale to a gigawatt. Now from a requirement like, that's the general demand. There's enough demand now that you could do sites that don't have to scale to a gigawatt because that's a significant scale. But the other piece I would say is, you know, we're being asked for sizes significantly beyond that, where we've even, you know, had some discussions on sites that are 10x that size. So what we're seeing from a demand perspective in the market and the trend where it's going now is larger scale sites, both for training and for inference, but built in a single location so that you get the cost advantages of building a scale in a single location. Logan: Got it. And then just one other I mean, it sounds like you're pretty late stage at Harwood. Just from, like, a lease economic standpoint, should we look for something similar to what you guys got done at Ellendale? Or is there a different end customer there potentially lead to different lease economics? Wes Cummins: Yeah. You should what you should expect so what we focus on is the kind of the spread. Right? And the spread is what is our cost to capital, versus the tenant that we sign at a location. And so if you have an investment-grade hyperscaler, then the cost of capital for us is lower from a project finance perspective. So you should expect that there's a lower economics versus the headline economics but you should be expecting a similar spread between those two, you know, from a cost of capital and then a revenue perspective so that we are getting, you know, really the same return from an economic perspective. But that's what you should expect. Logan: Makes sense. Congrats on the progress, and thanks for taking the questions. Operator: Thanks. The next question comes from the line of Michael Donovan from Compass Point. Please go ahead. Michael Donovan: Hi, Wes and Saidal. Thank you for taking my question. One question on the supply chain side. So what are you seeing in the supply chain for long lead equipment, such as the transformers, generators, and have lead times or pricing shifted materially in the past six months? Wes Cummins: So I think the lead times have become kind of stretched in the industry. Again, for us specifically, we secured these, you know, two years ago, and, you know, we bought out some a lot of manufacturing capacity to supply what we'll need for the future. Because we expected supply chain to be one of the critical components for this. But, you know, for ourselves specifically, we haven't seen a lot of pricing inflation or, you know, stretching of what we're ordering because of how we went about that. But I think you're generally seeing that throughout the industry. Michael Donovan: Okay. That's helpful. One just for clarification around Macquarie for the $5 billion and thinking of Polaris Forge One. How much additional funding would be needed for one for those three buildings? Or does that cover all of that? Wes Cummins: So between Macquarie and the project finance, we don't expect to contribute ourselves any additional funding into Polaris Forge One. It'll be funded by project finance and then Macquarie financing. Michael Donovan: That's good. Appreciate it, Wes. Operator: The next question comes from the line of John Todaro from Needham. Please go ahead. Austin Ortiz: Hey. It's Austin Ortiz on the line for John Todaro. Just a quick question on South Dakota. Is there any, I guess, expected power to come online potentially in 2026 or 2027 in the pipeline? Or just any updates on South Dakota if possible? Thank you. Wes Cummins: So South Dakota, the power will be available in '26 there. However, the piece that we're working on in South Dakota is sales tax exemption that I believe 41 other states have for IT equipment for data centers. And so we're working, you know, through the process there in South Dakota, and I know there's other hyperscalers that are working through that same process. But that's really the gating item for South Dakota is not the power for us. Austin Ortiz: Got it. Thank you. Appreciate it. Operator: The last question is from the line of Nick Giles from B. Riley Securities. Please go ahead. Nick Giles: Thanks so much for taking my follow-up. Saidal, I just had one. I first wanted to clarify. I think you said project financing could be wrapped up within the quarter. Would that be calendar or fiscal? And if it were to take longer, how much more could you draw from MAM? Saidal Mohmand: Yeah. The fiscal quarter. Nick Giles: Appreciate that. And then always had a follow-up. Always appreciate your industry commentary around demand. I mean, demand still sounds really strong. And, obviously, economics today are being, you know, determined by availability of power. But as we get out to 2027 and 2028, do you think it's gonna be driven by availability, or what other factors would you highlight? Wes Cummins: I would highlight, you know, generally now, I think there's a couple of things. So everyone's been scrambling for when can power turn on and when can you build a building. But I think as we go through the next twelve months, there's gonna be, you know, potentially some of a bit of a shakeout for things just not meeting construction timelines. I think there's just, you know, a lot of new entrants in the market at large, and I think, you know, some lessons that we learned, you know, a few years ago about the process of building these, that a lot of the other new entrants still, you know, probably will have to learn. I think you'll see projects get delayed, and then there will be, you know, proven vendors, proven developers that get more and more of the business as we go forward kind of, you know, in '27 and '28. Nick Giles: Guys, thanks again. Appreciate it. Wes Cummins: Thanks, Matt. Operator: There are no further questions at this time. I'd like to turn the call back over to Wes Cummins for closing comments. Sir, please go ahead. Wes Cummins: Thanks, everyone, for joining the call for our fiscal first quarter, and I look forward to speaking with you in January. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you very much for your participation. You may now disconnect.
Operator: Good afternoon. My name is Vaughan, and I will be your conference operator for today. At this time, I would like to welcome everyone to the Park Aerospace Corp. Second Quarter Fiscal Year 2026 Earnings Release Conference Call and Investor Presentation. [Operator Instructions]. At this time, I will turn today's call over to Mr. Brian Shore, Chairman and Chief Executive Officer. Mr. Shore, you may begin your conference. Brian Shore: Thank you very much, operator. This is Brian. Welcome, everybody, to the Park Aerospace Fiscal '26 Second Quarter Investor Conference Call. I have with me, as usual, Mark Esquivel, our President and COO. We announced the earnings right after the close. In the earnings release, there are instructions as to how you can access the presentation we're about to go through either via link and you also can link information in the news release and also on our website. If you want to pick that up because we're going to go through it. It will be a lot more meaningful if you have the -- listen to us, if you have the presentation in front of you. So we have quite a few new investors in the last quarter, they've come on board and out of consideration for them, I think we should go through some of the legacy items more carefully. I think in the past, the legacy items we just kind of skim over on the assumption that most people have already are familiar with them. Veteran investors, just please be patient with that. Another item I want to cover with you is that on Tuesday, I had some unplanned oral surgery, and I'm not really feeling that great. So I hope you can bear with me. And if I need Mark to take over, I'm sure he'll be very willing and able to do that. Questions at the end after we're done with the presentation, we'll take questions. And please do ask them. We love questions. Actually sometimes lead to questions are more meaningful in the presentation. We go through a presentation, we don't know whether you're liking it, not liking it, interested, disinterested, or you have to sleep, but the questions are always more helpful because then we know what people are really interested in what they're thinking about. So why don't we go ahead and get started with the presentation. Slide 2 is our forward-looking disclaimer language. We're not going to go through that. But if you have any questions about it, please let us know. Slide 3, table of contents. Starting on Slide 1 is our Q2 investor presentation, which we're about to go through now. And in Appendix 1, we have supplementary financial information. We're not going to go through that, if you have any -- during the call, but if you have any questions about it, please let us know. It's become our practice now or pattern, I guess, to feature the James Webb Space Telescope in our table of contents. So what we're talking about here, James Webb Space Telescope discovered, Cosmic Dust, which shouldn't exist outside its Galaxy, but shouldn't exist in quotes because I think we're developing a common theme here is so much that we believed about the universe and its origin, which just isn't true. Sorry, folks, not true James Webb saying, well, you could believe whatever you want, but this is what's really going on. So here's another one of those. Thank you, James Webb Space Telescope. The James Webb Space Telescope was produced with 18 Park Proprietary Sigma Struts. Let's go on to Slide 4. Kind of more nitty-gritty stuff here. So quarterly results, let's look at the right-hand column, second quarter that we just announced sales, $16.381 million, gross profit, $5.116 million; gross margin, $31.2 million. So we're happy about gross margins over 30% or maybe I should say we're unhappy when they're not over 30%. And it's good that they're over 30% because there are a couple of things we'll talk about in a second that dragged down our margins. Adjusted EBITDA, $3.401 million and adjusted EBITDA margin, 20.8%. What did we say about Q2 during our Q1 call on July 15. We said our sales estimate was $15 million to $16 million. So we came a little bit above that. EBITDA estimate $3 million to $3.4 million. So we came in kind of the top of the range of the EBITDA estimate. I just want to remind you, especially for some of our new investors that this is not guidance. We don't do guidance. When we give an estimate, we're saying to you, this is what we think is going to happen. Now we could be wrong, but this is what we think. There's -- I don't know, let's call it practice. We have different terms for it, but let's call it practice where everybody does it almost where let's say it's going to be 100, they think it's going to be 100. They go out with 90, that's their guidance. So then when they come out -- when they come back with 100, they come out of 100, then they're heroes. And I don't know. We think that's not worthy of our time. So when we give you an estimate, we're saying this is what we think is going to happen. We're not giving you a number which we plan to beat, okay? Let's go on to Slide 5. Q2 considerations. We always talk -- well, always in the last few quarters about ArianeGroup, it has impact on a lot of things, including the quarter. So we entered into this business partner agreement with ArianeGroup. It's a very large aerospace company in France, a great company and they're a JV between Airbus and Safran, I believe. And in January '22, we've been actually working with for 20 years. They appointed us exclusive distributor of their RAYCARB C2B fabric. That fabric is used to produce ablative composite materials for advanced missile systems programs. Now we sold $1.65 million of that fabric in Q2. As we previously explained, we sell that fabric to our defense industry customers for a small markup. What's going on here is the defense industry customers are stockpiling the C2B. We're the exclusive distributor, though, so they buy it from us. We buy it from -- we're a distributor, not a rep. We buy it from Ariane and then we resell it or sell it, I should say, to the OEM. But it's kind of a strange thing because we keep the C2B fabric in our plant because the OEM eventually ask us to produce prepreg with it. So even though we sell to them and they own the product, it's kept on our plan. The markup is small. So we have a significant amount of C2B fabric sales, that's going to push down our margins. And