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Operator: Welcome to Blackline Safety's Third Quarter Results Conference Call. The conference is being recorded. I would now like to turn the conference over to Jason Zandberg, Director of IR. Please go ahead. Jason Zandberg: Welcome, and thank you for joining us. On this call today, we will be discussing our fiscal results for the third quarter ending July 31, 2025, which were released earlier this morning. With me today is Cody Slater, CEO and Chair of Blackline Safety Corp.; Blackline's CFO, Robin Kooyman; and Sean Stinson, President and Chief Growth Officer. I will turn the call over to Cody for an overview of our third quarter results. Robin will then discuss the financial highlights before turning the call back to Cody for closing remarks. I'd like to remind everyone that an archive of this webcast will be made available on the Investors section of our website. I would like to note that some of the information discussed in this call is based on information as of today and contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those set forth in these statements. For a discussion of these risks and uncertainties, please review the forward-looking statement disclosure in the earnings news release as well as the company's SEDAR+ filings. During this call, there will be discussion of IFRS results, non-GAAP financial measures, non-GAAP ratios and supplementary financial measures. A reconciliation between IFRS results and non-GAAP financial measures is available in the company's earnings news release and MD&A, both of which can be found on our website, blacklinesafety.com, and on SEDAR+. All dollar amounts are reported in Canadian dollars, unless otherwise noted. With that, I will now hand the call over to Mr. Slater. Cody Slater: Thank you, Jason. Good morning, everyone, and welcome to Blackline Safety's Third Quarter 2025 Conference Call. I am pleased to report record Q3 results as we extended our streak to 34 consecutive quarters of year-over-year revenue growth. In the third quarter, revenue reached $37.6 million, up 12% from last year, and our adjusted EBITDA was $1.3 million compared to $0.8 million a year ago. Looking at the first 9 months of fiscal 2025, revenue was $111.2 million, up 21% and adjusted EBITDA was $3.9 million compared to a negative adjusted EBITDA of $4.5 million from the same period in the prior year. This performance demonstrates that Blackline has firmly entered a phase of sustainable profitability. We're especially proud of the continued strength of our annual recurring revenue, which surpassed $80 million this quarter, up 29% from the prior year. A strong recurring SaaS revenue base is a cornerstone of our business model, providing both visibility and stability as we continue to scale. Another key performance metric for us is net dollar retention, which came in at 128% in Q3. This marks the ninth consecutive quarter above 125%, demonstrating the enduring value our customers see in Blackline's connected safety solutions and the consistent expansion of their deployments over time. On a trailing 12-month basis, our gross margin reached 62%, and has increased every quarter for the past 13 quarters. These improvements reflect both the operating efficiencies we've built into the business and the benefits of greater scale as our customer base and service revenues expand. Last year at this time, we introduced our EXO 8 area monitor. And over the past 12 months, we've expanded the platform with new configurations, including gamma radiation detection. EXO 8 successfully replaced our previous generation EXO area monitor, and it has opened up new addressable markets such as homeland security, while also accelerating growth in markets like Fire & Hazmat and Emergency Response. Last week, the EXO 8 portable area monitor won 2 new Product of the Year awards from occupational health and safety. In total, the EXO 8 has won 7 product awards in the last year, including the internationally renowned Red Dot Design Award and the Preventica/Paris Innovation Award. With 7 major awards and growing interest and adoption, EXO 8 is cementing its leadership in the advancement of worker and public safety. I'm also pleased to highlight a recent major milestone in our international growth strategy. In late August, Blackline announced a multiyear purchase agreement with ADNOC, one of the world's leading energy producers for up to 28,000 of our connected safety devices and associated services. This agreement expands Blackline Safety's footprint in the Middle East and demonstrates our leading global enterprises are choosing our technology to safeguard their frontline workers while driving operational excellence. I'll now invite our CFO, Robin Kooyman to take you through the financial results and key drivers for the quarter. Robin Kooyman: Thank you, Cody. Total revenue in Q3 2025 was $37.6 million, up 12% year-over-year, driven by strong service growth. Service revenue rose 27% to $23.2 million, with software services at $20.4 million, up 28% and rentals at $2.8 million, up 22%. Product revenue declined 7% to $14.4 million as some customers deferred purchases in light of current trade policy uncertainty. Regionally, Canada delivered 21% year-over-year growth, Europe was up 16% and U.S. sales grew 12%. We are particularly encouraged by the improvement in the U.S. where growth rebounded from 1% growth last quarter. Sales in Rest of World declined 17%, reflecting a strong 2024 comparative period. The recent announcement of our long-term purchase agreement with ADNOC in the Middle East is expected to strengthen revenue in Rest of World in future quarters. Gross margin reached a record 64% in Q3 2025, up from 59% in the prior period, resulting in record gross profit of $23.9 million, up 20% year-over-year. Service margins plunged to an all-time high of 81% compared to 77% last year, reflecting scale efficiencies, customer growth and lower costs for connectivity and infrastructure. Product margin softened to 35% versus 38% in Q3 last year, primarily due to entering the third quarter with elevated finished goods inventory to help manage ongoing trade uncertainty, leading to lower production and higher unabsorbed costs in the quarter. Total expenses as a percentage of revenue, excluding foreign exchange, were 67%, equal to the 67% in Q3 last year as Blackline continued to invest in its operational and sales growth initiatives. General and administrative expenses were 21% of revenue compared to 22% in Q3 2024. Sales and marketing decreased to 30% of revenue from 31% a year ago, while product research and development increased to 16% of revenue from 15% of revenue, driven by higher consulting and staffing to accelerate its product development. Adjusted EBITDA improved 64% to $1.3 million compared to $0.8 million in Q3 2024, reflecting the underlying strength of recurring revenues and gross profit expansion. This marks the company's fifth consecutive quarter of positive adjusted EBITDA, demonstrating increasing scalability and resilience of Blackline's business model. The adjustment to EBITDA this quarter includes $0.1 million of certain nonrecurring items. Net loss of $3.2 million for the quarter compared to a net loss of $2.5 million last year, reflecting the foreign exchange loss and higher expenses, partially offset by stronger revenue and gross profit. Blackline's cash and short-term investments totaled $48.7 million at the end of the third quarter, up 13% from year-end fiscal 2024. The company had available capacity on the senior secured operating facility, including its accordion feature of $19.9 million as of July 31, 2025, for total available liquidity of $68.6 million. Our third quarter results underscore the strength of our high-margin SaaS platform, which continues to perform well despite the challenging macroeconomic environment. Looking ahead, while uncertainty around tariffs and global trade dynamics may persist, we remain confident in our ability to expand market share and deepen relationships with enterprise customers worldwide. A prime example of this momentum is our recently announced long-term purchase agreement with ADNOC. This agreement is a clear testament to the growing global demand for our connected safety solutions. We remain firmly committed to delivering positive adjusted EBITDA for the full fiscal year 2025. Our strong ARR growth consistent gross margin expansion and disciplined approach to managing operating expenses have positioned us well for sustained profitability. With that, I will hand it back over to Cody to discuss our outlook and provide closing remarks. Cody Slater: Thank you, Robin. As we close out another record quarter, I want to take a moment to look at our progress since we introduced the world's first cloud connected gas detection product in 2017. In just 8 years, we have grown into a global leader with trailing 12-month revenue of nearly $150 million, an annual recurring revenue base of more than $80 million and 34 consecutive quarters of year-over-year revenue growth. In fact, we have generated $0.5 billion in revenue from connected safety solutions since the launch of the G7. Today, Blackline protects the workforces of some of the world's most recognized organizations across energy, industrial and consumer goods sectors. This journey underscores the strength of our vision to create a safer, more connected industrial workplace. With more than 2,250 customers in over 75 countries and 165,000 workers protected, our solutions are trusted by leading and global brands to safeguard their people and optimize operations. Innovation has been central to Blackline since the launch of our first connected gas detection product. Since then, we've built an award-winning product portfolio that combined with our cloud-hosted software and 24/7 monitoring defined the connected safety market we pioneered and built from the ground up. While we're proud of how far we've come, we're even more energized by what's ahead. Our teams are actively advancing new innovations that build on our proven successes, and we're looking forward to introducing new products in the coming year that will further strengthen our competitive lead and expand our market opportunities. As we continue to push the boundaries of what's possible in connected safety and data-driven innovation, I'm thrilled to welcome Vasi Philomin to our Board. Vasi recently joined Siemens as Executive Vice President and Head of Data and Artificial Intelligence. Prior to that, he led generative AI at Amazon Web Services, where he played a pivotal role in developing foundational models and launching AWS Bedrock. Over his career, Vasi has held senior leadership roles at Amazon and Philips, or a PhD in computer science, along with multiple advanced degrees and holds more than 100 patents. With over 2 decades of experience at the forefront of AI, computer vision and enterprise innovation, Vasi brings invaluable experience to Blackline. We're especially excited about the perspective he'll offer as we look to harness our more than 300 billion data points and advance our AI strategy. In closing, I want to highlight the strong financial foundation we've built. With consistent top line growth, steady improvements in gross margins and multiple quarters of positive adjusted EBITDA, Blackline is demonstrating the power and resilience of our business model. This momentum positions us well as we look ahead to fiscal 2026, where we see the company moving from strength to strength as we continue to deliver value to our customers, our employees and our shareholders. I'm deeply grateful to our customers for their trust, to our employees for their dedication and innovation and to our shareholders for their continued confidence. Thank you all for your ongoing support. I'll now turn the call back to the operator for questions. Operator: [Operator Instructions] The first question comes from Doug Taylor with Canaccord. Doug Taylor: Congratulations on the quarter and on the recent ADNOC win. I know there was a lot of work that went into that, so it's a great result. So let me start there. It's only been a couple of weeks since that rollout was announced and probably too early to talk about how it's going. But I mean, I guess I'll phrase a question there about what milestones we should be looking for to understand your progress with such a large potential footprint and vision there over time? Can you help us with that? Sean Stinson: Yes. Doug, this is Sean here. Yes, it's a really important win for us, and it is the result of years and years of a lot of hard work and investment in that territory and something we're very proud of. Going forward, we talked about the potential for the LTPA, which isn't -- it's not contracted that there's a requirement for ADNOC to buy a certain number of instruments, but it allows them to buy up to a certain -- at a protected price. So in the future, I think as we make significant progress along milestones, we'll probably have some releases that go out to let the market know how we're doing against that contract. But it continues to be good right now. We've done some rental business with ADNOC in the past. So the initial experience that they've had with our products has been very good. So we have a lot of faith that the continued rollouts will be done very well. And we've got some people in the region already that we've hired that will ensure that the rollout is strong and that the initial support that they receive is very good to keep things moving in a positive fashion. Doug Taylor: Okay. And then maybe as a follow-up. Has that announcement since been made public woken up any other opportunities for similar size or scale deployments either in the region or perhaps with other NOCs globally? Sean Stinson: Yes. Word spreads in the industry. So before the press release came out, other players in that market knew that we were very far along the path with ADNOC and that has spurred a lot of interest. So -- and that's what we want. We've kind of talked about before how part of our growth strategy is to find Tier 1 clients in different industries and other companies look to the leadership of those businesses and ADNOC is just like that. There are a few players in that region that are really looked upon by the other businesses in the territory, and they take note of how ADNOC invest in safety. So this is a very important strategic win for us, and we are seeing the results of that in terms of the interest we're getting from other state oil companies and other businesses in the region. Doug Taylor: Okay. And then if we step back from that large and important win, you've had this infrastructure spending impact. I think you've referred to it as a trade policy uncertainty. It's impacted at least a couple of months of this fiscal year. I know hard to paint the whole market with one brush, but for Cody and/or Sean, I mean, how do you feel about how things sit today here in terms of pipeline velocity outside of ADNOC, I should say? Sean Stinson: Yes. The U.S. is the most effective market, I would say, by some of these. There's a little bit of effect in others, but it's really something that we see in the American market. And it's actually twofold. The price of oil being below $70 presents a bit of a headwind. And then we have the uncertainty in the cost base with a lot of our industrial clients which stems partly from tariffs, but I think there's other factors that play there as well. So those 2 present some type of headwind, and then our job is to overcome those headwinds. So I think you see sort of some of that result in the Q2 and Q3 product sales. You can see quantitatively what we're at there. But the pipeline is very strong. We have a very deep pipeline. The team is good at managing that pipeline. And now our job is really to just try to detect any risks and deals a bit sooner than we have in the past and try to mitigate them and try to push them along and in some cases, get creative with what we're doing with our customers to make sure that they can still adopt our solutions and that it fits into their budgets and their ability to deploy. Doug Taylor: All right. Let me just sneak one last one in for -- probably for Robin. I mean gross margins really stood out here, particularly in the services side. I think you talked about scale, some lower connectivity costs, things like that. Those seem like permanent improvements, anything that should stop us from journaling 80% plus gross margins for in the services business in our models? Any comments there? Robin Kooyman: Doug, thanks for the question. I mean, I think we're always looking at ways that we can optimize the business. And I think that was a great example of success this quarter. I would want to be conservative when I'm thinking about how we're running the business, but we're really pleased with the outcome we saw in that margin this quarter. Operator: The next question comes from David Kwan with TD Cowen. David Kwan: The rental revenue was pretty solid this quarter. It was up sequentially and what I think is typically a seasonally weaker quarter. Given the macro headwinds faced by many of your customers, are you seeing more customers actually looking to rent devices as opposed to buying devices and kind of waiting until conditions hopefully improve before they might hold the trigger? Sean Stinson: No. We tend to not see that type of flow between rentals and purchase. I would say that -- I mean, to speak specifically about how the rentals business works, like it's very project specific. So rentals is typically driven by -- in the oil and gas business, it's driven by maintenance work on large facilities. So turnarounds and things like that. There's other places where that -- where the rentals are really popular, but a lot of it is driven by rentals work on chemical assets, oil assets, things like that. And what we find -- and I'm not seeing this right now, but what we might see in a very tight market is that projects are delayed. And so what that looks like is the company might delay a turnaround for another year, and then that would create a softened demand for rentals. When we started to see the headwinds back in, I would say, like February, March, I started to sense that there might have been some headwind in the market. We started asking our rental clients if they were slowing down projects or anything, and they all came back and said, "No, we're not delaying projects right now." So we're still seeing strong demand in rentals despite the uncertainty in the cost base, companies are still carrying forward with their maintenance projects. But that is -- that area, that rentals business would be another leading indicator for me. So I continue to keep my eyes on that. And if we see rental projects delayed, then that would send a signal to me that there might be a further tightening in the market for us. David Kwan: That's great color, Sean. And maybe was it also just the investments that you've been making in building up the inventory for the rentals business that helped this quarter as well? Sean Stinson: Yes. It's -- we're always trying to manage the inventory in that and get good asset utilization. So we track our asset utilization, but it is a business where we need to put inventory in order to rent it out. So we think we've got good return on the invested capital in that business, it does provide a profit to the business. And we continue to just be very strategic about how we invest in that because it's also a great way for customers to experience what Blackline is. Our product, the way we take care of our customers, the whole business. So it is a very good way for us to build business with customers that haven't experienced us yet. So we talked about it being a lead gen program as well. So there's a lot of reasons why we do it. David Kwan: That's helpful. And Robin, just on the gross margin side, I know Doug asked about the services side. How about on the product gross margin side, you talked about the decline there just due to, amongst other things, just lower production as you had a higher finished goods inventory heading into the quarter. I saw the finished goods inventory drop this quarter. And given also Q4 tends to be a seasonally stronger quarter for you guys, should we expect those gross margins to improve? Robin Kooyman: David, it's Robin. Thanks for the question. So finished goods inventory declined 2% from year-end 2024, and it's by over $1 million sequentially. So look, we remain committed to optimizing our working capital and proactively addressing the trade policy uncertainty. And with that comes balancing product margins. So we'll be very keenly looking at the different factors as we work through Q4 here. David Kwan: All right. And then maybe just one last question. There were a couple of large deals that slipped from Q4 last year. I think you had expected that they were going to hit in Q4 this year. Is that still the case? Sean Stinson: Well, one of them came in. And the other one, David, is one that the client has extended further. So it was a large renewal contract. And what we saw was they are extending their service with the current product that they have. And so we're expecting that now to be a renewal likely around the beginning of Q2 -- our fiscal Q2 of next year. And maybe I'll just kind of go back to your question about rentals that you asked the question about do we see demand shifting from rentals to -- or from purchase to rentals in a tight market. What we actually see more of is customers just delaying the renewal by a few months. So we still get service revenue from that. But the hardware deals in the pipeline might stretch a little bit. Operator: The next question comes from Amr Ezzat with Ventum Capital. Amr Ezzat: Just wanted to go back on your comments on U.S. products rebounding this quarter. And I'm wondering if you can give us more color on how you feel, I guess, customer behavior is evolving into Q4. Would you still characterize the environment as cautious? Or do you feel goods that we continue to sort of see that rebound? Sean Stinson: Yes. I would still say it's cautious. The amount of the rebound is small enough, and I would say that it's sort of in the noise. Like to me, it doesn't present a significant change one way or the other, although it is -- by the numbers, it is a rebound, but we're still seeing some cautious behavior out there. And like I mentioned, it's coming both from the cost base uncertainty, which in part is driven by tariffs. I think there's some now concern about recession. And so we're seeing a bit of nervousness on that front. And then with the energy base, you've got the lower oil price. So a few headwinds there. But again, the product is best in class. We have a very passionate customer base. We have a very deep pipeline. So really what I see it affecting us velocity, but not necessarily sort of business fundamentals, if you want to think of it that way. Amr Ezzat: Understood. I mean there are a couple of moving parts with the ADNOC deal and, I guess, like some cautious behavior. So I'm wondering like going into Q4 product sales, we shouldn't expect that to revert to the usual seasonal strength because there are still like factors like the ones you've described that might impact that. Is that a fair statement? Cody Slater: It's Cody here, Amr. I'd still say we -- Q4 is always our seasonally strongest quarter. We still expect to see that this year. The question -- to Sean's point, is it -- some of that headwinds we're seeing going to reduce that? That's entirely possible. I'd be a little cautious with those numbers. But having said that, none of that really impacts the longer term, and we still expect to see Q4 being our strongest quarter for the year. Amr Ezzat: Understood. Understood. That's very helpful. Then I'm just wondering with the recently rolled out updates that you guys announced ahead of NSE, on the Blackline Live. Are these features included in existing service tiers? Or should we think of them as services that would be monetized separately? I guess more broadly, should we think of them as ARPU drivers or really features that are meant to deepen customer stickiness over time? Sean Stinson: It's a bit of both. First off, they're not individually monetized. They are included in some of the higher level service plans we have. So that will increase the ability to drive sales into the higher level of service plans. So they will indirectly be ARPU drivers. And they are designed to both increase velocity of new sales and stickiness. They're really, I think, sophisticated connected safety-type features that put us ahead of the competition even further and the type of things that we can leverage going forward in combination with other new features that we have planned over the next few years. Operator: The next question comes from Frederic Bastien with Raymond James. Frederic Bastien: Congrats on the solid execution so far this year. A lot of the questions have been asked, but I just wanted to build on the one around revenues in Q4 and recognizing that this is typically your seasonally strongest quarter, but also acknowledging that we've seen a couple of consecutive quarters of negative growth. Is it fair to assume you could land somewhere in between, like we could see positive revenue growth, but maybe in the single digits? Cody Slater: Yes. I mean, it's fair to say that, Frederic. One thing I'd point out about when you look at -- like, firstly, our growth has been strong in every quarter. It's a product you're referring to there. One thing I think one to keep in mind with product is that for us, it's really about the new customer acquisition. It's about how many new units we've sold that will continue to drive that ARR going forward. And really to compare that number, you have to compare what we were selling 4, 5 years ago. 4, 5 years ago, we were selling $3 million, $4 million with a product a quarter. At that $14.5 million, $15 million over the last couple of quarters, that still is showing that we're gaining market share every single quarter. So to answer your question, we're seeing -- Q4 is always our strongest. There's lots of seasonality aspects to that. Announcement of things like ADNOC will help those. You still have a little bit of caution to some of the headwinds as to what the top line number is but both on the prior year. But again, I think a real focus should be is the continued gain in market share the company is generating every quarter here. Frederic Bastien: And just curious, I think I know the answer, but over the next 3 years, which region excites you the most? Sean Stinson: It's a tough one, Frederic, because for the employees on the phone, all of them excite me. There's different challenges in every region. So really, it is true that there's a different challenge and a different excitement level. I think the Middle East, though, on a percentage basis, the Middle East has the greatest ability to grow. That's definitely a new frontier for us. We have an incredibly strong team that we've built out there that we're continuing to build. So that one is, I think, really, really interesting. But I'm looking forward to some other regions that we're in right now, really probably taking off in -- starting in 2 years. So all really good. I think we're going to experience strong growth everywhere, but that Middle East region is exciting. And partly that's just because it's brand new for us. It's a new territory. There's some really big deals out there that are going to be really impactful to the company's future. Cody Slater: It's also -- sorry, I was just going to add that. From our end, I think the other exciting is looking at new verticals like the Fire & Hazmat, we've talked about. I mean, the growth in there has been extreme, and we have lots of things coming down the pipe that we think is going to accelerate that as well as petrochemical is going to be a bigger portion of our play. So it's both geographies and verticals that are the opportunities going forward for that growth. And I think as Sean says, it's anything that's new is always a bit exciting because it means new challenges for the whole company like it's -- every customer has different requirements, every customer has different values looking for from what we bring to the table. So we're learning something every time we get into a new geography, a new vertical, a new market, and that's always exciting. Operator: Next question comes from John Shao with National Bank Financial. Meng Shao: I have a question on macro. I understand uncertainties still impact some of the customers' decision-making. But going forward, what do you think needs to happen in order to get those customers back to the table? Is it new product cycle, new compliance requirement or even AI and data? Cody Slater: I think the core thing when we're talking about what's happening in the market right now, as Sean mentioned, most of what we're seeing in customer is really on that renewal side or just the delay in purchase -- and that's just a timing element. Like just these things stretch out, it takes a little longer. Some of that can be sped up with new products, new enhancements, new capabilities, give more value prop to the customer to make that decision sooner. But what we're really -- what we really see happening in most of these cases is just simply people putting off those decisions for a period of time. And eventually, you have to make that decision at the end of the day, the products that they have are getting too old, they need to replace them, it's time to move on. But for sure, as we're adding new products, new capabilities to what we do, we're giving them just more reasons to choose Blackline over somebody else. Meng Shao: Got it. And I have one more question specifically on the compliance environment. I had discussed this one with one of the investors out there. So do you get a sense that because data is everywhere now the compliance might need to adapt and include connectivity is one of the requirements. If so, I can imagine it's going to be a big tailwind. So where are we in terms of that journey today? Cody Slater: I think those kinds of changes in the structure, particularly if there are regulatory changes take a long time, John. I do think they're going to go down that path, like that's sort of how that whole OSHA world has developed over the years, but I wouldn't say that it's something that's going to happen really quickly. Operator: Next question comes from Martin Toner with ATB Capital Markets. Martin Toner: Any evidence of competitive -- competitors taking price increases? And can you kind of just give us an update on your strategy with pricing to date and going forward? Sean Stinson: Yes, our competitors tend to raise prices sort of in the 5% band every year. It's -- I'd say it's just keeping up with inflation typically is what people are trying to do over there. So that's what we've seen to date. Our pricing strategy is -- I'd say we price what we think the value of what we provide is. So we are a premium product. But we're constantly looking at market pressures to understand what the market can bear. We want to be an innovative solution, and we want to offer it at a fair price. So that's -- at our pricing strategy, I'd say it's value-based, but it's always -- there's no equation for these things. So it's a lot of gut feel and trying to understand what the market can bear. Does that answer it, Martin? I feel like it's a bit of a short answer to your question. Martin Toner: No, that's a good answer. And one reason I asked the question was it appears that the tariff burden on U.S. devices for U.S. manufacturers would be -- would exist. And I guess, I was wondering if that created some increased level of price taking. Sean Stinson: I mean we -- I would say some of our U.S. competitors might have a bit more of a challenge than we do because of the tariffs on Chinese components going into the United States. And the -- a lot of the electronic components that are used in these devices have come through China. They come from China. So I think some of our U.S. competitors will have a harder time protecting their margins than we will. And so we haven't seen them increase prices drastically. I think they're probably in a bit of a wait-and-see mode, trying to understand if the tariffs will stick long term. And given that if your cost base goes up by 55% on your COGS, that's an enormous amount of price you have to increase in the market in order to maintain your margins. So -- and I think that, that could be very detrimental to their sales. So I feel like I don't know what's going on in their boardrooms, but I imagine there are some conversations about where do we move pricing and how long are the tariff is going to last and how much margin erosion can we bear. We don't have to have those conversations. Robin Kooyman: Yes. Just as a reminder, I'm sure you know this, Martin. Nearly all of our products are compliant with USMCA. So they're currently sent from tariffs for goods going from Canada into the U.S. right now. Cody Slater: And to Sean's point, when you look at our competitors, they all -- I mean, your core U.S. competitors manufacture in the U.S., but there's a portion of their product -- the portion of the material in their product that definitely have to come from China and other tariff-bearing entities. But I think in most of those cases, they're going to play a bit of a wait-and-see game before they do anything from a pricing standpoint. Martin Toner: Perfect. Yes, I think that's an important dynamic to understand. And you mentioned in the press release that the Rest of World decline was impacted by global economic uncertainty. Can you kind of like characterize what customers in that geographic segment are kind of thinking? And to what extent do you think that pressure will alleviate? And to what extent is there like pent-up demand building? Cody Slater: I think one thing I'd add in that Rest of World segment is it's still one of our lumpy segments. It's because it's early in its penetration. You have a good quarter with a couple of big sales in it. You have a lower quarter. I think that's probably a little bit more of what we saw in Q3 was comparable with a strong quarter from prior. But I think that as an overall market, it's really about that build and that establishment that we've been doing that you're seeing in the Middle East now, and you'll start seeing going forward from there. But look at the variance between the 2Qs is being more impacted by some large orders and success in the prior period. Martin Toner: Makes sense. Fantastic. And last one for me. Do you expect any significant working capital changes next year? Robin Kooyman: Martin, thanks for the question. We've talked a little bit on this call about product margin and what we're doing on the inventory front. And that's really helping us just address some of this trade policy uncertainty. That finished goods inventory has declined. So we'll be looking to sort of proactively manage and balance both the product margin side of things and then the trade policy uncertainty. Additionally, we're always looking at optimizing working capital. I would say it's gone up like a little bit in this period versus other periods in fiscal 2025. Some of that is the result of us paying off current liabilities, such as related to the securitization facility. So we'll just keep that sort of put and take in mind as you look at that number. Operator: This concludes the question-and-answer session. I would like to turn the conference back over to Cody Slater for any closing remarks. Please go ahead. Cody Slater: Thank you, operator. And I'd just like to thank everyone today for their attention. We look forward to talking to you again in a few months as we finish our 2025 and enter 2026. Thank you again. Operator: This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.