we sold $415,000 ablative materials manufactured with C2B fabric in Q2. Now the margins on the ablative materials that we produce those fabric very, very good, very good. So that's the offset. But it's still -- the ratio of sales of fabric to ablative materials manufactured with the C2B fabric are still at a balance, right? So more fabric than materials, [indiscernible], let's call it. What's the reason? I already said because the OEMs are stockpiling this product. A more normal kind of ratio will be 40%-60%. So 40% would be the materials and 60% would be the fabric. That's not always going to be exactly it, but just to give you a sense. So you see that the ratio is much more than 40%-60% here. And that's going to drive down our margins. So let's talk about -- let's go to Slide 6 rather. We're still on the topic of C2B fabric requalification by one of Park's key customers of the C2B fabric. This is kind of -- has been a big deal for the last few quarters. And Mark, like we always get Mark the hard stuff to talk about. Can you help us what's going on with that? Mark A. Esquivel: Yes. So we actually do have an update this time. I think the last couple of calls, we said we're waiting for approval. So we do have approval. We don't have full approval. We have approval at about 90% of the specification. Not to get too technical, there's -- there's a requirement within the spec that has a lower and an upper range. They were somewhere in the middle. They moved down closer to the commercial specification as we call it, which gets us back into production at 90-plus percent of everything we have. So what we're doing now is they're currently testing that last 10%, which will probably take another 9 to 12 months. So we'll continue to talk about when we get that approval. But as far as the program is concerned, we're back in business, we're back running. And we're back to, I would say, normal typical rates that we were running prior to this, I won't say issue coming up, but this recall coming up. So -- and we actually expect to see some upside in the coming quarters, and Brian will talk about some of that news as well. But I guess the story here, the message here is we're pretty much back in business with running at our normal levels. Brian Shore: Okay. Thanks, Mark. Good news. Let's keep moving here, production versus sales. To bring this up because this has been an issue in prior quarters in terms of the impact on the bottom line. But in our Q2, our sales value of production, we call it SVP, that's not inventory value. That's the value of production at sales price. It was well matched with our sales, and that's a good thing. That means it's really very -- no meaningful, no impact on bottom line. When our sales exceed our production, that is by a significant amount, that is a negative impact on the bottom line, but no impact in Q2. And then last thing we'll talk about in terms of bottom line impact, significant ongoing expenses. This is something we had in our presentation for several quarters now. It's not going away anytime soon. We are operating our new manufacturing facility in Q2, including all these other expenses. And this is significant. So that's why I was saying that the gross margin being over 31%, I think that's actually not bad because there's 2 factors that hold it down. One is the expenses related to the new plant. The other is the, let's call it, excess C2B fabric compared to the C2B material sales. Total missed shipments, a little bit of a surprise here, $510,000, that number is way up. But last few quarters, we keep talking about international shipment issues. That's not the issue this time. This time, it's something different. It's customer certification and testing delays. It's a little bit of a new story here. It happens sometimes and it just happens. It's nothing we can do about it, not our fault or anything like that. But sometimes it just delays insurance of certification and engineering work and testing delays. So that had a meaningful impact upon our shipments in Q2. So let's go on to Slide 7, impact of tariffs and tariff-related costs. You know what, I should say net impact, I say that to Mark earlier, it should say net impact of tariff and tariff-related costs because we have tariffs, it's just that the net impact takes into account the pass-through. So very minimal in Q2 hardly anything. But that's the net impact. That's not the total tariff. That's a net impact because of the fact that we pass the tariff cost on. And then the future impacts, I think we'll get back to that later, and Mark will help talk through that later on in the presentation. Why don't we go on to Slide 8. So this is a slide we do every quarter. As you know, some of you veterans are probably tired of top 5, and it's kind of the usual suspects also. It's like, all right, GKN, Kratos, MRAS, TexTech and Nordam. TexTech is not -- is kind of a little bit a new name for us, but the rest are usual suspects. The Global 7500, that refers to Nordam, the A321XLR, that's an MRAS program. Kratos, obviously, is Kratos and the 787 Dreamliner, that's actually GKN. That's for the GEnx-1B engine. So it's a GE engine, but it's not part of the MRAS LTAA, which we'll go into that later. Let's go on to Slide 9. So here, we have our estimated revenues by aerospace market segments. We call them our pie charts. I know you, but I like -- because I think they tell a little bit of a story. Fiscal '21, that was the pandemic year where the commercial aircraft was -- remember, were airplanes, pictures of like 737s with like 2 people on them, and they were basically everything parked, not flown at all. And then after that, the pie charts seem to be fairly stable. Interesting -- what will be interesting is to see what will happen in the future because the commercial is going to be accelerating because the programs are on as those programs ramp up, but military will be accelerating a lot. Business probably could go down as a percentage. We'll see about that. Let's go on to Slide 10, Park Loves Niche Military Aerospace Programs. So we have a little pie chart here. Radomes, missile systems, unmanned aircraft, all niche markets for us, some markets, but even aircraft structures are niche markets for us. So we actually changed -- we used to call it rocket nozzles, I think we changed the missile systems because the missile systems, we supply into more than just the rocket nozzles, other aspects of missiles that we supply into. I think we used to call unmanned aircraft drones, but I think the more politically correct term is unmanned aircraft, but there's no change in there. You know what? And other than nice pictures, and you can see what the programs are. We really are not going to talk about these programs anymore. It's just not really appropriate for us to say very much about the programs, except understand, please, any picture we show you, that means it's a program we're on, not a program we like or a cool picture or something. Okay, you got it. Let's go on to Slide 11. GE Aerospace Jet Engine Programs. Again, a slide every quarter. But for the benefit of some of our new investors, let me try to explain quickly. So we have a firm LTA requirements contract for '19 to '29 with MRAS, Middle River Aerostructure Systems, a sub of ST Engineering Aerospace. You see we're sole source for composite materials for all these programs, but they're all GE programs. So what's going on here? If you look at all the checked items below, they're all GE engine programs. And what's going on here is that even we got on these programs with GE Aviation even before 2019 when MRAS was owned by GE Aviation, now GE Aerospace. So we got on these programs even before that. There were predecessor LTAs before this '19 to '29 LTA. And then I think about 5 years ago, GE sold MRAS to ST Engineering, which is a large Singapore aerospace company. So that's the explanation there. Redundant factory, you know about that when -- I guess, around 2019, GE said to us, look, Park, we're going to put -- give you this 10-year agreement for sole source and all the stuff, all these great programs, wonderful programs, but we really are concerned about redundancy. So would you please build another factory? And we said, yes, we check that box. That's been done. I'm not going to go through the individual programs, maybe except to get to talk about the first 5 are really all A320neo family aircraft programs. All right. Do you have any questions about the specific programs, let us know. Let's go on to Slide 12, just to keep moving along here. Item -- the first item on Slide 12, we're just continuing here. This is -- I don't know, a little bit of a nuance here because this is -- this program was mentioned in the prior slide, but this is a different component. And this also is part of our GE Aerospace LTA not necessarily the -- not the MRAS LTA. So I'm probably getting only technical, not necessary. Fan Case, this is something we should talk about for a second. This is for the GE9X engine for the 777X airplane. This is produced with our AFP material and other composite materials, automated fire replacement. That's what the AFP stands for. It's a robotic way method for producing composite structures. And this is planned to be included in the Life of Program, MRAS Life of Program agreement. Next item, we had a 6.5% weighted average price increase in our MRAS LTA effective January 1. That was already built in the LTA a long time ago. And next item, Park, the LTA was -- Park MRAS LTA was amended to include 3 proprietary film adhesive formulation products, and those are now undergoing qualification. Then Life of Program agreement requested by MRAS and STE. So we're still negotiating this, I guess. And I think there is a meeting that's being planned for next month. We'll see what happens. As I said to you many times, we're okay either way. This is requested by STE and MRAS. It's something they want. They want the stability of long-term supply. But either -- we're okay either way. If we do it, that's fine. If not, we'll be fine as well. And it's still under negotiation. I don't want to give you the wrong impression. It's not like -- we've been actively negotiating. It's like we talk about the 3 months go by. And so I think now we're planning to have some get together in December -- sorry, November to hopefully get through this. We'll see. We'll keep you posted. Item -- Page 13, rather, Slide 13. So let's talk about an update on some of these GE Aerospace Jet Engine Programs, includes A320neo family. That's a wonderful, wonderful program that Park is on sole source qualify. And let's talk about that program. Airbus has a huge backlog of these airplanes, over 7,000 of them. That's a lot of airplanes, a lot of airplanes. And let's just talk about the -- we can take a look at the aircraft -- the A320neo family aircraft deliveries. We're not going to go through each year, but you can see what's going on here. With the amount of orders that Airbus has, we'll get to in a second, they would be at a much higher rate than this. They'd be at 75 per month. What's holding them back is issues with supply chain. So this year, year-to-date, average at 44, but don't get fooled by that because they usually kind of make their year in the last 3 months. And if you look at September, you can see what's going on here. They're already -- the Airbus is already ramping up to 59 were delivered in -- 59 A320neo family aircraft delivered in September. Let's keep going. Slide 14, just continuing here. The -- importantly, the engine supply bottleneck, remember, I said that one of the big issue is supply chain restrictions. That's what's preventing Airbus from ramping up to their target of 75. We'll get a min at 75 per month. CFM, they have another engine, but let's just talk about CFM, the LEAP-1A engine, reportedly improving that it's getting better. And I think that's a deliberate focus by GE and CFM, which is a very good thing because that's probably the most significant restriction to Airbus' ability to ramp up to that 75. They'd be up there now based upon how many orders they have. So that's very good news actually. As we already alluded to, Airbus is targeting a delivery rate of 75 A320neo family per month. And you could see that they're still at 50 to 55. So they still have a way to go, quite a way to go. Two engines approved for the A320neo aircraft. We're on the CFM LEAP-1A engine. We're not on that. We have nothing -- no content on the Pratt & Whitney GTF engine. And so I guess that covers the second bullet item. We supply into the A320 family aircraft using the LEAP-1A engine. According to the second quarter 2025 addition of Aero Engine News, which is kind of like a viable for us anyway, the CFM LEAP-1A market share with -- compared to the Pratt market share of firm engine orders for the A320neo family was 64.7%. And those are firm orders. That's not speculation or hopes and dreams. Those are firm orders. So you could see that the CFM has the large -- larger market share of the engines for the A320neo aircraft. I have the delivery rate of 75 A320neo family aircraft per month, that 64.7% market share translates into 1,165 LEAP engines per year. That's a real lot of engines and lots of revenue for Park at that point. Slide 15. As of June 30, 25, a few months ago, there were a little over 8,000 firm LEAP-1A engine orders. These are not airplanes. These are LEAP-1A engine orders where we're sole source qualified over 8,000. If you want to look at Slide 29, you get a feel for what our revenue per unit is, do get your pocket calculator out and do the math, you can see what that's worth to us. Those are just the firm orders that are on the books now. So this is a big deal for Park. The Airbus A321XLR, this is a variant. We're still talking A320 family, okay? We're not off to a different aircraft. This is part of the A320 family. This is recently introduced, supposedly changing the air map of the world. Why is that? Because the payload and range capability of this aircraft are very unusual for a single aisle. So it allows a single aisle to compete against wide-bodies, but obviously at a much lower cost. So that's why it's changing the map of the world. Quantas is very involved in the program, American Airlines, Iberia Airlines. The reason I highlight this because a lot of airlines are buying this airplane, why am I highlighting this? They call it a game changer. But what's really, I think, very impressive to me is that they say they claim they've had almost no AOGs. -- That's aircraft on ground after almost a year. That's really a big deal because normally, for the first year or 2, it's all kind of bugs you have to get out of a new airplane, a new design and the airplane sits in the ground a lot. And it's kind of you just expect it. And it's not good because when the airplane on the ground, the airlines aren't making any money. And you kind of expect that if you get an airplane that's been recently certified and delivered. But here you go, they're saying almost no AOGs. I've never heard of anything like that. That's quite impressive. Boeing has no response to this aircraft. Let's go on to Slide 16. So still on A320 here, folks. Airbus plans to open a new A320 aircraft family final assembly lines, FALs in the U.S. and China this month, in the next couple of weeks. So these 2 new FALs in combination with the existing FALs in Germany and France will provide Airbus with the manufacturing capability to achieve its 75 A320neo aircraft per month delivery goal in '27. So this is nice because Airbus is -- they're putting the money more of their mouth this year. These FALs are -- they're a big deal. So that's good news. And then breaking news, October 7, this is the day in my oral surgery, I think, yes. So the 2 big things happened on October 7, just 2 days ago, the A320 aircraft family became the world's most delivered commercial jet ever. Of course, that means that it beat out the 737. -- Not just the MAX, this is the 737 family versus the A320 family going back to the beginning. So that's pretty big news, I guess. Comac 919, that's a Chinese-made aircraft. Again, with a LEAP engine, this is a different variation of it, this LEAP-1C engine. Comac is targeting -- this airplane is designed to compete -- single aisle designed to compete against the 737, A320. They're targeting 30 919 aircraft deliveries in '25, but recent unconfirmed report saying they're probably fall short of this target. I can't tell you I'm very surprised. I probably would have -- to be just totally candid about it, I would be more surprised if they met the target. I'm not going to go into why, but I'm not surprised or really disappointed. Malaysian Airlines, AirAsia has confirmed in advanced talks to purchase these airplanes. Why is that important? Why am I focusing on that? Because there are a lot of airlines that are buying this airplane. But the reason I'm focusing on is this is a non-Chinese airline. This airplane is certified by the Chinese FAA, I think called CAAC or something like that. So the thought was originally these Comac airplanes would be China-only airplanes. Well, that's not what Comac wants. They're selling the airplane outside of China for operations outside of China, which will require certification by the FAA and EASA, the European Aviation Authority. So that's why I highlighted this AirAsia thing. Let's go on to Slide 17. They plan to achieve a reduction rate of 200 airplanes by 2029, and Comac claims to have over 100,000 orders for this airplane. This airplane does not have 2 engine options. It's all LEAP in terms of the engine that's certified for the airplane. Comac C909, again, Comac, the Chinese company. This is a regional jet. And this airplane was introduced a while ago. It's already pretty close to that rate. But what's interesting here, they delivered the same kind of topic really, Lao Airlines, Vietjet, Air Cambodia signed up. Again, what's the theme here, non-Chinese airlines. So originally, the thinking the Chinese -- the Comac airplanes are going to be China only, but that's obviously not what Comac wants. 777X, Boeing 777X, we have to slow down a little bit to talk about this one. This is an important program for Park. Test program has advanced over 1,500 out flights and nearly 4,100 flight hours. That's a lot. That's good. This picture was taken by a friend of mine a couple of few years ago when the 777X was doing cold weather testing in Fairbanks. Good place to go for cold weather testing. So let's talk -- let's go to Slide 18, sorry. Boeing reportedly has 565 open orders for the airplane. Boeing had previously announced that the airplane program was on track for certification in late '25 and entry into service in '26, when the Boeing CEO recently stated the certification program is falling behind schedule. The CEO further stated the aircraft and the engine and GX engines, GE9X right -- GE9X engine are really performing quite well and that the potential delay in certification was being caused by increasingly deliberate FAA scrutiny. You get the sense there's some tension there between Boeing and the FAA. I do anyway. A key gating item for -- is the receipt of the -- what's called the type inspection authorization from the FAA because as the CEO explains, they can fly these airplanes, need to have 5 airplanes [indiscernible] for the certification program, but those flights don't really count towards certification until they get the TIA. There's a lot of boxes that have to be checked for an airplane to be certified. So they can go fly the airplane, which is good. They can learn a lot more about the airplane, but they can't check those boxes until they get the TIA from the FAA. Boeing hasn't announced any new targets for the certification and EIS, but speculation is that they'd be pushed into next year or '26. Let's go on to Slide 19. So let's talk about big picture GE Aerospace jet engine program sales history and forecast estimates. The top is the sales history. We won't go through all the history, except in Q2, $7.5 million. And I think we had forecasted in our Q1 presentation, $6.7 million to $7.2 million, a little higher. I wouldn't read anything into it. The numbers move around a little bit, but a little higher than we forecast. GE Aerospace program sales forecast -- sales forecast estimates, again, not guidance estimates. Q3, we're estimating $7.5 million to $8 million. And total for the year, we got to slow down here a little bit, $27.5 million to $29 million. Now in our prior presentation, we indicated that we're looking at $28 million to $32 million for the year for fiscal '26. But as we explained to you, that was based upon information called a build plan from our customer wasn't our forecast, was their forecast. Now we have now the current forecast, $27.5 million to $29 million. That's now Park forecast based upon what -- based upon the backlog for Q3 and Q4. Q3 is already booked. Q4 is partially booked and what we expect based on lots of experience to the additional bookings for Q4. So now this is our number, $27.5 million to $29 million. Let's go on to Slide 20, Park's financial performance history and forecast estimates, estimate singular. So we just have the history up top. You already saw this just for perspective and context. Down below our Q3 '26, Q3 financial forecast estimates now plural sales of $16.5 million to $17.5 million, adjusted EBITDA of $3.7 million to $4.1 million. That's our estimate for Q3. You have any questions about that, just let us know. So let's go on to Slide 21. This is just history, and we've showed you the slide for the last several quarters. We think it's interesting, just you can see what's going on here. Historically, you go from $17 million to $20 million like every year, we increased by about $10 million, then we got stalled out. So we're kind of in fiscal '25, we're pretty much where we were in fiscal '20. And obviously, that's because of the pandemic. The pandemic really had a very big impact on commercial aerospace. It wasn't the pandemic so much, it's how we responded to it, how the industry responded to it, especially with respect to supply chain issues that held back commercial aerospace. So -- just one other thing. We're not giving you a forecast for fiscal '26 at this time, but we believe that the number will be over $70 million for fiscal '26. We'll just give you that number, not giving EBITDA, not giving details. I think what's going on here, though, is the industry is getting religion. And it's not just an opinion, this is based upon lots of input we've received, a different kind of attitude on the part of the OEMs in terms of ramping up to meet demand and also working with suppliers and supply chain in a much more productive and in a more -- I don't know, more collaborative way, sorry, up trying to come up that word collaborative way. So it's not just a little thing. It's a big thing. It's very palpable in the industry. We'll see what happens. But to us, it seems like there's something really going on here. And we're not alone in that opinion. We're not alone in that opinion. So let's see what happens. But just so you know, we're probably looking at about a little over $70 million for fiscal '25. Let's go on to Slide 22. Okay, General Park updates. Agreements with Ariane. -- okay, we've got to slow down with Ariane again. We entered in that business partner agreement in January '22, under which Ariane appointed us as exclusive North American distributor. We already covered that, okay? But then on March 27, '25, just early this year, Park and Ariane entered -- they're a great partner. They're a wonderful partner. We love them, entered into a new agreement under which Park will advance I don't know, it's probably about EUR 5 million -- EUR 4,587,000 against future purchases by Park of C2B fabric. These funds will be used by Ariane to help finance the purchase of additional installation of new manufacturing equipment for Ariane's production of the C2B fabric in France. And that should be paid to Ariane in 3 installments, the first of which is already paid about EUR 1,376,000. That's about $1.5 million. So that would affect our cash when we reported in Q1. Let's talk -- let's move to Slide 23 rather. So the purpose of this new agreement is to provide additional C2B fabric manufacturing capacity to support the rapidly increasing demand for C2B -- in C2B fabric in Europe and North America. Just so you know, one of the big programs that uses C2B fabric is the Patriot missile program. ArianeGroup recently asked the partner to partner again with them on a study related to the potential significant increase of C2B fabric manufacturing capacity, presumably in the U.S. The study expected to cost about EUR 700,000. We split it 50-50. So that's probably about $410,000 for Park, and we'll record that in our Q3 as a special item. I just want you to be aware of that. We'll get back to this later on in