Operator: Hello. My name is David, and I'll be your conference operator today. At this time, I'd like to welcome you to Optical Cable Corporation's Third Quarter of Fiscal Year 2025 Earnings Conference Call. [Operator Instructions] Please note that today's call will be recorded. Your host today will be Mr. Dean Sterrett. Mr. Sterrett, you may begin your conference. Dean Sterrett: Good afternoon, and thank you for joining us for Optical Cable Corporation's Third Quarter of Fiscal 2025 Conference Call. By this time, everyone should have a copy of the earnings press release issued earlier today. You can also visit www.occfiber.com for a copy. On the call with us today are Neil Wilkin, President and Chief Executive Officer of OCC; and Tracy Smith, Senior Vice President and Chief Financial Officer. Before we begin, I would like to remind everyone that this call may contain forward-looking statements that involve risks and uncertainties. The actual future results of Optical Cable Corporation may differ materially due to a number of factors and risks, including, but not limited to, those factors referenced in the forward-looking statements section of this morning's press release. The cautionary statements apply to the contents of the Internet webcast on occfiber.com as well as today's call. With that, I'll turn the call over to Neil Wilkin. Neil, please begin. Neil Wilkin: Thank you, Dean, and good afternoon, everyone. I will begin the call today with a few opening remarks. Tracy will then review the third quarter results for the 3-month and 9-month periods ended July 31, 2025, and some additional detail. After Tracy's remarks, we will answer as many of your questions as we can. As is our normal practice, we will only take questions from analysts and institutional investors during the Q&A session. However, we also offer other shareholders the opportunity to submit questions in advance of our earnings call. Instructions regarding such submissions are included in our press release announcing the date and time of our call. OCC had a strong third quarter as we delivered significant net sales growth and gross profit expansion during both the third quarter and the first 9 months of this fiscal year. Net sales increased 22.8% during the third quarter of fiscal 2025 compared to the same period last fiscal year and increased 12.8% during the 9 months ended July 31, 2025, compared to the same period last year. These results reflect the OCC team's ability to capture additional opportunities as demand for our products increased in many of our markets. We also continue to see the benefits of OCC's significant operating leverage during the third quarter as our 22% -- 22.8% year-over-year increase in net sales drove gross profit growth of 61.2%. I'm pleased to report that the OCC team is executing well against our long-term growth strategy. As previously announced, OCC and Lightera entered into a strategic collaboration agreement in early July to expand product offerings and solutions to the enterprise sector, the data center sector as well as expanded presence in certain other sectors. As part of this strategic collaboration, OCC and Lightera have combined portions of the product portfolios of both companies to deliver additional integrated cabling and connectivity solution offerings which will include certain Lightera products being offered and sold by OCC. In connection with this strategic collaboration, Lightera made an investment in OCC with Lightera holding 7.24% of the company's outstanding common shares. We anticipate our strategic collaboration with Lightera will provide growth opportunities for OCC. As we look ahead to the end of fiscal year -- of this fiscal year and into 2026, we remain focused on disciplined execution and capitalizing on growth opportunities to drive shareholder value. And with that, I'll turn the call over to Tracy, who will review in additional detail, our third quarter of fiscal year 2025 financial results. Tracy Smith: Thank you, Neil. Consolidated net sales for the third quarter of fiscal 2025 increased 22.8% to $19.9 million compared to net sales of $16.2 million for the same period last year, resulting from increases in net sales in both our enterprise and specialty markets. Sequentially, net sales increased 13.5% during the third quarter of fiscal year 2025 compared to net sales of $17.5 million for the second quarter of fiscal 2025. Consolidated net sales for the first 9 months of fiscal 2025 increased 12.8% to $53.2 million compared to net sales of $47.2 million for the first 9 months of fiscal 2024 with sales increases in both our enterprise and specialty markets. At the end of our third fiscal quarter of 2025, our sales order backlog and forward load was $7.1 million compared to $7.2 million as of April 30, 2025, $6.6 million as of January 31, 2025, and $5.7 million as of October 31, 2024. Turning to gross profit. Our gross profit increased 61.2% or $2.4 million to $6.3 million in the third quarter of fiscal 2025 compared to $3.9 million for the same period last year. Gross profit margin or gross profit as a percentage of net sales increased to 31.7% in the third quarter of fiscal 2025, up from 24.2% in the third quarter of fiscal 2024 and 30.4% for the second quarter of fiscal year 2025. Gross profit increased 39.5% to $16.3 million in the first 9 months of fiscal 2025 compared to $11.7 million in the first 9 months of fiscal 2024. Gross profit margin increased to 30.6% in the first 9 months of fiscal 2025 compared to 24.7% in the 9 months of fiscal 2024. Gross profit margin for the third quarter and first 9 months of fiscal 2025 was positively impacted by production efficiencies created by higher volumes and the resulting positive impact of our operating leverage. Additionally, our gross profit margin percentages are heavily dependent upon product mix on a quarterly basis and may vary based on changes in product mix. SG&A expenses increased to $5.7 million or 9.5% in the third quarter of fiscal year 2025 compared to $5.2 million for the same period last year. SG&A expenses as a percentage of net sales were 28.8% in the third quarter of fiscal 2025 compared to 32.3% in the prior year period. SG&A expenses increased to $16.9 million or 8.2% during the first 9 months of fiscal year 2025 compared to $15.7 million for the same period last year. SG&A expenses as a percentage of net sales were 31.8% in the third quarter of fiscal 2025 compared to 33.2% in the prior year period. The increase in SG&A expenses during the third quarter and first 9 months of fiscal year 2025 compared to the same periods last year was primarily the result of increases in employee and contracted sales personnel-related costs and shipping costs, included an employee and contracted sales personnel-related costs for compensation costs and sales incentives. OCC recorded net income of $302,000 or $0.04 per basic and diluted share for the third quarter of fiscal 2025 compared to a net loss of $1.6 million or $0.20 per basic and diluted share for the third quarter of fiscal 2024. OCC recorded a net loss of $1.5 million or $0.19 per basic and diluted share for the first 9 months of fiscal year 2025 compared to $4.6 million or $0.59 per share for the first 9 months of fiscal year 2024. With that, I'll turn the call back over to you, Neil. Neil Wilkin: Thank you, Tracy. At this time, we would normally take questions from analysts and institutional investors -- live questions. However, we have received a number of questions in advance of the call today, we believe would be of interest in most participants. So we're going to go through those questions first, and then we will address any remaining questions live that may come from analysts and institutional investors. Dean, if you could please begin reading the questions we've received in advance, and we will respond. Dean Sterrett: Absolutely. First question, can you comment on what you're seeing in your traditional markets and how it has evolved through the year? Neil Wilkin: Yes. We are generally seeing strength in our targeted markets this year, and that's been the case with others in the industry as well. We believe we're benefiting from our strong market position, and that's been reflected in our top line results this year, including in the third quarter of 2025. Dean Sterrett: Can you comment as to what you're seeing in terms of AI impact? It seems like there should be a significant opportunity for you. Neil Wilkin: Well, as folks know, and I believe it's fairly clear that AI is growing or some would even say exploding because of all the demand. And this is positively impacting our industry generally. The impact is seen in the growth of hyperscale data centers in particular. Currently, OCC's products are more suited for what we would call Tier 2 and Tier 3 data centers. However, we do believe we will see positive impact from AI and data center growth. However, we also believe the biggest growth will be seen by those companies targeting hyperscale data centers. Dean Sterrett: Yes, apologies. CommScope recently sold the vertical that is competing with you on Amphenol. Do you expect any impact from that? Neil Wilkin: As our listeners may expect, we are following these developments, but at this time, we do not believe this will have an impact on OCC. Dean Sterrett: Next question. The backlog is down versus Q2, but Q4 is usually the strongest quarter. Does this decline in backlog mean that the seasonality is not expected to be what we'd normally expect from Q4? Neil Wilkin: Tracy is going to take the next few questions here. Tracy Smith: Thanks. I would describe the decrease in backlog and forward load of approximately $100,000 as more of a leveling cost rather than a decrease, certainly not a significant decrease. And possibly more related to timing of shipments and order entry than indicative of demand. At the end of Q3, our backlog and forward load was still higher than the backlog and forward load at the end of both fiscal 2024 and the first quarter of fiscal 2025, which is basically where you see the seasonality impact. Dean Sterrett: Thanks, Tracy. How much indicative backlog decline is a result of potentially weaker demand? Tracy Smith: Well, as I mentioned in my response to the previous question, this was a very minimal decline. We don't believe it is an indicator of weaker demand at this point. As Neil said, we're generally seeing strength in our target markets and believe demand is holding strong. Dean Sterrett: Appreciate that. Next question is why was the gross margin 31.5% with higher sales levels in the quarter considering in Q4 last year, it was 33.5% with lower sales growth? Tracy Smith: As we've mentioned in our previous filings, our gross profit margin varies depending on product mix in addition to volumes. We believe this was a result of product mix when comparing the 2 quarters. Dean Sterrett: Next question. Do you think you will need to increase capacity if you have plans to materially invest in extra capacity? Tracy Smith: We believe we have the capacity to capture the exciting growth opportunities out there. We're currently filling some open positions in our manufacturing operations, given anticipated demand, particularly in Roanoke. And it does take some time for our production employees to get fully up to speed. But other than filling open requisitions to meet anticipated demand, we don't have any needs or plans to significantly invest in extra capacity at this time. Dean Sterrett: Next question. Is the current OpEx level sustainable? Or should we expect any material expenses moving forward? Tracy Smith: As we've described in the past, we believe our operating leverage has a significant positive impact on our results as revenues increase. We also believe that our operating expenses should be generally sustainable at current and even higher sales levels. Dean Sterrett: Next question. Could you elaborate on the structure of OCC's Lightera cooperation? Will OCC be manufacturing Lightera branded products? And will OCC hold any Lightera equipment inventory? Neil Wilkin: Thanks, Dean. I will answer the number of questions that we've received regarding Lightera. I will say, as we get started and going through these questions that there's a lot of details about our collaboration that we're not prepared to share and that I think is consistent with the way we've typically operated. With respect to the question at hand here, we have previously disclosed the purpose of strategic collaboration that OCC has entered into with Lightera was to expand product offerings and solutions, especially for the data center and enterprise sectors. We believe that both OCC and Lightera will benefit from opportunities generated by the ability to expand fiber optic and copper cabling and connectivity solutions in the enterprise sector, the data center sector as well as an expanded presence in certain other sectors. As you all know, Lightera has made investment in OCC, and we believe this reflects their confidence in OCC and resulted in Lightera holding 7.24% interest in OCC. We have on file the stock purchase agreement related to this investment by Lightera, and that was filed with the SEC in a Form 8-K shortly after the announcement on July 7. Dean Sterrett: The next question on this topic. How will Lightera add value to OCC? How will Lightera help you to increase sales? Neil Wilkin: Well, as we've said and one of the benefits of working with a company like Lightera is they are a global leader in optical fiber and connectivity solutions. And we've successfully worked with Lightera and its predecessor OFS Fitel for decades. Our collaboration with Lightera expands on our product offerings and solutions, especially for data centers and enterprise sectors, and we believe OCC will benefit from that. We also -- we think not only our customers will benefit, but also our shareholders as well. Dean Sterrett: Next question. It seems like OCC has already started to benefit from Lightera sales and marketing efforts. Is Lightera going to spend sales and marketing resources to generate business for the partnership going forward? Neil Wilkin: Lightera did exhibit at the BICSI trade show last month. And at the invitation of Lightera, OCC did provide some personnel at the Lightera booth at BICSI. As part of this new collaboration, we expect Lightera and OCC will be working together in various different ways. However, we are not commenting on our specific sales and marketing strategies, which is consistent with OCC's past practice. Dean Sterrett: Thanks, Neil. Next question. Is the goal with Lightera collaboration still to target Tier 2 data centers? Or does this open the door to hyperscalers and larger data centers? Neil Wilkin: OCC continues to focus on the products we offer, which tend to be more suitable