the presentation, in Ariane study. Just continuing with general updates, our lightening strike protection material certified on the Passport 20 engine used in the -- used on the Bombardier Global 7500/8000 Vision jet. That revenue is about approximately $500,000 per year expected on our LSP material. We're very happy about this. Our LSP is already qualified, approved and use on the A320 and the 919, but we have not -- just -- we're getting it approved now on the Passport 20 engine and also still to get approved on what's called the 10A engine for the Comac 909. So -- and we expect that these revenues will start to kick in fairly soon, let's say, in the next couple of months. Slide 24, still updates. This is just something we covered already. We entered into an LTA with GE Aerospace and for calendar years '25 to '30. Park and then another update, Park's discussion with 2 Asian industrial conglomerates relating to Asian manufacturing joint ventures continue. We've been talking about this for a while. John Jamieson is in Asia now working on this project along with one of our other guys. So we'll see what happens. It seems interesting, but we'll see what happens. Okay, Mark, your turn. Tariff international trade issues, what's the expected impact of tariffs going forward, do you think? Mark A. Esquivel: I don't think much. I know this quarter alone, we had about $1,700, which we don't like to take on any additional cost, but that was mostly nonmaterial items. So going forward, again, as I mentioned before, we got ahead of this pretty early. We put controls in place to manage it. We're passing that cost along to our customers, whether it's through contracts or stuff like our POs or stuff like that or order confirmation. So I don't expect to see much. I mean it's obviously a dynamic situation. I don't think all the tariffs are completely locked in. It's been a little quiet in the news lately. But where we're at today and what we've seen so far, it's very minimal impact to our business. Brian Shore: Okay. Thanks, Mark. So let's keep going here. Current MRAS supplier scorecard scores, what happened? We don't have all hundreds here. Why not all 100s. Does MRAS still love us? I think they do. I think I mentioned to you in prior quarters that we're told that most suppliers would be happy to get 80s. And MRAS finds a little bit numerous that we ask, well, what happened and what are we doing -- what do we need to do to fix this [indiscernible] let's call it a technical issue in terms of how we recorded something. So we take it seriously. We're a 100 company. We're not a 99.87 country, so company rather. So we take it seriously. And like I said, MRAS, I think finds it a little amusing that we spend so much time talking about why we're not -- why we didn't get 100 on one of these 3 scores. Let's go on to Slide 25. So making customers love us, this is still in our general updates is central to what we call Park's Egg Strategy. How do we make our customers love us with our calling cards of flexibility, urgency and responsiveness by asking how high before our customers say jump. And we're not kidding about this. We will go to customers and say, what else can we do, what else can we do, what else can we do before they even ask us. Making customers love us is a boiler room thing, not a boardroom thing. And the board is on board with the strategy. We've certainly reviewed it with the board. But the strategy happens on the factory floor, not in the boardroom. That's where the rubber hits the road. It's up to all our people to make the strategy work. It's a boiler room thing. So first for this strategy to work, all of our people need to be bought into it and feel passionate about it. Making customers love us is the secret to our success. It's a hidden plain sight secret. Sometimes the most brilliant ideas are the most obvious ones with the benefit of hindsight and well, why did I think of that? I don't know. Why didn't you think of it? So the secret is kind of hidden plain sight, but it's a secret to our success. Slide 26, buyback authorization. We don't spend a lot of time on this. Let's just go down to the last 2 check items. We did not purchase any shares in fiscal -- in our second quarter. And we don't -- we have not purchased any shares so far in our third quarter to date. I don't think we'll be -- my feeling, my opinion is we probably won't be purchasing too many shares in the near future, but we'll see about that. Slide 27. Again, this is just going to review Park's balance sheet, cash and incredible cash dividend history. Long-term debt, we don't have any. We had -- we reported $61.6 million of cash and marketable securities at the end of Q2, but we also made that final transition tax installment payment of $4.9 million in Q2. In Q1, we reported cash at end of Q1 of $65.6 million. So if you take that $4.9 million, subtract it from $65.6 million, it gets you to that $61.6 million number, more or less, it explains the difference. 40 consecutive years of uninterrupted regular cash dividends. And we've now paid over $606 million or $29.60 per share in cash dividends since the beginning of fiscal 2005. This is Park Founders. The reason we placed the picture of our Park Founders here is because we started out with basically nothing or 2 guys that started the company, I think, in 1954 with about $40,000 that they had saved from more duty. And here we are paying over $600 million of cash dividends in the last 20 years or so. Let's go on to Slide 28. Okay. We can kind of skim through this because these 3 slides are exactly how the same slide that we showed you last quarter, I think the quarter before that, financial outlooks for GE Aerospace jet engine programs, the juggernaut, called the juggernaut -- the timing, we're not sure. We're going to talk about, yes, the 919 is a little slower ramping up and the 777X is having a little more difficulty getting certified. So we don't know. We don't really spend a lot of time worrying about that. But the thing is that we say it's a juggernaut, it's coming. It can't be stopped. And the key thing for us is we better be ready. If you go to Slide 29, there's no change anything here. All the numbers are exactly the same. Like I said, relate to a previous slide, we feel that GE and CFM have kind of gotten a religion that they're really focused on ramping up production and working closely and collaboratively with the supply chain. Slide 30 is just footnotes related to the prior slides. I won't go through those. If you have any questions, any of this let us know. Okay. Let's go to Slide 31, War and Peace, Park's new juggernaut and peace for the question. These slides came from -- originated in the last quarter, although there are some updates to them. The first thing I want to cover again though is we're not providing any inside information on any of these programs. All this information in these slides is based upon publicly reported news and reports. We don't give away inside information, especially with sense and defense programs. Unprecedented demand for missile systems. Missile systems stockpiles have been seriously depleted by the wars in Europe and Middle East. There's an urgent need to replenish the depleted missile system stockpiles. According to Wall Street Journal reporting, the Pentagon is pushing defense OEMs to double or even quadruple missile system production "on a breakneck schedule", partly in preparation for a potential conflict with China. The list of Pentagon targeted missile systems include the PAC-3 missile system, the LRASM and the SM-6. The Patriot missile system is a particular priority. I think you should know, the Park is on all those programs, participates in all those programs, all 3 of them. Review an update of the PAC-3 Patriot missile system. The reason we spend more time talking about this is a lot of public visibility information about it. Some of the other programs we're on, it could be quite significant, but we're not able to even mention what they are. The largest deployment of PAC-3 Patriot missile systems in history occurred in response to Iran's ballistic missile strikes on our air base in Qatar. Going on to Slide 32. What happened here? In anticipation of this, I guess we knew what was going to happen. We moved Patriot missile systems to Qatar from South Korea and Japan, knowing what was coming. And we call it the shell game, moving the systems from one place to another. That's not sustainable. The Department of War wants to very significantly increase Patriot missile stockpiles in Asia to protect bases and allies in the Pacific region. So this is not working out very well at all, is it? We take missile systems out of South Korea and Japan because we have this issue with Iran and then we depleted their systems when the Department of War wants to significantly increase the Patriot missile stockpiles in Asia. I see the problem. So just public stuff, Israeli supply of Patriot missile systems seriously depleted. Ukraine supply of Patriot missile systems seriously depleted. Other countries have been waiting for Patriot missile systems for years. September 3, 2025, Lockheed's Missile and Fire Control Division received its biggest contract in history, a $9.8 billion award from the U.S. Army for 1,970 Patriot missiles. According to the Wall Street Journal, Department of War wants suppliers to ramp up to produce approximately 2,000 Patriot missiles per year, which is almost 4x the current production rate. Didn't we say something about quadruple in the prior slide? We did, 4x production rate. So we're talking about -- well, we'll get to -- wait, and we'll get to in a second because I thought to say Park is sole source qualified. We'll get that in a second. Let's go on to Slide 33. Patriot missile systems are planned to be incorporated into the Golden Dome. And it's apparent from the reporting that the U.S. plans to do much more than just replenish these depleted systems. So next arrow item, Park supports the Patriot missile system with specialty ablated materials produced in Ariane's C2B fabric. And Park is sole-source qualified for specialty ablated materials on this program. So I was going to say at the bottom of Slide 32, this 2,000 missiles per year, that represents very significant revenue of Park. We're sole source qualified in that program. Park back to Slide 33, sorry to bounce around on here. Park has recently asked to increase our expected output of specialty ablative materials for the program by significant orders of magnitude. We can't really say how much, but significant orders of magnitude. Hopefully, that gives you some kind of feel for what's going on here. And we will fully support this request partly with the additional manufacturing capacity provided by our major facilities expansion, which we'll discuss below. Remember that Park recently entered into this new agreement going back to Ariane with Ariane for the purpose of increasing C2B fabric manufacturing capacity. It's going to Slide 34. But will that additional manufacturing capacity be enough considering what's going on with the Patriot missile. No. I don't think so. As discussed above, Park is partnering with ArianeGroup in a study related to potentially significantly increasing C2B fabric manufacturing capacity, presumably in the U.S. This is a big deal. Let me just say this. Once we're -- our partnership when the study is done, that's not the end of the partnership. I don't think anyway. That's not what we're talking about. I'm not going to say anything more about it, but let me just say it's a big deal. We covered the Arrow 3 and 4 missile systems last time, so we just kind of covered again. Not too much here. Last item, update on Park's involvement. Remember, we were second source qualified in the Arrow 3. We weren't really expecting orders. We got them. We already got them. Arrow 4 were sole-source qualified on the Arrow 4, which is expected to go into production, I think, relatively soon. Let's go on to Slide 35. This is really probably the most important slide of this whole warrant piece section of the presentation. The above missile programs are just a small representation of the critical missile programs Park is supporting or planning to support. There are too many programs to iterate here and many, probably most are too confidential and sensitive to mention for national security or other reasons. But this is highlighted or bold, whatever you and [indiscernible] . But please understand that certain of these programs represent very significant revenue for Park over long periods of time. We're disappointed we're not able to discuss these programs with you, but we can't. Let's go on to Slide 36, major expansion. So we're just going to give you a quick update here. I know we're running late with time, but we got a lot to cover here. And like I said, we got new investors, so we couldn't just skim through things too much. A major new expansion. We talked about this in the -- of our manufacturing facility, talked about this in the last 2 quarter presentations, I believe. So we're planning a major new expansion of our manufacturing facilities. It could be at Newton or elsewhere. The plant expansion will include manufacturing following lines, Solution Treating, Hot Melt film, Hot Melt tape, Hypersonic materials manufacturing. The current estimated capital budget for new manufacturing plant equipment, $40 million to $45 million. That's gone up. I forget what we said last quarter, maybe $30 million to $35 million to $40 million. Why did it go up? Well, we need another line. Extra $5 million of the [indiscernible] line because the requirements keep going up and up and up. It's quite incredible actually. So new manufacturing -- Slide 37, just continuing new manufacturing, major new manufacturing -- major new expansion of Park's manufacturing facilities. Why are we doing this? Our juggernauts require. We have a juggernaut for GE Aerospace. We have a juggernaut for defense and missile programs. Our long-term business forecast requires it. And the second bullet item under that check item is that our long-term forecast has increased since we talked to you on July 15. And also have manufacturing capacity needed for Park to be parked, our calling cards, again, flexibility, responsiveness, urgency. We don't run a business a mill, meaning that, okay, we campaign and you want something, well, we can fit you in maybe a year from December. We don't run our business that way. Urgency, responsiveness, flexibility. So it would be really stupid for Park to abandon those things because those are things that got us where we are today, all those opportunities. So it's important we have the manufacturing capacity in order to be parked for Park to be Park, the secret to our success. That's part of our theory or our thinking with respect to the expansion. And last item in bold, this is not a close call, not even close to a close call. I mean the need for what we're talking about is a need for a major expansion of our manufacturing facilities. Let's go on to Slide 38. We're just continuing on the expansion. We're not sharing our long-term business forecast at this time, but the opportunities for Park are significant. Timing is now, we must take advantage of the opportunities now. We must not hesitate or we will squander the "once-in-a-lifetime" opportunities, we have sacrificed so much over many years to develop. So this is kind of interesting. There was a Board meeting last week, and Mark was discussing with the Board some of these missile programs and he used the term once-a-lifetime opportunities. And the Board was really got the thought, well, let's come to Mark. This must be really big. Mark is not a guy given to hyperbole. It's usually the skeptical guy, which is good. You want your President to be skeptical things. That was his quote once a lifetime and the Board thought, wow, this must be a big thing then. Our objective is to have our expansion plan in place by the end of the calendar year and to be moving into the implementation phase by -- of our plan by then. Slide 39. How are we doing with Park? Let's change gears for a little bit. I'm sorry, it's going to take it so long. But like I said, we're trying to cover a lot of things here. So what are Park's objectives? This is important. How do we measure success? I think there's a lot of misunderstanding about this. So let's talk about it. We measure success. Our objectives are getting qualified and sole source qualified whenever possible on chosen special aerospace programs. These are programs we want to be on. These are the special programs, the wonderful programs. That's our success. Once we get qualified on our chosen special programs, our objectives have been achieved. We're done. And once we're qualified in those chosen programs, all in [indiscernible] , all we need to do is support those programs with what, extreme urgency, flexibility and responsiveness. That's it. Other than that, it's up to the program OEMs to determine and decide how quickly their programs will ramp. That is not something over which we have control, and it's not even our concern. We're on the program. We achieved our objective. Our objective has been achieved. And some guy wrote something about we're shifting blame or mitigation plans, and it's just kind of a total misunderstanding of how Park and our objectives and how we operate. Once we get these programs, sole source qualified, our objectives have been realized. And we -- let's talk about how have we done with our objectives. If you ask me, we have been incredibly successful. We have gotten on wonderful aerospace programs, special programs we want to be on, most of which we can't mention. You know some of them already, A320, wow, Patriot, wow, a lot of them we can't mention. Slide 40. And we were nobody as we came into the aerospace industry. We came from nowhere. We welcomed into the industry with open arms with the entrenched competitors. I don't think so. They didn't want us. I mean they were brought polite and respectful, but they clearly didn't want -- they do not welcome us. We achieved what we achieved against great odds, incredible success by getting on these programs that are the envy of the industry from nowhere, nothing, went to an industry where there's aerospace, there's a lot of entrenchment. People kind of programs, they get very complacent sometimes. That's not us. We don't do that. Are we lucky? If you ask me, we earned everything we got. Are we an overnight success? I don't think so. It's been a long and difficult road with much sacrifice along the way, but it's a road we chose. Let's go to Slide 41. I think that's our last slide, almost there folks. Very fortunately, for all of us, Park had the courage and conviction. This should be in bold. This is important to stay the course with our principles and our simple but elegant "Egg Strategy" in the face of sometimes unrelenting doubts, negativity and skepticism. Very fortunate for all of us, meaning investors, too, very fortunate that we stood our ground and our knees didn't buckle, and we did what we thought was right under quite a bit of pressure. Because if we didn't do that, we wouldn't be where we are now. We wouldn't be looking at these "once-in-lifetime" opportunities, wouldn't be, and we'd all -- we all lose out -- all lose out. So how are we doing at Park? We believe Park has done a remarkable job of positioning our company to capitalize on, thank you, Mark, once-in-lifetime opportunities we are now facing. These are unprecedented times for Park. Okay. Operator, so we're done with our presentation, and we'll be happy to take any questions at this time. Operator: [Operator Instructions] I see we have a question coming from Nick Ripostella from NR Management. Nick Ripostella: Once again, nice presentation, nice quarter. And just a couple of easy questions. I've been thinking about Park and all the exciting things going on. How do you feel about the need for additional sales personnel? Or are you feel that everything you have there is adequate. You've got so much going on. I'm just wondering, are you covered in that area sufficiently. And the second thing is, I know you say you're not prepared at this time to share the long-term forecast. So do you think like sometime next calendar year, you can kind of give people a longer-term view of where this company could be in 3 to 5 years. There are so many things that are blossoming. You truly are a growth company. But -- and then the third thing is -- and I know this is not your primary function, obviously, but you must be on the radars of firms out here to pick up research coverage. There's so much research out there now by niche firms, and you have such a great story. I was just wondering if anything happening in that regard? Brian Shore: Thanks, Nick. Thanks for your questions. So let's take them in order. Additional salespeople. I think, Mark, you can chime in. We've learned a lot over the last 20 years. And I think our view on salespeople is a little bit skeptical. I think we prefer to have additional technical people, engineering people in terms of getting more business. We -- you're right, Nick, we certainly have our hands full of what we have already, but we're always interested in new opportunities, new opportunities. They're coming pretty fast and furious, but they're not coming because of salespeople. They're coming because it's a small industry, particularly in the defense side, and we have close ties with a lot of the OEMs and the military as well. So the work gets out pretty quickly. The important thing is we have engineering people to support those activities rather than salespeople that go get those -- the business. And I'm not sure that really works anyway. I don't think that -- I don't know, Mark, you chime in, that typical OEMs really are that interested in the guy bringing doughnuts and a slick salesmen. They're more interested in what you can do, how you can help us. And that's going to be more of an engineering discussion or it could be a supply chain discussion, okay, how can you support us in terms of providing a product to us. But I don't know, I'm a little skeptical about whether additional salespeople are -- we want to talk about at this point. Why don't we -- Mark, why don't you chime in? I'll take the other 2 questions, but why don't you chime in if you have anything you want to add to that, my answer on that question. Mark A. Esquivel: Yes, Brian, I think you're correct. I mean we work really close with the technical and engineering folks and it kind of goes back to our strategy too, they have priorities and they need to get projects done. And we work directly with them and help them develop new programs, new products, and that really helps us get business more so than the traditional, like you said, Brian, going to the supply chain people, bringing doughnuts. It's a little different in our industry. It's more technical, more engineering driven. And if you're satisfying those groups, that's how the business usually comes our way. Brian Shore: Yes. I think a lot of times it comes to us rather than we go into it. But it's a real kind of small close to industry and people know where to find us. Long-term forecast, I understand why you're asking that. I think what we'll try to do in Q3 is provide some information. I'm a little bit -- like a little reluctant because I think the number is going to be shocking to our investors. Nick Ripostella: [indiscernible] . Brian Shore: Yes. Okay. Well, let's see what we can do to give you more perspective, quantitative perspective when we announce Q3, okay? Would that be right? And we'll work on that. I'm not saying we'll give you a hard like 3- or 4-year forecast, but there's something that you could sink your teeth into a little bit more. And the research, we're here. I mean, nowhere to find us. We'd be happy to be covered. Like you said, Nick, not really our principal focus, but we'd be happy to be covered. And if anybody is interested, I'm happy to talk to them. I think we are seeing a lot more visibility in the last few months or so. So we'll see what happens. I don't believe there's anything imminent where somebody is about to pick us up right now, but we're very open to being covered. So hopefully, those... Nick Ripostella: When the revenue doubles from here, then they'll come around. That's the way it happens a lot. Brian Shore: Maybe. Yes, maybe you're right. Any other questions you have, Nick? Or is that covered it? Nick Ripostella: No, thank you so much. And it's glad to see that all the hard work, the stock has caught lightning in the bottle after the last quarter, and it's good. It's a nice thing to see hard work appreciated and reflected in the value. It must make all the employees and everybody feel good and the investors, obviously. But -- so thank you. Brian Shore: It's a good thing. Thank you very much for your input, Nick. Operator, do we