for what we would call Tier 2 and Tier 3 data centers that does not rule out the possibility of us seeing benefits from the growth that's happening in the hyperscale market, but our core products are really -- and solutions are fairly focused on Tier 2 and Tier 3. Dean Sterrett: The next investor question. Can you give us an impression of the opportunity here, maybe a typical ticket size for Tier 2 or Tier 3 data centers given the combined offerings? Neil Wilkin: Well, I will say that the opportunities in Tier 2 and Tier 3 data centers really vary in size. It can include anything from greenfield builds to moves ads and changes. And as you all know, our practice -- it's our practice that we do not provide forecast of expected sales opportunities. So -- that's where -- I think that's what we can say about that. Dean Sterrett: Next question is, did Lightera want to buy more of the equity than the 7.24% interest? Neil Wilkin: Well, we're not going to comment or get into the details of our negotiations with Lightera, and that shouldn't be a surprise. We do think very highly of Lightera and Lightera team, and we believe their investment in OCC reflects their confidence in our business and the work we will do together. We're very excited to be working with Lightera and look forward to that continuing to develop over time. Dean Sterrett: We received a number of questions with respect to specific sales or financial outlook with respect to the strategic collaboration with Lightera. Can you speak to that? Neil Wilkin: Again, consistent with OCC's past practice, we are not going to give specific guidance or projections. What we will say is that we are confident that our strategic collaboration with Lightera and the resulting Lightera-OCC integrated solutions will enable us to offer -- make -- provide an offering that will expand our market opportunities, accelerate OCC's sales growth and will create value for OCC and its shareholders. Dean Sterrett: We have no other questions that were provided in advance of the call today at this time. Neil? Neil Wilkin: Okay. Thank you, Dean. So now as we usually do, if any analysts or institutional investors have any remaining questions, we are happy to answer them. David, if you could please indicate the instructions for our participants to call in the questions they may have, I'd appreciate it. Again, we are only taking live questions from analysts and institutional investors. Operator: [Operator Instructions] And we'll take our first question from [indiscernible] Discovery. Unknown Analyst: Congratulations on a wonderful quarter. My first question is that you saw meaningful growth in the U.S. market this quarter. And in the past quarters, the U.S. was not growing that fast. So I was wondering if you can give us a little bit of color about which verticals caused this strong acceleration and which products, it will be great. Neil Wilkin: I appreciate the question. Part of the reason why we're seeing growth in addition to the work that our sales and business development teams are doing successfully is, you'll recall that in most of fiscal year 2024 and before that, the whole industry was in a bit of a downturn. So we're benefiting that, but we're also benefiting from our strong position in the marketplace. It's doing well. I don't think we can speak and we typically don't speak to the specifics of which markets and which products are doing well. But generally, right now, and as we will disclose in our Form 10-Q that will be filed later today, we've seen growth in both our enterprise markets as well as our specialty markets. And we've seen growth in the U.S., and we've seen growth internationally. And so I think that for -- and right at this point, it's a fairly broad growth scenario that we are experiencing and strength in market. Unknown Analyst: Okay. And from my next question, I've been following you for a long time, and I read all the press releases and I noticed all the tones. So at the current press release, you talked about good prospects for this year and beyond, which is a new thing. It seems that you are more confident on the next fiscal year. So this is also a surprise. So -- can you explain a little bit about driving that and a little bit more color about what makes you feel more optimistic? Neil Wilkin: Well, we've been optimistic because the industry went through about 5 quarters of decrease and pressure. We kept the position. We weren't as negatively affected as others in our industry were. And in addition to that, we're also benefiting from the recovery in the industry. We believe that the activity that's going on in data centers, we're going to benefit from even though we are not, at the moment, offering products that are more hyperscale related. And we also see strength in our other markets. We do a lot of specialty work and we're seeing strength across the board in those markets. And so that's the reason why we're optimistic. I think we're also, as you would expect, excited about our relationship -- new relationship with Lightera. We've worked with Lightera for years. We know the quality company that they are and the people. And the fact that we believe we are taking the relationship we've developed over many years to a different level by them making this investment and us collaborating in a significant way in certain markets and with certain products, I think, is particularly -- the reason to be particularly optimistic on our part. We still have seasonality in our annual cycle. Quarters Q1 and Q2 tend to be a little softer. And of course, there's a lot of noise in the market now in many different fronts. If you just -- as you see and follow the financial moves, you can see that. So we can't be certain about what will happen. But right now, we're particularly optimistic about the path we're on. Unknown Analyst: That's very helpful. And for my last question, I won't difficult. So it's a little bit more macro oriented. So as we can assume interest rates are probably going down soon. So I was wondering, does the fact that interest rates are going down can maybe affect some of your clients, maybe help a little bit to relieve some of the financial pressure and maybe accelerate your growth. Do you see any effect like that? Neil Wilkin: It's hard to say. I think that the interest rate decreases that the Fed is at least being pressured and somewhat considering. They're looking at various different market data, some of which is conflicting and how that actually filters down is the actual interest rates that businesses are subject to is also still a question mark, I think, in the market. So we're not really looking to what happens with the interest rates to figure out how our business is going to do going forward, but it is something we'd watch as you'd expect. Unknown Analyst: Just a very last question. Considering the large growth you had this quarter, do you still expect the regular seasonality to take place? Do you still expect Q4 to be the strongest? Neil Wilkin: Well, we don't really forecast on a quarterly basis. And our business also is a business that has -- can have a lot of volatility in it. But right now, we're optimistic. Appreciate your questions. I was happy that you've asked a number of them. I'm happy to answer those. We tend to restrict the questions just to 2 per institutional investor. Dean, are there any other questions or operator, excuse me? Operator: [Operator Instructions] We'll take our next question from James Winchester with Quantified Value Partners. Unknown Analyst: I wanted to ask if you could maybe give us a little bit better sense of what's driving gross margin. I know that you've talked in the past about how -- when the market was soft, you maintain your infrastructure and capacity, even though it was kind of penalized you during that period. But -- in looking at gross margins, I see we are now, I think, up to the fourth quarter consecutively of very nice expansion in gross margin. I was wondering if you could just talk a little bit about what's driving that? Neil Wilkin: Sure. There's two things that impact our margins significantly. One is the product mix. The products that we offer particularly on the fiber optic cable side, but also across our other product lines can vary based on product mix, not just from what the market price is for certain products. And so that creates an issue. And also on the cable manufacturing side, that product mix can particularly impact from a processing standpoint. So I put those kind of in one bucket, which is really product mix. The second piece that really impacts us and then we benefit from a higher sales levels is the operating leverage, and that operating leverage in our business is significant. So -- yes, we do tend to not to like to pull back in personnel significantly on the manufacturing side when there's pullbacks in the marketplace, but a lot of the cost relates to just the fixed cost of having a manufacturing facility. And as our sales dollars go up, those fixed costs get spread over those higher dollars very quickly, and that results in higher gross profit margins. We did see the same effect in SG&A costs because we have a substantial amount of fixed SG&A costs. And being a public company, those public company costs also factor into that. I addressed that in my letter to the shareholders in our 2024 last year's letter to the shareholders, that kind of gives you a sense of what you can see over several quarters, which may be of interest to you if you haven't looked at that before. Unknown Analyst: That's very helpful. Just sort of extending on that first question. And in light of your new relationship or a joint venture with Lightera, can you sort of give a generalization of whether that will -- number one, whether that will drive more volume over your manufacturing infrastructure? And number two, can you give us some sense of kind of where you're at in terms of utilization of your capacity? Are you at 1/4, 1/2, 90%, we're going to need more capacity next year or just to sort of give a broad brush assessment of where you're at? Neil Wilkin: Sure. Well, we certainly do hope that the relationship with Lightera will create more production volume for us. I think that we're in a good position in our products and in our markets. And then adding Lightera's products to that, I think, ultimately should create more demand for us. And that's what our goal certainly is. From a utilization or capacity standpoint, typically, and Tracy had talked about this, I think, earlier in a question a little bit is typically what affects us most is the personnel standpoint from a manufacturing side. The -- we tend to have more capacity in equipment than we completely utilize part of that's because our product line is diverse enough that we have to be prepared for different types of flows of products through the plant, particularly on the cable side. And -- so we tend to flex on personnel with overtime and then by new hires, has demands increase, and that typically does not require significant additional investment in new equipment. And that also explains the operating leverage. What we've disclosed in our Form 10-Q, typically, when we do our calculations is a capacity -- running at a capacity of about 50%. Now that seems low, but that's not the personnel we have staffed, that's really the machinery and also recognition of how we calculate or how we're utilizing shifts. So in two of our facilities, we're not running 24 hours a day. And in Roanoke, we're not fully staffed 24 hours a day, 365 like some companies. That's important and strategic in the way we operate because we're not making just a handful of cable products that are always run in very, very long runs and are kind of set it and forget it. Our products include customized products and also specialty products that allow us to be more flexible as different product lines move through our facility in different cells in different manners, depending on demand. So what I'd say is that we report that by calculating in that manner, it's about a 50% capacity. I think on any day, our manufacturing people wouldn't look at it that way. And -- but that's the way we calculate it. But certainly, we have to maintain and do maintain excess capacity in order to maintain that flexibility and also a reality of the type of business and the part of the business we're in rather than a company that really focuses on 100 different or 200 different cable products, and that's what they run all day long, 365, 24/7. Operator: [Operator Instructions] We'll take our next question from [ Sergey Mascara ] with [ Kelper ] Capital Firm. Unknown Analyst: I'm wondering why you are not talking about the data center opportunity in your website and your data center products? Neil Wilkin: Let me make sure I understood the question, why we're not talking about the collaboration more extensively on our website yet, is that what you're talking about? Unknown Analyst: No, no, no. I'm asking if I check your website, it seems that you are not offering products for data center. I'm wondering why you are not advertising the product that you have on your website? Neil Wilkin: Well, I mean, we do have -- we are in the process of making some improvements to our website. I think that there's a couple of reasons. Number one, I think that there needs to be some improvements. We do have data center products on our website. I need to go back to see how much we specifically promoted that, but we are -- we will look at improvements on our website. But a lot of our sales and the business that we receive is through the relationships we've had in the industry over years and years and years. And so it's a little bit different than some other businesses that relied more on the advertising on the website. Operator: And there are no further questions on the line at this time. I'll turn the program back to management for any additional or closing remarks. Neil Wilkin: Thank you, David. I would like to thank everyone for listening to our third quarter fiscal year 2025 conference call today. As always, we appreciate your time and your investment in Optical Cable Corporation. Additionally, on today, specifically, I'd like to thank those men and women who have served and are serving our country around the world to protect our freedom and liberty. And to honor those who perished in the terrorist attack on our country 24 years ago today in New York, Pennsylvania and Virginia. In OCC, we will never forget. Thank you. Operator: This does conclude the Optical Cable Corporation's Third Quarter of Fiscal Year 2025 Earnings Conference Call. Thank you for your participation, and you may now disconnect.
Operator: Good morning, and thank you all for attending the D2L Inc. Second Quarter Fiscal 2026 Financial Results. My name is Bricka, and I will be your moderator for today. [Operator Instructions] This morning's call is being recorded on September 11, 2025 at 8:30 a.m. Eastern Time. And I would now like to pass the conference over to your host, Craig Armitage, Investor Relations. Thank you. You may proceed, Craig. Craig Armitage: Thank you, and good morning, everyone. Listeners are reminded that portions of today's discussion will include statements that contain forward-looking information. Any such statements are subject to risks and uncertainties that could cause actual results to differ materially from the conclusion, forecast or projection in the forward-looking information. Further, certain material factors or assumptions were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information. For identification and discussion of such risks, uncertainties, factors and assumptions as well as further information concerning forward-looking statements, please refer to the company's annual and interim management discussion and analysis and the most recently filed annual information form in each case as filed under the company's profile on SEDAR+ at www.sedarplus.com. In addition, during this call, reference will be made to various non-IFRS financial measures, including constant currency revenue, adjusted EBITDA, adjusted EBITDA margin, adjusted gross margin and free cash flow. These non-IFRS financial measures do not have any standardized meanings prescribed by IFRS and may not be comparable to similar measures presented by other public companies. Please refer to the company's MD&A for the 3 and 6 months ended July 31, 2025 and 2024 for more information about these and certain other non-IFRS financial measures, including, where applicable, a reconciliation of historical non-IFRS financial measures to the most directly comparable IFRS financial measures from our financial statements. I'd now like to turn the call over to Mr. John Baker, Chief Executive Officer, D2L. Please go ahead, John. John Baker: Thank you, Craig, and thank you, everyone, for joining us for our Q2 earnings call. We released financial results after the market closed yesterday, which you can find on the Investor Relations section of our website at d2l.com. Please note that the results we're discussing today are in U.S. dollars. I'm also pleased to be joined this morning by Josh Huff, our CFO. Our second quarter performance reflected strong SaaS revenue growth and improved year-over-year profitability, demonstrating continued execution on our balance of growth and profitability. This quarter we also made a number of enhancements to our core products as we continue to execute on our innovation agenda, with a particular focus on AI to help us win in more markets globally. The Q2 highlights included total revenue growth of 11% to $54.8 million. Subscription and support revenue rose 14% to $50.1 million, driving increased full year guidance. Adjusted gross margins were up 220 basis points to 71%. Annual recurring revenue grew 7% over last year's Q2 to $212.6 million. And adjusted EBITDA increased to $7.5 million, with adjusted EBITDA margin at 13.7%, up 510 basis points from last year's Q2. During Q2, we had solid performance across our go-to-market team, building sales and pipeline momentum despite continued challenges in the current market environment. We're welcoming new customers across our key markets. Two examples in North America higher education, for the University of the People, an online university serving more than 150,000 students in over 200 countries and territories around the world; and Red Deer Polytechnic, a leading institution in Alberta, selected Brightspace to support its evolving digital learning strategy for 7,500 students. Internationally, we continue to grow our footprint across key regions. JIS Group and SASTRA University, both in India, selected Brightspace to advance their digital transformation. SASTRA University enrolled approximately 10,000 students and JIS Group serves over 45,000 students, making it one of the India's largest private educational groups. And we're pleased to welcome Northwest University, one of South Africa's largest universities with more than 60,000 students across 3 campuses and a growing online learning community. NWU adds to our growing presence in the region. We continue to expand our reach in corporate learning, adding influential organizations to our customer base. In Q2, these included the Project Management Institute, a global leader in professional certifications and training with nearly 750,000 members across more than 200 countries. And CPA Australia is now leveraging Brightspace to support its members' lifelong learning, building on our success with CPA organizations globally. While we add these new flagship customers, we continue to provide additional value to our current customers and grow our impact with them over time. For example, a longstanding North American research university with approximately 50,000 students renewed early and added Course Merchant and Creator+ with H5P as part of the long-term contract extension. We're also seeing healthy pipeline generation for new products, including our AI offering, D2L Lumi. And whilst it's early days, Lumi bookings continued to increase at a healthy pace each quarter since launch. And at the end of Q2, we also unveiled an expanded list of AI experiences in D2L Lumi. Our team has now made it easier and faster to deliver personalized learning, guide learners with timely study support, offer virtual tutors, provide assessment feedback support and provide insights into learner progress and where to act, allowing educators to focus on what truly matters, helping learners succeed. The future of AI and learning continues to be a top focus of my conversations with customers and prospects, and it was a prime topic at our user conference, which was held in Savannah, Georgia this July. Fusion 2025 brought together over 1,200 people in person and many more online. Our customer engagements at Fusion and throughout the world reinforced our belief that AI will act as a catalyst for new investment cycles, with growing customer adoption, expanding use cases that demonstrate improved learning experiences and outcomes and a clear road map for growth, D2L is well positioned to lead this AI transformation. We're proud to also be recognized for our continued impact in education. In Q2, D2L was named One of Canada's Best Managed Companies for the 13th consecutive year. We were also honored to receive the prestigious title of Overall Learning Management System Solution Provider of the Year in the 2025 EdTech Breakthrough Awards, underscoring our leadership in delivering transformative learning experiences. And most recently, D2L and our client jointly won 8 Brandon Hall HCM Excellence Awards for delivering exceptional workforce learning. As you know, the late summer marks a return to school for many customers around the world, and I'm pleased to announce the strong start to this new school year. We now have over 21 million users on our Brightspace learning platform globally. In summary, it was a strong first half of the year for our company, and I want to thank all D2Lers for their exceptional work delivering on these important milestones. As I reflect on the quarter, it's clear that we're building momentum and that our customers see us as a very strategic partner to help them navigate the future of learning. With that, I'll turn the call over to Josh. Josh Huff: Thanks, John, and good morning. The Q2 results continue to show an intentional balance of growth and profitability, highlighted by further improvements in gross profit and operating leverage. Total revenue for Q2 was $54.8 million, an 11% increase over the same period last year, in constant currency revenue increased 11% to $54.4 million. Subscription and support revenue increased 14% to $50.1 million, reflecting new customer growth and strong revenue expansion from existing customers, supported by new product offerings such as H5P. Annual recurring revenue grew by 7% to $212.6 million. This was a result of a strong second quarter for new ARR bookings from our global higher ed and corporate markets, partially offset by higher-than-normal churn in the U.S. K-12 market. Professional services and other revenue decreased 10% in Q2 to $4.6 million. As we discussed in Q1, the current macro conditions are resulting in reduced near-term demand amongst U.S. higher education customers for larger professional services engagements such as our curriculum advisory services. The Q2 results showed further improvements in our gross profit metrics. Adjusted gross profit increased by 15% and adjusted gross margin was 70.6%, up from 68.4% last year. Subscription and support gross profit margin rose to 75.1%, compared to 72.9% in the prior year, reflecting ongoing optimizations in our cloud technology delivery and the positive impact of increasing revenues from high-margin software add-on products. As we look ahead to the second half of this year, I will note on our cloud delivery. There's a planned migration of 1 back-end technology that will create a slight bubble cost over our subscription gross margin profile. We anticipate a roughly 200 basis point impact, which we expect will moderate and subsequently allow for continued gross margin expansion once the transition is completed within fiscal 2027. Gross profit margin for professional services was 9.1% in Q2, versus 24.9% in the comparable period of last year. This is significantly lower than our historical margin profile and reflects decreased revenue in the quarter, while capacity was held stable as we evaluated the level of short-term demand in the market. We anticipate an eventual bounce-back as clients adjust their operations within this macro environment. We continue to demonstrate operating leverage and efficient growth as we scale the business. Operating expenses for the second quarter were $35.9 million, up less than 3% year-over-year. As a percentage of revenue, total OpEx was 65.6% this quarter, versus 71% of revenue in last year's Q2, a 540 basis point improvement in operating scale. R&D expenses were 22% of revenue compared to 24% of revenue in last year's Q2, in large part due to efficiency improvements and lower head count comparatively post the SkillsWave spinout that occurred last year. Sales and marketing expenses were up 9% over the same period of the prior year. As a reminder, Q2 results include our annual user conference Fusion, which is a significant investment for the business. And as John highlighted, this was a great event with high engagement from our current customers, partners and many prospects who are in attendance. G&A expenses decreased by 8% compared to the same period of the prior year, predominantly due to a decline in stock-based compensation expense year-over-year, and therefore, on a run rate basis, remains stable year-over-year. As we work to become #1 in targeted education markets globally and establish ourselves as a next-generation learning platform, we are investing in product innovation and market expansion this year, and therefore, expect OpEx to continue to increase modestly as reflected in our guidance. The combination of revenue growth, improved gross profit margins and operating leverage drove a substantial year-over-year improvement in profitability. We reported Q2 adjusted EBITDA of $7.5 million or 13.7% margin, a 510 basis point improvement from 8.6% margin in the same period of the prior year. Excluding the cost of Fusion, our normalized margin would be in line with the past few quarters. And income for the period improved to $2.7 million, compared with a loss of $0.3 million for the same period in the prior year. Free cash flow was $14.9 million in Q2, compared to $31.2 million in the same period prior year. I would highlight 2 timing factors that impacted the year-over-year comparison. Number one, the annual variable compensation plan for the company was paid in Q1 in the last fiscal year versus Q2 in fiscal 2026. And secondly, the quantity and timing of collections within the second quarter relative to prior year, which will result in a stronger third quarter collection period. Setting aside these timing factors, we continue to expect strong full year growth in free cash flow year-over-year. Our financial position remains strong at quarter end with no debt and $102.5 million in cash, providing us the financial flexibility to invest in growth opportunities as we move forward. In terms of capital allocation, we bought back over 240,000 shares under the NCIB program in the second quarter. For the fiscal year-to-date, our allocation to the NCIB buyback is roughly 150% higher than prior year. This activity largely offset any dilution from equity grants. And as a result, the weighted average diluted shares outstanding increased by less than 1% over the past 12 months. With our Q2 results, we updated our annual guidance for SaaS revenue to a range of $198 million to $200 million, implying growth of 10% to 11% over fiscal 2025 and 10% to 11% growth on a constant currency basis. This is an increase from previously issued guidance of $194 million to $196 million and reflects the strong first half-year performance and the relative strengthening of certain foreign currencies. As we have discussed in the past, this movement in foreign exchange has an offsetting increase to our reported operating expenses and, therefore, adjusted EBITDA guidance remains unchanged. Total revenue guidance is also unchanged, which reflects the increase in subscription and support revenue, offset by a decrease in professional services revenue due to the more cautious spending environment. In closing, we're executing well and effectively navigating the near-term macro conditions, delivering on our outlook for balanced growth and profitability while at the same time, reinforcing our competitive position in our core markets. With that, we will open the call to questions. Operator? Operator: [Operator Instructions] The first question we have comes from Gavin Fairweather with Cormark. Gavin Fairweather: Congrats on the strong quarter. Nice to hear a good expansion momentum quarter in Q2 here. Curious as you've kind of continued to enhance your add-ons, including with AI and socialize them more with the base down at your user conference, if your excitement or views on the expansion potential on the base are evolving at all as this has progressed. John Baker: Great to connect again, Gavin. And yes, the Fusion conference was a fantastic event, really a great opportunity for us to connect with so many of our clients from all over the world. We saw a wonderful pipeline build at that event for all of our key add-on products, everything from Lumi, to Creator+, to our new Accessibility+ offering, which was incredibly well received, that's really closing the gap for a lot of our clients and to making sure that they're delivering really, truly world-class accessibility for all of their students globally. Very excited about all 3 of those products in particular. We're also seeing good performance on Performance+, and I think that road map ahead will continue to drive adoption within our client base in new and exciting ways. I think at the heart of this, what we're seeing is quarter-over-quarter-over-quarter build in each of these products. They're relatively new. But I'm quite excited about what we see for the future as they continue to evolve and grow. With AI in particular, you're not only seeing us now deliver on organic product growth. There's a lot of innovations coming out from study support. But you're also seeing us now packaging in key partner solutions, everything from virtual tutoring to making sure that we're delivering on a lot of types of experiences for students and teachers alike. This ability for us to really harness the ecosystem, which was announced at our Fusion conference. I think, will be a very compelling driver for continued adoption of these technologies. Gavin Fairweather: It's great to hear. And then maybe for Josh. You referenced the cloud migration there, which is going to be coming through in the back half of the year. So should we expect a 200 basis points impact evenly over the back half of the year? Will that be completely done this fiscal year? And are there any kind of offsets that we should think about as you're continuing to optimize your cloud hosting? Josh Huff: Yes. Thanks, Gavin. I would think of it as the 200 basis points over sort of the remainder of fiscal '26. And then I think as we get into fiscal '27, we sort of have a 12-month view of it, if you will, starting in Q3 of this fiscal. And so as we get through fiscal 2027, we'll be through that. And I think importantly, it also lays the foundation for continued expansion thereafter. As we've talked about at length in the past, the optimization of our cloud hosting has been going on for many years, and there continues to be a long road map of improvements that we're working against. But in the short term, there is that sort of bubble cost that we've articulated here. Operator: Your next question comes from Doug Taylor with Canaccord Genuity. Doug Taylor: I'll just pick up on that last line of questioning as it relates to the cloud migration here first. I mean you've talked about the 200 basis points gross margin near-term impact. Maybe you could expand upon the economics of that initiative longer term in reference to your overall gross margin objectives over your medium-term model that you've provided? John Baker: Yes, Doug. Well, maybe I can just add a little bit of color to that. We've got a number of big initiatives in engineering to really optimize our cloud environment. So clearly what we're doing is really enhancing one of the technologies that are in that environment, that's going to have a short-term impact. Longer term, it means gross margin for the product will continue to accelerate from where it is today and continue to go up significantly as we continue to deliver on these innovations coming out from our engineering group. There's a lot of optimization, there's a lot of opportunity for us to have savings at every layer within our app. And those savings will continue to build quarter-over-quarter-over-quarter. This investment that we're making right now should result in some significant long-term savings and improvement in gross margin. And it's been planned, it's in our outlook already. There's nothing surprising and it's something that we've known for years. Doug Taylor: Okay. And so what I'm hearing there is that there are cost savings, and that's one of the factors here. But part of this is also product leadership and building upon that as well, is that a fair assessment? John Baker: Yes, that's a fair assessment. So swapping out a technology for a better technology, then at the same time a technology that costs significantly less than the technology that we're swapping out, that's where the savings are going to come for that specific investment. But there are a number of other investments that we're