have any other questions? Operator: Currently, there are no further questions at this time. I actually see one just popping in by Chris Showers, private investor. Unknown Analyst: Brian, just, I guess, 2 questions. You mentioned the C2B material being a 60%-40% lower to higher margin mix. When the Patriot missile gets ramped up, will that be constant? Or can you get a higher mix there with the higher revenue converted material? Brian Shore: So I'll answer that. So what's going on here is they're stockpiling, stockpiling, stockpiling. And that's why there's -- the ratio is not really balanced. At the end of the day, though, there will be a certain amount of C2B fabric that's required to make the C2B material. But at the end of the day, it all has to kind of even out. Right now, the OEMs are stockpiling. Why? Because they're nervous. They want as much as they can get because they see where the future is going. And they're not stopping. They're going to keep stockpiling, I think. But eventually, the plan is not to just have that stuff sitting in our factory, of course, it's for us to produce the material that's used to make the rocket nozzle materials for the -- rocket nozzle structures for the Patriot missile system. Unknown Analyst: Okay. And is there timing on that, where you think that might pick up this calendar year? Brian Shore: Yes. I think as Mark alluded to, we had this issue with the recall and that was slowing down a lot in our ability to produce the materials, the C2B materials. The recall is pretty much complete now. So we think that's going to open things up quite a bit even in the next quarter. I mean, even this quarter, I think. So we'll see. We'll see. With the aerospace, probably most industries, though, Chris, the demand is there, but the supply chain can't turn everything on, on a dime. We can, but there's a lot of other steps along the way in the supply chain in order to be able to ramp up like with the A320, we could support 75 airplanes a month at this point if they needed it. But -- and Airbus would like to be at 75 airplanes for a month. I'm quite sure of that. What's holding them back is the supply chain, the supply chain is not able to turn on a dime. Was there another question, Chris? Unknown Analyst: No. Brian Shore: Good. Okay. Operator, anything else right now? Operator: There are no further questions at this time. I would like to turn the floor back over to Mr. Shore for any closing comments. Brian Shore: Okay. Well, Brian again here. Thank you very much for listening in. Sorry, the call went so long. If you have any other questions, you want to call us any time, we're happy to talk to you. Have a great day. Thank you. Bye. Operator: Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. Please disconnect your lines, and have a wonderful day.
Operator: Good day, and thank you for standing by. Welcome to the Richardson Electronics earnings call for 2026. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you will need to press 11 on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to turn the call over to your speaker today, Edward Richardson, CEO. You may begin. Edward Richardson: Good morning, and thank you all for joining us in 2026. We appreciate your continued support and interest in Richardson Electronics. Joining me today are Robert Ben, Chief Financial Officer, Wendy Diddell, Chief Operating Officer, Gregory Peloquin, General Manager of our Power and Microwave Technologies Group which includes Green Energy Solutions, and Jens Ruppert, General Manager of Canvas. As a reminder, this call is being recorded and will be available for playback. I would also like to remind you that we will be making forward-looking statements. They are based on current expectations and involve risks and uncertainties. Therefore, our actual results could be materially different. Please refer to our press release and SEC filings for an explanation of our risk factors. In 2026, total sales were $54.6 million, up from $53.7 million in Q1 of last year. Driven by sales growth in both PMT and Canvas, PMT delivered notable year-over-year sales growth driven by continued strength in our semiconductor and RF power segments. It's important to note that sales growth was partially offset by the inclusion of our Healthcare business in both the current and prior quarters. As a reminder, we sold our healthcare in 2025, so this will impact our year-over-year comparisons through the end of Q this year. The healthcare engineering and manufacturing team is making good progress finishing production of AltiTubes and finalizing repair processes for the Siemens tubes, which should result in positive operating contribution toward the end of FY 2026. Within our GES business unit, we're very pleased with the year-over-year growth in the wind segment. The performance provides us with growth evidence that the policies from the current administration are not hurting demand for our alternative energy solutions. We believe our wind business is protected because we're pursuing programs strictly on land-based turbines to support global customers in providing solutions that improve the performance and efficiency of the existing fleet. While overall sales were down slightly in GES, this was driven by a large one-time order in our EV rail sector in the first quarter of last year that did not repeat this year. Backing out this sale, GES would have been up quarter over quarter. The strategic priority of the company is engineered solutions, which are products we make ourselves in LaFox. The strategy focus, along with improved manufacturing utilization in the quarter, contributed to the higher gross margin versus the prior year. The long-term investment in our global footprint is also a strength, helping us better manage the tariff landscape. Finally, we're pleased to report that we generated positive operating cash flow in the quarter, marking six consecutive quarters. Our cash position remains strong at $35.7 million, providing us with flexibility to support both our ongoing operations and strategic growth opportunities. I'll now turn the call over to Robert Ben, our Chief Financial Officer, who will provide a detailed review of our first quarter results and capital position. Robert Ben: Thank you, Edward, and good morning. I will review our financial results for our first quarter fiscal year 2026, followed by a review of our cash position. Consolidated net sales for 2026 increased 1.6% to $54.6 million compared to net sales of $53.7 million in the prior year's first quarter. When excluding Healthcare, which the majority of assets were sold in January 2025, net sales increased by 6.8%. Please note that healthcare results, including prior periods, are consolidated into the PMT segment beginning this quarter. This was our fifth consecutive quarterly year-over-year increase in sales. First quarter net sales growth was led by a 2.8% increase in PMT sales. Excluding Healthcare, PMT sales were up 10.5% and were due to higher demand from the company's semiconductor wafer fab customers as well as our legacy power grid tube product lines. Canvas sales increased 8.3%, which reflected improved market conditions in Europe. Partially offsetting these increases was a 10.2% decrease in sales for our GES business unit. While revenues in the wind segment increased, they were offset by the nonrecurrence of a large EV locomotive order from the prior year's first quarter. Consolidated gross margin for the first quarter was 31% of net sales compared to 30.6% during 2025. The 40 basis point increase in consolidated gross margin was primarily due to margin improvement in both PMT and GES. PMT's gross margin increased to 31.3% from 30.1% as a result of a favorable product mix and improved manufacturing absorption. GES gross margin increased to 29.6% from 29.4% due to product mix, including a higher percentage of products we manufacture in LaFox. Lower gross margin for Canvas partially offset the improvement in consolidated gross margin. Operating expenses as a percentage of net sales improved to 29.2% for 2026 compared to 30% in 2025. As a result, operating income was $1 million for 2026 compared to an operating income of $300,000 in the prior year's first quarter. Other income totaled $1.4 million for the quarter, which was $1.1 million higher than 2025. The increase from the prior year's first quarter was mainly due to a nonrecurring gain of $900,000 from a confidential contractual settlement. Net income was $1.9 million for 2026 compared to $600,000 in 2025. Earnings per common share diluted were $0.13 in 2026 compared to $0.04 in 2025. EBITDA for 2026 was $3.3 million versus $1.7 million in the prior year's first quarter. Please note that EBITDA is a non-GAAP financial measure, and a reconciliation of the non-GAAP item to the comparable GAAP measure is available in our first quarter fiscal year 2026 press release that was issued yesterday after the market closed. Turning to a review of our cash position, cash and cash equivalents at the end of the first quarter fiscal 2026 were $35.7 million compared to $35.9 million at the end of fiscal 2025. Cash flow provided from operations was $1.4 million compared to cash flow provided from operations of $400,000 in the first quarter of the prior year. Capital expenditures of $1 million in 2026 were primarily related to our manufacturing business facilities improvements and IT systems, versus $900,000 in 2025. We paid $900,000 in the first quarter for cash dividends. In addition, based on our current financial position, our Board of Directors declared a regular quarterly cash dividend of $0.06 per common share, which will be paid in 2026. As of the end of 2026, the company had no outstanding debt on its revolving line of credit with PNC Bank. In addition, we have extended this credit agreement through October 6, 2028, with similar terms and a $20 million borrowing limit. Now I'll turn the call over to Gregory Peloquin, who will provide more details for our PMT and GES business groups. Gregory Peloquin: Thank you, Robert, and good morning, everyone. PMT and GES are key components of our multiyear growth plan. Coming out of FY 2025, we had a strong backlog, launched several new products, expanded our customer base, and advanced multiple development programs from beta testing to preproduction. Building on that positive momentum, in Q1 fiscal year 2026, PMT excluding healthcare grew to $37.8 million, a 10.5% increase over the prior year and a 5.1% increase over Q4 fiscal year 2025. GES sales were $7.3 million, up 35.5% over fiscal Q4 2025 and down 10.2% year over year due to a multimillion-dollar EV locomotive billing that did not occur this year and without which GES would have been up in the quarter versus the prior year's first quarter. However, on a positive side, the core wind turbine business grew 86.1% over the prior year and 16% over the prior quarter, supported by new customers, global expansion, and new products. Our pitch energy modules and related wind energy products lead GES quarter-over-quarter growth. We continue to gain market share with our end customers by developing new products and solutions that they are incorporating. Today, we serve dozens of wind turbine owner-operators, including exclusive partnerships with the top four owner-operators of GE wind turbines, RWE, Inver Energy, Enel, and NextEra. We also saw growth in our new multi-brand PEM turbine platforms. We continue to grow this program internationally, expanding in Europe and Asia with new products for other turbine platforms such as Suzlan, Senvion, Nordex, and SSB. We have now received orders from customers in Australia, India, France, and Italy. Our GES growth strategy centers around power management applications. We rapidly design multiple products, secured patents, and built a strong global customer base and partnerships. Our success is evident in our growing pipeline as we capitalize on numerous growth opportunities to support new power management requirements, significant energy transformation, and wind turbine repowering projects. We're entering Q2 FY 2026 with solid momentum. We've recently added key technology partners such as Kiba, Goshen, and Wulong, who will play critical roles in both wind power management and energy storage. Key initiatives include faster design-to-production cycles, supported by a new design center in Sweetwater, Texas. Sweetwater has one of the largest concentrations of power management and wind