making that will take out large percentages of costs out of the provisioning in our cloud environment. And those will continue to roll out quarter-over-quarter-over-quarter. It's just unfortunate we're seeing a bit of a bubble cost go through in the next 2 quarters. Doug Taylor: Okay. I appreciate that extra color. Maybe moving back to the revenue line and the environment. You did flag some pressure in the K-12 market in some of your churn metrics. I just want to understand that dynamic a bit more. I think we all understand the budget pressure. But how exactly is that manifesting in relation to your ARR? Is there a temporary turning off of certain features or models? Or is it student numbers being reduced? Maybe you could help us understand that and how transitory that impact might be? John Baker: Yes, Doug, I wouldn't read too much into that. It's isolated to an individual client or 2 in this particular case. And if you look at broadly across our K-12 client base, we're seeing a good solid growth opportunity within the clients that we're serving today. But as a reminder, K12 represents about 10% to 15% of our business today. And the broader K-12 education environment is seeing pressure from funding. But the clients that we've got by and large are really good clients. They're investing heavily into the technology. They want to see improvements just like every other client with AI, with a better creation experience with Creator+. I'm actually very bullish on that market in the long term. It's just a short-term pressure. Doug Taylor: Okay. And then maybe one last question for you, John. It's been now a little over a year since the last meaningful M&A with H5P, and you've articulated that tuck-ins are going to be a more consistent part of the strategy here. I just want to understand, is the macroeconomic conditions that you've been seeing generally, is that impacting the M&A strategy, the market, the pipeline, asking prices and valuations and things like that? John Baker: It did elevate our discipline, yes, there's no question. When you're looking at the broader macro conditions, the appetite for adding on additional products comes under additional scrutiny. So you want to make sure that if you are doing M&A in this particular market, that you're buying something like clients really value, they're going to continue to invest in and continue to grow with over time. So yes, it's -- simply put, it has elevated our discipline in that particular space. Operator: We now have Erin Kyle with CIBC. Erin Kyle: Maybe I just want to start on the demand environment there. I know you talked about it a bit, but subscription growth was solid in the quarter and then the ARR build in the quarter was a bit ahead of our expectations as well. So maybe you could just expand a little bit more on what you've been seeing there? Are you seeing customers make decisions and the typical decision-making time line period this summer? Or are they still a little bit elongated? What do sales cycles look like right now? John Baker: That's a great question, Erin. We're still seeing the same sort of macro or environmental conditions, just generally speaking, where clients are taking longer to make a decision. They're chewing through their own issues. For example, in some regions around the world, higher education has gone through a compression in terms of the number of employees, as an example, and they've had to make those changes. Even in those markets, we're still seeing good, strong demand signals; it's just taking longer for them to materialize into deals. So how does that show up? It shows up in us building momentum within the market, as you've seen the results from Q2. You're seeing our win rate continue to tick up, so our ability to compete against our competitors in this market is getting stronger. And you're seeing our pipeline continues to grow rapidly. This is now the third quarter in a row where we've really outperformed on pipeline build. I'm quite excited about that. That bodes well for the future. We just need to start to see more of these clients ready to actually shift gears from moving the way through the early stages of our process into an implementation mode. My hope is that this fall into next year, you'll start to see a lot more indications of that as folks change gears and really start to ramp up into a better student experience. I also think, Erin, AI is going to be a big driver for this change. The investments that we've made in AI across the entire platform, frankly, have a huge impact for our clients when it comes to improving productivity for faculty, now making that student experience better, helping them drive better retention, better engagement. That has a compelling ROI for a lot of our clients. If they can save time and money building courses and, at the same time, retain more of their students in a tight environment, that has a big driver for adoption. And we need to get that message out. It's still not showing up in all the RFPs that we're reading yet today, but we're starting to see early indicators that AI is starting to work their way in, but it's still not at the level that we'd want to see that as a catalyst for a massive wave of transformation. That I think is still ahead of us. Erin Kyle: That's helpful there on the demand environment. I actually want to switch gears a little bit, still sticking to demand, but just on the international growth. The revenue growth for international looks like it decelerated a little bit in the quarter, and it's bit below the historical 15% to 20% range you've been putting out in recent quarters. So you announced some international wins this quarter. Maybe you can just comment on how that go-to-market international is going and if we should expect to see the growth there start to return to double digits? Or just what demand looks like from an international perspective? John Baker: Yes. Thanks, Erin. Good question. I think the financial statement note regarding geographical split, I'll say, is -- sort of tends to be a bit lagging. And so that 90-day period of time is also impacted by the onetime services and constant currency FX fluctuations. So if you -- ex onetime services, the growth profile in Q2 on a rev rec basis was above 10%. And then you'll recall in fiscal '25, kind of Q2 through Q4, there was a rebuild of some of the international sales leadership team. And so that had a short-term impact on bookings in prior year. The good news is that, that leadership group and extended team is doing a really good job, performing very well. And so we've actually seen year-to-date in ARR growth for the international side is we are operating within that 15% to 20% range. And so we'll see that flow through rev rec in upcoming quarters. So we certainly continue to be very confident in that business driver growing very well and continue to view it in that 15-plus range. Operator: Your next question comes from John Shao with National Bank. Meng Shao: So John, could you maybe talk about what you see out there regarding your competitors' AI initiatives at this stage and how D2L differentiates or plan to differentiate from those competitors in this AI journey? John Baker: I think -- and it's not just me saying this, there's industry analysts also saying, that D2L's really positioned itself in the lead with AI. Our other competitors are in 2 different stages. One's early stage trying to integrate partners to support their AI strategy. And the other one is going through their own financial difficulties, which puts their AI strategy in terms of long-term in question. And so I think we've got a substantial lead when it comes to embracing AI into our core workflows. So if you wanted to make a quiz, for example, you can do that instantly with AI. If you want to create content, we can take an old PowerPoint and turn it into something much more engaging and inspiring for students in terms of the interactives and games and all sorts of practices, all automatically using AI. These are things that just simply don't exist in the market if you're not using D2L's product. And so I do think we've got a good lead. We're going to continue to double down on that, not only investing in AI in our product but also investing in AI in terms of our own internal practices. And I think with that, I think we've got an opportunity to really have AI be a compelling driver to switch learning platforms to D2L Brightspace to really give our clients a significant advantage in the market. I wouldn't want to be using a competitor software relative to the schools down the street using Brightspace because those faculty are going to have a much easier time building great engagement with their students, building interactives. They're going to look like superheroes relative to the professors that are still struggling to figure out how to get it done in our competitor's systems. Meng Shao: Got you. That's great color. I also wanted to ask about, again, on the macro. So did you guys sense that situation has been stabilized since earlier this year because it's been a while since we see any news articles on the headlines? So can I say the macro situation is still there, but it's not getting worse, am I right? John Baker: I think it's been a challenge for a lot of organizations. I don't think I can remember a time where education has been under this much strain in terms of budget cutbacks and other changes. What's reassuring is that they look at us as a strategic investment to improve student experience even in that strain. I do think, to your point on stabilization, most clients have figured out how to make adjustments in this new market. Those adjustments have by and large been made. And now they're looking at the fall and into next year as an opportunity for them to readjust and grow again. And so we're back to not just having conversations around efficiency with clients. We're now helping them open up new growth vectors to support their next phase as a university, as a school or as a company. Operator: We now have Suthan Sukumar with Stifel. Suthan Sukumar: Congrats on a nice print here. My first question, I just wanted to double-click on the macro. It's good to hear that your pipeline build continues to play out consistently here despite the headwinds that you're seeing in the market. I'm just kind of curious, what's -- what would you call out as having changed the most in your prospect conversations? I mean you mentioned AI is still not really having a meaningful presence in the RFPs that you're seeing. But how important is AI in the conversation that you are having? And how is that playing into the size and structure deals and the pricing leverage that you may have? John Baker: Suthan, that's a fantastic question. So I think that is where the gap is. The procurement side of the institutions are still printing RFPs with old requirements. But if you get into the actual demos and the conversations with clients, it really is the only point that's coming out. Now that said, they get through that AI piece and then they're really interested in the classics. How is this going to help me with retention, engagement? How is this going to help courses be a better design? How is this going to help students through getting better feedback, we get into the classic conversations that we're very comfortable with in terms of driving these underlying metrics that really help these organizations outperform. AI becomes the tool in terms of how it's enabled much more efficiently than it was in the past. I think what becomes very compelling in the demos is how much easier it makes the learning platform to use for faculty and for students. So in the past, if you want to do something in a system, you literally had to do it yourself. And now with AI, we can actually point it at the materials that you already have and transform it into a much more engaging, inspiring offering. And then the faculty really just has to review and approve. And that is very compelling. If you're a faculty member, you're very busy. And if you can spend 1/3 of the time building an even higher-quality course offering that allows you more time to spend with one-on-one with students, it allows you more time to do research, it allows you to build better course offerings, there's so much more that can be done with that time that gets freed up. And so I think that's why our win rate continues to tick up quarter-over-quarter over quarter. Suthan Sukumar: That's helpful color. On corporate learning, can you provide us with an update on some of the progress that you're making here with respect to some of the product initiatives that you've been working on? I mean from a go-to-market standpoint, it sounds like you're still having pretty good success securing large wins. But just kind of curious on sort of the progress that you're making on both the product and go-to-market front. And I know it's been an area of investment for you guys. John Baker: Yes. PMI is a fantastic example of the investments that we're making into corporate learning and upskilling. They're a great organization, 750,000 people use their platform in over 200 countries around the world. Great example, building on the success that we've already built in that market. We continue to double down on our corporate strategy. It's showing up in our ARR growth, it's showing up in -- now corporate almost reaching 25% of our business. We're quite bullish on this market. It's not just product investments that we're making. So we've made investments in terms of making it easier to integrate these technologies into the traditional enterprises within large companies. Those are really having a positive impact in the conversations that we're having with large enterprises. But it's also about the people. And so we've made investments into leadership to not only go after training organizations, but also to go after employee organizations that are trying to upskill their own people, not just members, if you will. And I think that is going to be where we're going to gain the most in the future. It's not just that -- it's balancing that product investment with a really strong go-to-market investment. Suthan Sukumar: Perfect. And just last one for me. Just on the H5P business, on some of the synergies that you're seeing here. From an upsell standpoint, this appears to be -- it seems to gain traction. It just feels that it's a very natural value prop that you bring into your basin. But from a -- I guess, from a cross-sell and sort of the longer-term growth opportunity, any update on sort of what the opportunity looks like in terms of tapping into their user base, their global user base and potentially displacing some of the other LMS' that customer base is using? John Baker: Yes. Suthan, we're still early days. What we've done over the course of the last year is really tightly integrated H5P into Brightspace. You saw that show up at our user conference where not only do we have these interactive now playing in the content area, we now have added over 50 new question types to our quizzing engine because we've now hooked in all these question types within our quizzing framework. And so that gives our clients a significant advantage in terms of being able to assess students in new ways that were simply not possible before. And I think that framework is going to be compelling for other LMS' to adopt, and for H5P to really, over time, become a global standard for building interactive learning. So we are very committed to that plan. We're very committed to making sure that this works well with others, not just within Brightspace. But the other nice thing is the cross-sell motion is starting to take hold. Now it's still early. It's at the pipeline stage. It's not in the, hey, this is converted into a lot of new business for Brightspace yet. But as an example, we did a big event in Australia for H5P. It was an H5P event. And it's generated opportunities for us on the Brightspace side. We want to see more of that as we scale our activity with H5P globally over the course of next year. Operator: We now have Thanos Moschopoulos with BMO Capital Markets. Thanos Moschopoulos: Regarding the PS business, should we expect margins to remain at a similar level near term? Or are there some early indications that PS demand might start to ramp up -- ramp back up heading into the fall? John Baker: Well, I'll speak to the demand side of it, and then I think, Josh, you probably take the margins piece. On the demand side, as clients went through these changes, so for example, in one market, we saw clients really cut back on their staffing levels. They had to make those changes over the course of the last few months. Now that they've gone through those changes, the programs for them to invest and to build new courses, build new offerings and everything from AI, as you can imagine, to green technologies, basically transformation of like the semiconductor industry in the U.S., there is a lot of different programming that needs to be built to upscale the future of not only new grads, but also the talent that's in the workforce. And so pursuing that, I actually think on the other side of that short-term macro issue is the long-term opportunity for us on the services side. So we've gone through this period where margins have come down a little. We're optimistic that in the back half of the year, that we'll start to see them tick back up again as our clients return to buying more of these services from us. We've got work to do to really go off and demonstrate that. But at the same time, we've also been making investments in our learning services group around AI over the course of the last 3 years to really bring our ability to deliver high-quality offerings up and, at the same time, bring our efficiency in line. But there's more work to be done there as we look at the next quarter or 2 to make sure that we're delivering on that promise. Josh Huff: Yes, Thanos, not a ton to add. I think John covered it well. But I think in the back half of the year, you'll see margins start to move closer to historical. I think about it more in kind of the 20% margin profile range than the 30% margin profile range. To John's point, we continue to sort of evaluate the short-term demand levels, which we do think will bounce back and return. So in light of that, the margin profile is a little bit different than it has been in the past year. But certainly, we expect improvement. John Baker: Yes. And maybe just to give you some data points. I am talking with a number of different university presidents or college presidents around making significant investments in terms of doing things very differently. So just like we've retooled around AI, as they build courses, they're interested in doing similar work. And so our learning services group, for example, has built out an offering to help clients leverage AI in new ways in terms of building out their own offerings. I think that's going to be a great demand for a lot of clients around the world. We've already had a few conversations. We just now need to turn that from pipeline into actual real deals. Thanos Moschopoulos: Great. In terms of using AI internally to drive efficiency, is it early days, or is that helping drive contributors to the margin improvement that we're seeing? John Baker: I think it's at different stages across different parts of the organization. So some parts of our organization like our partner team, for example, has done a fantastic job, leveraging AI, including agentic AI to really drive efficiency per employee way up, while at the same time improving the quality of our partnerships with all of our partners around the world. So that's a great example. Our support team is leveraging AI to really be more responsive to clients. Our learning services team has been an early adopter of AI for many years in terms of making it easier to embrace many AI technologies to support the course development cycle. So it's not just product investments that we've been making, it is starting to have an impact in terms of driving efficiency within the company. But again, I still think we're early innings. There's a lot of opportunity for us to leverage the technologies in new ways to help us primarily grow much faster than we are today. And that's the focus that we've got. And through that growth, we'll come to some efficiencies as well. Operator: We have Brian Peterson with Raymond James. Brian Peterson: It was great to see you guys out in Savannah. So just one for me, and I don't know if it's John or Josh, who wants to take this. But as the business diversifies into corporate, and we hear things like early renewals, I don't know how common that will be, I'd love to understand how we should be thinking about the seasonality of incremental ARR. I know historically, that's been in the summer months, maybe international is a little different on that. But as we think about how to sequence the quarterly additions to ARR, any help on seasonality would be helpful. John Baker: Yes. I think on seasonality, maybe, Josh, we can probably split this. But usually, Q1 is typically the light quarter. But Q2, Q3, Q4 tend to be all good quarters for ARR adds. And if I look at our add-ons, which is like what you're getting at to, we're seeing quarter-over-quarter-over-quarter build with our add-on products. There's not really a seasonality there. I think it's more of a ramp-up as people start to embrace these new technologies. Josh Huff: Yes. The only thing I'd add, Brian, is I think to your point, corporate tends to have a little bit more of a Q4 emphasis, whereas I think on the education side, historically, Q2, Q3 can be bigger quarters. So over time, I think you'll see a continued balance as different parts of the business contribute more substantively in different quarters. But I think, by and large, it's -- Q1 is seasonally lower, and the rest of the quarters, you should have a similar profile. Operator: We have our final question from Paul Treiber with RBC Capital. Unknown Analyst: It's [ Sylvia ] on for Paul. Just 2 quick questions from us. I was wondering if you can provide anything on U.S. demand given the comment on healthy new bookings but weaker professional services? John Baker: I think I'm going to have to ask you to repeat the question. We didn't quite hear you. Josh Huff: A little louder. John Baker: Is it possible to speak a little louder? Unknown Analyst: Yes, for sure. Can you provide anything on U.S. demand given the comment on healthy new bookings but weaker professional services? John Baker: So U.S. demand, in general, is starting to slowly bounce back. We saw a pretty significant decline about a year ago. But it's, quarter-over-quarter, it continues to bounce back and certainly, in pipeline, we've seen it really bounce back. But now we've got to turn that pipeline into real opportunity. In terms of the professional services side, for the last 3 quarters, we've seen good bookings. We've got -- we're getting much more efficient in terms of executing against the backlog that's in our services group. The key now is can we translate some of these big projects that we're talking to our clients about into booked revenue, whether that's adopting new practices within -- in course development around AI, whether it's helping them with new innovations that are going to be very compelling in terms of creating a new experience for students. There's a lot of work that we're doing with a number of our thought leadership clients, more, I would say, today than we probably did 2, 3 years ago, that just needs to be turned now into good execution. I think what the pipeline tells me is that our clients are looking at us as a very strategic partner to help them evolve into the future of teaching and learning and to really transform their own practices. And so I'm very bullish on the future as you pierce through the fog in the current macro environment. Unknown Analyst: And then as a follow-up from one of the earlier questions asked, can you comment on any international market share gains? John Baker: Yes. The international market is a very good market for us. We saw a bit of a blip in new bookings probably a few quarters ago, which is showing up in rev rec right now. But the underlying business is going really well, which is showing up in our ARR bookings, which we don't do the split in terms of what we're announcing publicly, but we did talk to it on this call. And so you're seeing that show up with North-West University down in South America -- I'm sorry, South Africa. You're seeing it in India, you're seeing it in the Netherlands. You're seeing it all over the world really. I think in markets like the Netherlands or Singapore or Colombia or India, we're really starting to emerge as the #1 player in those markets. And we're continuing to double down on our strategy there to open up not only the rest of that market, but also start to move into whether it's corporate or K-12. So international for us is a very big part of our growth story for the future and it's holding up really well. Operator: Thank you. I can confirm that does conclude the question-and-answer session. I'd like to hand it back to President and CEO and Board Chair, John Baker, for final closing comments. John Baker: Thank you, operator, and thank you, everyone, for joining us on today's call. We're looking forward to seeing many of you at our upcoming conferences and roadshows. Have a great day, everybody. Operator: Thank you all for dialing in. I can confirm that does conclude today's conference call with D2L. Thank you all for your participation, and enjoy the rest of your day.
Mary Vilakazi: Good morning, everyone, and welcome to the FirstRand's Annual Results Presentation for the year ended June 2025. Let's start with the operating environment. The macroeconomic environment over the last financial year was characterized by ongoing global fracturing and reorientation of the global economic policy. The ongoing conflict in Ukraine, Middle East and the uncertainty around U.S. tariffs serve as a few examples of this environment. Economic policy uncertainty has lifted well above levels seen in the midst of the COVID pandemic. Sticky inflation and ever-increasing sovereign indebtedness have raised the funding cost of several systemically important economies. This increase is seen in the graph on the right-hand side of the slide, which shows 10-year bond yields in some of these economies. On a comparative basis, South Africa is biking the global trend with the reduction in bond yields supported by the country's structural reform prospects alongside lower inflation expectations. The uncertainty in the global environment spilled into the South African economy weighing on business and consumer confidence. Consequently, private sector investment was particularly weak. The figure on the left-hand side of the slide shows the progression of GDP growth focus as reflected in the Bloomberg consensus survey. At the start of this financial year, consensus expectations for GDP growth for this year at about 1.6%. At the last survey, expectations put growth for 2025 at 1%. There were, however, signals of support to the economic activity in South Africa. Interest rate cuts and lower inflation provided some support to households and businesses, while the reform implementation through Operation Vulindlela continues. We, however, expect this high interest rate environment to persist over the next 2 years with the repo rates falling to 6.5% by June 2027 driven by an average inflation of 3.8%. The operational environments in the broader Africa portfolio were somewhat a mixed bank. Encouragingly, countries that suffered the consequences of sovereign debt restructurings and the lack of reforms over the last few years are starting to turn the corner. In Ghana and Zambia, inflation and interest rates are reducing and economic activity is gradually lifting. And these signs that -- there are signs that the long-awaited economic reforms in Nigeria are paying off. While economic activity in Namibia continued to perform in line with expectations, Botswana's economy has suffered significantly from the fall in demand for natural diamonds creating a challenging operating environment. The Mozambican economy is another one that continued to present headwinds in the face of economic imbalances. A challenging fiscal backdrop and tariff uncertainty has kept a lid on economic activity in the U.K. While interest rate cuts provided some relief, it was not enough to offset the negative impact of business tax increases and cost of living pressures. In this environment, the Bank of England was limited from providing faster interest rate relief. And moving on to unpack the group's operating performance against this macro background. This slide highlights the key performance metrics included -- including the impact of the large provision for the U.K. motor commission matter. These metrics clearly demonstrates the strength of the operational performance delivered by the business, which we are very pleased about. For completeness, I would like to contextualize the results relative to our guidance in the trading update we issued in June. At that time, we were expecting growth of 16% in normalized earnings of last year's base, which included the first motor commission provision, and we guided as such. However, subsequent to the guidance, we did raise a further provision, which, in our view, is prudent given the regulatory uncertainty in the U.K. The strong earnings capacity generated by the group allowed us to absorb this provision and still deliver what in our view is solid earnings growth of 10%. To absorb a further provision of ZAR 2.7 billion and still deliver normalized earnings growth ahead of our long-term stated range and a superior return on equity is testament to the quality of the group's portfolio. The high ROE and ongoing generation of capital also allowed us to deliver growth in dividends ahead of normalized earnings growth, which I will cover in more detail later. All in all, despite the challenges we continue to navigate in the U.K., our businesses continued to consistently outperform in terms of growth. Growth in net asset value and economic profits, the 2 key shareholder value metrics, they remained pleasingly strong. The group's superior ROE benefited from an improved return on assets increasing by 6 basis points. This was again a result of the quality of our operational performance, in particular, strong growth in investment income, improved operational leverage and a stable credit outcome. Gearing decreased this year and the cost of equity remained unchanged at 14.65%. Worthwhile noting that at prior year gearing levels, ROE would have been 20.9%. This is a snapshot of operational performances delivered by our client-facing franchises. All the large domestic franchises performed well. Some of them ahead of our expectations 6 months ago. In a highly competitive environment, FNB retail and commercial delivered good earnings and growth on the back of customer growth and healthy volumes. A call-out here for WesBank, which delivered excellent growth and an impressive ROE given how fiercely competitive the market is. Another call-out is the improvement in RMB's ROE. This came despite another challenging year for the global markets business, but private equity provided mitigation for that. And also the originate and distribution strategy executed in the business in the second half of the year supported the returns outcome. I will now unpack across 3 -- I'll now unpack the performance across 3 themes, similar to when I presented the results in March. These themes represent key differentiators and are foundational to first strength structurally higher and sustainable ROE relative to other traditional sector players. So let me start with the strength of the group's origination franchise. Our story here has been consistent. Our origination philosophy and mix of advances is deliberately anchored to growing the balance sheet, meeting the needs of our clients and at the same time, achieving appropriate risk-adjusted returns. This means we have continued to grow our market share in good quality credit supported by the appropriate allocation of financial resources through our FRM process. In retail, we have remained focused on how lending to low- to medium-risk customers with capacity to borrow. And in commercial and corporate, we have targeted growth in sectors aligned to macro growth themes. A particular example of this has been the tilt to supporting SMEs. Specific balance sheet optimization strategies have also created the necessary capital and funding capacity to support our origination franchises. This slide shows that across brands, customer segments and product lines, we have seen good growth in lending. Standouts here are WesBank, FNB commercial and Aldermore. The pie chart on the right unpacks the results of the sector-specific lending strategies we have been pursuing. The U.K. operations did very well to deliver book growth and continue to anchor origination to protecting margins in a competitive market, combined with soft macros, particularly for mortgages. The embedment of FRM principles in the U.K. has also resulted in improving risk-adjusted margins. What this slide shows is that the originate and distribute strategy designed to improve margins and ROE and create funding capacity gained momentum in the year under review. So whilst year-on-year advances growth looks subdued at 1%, gross origination at 8% remained healthy. These activities help match assets originated by the bank to better balance sheet with lower regulatory friction costs. Overall, the credit performance based on the group's origination approach is well within expectations. As guided, the retail credit loss ratio has moved into the TTC range as pressure on households