turbine engineers in North America. Expanding our design team to accelerate enhanced design cycles prior to transitioning the work to our world-class manufacturing and test group in LaFox is one of our main strategic priorities this year. We expect to have the Sweetwater Design Center operational in Q2 FY 2026. Turning to Power and Microwave Technologies Group or PMT, which includes the electron device group, our legacy tube and semiconductor wafer fab equipment business, and RF and power microwave components group, or PMG. In the quarter, sales growth was led by increased demand in both our RF and microwave components business. As we see growth in RF and wireless applications such as SATCOM, and military applications, including radar, and drone technology. We also saw continued growth in the fourth straight quarter among our semiconductor wafer fab manufacturing customers. Looking ahead, we're excited about the strategic initiatives across PMT and GES, including our ESS or energy storage system program, global expansion of our green energy products, and new technology partnerships. While we are navigating a higher degree of uncertainty associated with the impacts of tariffs and market conditions, we are pursuing opportunities that may come from these disruptions. Investing in infrastructure, expanding our design and field engineering teams, enhancing our in-house design and manufacturing capabilities to support growth demand and innovation. Our field engineering team continues to identify new customers and opportunities. Our global capabilities and global go-to-market strategy set us apart from our competition in the power management, RF microwave, and green energy markets. We have developed a business model that combines legacy products with new technology partners and solutions. Aligning with our growth strategy to deliver engineered solutions to a global customer base. This model differentiates us from our competition. Our GES products and technology partners support our niche product strategies. As it appears federal subsidies will be harder to get under this administration. Looking at our new ESS project and strategy, we are focused in key states that will continue offering large subsidies such as Illinois, Massachusetts, and California. We are expediting our efforts to expand our global market penetration of our power management products for green energy applications, focusing particularly on Europe and Asia. As currently, about 70% of our GES sales are in North America. We are working on these initiatives alongside marketing our services to companies who need partners in the US to manufacture, test, and support products currently made in other countries. We acknowledge that there are a lot of moving parts of end nodes in this market right now. But we have successfully used our global resources and capabilities to mitigate the effect of situations like this in the past. In summary, we remain optimistic about our growing project-based business even though it remains hard to forecast. We continue to increase our technology partners, design opportunities, and engineering staff. We have new technology partners that fill technology gaps. We have a proven strategy of identifying opportunities in this multibillion-dollar market reserve. As a result, we feel FY 2026 will be another growth year for both PMT and GES. And with that, I'll turn it over to Jens Ruppert to discuss Canvas. Jens Ruppert: Thanks, Gregory, and good morning, everyone. Canvas engineers, manufacturers, and sells custom displays to original equipment manufacturers across global industrial and medical markets. It is our mission to deliver high-quality display solutions tailored to our customers' needs. Canvas reported revenue of $8.3 million in 2026, an increase from $7.6 million in the same quarter of the previous year. Our gross margin as a percentage of net sales decreased to 30.9% from 34.3% in 2025, primarily due to product mix and higher inbound freight costs. The backlog at the end of 2026 remains strong at $38.4 million, providing a robust foundation for future business. During this most recent quarter, Henley secured orders from both repeat and new medical OEM customers for a range of applications. Our primary focus remains on robotic-assisted surgery, navigation, endoscopy, and human-machine interface solutions for the control of medical devices. Furthermore, our solutions are widely utilized in various commercial and industrial applications. For instance, our products enhance passenger information systems in trains and buses, and improve HMI technologies used in printing, vending, milling, and packaging equipment. Our initiatives focus on increasing Canvas' visibility and market leadership by seeking new opportunities, building customer relationships, and collaborating within the industry to drive growth. Looking ahead, while the business is still project-focused and can therefore vary quarter over quarter, we are cautiously optimistic about improving demand in our markets. Positive indicators such as increasing requests for quotes and encouraging customer feedback suggest steady growth. Our dedicated sales team continues to explore new opportunities while I focus on implementing strategic plans to ensure sustainable growth and deliver long-term value for our shareholders. I will now turn the call over to Wendy Diddell. Wendy Diddell: Thank you, Jens, and good morning, everyone. While our healthcare business is now included in PMT, I want to provide some additional color as we go through this transition period over the next several quarters. As a reminder, we sell CT tubes exclusively to DirectMed as provided under the terms of the January 2025 sale and distribution agreements. I am pleased to convey we are making excellent progress finalizing production of our Alta tubes. We've also made good strides over the last quarter validating new equipment and materials required to improve our processes for the repaired Siemens tube types. Comparable healthcare sales throughout most of FY 2026 will be lower than the prior year given DirectMed acquired the healthcare parts business. The sale concluded in January 2025, so this unfavorable comp will continue through Q3 FY 2026. We anticipate the financial impact of the retained CT tube business will turn positive in 2026 or shortly thereafter. Last quarter, after the sale of Richardson Healthcare, we discussed our focus on accelerating growth and improving efficiency. In the first quarter, we were pleased to see year-over-year growth in PMT and Canvas, as well as the wind energy portion of GES, reflecting our ongoing investments in these sectors. Of particular importance is the success we continue to see with our engineered solutions growth strategy. We also see some initial benefits from the Big Beautiful Bill. There are implications in the bill that are fostering wind turbine repowers, which lift sales of our wind turbine modules as well as sales of products from our technology partners. Wind management companies need to upgrade their towers to receive comparable tax in coming years. In the quarter, we announced our participation in the REV Illinois program, which provides significant tax credits in return for investment in alternative energy technology development in the state of Illinois. We're making progress developing a world-class battery energy storage demonstration site at our LaFox facility. As we've mentioned before, the demand for battery energy storage continues to accelerate, and our turnkey solutions position us to capitalize on that growth. Our Made in America marketing campaign recently kicked off with the addition of a dedicated business development manager. We are highlighting our capabilities on our website and through trade show attendance. In addition, we are leveraging our existing sales organization and global customer relationships throughout the company. Finally, we are seeing increasing demand for our engineered solutions in the semiconductor wafer fab equipment market. Our large customers in this segment indicate sustained growth relating to the ongoing benefit of AI on equipment demand throughout the world. Rest assured, the management team remains focused on efficiency and cash as well. The end of the significant inventory growth in support of one of our largest suppliers who will soon terminate production of power grid tubes is in sight. In this regard, we are working closely with other partners to ensure ongoing sources of supply, but we are in a good inventory position to execute this strategy over several years. Longer term, we remain committed to driving growth both organically and through strategic acquisitions. We're being thoughtful in our approach. We are looking for the right opportunities to utilize our capabilities and accelerate our growth while making full use of our global infrastructure. We believe our current strategic initiatives will drive revenue and profitability growth over the next several years while we consider longer-term strategic acquisitions that further enhance our business. I will now turn the call back to Edward Richardson. Edward Richardson: Thanks, Wendy. In closing, our results this quarter demonstrate the strength of our strategy and the resilience of our business model. By sharpening our focus on repeatable sales, driving strong cash flow, and building on diversity across power management and alternative energy solutions, we're positioning the company for long-term success. At the same time, we remain disciplined in our commitment to improving profitability. These priorities give us confidence in our ability to deliver sustainable value for our customers, shareholders, and employees as we move forward. We will now open for questions. Operator: Certainly. Ladies and gentlemen, due to time constraints, we ask that you please limit yourself to one question and one follow-up. Again, we ask that you please limit yourself to one question and a follow-up until we all have a chance. For a question, after which we will answer additional questions from you as time permits. As a reminder, to ask a question, please press star 11 on your telephone. Our first question will be coming from Robert Brooks of Northland Capital Markets. Your line is open, Robert. Robert Brooks: Hey. Good morning, guys. I wanted to ask you on where we are with the Ultra 3000s getting onto GE's approved aftermarket vendors list. On your fourth quarter call earlier this summer, you had said that you did a final test in June, and the engineering team sent it to GE Legal, and it was sitting there. But all indications were that the service agreements were not going to be jeopardized if the Ultra 3000s are used. And so I just wanted to hear where that's sitting or any new developments on that. Gregory Peloquin: Yeah. Hi, Bobby. They update me every week. We actually talk to GE about other things, this included. So we're in communication with them. Their engineering team has signed off on it, and the last communication, which was last week, was that it's final signatures from legal. They're still waiting on it. And it was promised to us here in the next week or two. That's the status of it. Once we get that final signature from their legal team, we will send them a number of units. They'll test them, mainly for safety, not for function, but for safety because their installers will be working with it. And so, once that's done, they'll approve it, and then along with that, not only are we pushing, if you will, GE, but also two of our largest owner-operators are also pushing it. Because they have both TSAs and their own repair. So the short answer, which I just went long on, is we expect it to be signed in the next couple of weeks. They'll do the audit of it for quality, safety. And we fully expect sign-off here in Q2 at some point. Robert Brooks: Got it. And then the semi fab sales were up 52% year over year, which was great to see. But I just wanted to make sure I'm thinking about it right. Wasn't Q1 last year we were at, like, a trough level for those sales? And then the follow-up is, would you expect that year-over-year growth rate to continue through your fiscal 2026 or maybe at the minimum, the nominal level of semi wafer fab sales in Q1 stay consistent through fiscal 2026? Gregory Peloquin: Yeah. You're correct, Bobby. Q1 of last year was the lowest quarter of the year for Lam. Although they recovered very well. And we don't get a lot of visibility from them. But the most recent information that they've put in the portal looks like these larger numbers they've been talking about now, which seems like a year or two, we should start seeing strong, strong growth in Q3 and Q4 of our fiscal year. But we'll kind of be at the same run rate here in Q1 and Q2. With large growth in Q3 and Q4 based on their forecast, which is a forecast. Robert Brooks: Thank you. Operator: And our next question will be coming from Anja Soderstrom of Sidoti. Your line is open. Anja Soderstrom: Hi. Thank you for taking my questions. So I'm just curious where the wind orders you noted from several countries around the world. How meaningful were they, and how do they compare to the actual opportunity there? Gregory Peloquin: Yeah. So we've launched it hard to produce this product globally with our customer base. It's a smaller market than North America, but still a very strong market for us. We've been able to do a great job in introducing four new platforms, which will be more popular in Europe than GE, Nordex, Senvion, Suzlon, and SSB. We've done already in part of Q1 alpha and beta testing with customers in Australia, India, France, and Italy. And they've approved that, and we've already received orders in our Q1 from customers in those four countries. And we look at this every week. If I look at the document that we track, all the opportunities that we're currently working on in terms of our teams worldwide, it's getting up to two or three pages. So it's active. It's just an education process for these customers that it's available. And this product is available for their specific turbines. And then, of course, like we did with North America, you'll have alpha testing, beta testing, and then final production. But I would say it's not going as fast as we'd like. Nothing ever does. But we're getting some good traction expanding this capability, if you will, outside of North America. Because as you know, 70% of our business is currently in North America, so it's pretty much nothing but upside outside of North America. Anja Soderstrom: Okay. Thank you. And what do you expect in terms of CapEx for the year given your expansions in LaFox and the Texas Center? Robert Ben: So I'll take that one, Anja. We're estimating it'll probably be in that $5 million range. So a little bit higher than last year, but last year was very low because there were some programs that were pushed into FY 2026. So, again, we'll stick with that $4 to $5 million range. Anja Soderstrom: Okay. Let me also add something. Yes. Wendy Diddell: Real quick. On the REV Illinois program and, Greg, you can jump in here. The CapEx requirements themselves are not significant in this fiscal year. What we're looking at is some equipment that will help improve our manufacturing efficiencies and position us for new opportunities primarily and particularly in the ESS solution. So what we'll be looking at, the REV Illinois program allows us to account for people, in addition to CapEx, in addition to other R&D related expenses. And that's where we're focused on right now with making sure we've got the engineering resources we need, the program managers we need, so that when we get our facility built here in FY 2026, we'll be ready to efficiently and effectively market that. Gregory Peloquin: Yep. Yeah. I mean, this good example is the demo site. That all that development and goes towards the number that we've been to attain to get all the subsidies and rebates. And just one thing in the REV Illinois program. You know, we're going to apply for every single subsidy and tax credit we can get with this green energy program. Luckily, the state of Illinois has even better than California, the most rebates and tax incentives for people doing wind, solar, energy storage, green energy itself. So we found out about this from some local contacts. We applied. You have four years to do it. And it's approximately $8 million in total investment and a number of headcount. But we have four years to do it. So we're not doing things to get that credit. We're doing things to grow the business and increase shareholders' value. But our estimate is we'll hit those numbers very easily, so we might as well take advantage of it. Anja Soderstrom: Okay. Great. Thank you. That was all for me. Operator: Thanks, Anja. And our next question will be coming from Brendan Kinney, Private Investor. Brendan Kinney: Hello. Can you hear me? Robert Ben: Yes. I can hear you, Brendan. Brendan Kinney: Hi. So just one quick question. The operating income, you know, it was mainly due to a nonrecurring gain of $900,000. Could you just fill in a bit more detail about what that was? Robert Ben: Hi, Brendan. This is Robert Ben. First of all, the operating income, as I stated in my remarks, was $1 million, and that did not include the nonrecurring gain, that's below in other income. Just to clarify. So operating income for the quarter more than tripled from last year's first quarter. But to specifically address your question on the $900,000 nonrecurring gain, you know, as I stated in my remarks, that's from a confidential contractual settlement. So, unfortunately, I'm not really allowed to say much about it other than that. Brendan Kinney: Okay. I missed that. Yeah. Thank you. Operator: Thank you. Thanks, Brendan. Star 11 on your telephone and wait for your name to be announced. Our next question will be coming from Chip Rui of Roe Asset Management. Your line is open. Chip Rui: Good morning, guys. Good quarter. I have three questions, so maybe I'll just lay them out. And you can divvy them up. First, I think the when do your comment on the repower initiatives and the Big Beautiful Bill. Could you expand on that? I think the sentiment has been kind of misplaced on you guys around wind anyway because you're not OE. You're pretty much all aftermarket. So now that there's a potential positive from the administration on repowering, I just like to dig into that a little bit more. Secondly, the operating leverage looked great. On the operating income, can you just give us some thoughts on how the rest of the year will play out? Can we continue to see muted expense growth that would contribute to good leverage to the year? And last, maybe, Edward, I'd like the comments on kind of I mean, clearly, the semi business and PMT is a really positive thing to hear. The outlook there. But maybe dig into the other side, the legacy RF business seems like it's perking up too, so maybe some details there. Gregory Peloquin: Thanks, Chip. Hey. I'll Chip, I'll just talk about the first question you had. It's a great question. So and you hit it on the head. You understand it very well that almost all of our business other than Suzlon is aftermarket. And so with this administration kind of removing a lot of the subsidies you get for new turbines, kind of like your old car in college, can't afford a new one, so you refurbish and fix up your current one. What's kind of going on, and the term in the industry is called repowering. Where they, in some cases, drop the turbine to the ground and then replace everything they can, and then they'll have a turbine that's good for another ten to fifteen years. At that time, instead of putting lead acid batteries back into the turbines, many of our customers and some of those larger orders we got in terms of our large, you know, get a 1.25 book to bill in FY 2025. With people ordering parts for this repowering program. So they will put in our pitch energy modules, which will last up to fifteen years instead of the lead acid batteries. And so that decision by the government, which is getting a lot of press, actually, in a roundabout way, supports us and hopefully will expedite some of the large orders we have on our books in terms of pulling them in over the next two to three quarters. The last thing with that and the Big Beautiful Bill, Wendy's talking about if they get it done by the end of this calendar year, they can put some of that money to the side or keep the current rebates and tax credits that they have now. So we're working a lot of our owner-operators to get their forecast between now and the end of the year. So we again, we grew 23% in FY 2025. Fully expect based on the forecast and some of these other things that GES will grow double digits in FY 2026. Wendy Diddell: And then, I guess, operating leverage. I'll take that one. Okay. So in terms of leveraging and operating expenses, you know, I'm looking at our forecast for the full year. It'll be up just a little bit, not a lot over FY 2025. As we invest in some of the programs that Greg has mentioned, you know, in terms of additional engineers, additional people outside the US focusing on green energy growth. But, Chip, one of the things we do well as a company is really managing our SG&A level and keeping that increase under control. So I would not anticipate a significant increase over FY 2025. Does that answer your question? Chip Rui: Yes. And then just thoughts on the RF side. Edward Richardson: Right. Well, our RF tube business still remains about $85 million. We're going through a period where our largest supplier is actually going to exit the business over the next three to five years. And a lot of that equipment and technology we own, so we're in the process of trying to determine if we move it back here or work with other tube manufacturers around the world. But it's put us in a position where we built up our inventory very substantially. On the other hand, that inventory tubes are like good or fine wine. You know, they under vacuum, and they last forever. So we have no issue as far as obsolescence on the tubes, but our difficulty at this point is finding other manufacturers or making a decision to bring some of that manufacturing back here. But what you'll see over the next three or four years is our inventory go down dramatically as far as that's concerned. But the business stays extremely profitable, and we're pleased to be pretty much sole source on tubes around the world. Chip Rui: Okay. That's great. Did you see I thought you said you saw a pickup in the kind of that core business in the quarter and some more positive signs. Edward Richardson: In the tube business, I think it's just about level. What we are seeing is a pickup in the semis to have equipment manufacturing business. You know, we follow Lam's quarterly vendor meetings and listen to them, and they're talking about a very positive increase in their business going forward. In the best year, we did about $40 million with Lam and people in that business. And I think right now, we're running in the low twenties, Wendy, somewhere. So we see an opportunity to grow substantially in that business going forward. Gregory Peloquin: And then on the RF solid-state side, if you bring to that because that was, you know, business that we were in before, that also grew. And we're seeing a large uptick in military defense, RF communications, drones, and then, of course, SATCOM, globally, to get 5G to all these remote areas. That's the business that picked up, and that's where the growth was on the solid-state side. Chip Rui: Okay. That's what I was asking. Thanks for the clarification. And that sounds like that sector, the defense side, it's pretty hot across the board. Do you see kind of accelerating participation into that end market? Gregory Peloquin: Yeah. And it's, you know, because of this global infrastructure that Edward put in place decades ago, it really is a benefit to a company like us. We're seeing a lot of the drone manufacturers are in Europe, and we have a great team there. But, you know, it's military too, but what we're seeing also, you know, urban development, homeland security, disaster management, forest fires. I mean, drone technology is expanding very, very fast, and we have some of the, if not the best, technology partners like 3R Wave that have great products for that. So we're participating in it, and that's where the growth is on the solid-state RF and microwave side. Chip Rui: Okay. Thank you. Operator: And I would now like to turn the conference back to Edward Richardson for closing remarks. Edward Richardson: Well, we want to thank you very much for following our progress and growth. We're really pleased with the performance of the company, and if you have further questions, please feel free to call us at any time. Thank you very much. Operator: And this concludes today's conference call. Thank you for participating. You may now disconnect.