start to ease. Commercial credit loss ratio has trended into the midpoint of the TTC range. And this is to be expected given where we are in the cycle and the front book strain emanating from our strategy to lean in and lend to SMEs that are well positioned to benefit from the early structural reform activity in South Africa. Outside our expectations are the 2 specific concepts in the commercial enterprise subsegment, but these are fully collateralized. The next theme I will unpack is the result anchored to our strategy to grow the deposit franchise, which is a key underpin to the group's ROE. It is extremely pleasing to see that all of the group's deposit franchises delivered good growth during the year. RMB's corporate deposit franchise continues to show increased momentum, the steady strategy to build in-country deposit franchises in the broader Africa portfolio is also gaining traction. In South Africa, retail and commercial deposits continue to increase off an already high base with a significant milestone reached during the year as FNB deposit base exceeded ZAR 1 trillion. The group's margin was up 5 basis points and up 6 basis points when excluding U.K. operations. Asset margins benefited by 4 basis points from improved pricing, offset by 2 basis points due to mix. Deposit margins did experience margin compression, but supported better customer value propositions. These outcomes are a consequence of deliberate strategies to reward customers for their savings and ensure appropriate risk-adjusted pricing for lending. As an example, amidst fierce competition in home loans, particularly as this is a switch lever for main bank relationships. FNB home loans managed to improve front book pricing and margin, lifting the home loans portfolio margin by 4 basis points, a commendable outcome in the circumstances. The group margin uplift was supported by the balance sheet management activities already mentioned as part of the distribution and risk sharing undertaken by RMB. This slide, again, demonstrates the benefit of the group's active management of interest rates and ALM risks, ensuring the group earns appropriate value from interest rates and credit premium. In the current year, the strategy produced an additional ZAR 300 million compared to an opportunity cost of ZAR 1.5 billion in the prior year. This represents a ZAR 1.8 billion year-on-year change, thus contributing around 2% to NII growth. With interest rates forecasted to reduce further, the ALM strategy is expected to yet again outperform as shown in the gray shaded area on the graph. I will now move to the third theme the group's strategy to grow and diversify sources of NII. The group has consistently focused on diversifying sources of NII, and this slide shows this diversification and how it's provided mitigation for a disappointing trading income result. I will cover these in more detail, but just to point out the fee and commission income unpacked on the left-hand side of the slide. We can see that FNB benefited from new customer acquisition and improved volumes growth. FNB also benefited from growth generated by value-added services sold into the core transactional base, including FNB Connect, Send Money, eBucks and [ NAV ]. With FNB Connect alone generating volumes worth ZAR 22 billion. 3 million customers use these value-added services. And the revenue from these services grew 15% to more than ZAR 2.9 billion in retail only, an encouraging outcome of FNB's platform and app capabilities to scale offerings. This slide shows the resilience of the FNB fee and commission income, which continues to grow. It also unpacks the customer growth at a segment level. The Personal segment continues to face heightened competition. Customers with stand-alone products where the relationship is not entrenched are easily switched. In addition, FNB's strict application of new tax and FATF regulations resulted in constraints to onboarding new customers and furthermore resulted in accounts deemed noncompliant being closed. The business is, however, executing on a number of strategies to reverse the current attrition levels. FNB Retail, Private and Commercial segments continue to acquire new customers as well as benefits from customer migration, which has provided a solid underpin to fee and commission growth. The shifting payments landscape is something we are very focused on with dedicated senior resources building out the response to defend and attack designed to address risks but also to capitalize on the growth opportunities that are going to arise. The scale presented by the group's customer base combined with the payment rails we can provide to those customers cannot be underestimated. However, we are not complacent. Customer behavior, regulatory changes and the nature of new competitors means we need to be front-footed. We have a clear road map of actions, which is unpacked in this slide. This slide demonstrates the continued health of FNB's retail and commercial transactional franchise despite the highly competitive environment. Shareholders will recall we took a knock to NIR last year when we repriced for the introduction of PayShap. What we can clearly see here from the growth in volumes is that this was the right outcome for customers who have adapted to the new payment rail. These volumes reflect organic growth driven by actual customer choice and usage and is supported by other cash to digital initiatives. I talked earlier about RMB's investment bank origination engine. Here, we can see the continued growth in knowledge-based fees driven by the healthy origination levels, which I have touched on earlier. And these have produced material structuring and advisory mandates. Structuring and arranging fees account for about 80% of the knowledge base fees with advisory making up the rest. RMB's NIR also continues to benefit from further private equity realizations and stable annuity income flows. The business has adopted a more proactive management approach to increase the velocity and timing of exits to create a more consistent realization income stream going forward. A noteworthy call-out is that ZAR 2.6 billion of new investments made in the portfolio in the past year, providing an underpin to future annuity income and realizations. The unrealized value of the portfolio now sits at ZAR 8 billion. As I mentioned earlier, the weak performance from global markets impacted overall NIR growth. There were some specific reasons including the delivery strategy to derisk concentrated sovereign exposures in broader Africa. However, this was a disappointing year for the business. The team is busy executing on our strategy to reposition the GM business to build new capabilities and significantly improve operational efficiencies. In-force APE for insurance business is a measure of the size and scale of the insurance book, which is currently sitting at about ZAR 10 billion. We are not only seeing steady growth in funeral, but we are seeing strong momentum across the newer product lines underwritten and short-term insurance, and we are gaining traction into the commercial segment. The group strategy has been to build a diversified insurance business and the last number of years has seen significant investment in capabilities to enable this. Pleasingly, non-credit life business now accounts for 75% of this portfolio. In this portfolio, profitability has, in the past, been generated by the credit life and the core life businesses. And we are now at a stage where the other product lines are expected to be profitable in the next 12 months, which will materially lift the growth from the insurance business. We continue to generate good top line growth in new business for insurance businesses. Credit Life new business APE was impacted by lower levels of unsecured lending in FNB this year. We also saw reduced sales of the life simplified product due to risk appetite changes. The claims experience was adverse and a decision was made to reprice that product. However, the rest of underwritten business is 15% up largely supported by growth in our advisory channel, which now accounts for 50% of the sales for underwritten policies. Moving on from NIR specifically, I wanted to touch on geographical diversification. This slide shows that the group's current geographic mix has mitigated for sluggish asset growth in the past. In 2023 and 2024, the broader Africa portfolio delivered excellent growth against a muted performance from the domestic business. The U.K. also contributed to the group's outperformance last year. This year, the picture has reversed to some degree. Looking forward, we still believe that our current mix supports profitability over the medium term. This slide is a quick snapshot of the performance metrics from the broader Africa portfolio, which continue to build good underlying franchise value demonstrated in growth in customers and deposits. The ROE is very healthy at 23%, supported by economic profits of ZAR 1.6 billion impacted by increases in regulatory capital but to a greater extent, the global market strategy to reduce concentrations in sovereign exposures. The macro conditions in markets that have been impacted by sovereign distress and reforms, as I mentioned earlier, are expected to improve, providing opportunities for growth for the in-country and the cross-border businesses going forward. The U.K. operational performance, excluding the impact of the motor provision was pleasing. The performance was driven by healthy lending growth across all 3 core lending franchises. The operational efficiencies are starting to emerge with focus on improving the cost-to-income ratio to mid-40s. The U.K.'s strong capital position allowed Aldermore to pay a dividend of GBP 125 million to FirstRand, the first since Aldermore's acquisition in 2018 and aligns with Aldermore strategy to distribute excess capital as they optimize their capital stack. This is expected to be supportive to an improving ROE from the U.K. operations going forward. I would like to spend some time on 2 specific growth strategies that we believe will be supportive of ongoing growth going forward. Our focus on SMEs and the informal economy and secondly, the scaling of our corporate bank. The group has consistently focused on SME leading as it leans into the macro expectations that this subsegment will be an early beneficiary of structural economic reforms underway in South Africa. This focus has resulted in a franchise representing 1.2 million customers and a significant lending book and deposit franchise. Just as a point of reference, customers in SME have revenues -- have businesses where the turnover of the business is below ZAR 60 million. In addition, the group has made strong headway in its strategy to service the needs of the informal economy. This has resulted in a sizable business within FNB commercial representing over 0.25 million customers. FNB has a demonstrable track record here, and we believe there's significant runway for growth. Significant risk appetite has been facilitated through risk-sharing partnerships with DFIs. Products have been created and successfully rolled out to meet the specific needs of this client set, such as FNB Merchant Cash Advance, which is a [ stutter limit ] credit card that enables users to build a track record and single invoice discounting. Additionally, supply chain financing was recently launched for mid-corporates into the value chains of their commercial partners. Development is also underway for a bespoke asset-based finance product. We are excited about the prospects of the subsegment, and we believe it represents a growth trajectory far above system growth. This slide shows the current size of the group's corporate bank, which sits across 2 silos in RMB and FNB, and which has created some drag to unlocking growth opportunities from this client set. Large corporates and MNCs have been serviced by RMB, and you can see the size of that franchise on the left. On the right, you can see FNB's enterprise subsegment, which sits in commercial, representing 45,000 clients. These building blocks to a fully integrated corporate bank, which will be further enhanced by the corporate and MNC franchise that we are acquiring early next year from HSBC. The opportunity set to unlock here is meaningful, which is why we created a brand-agnostic group executive role to establish what we refer to as commercial, corporate and MNC ecosystem. This will accelerate cross-sell, particularly in the FNB enterprise segment where they are many sizable corporates requiring the same products as RMB clients. This will also improve our ability to service clients with broader Africa ambitions, and the strategy will also create growth for Global Markets business, which is currently subscale and would benefit from the much needed flow from market access and risk management being part of a client ecosystem. The group CET1 ratio over the past 12 months reflects both the return profile and active management of financial resources. The increase in CET1 was supported by strong earnings that even net of dividend exceeded risk-weighted asset consumption by 24 basis points. Risk-weighted asset optimization further added 34 basis points lifting the group CET1 ratio to 14%. Accreting ZAR 8 billion in capital over the past 12 months alone, leaves the group in a strong position to support ongoing growth opportunities. The group's high return profile and solid capital position together with sustainable active FRM allows for a dividend cover at the bottom end of the board approved range of 1.6 to 2x. This generous dividend cover of 1.6x still leaves the group with sufficient financial resources to deliver on the group's growth objectives. I will now hand over to Markos to take us through the financial review and a detailed unpack of the U.K. provision matter, and I'll come back to close. Markos Davias: Thank you, Mary, and good morning, everyone. I'm pleased to present the FirstRand Group financial review for the year ended 30 June 2025. Despite a tough operating environment and the requirement to raise an additional provision for the U.K. motor commission matter, the group has delivered a resilient financial performance with normalized earnings increasing 10% at a return on equity of 20.2%. This has resulted in NIACC growth of 12% and good net asset value accretion of 11%. The key drivers of this performance are reflected in the 6 basis points improvement in return on assets, which Mary highlighted earlier. A key additional call-out is that improved operational leverage resulted in a significant improvement in the cost-to-income ratio to 50.8%. And this is despite the additional income statement impact of the provision raised of GBP 115 million or ZAR 2.7 billion during the period. The group CLR remains below the midpoint of the TTC range and continues to benefit from the group's origination strategies including the overall advances mix and diversification. The group's normalized earnings waterfall reflects the resilient top line growth during the period and the benefit of the positive cost jaws and the slowing credit emergence. Earlier, Mary covered the operational performance and unpack some of the key income drivers across NII and NIR. My portion of the presentation will therefore focus on the financial review of the overall credit performance and operating expenses and includes a more detailed unpack of the U.K. motor commission matter. The group's credit impairment charge increased 12% during the period. Notably, this outcome was achieved despite the significant base impact of the GBP 46 million or ZAR 1.1 billion provision release related to the prior year closure of the U.K. NOSIA matter. Excluding this large base impact, the group's impairment charge increased 3% and is overall in line with our expectations considering the tough macroeconomic backdrop. The group CLR remains anchored at the bottom end of its stated TTC range and excluding the NOSIA base impact, improved by 3 basis points to 85 basis points. In addition, the SA and broader Africa combined CLR trended marginally lower to 108 basis points with an improvement in the domestic retail portfolios, offset by the emergence of some strain in commercial I will unpack these further shortly. The group's overall credit performance remains resilient. Last year, I noted that the group believed excluding the NOSIA benefit, our CLR had peaked at 92 basis points and should trend lower in the 2025 period. Pleasingly, this has played out. And despite book growth, the absolute 6-month rolling impairment trend also remains positive. In addition, the group's impairment coverage remains appropriate for the current cycle and notably includes a centrally raised geoeconomic credit overlay of ZAR 300 million for the potential forward-looking impact of the latest tariff announcements by the U.S. Overall, performing coverage has reduced to 1.44%, driven by new origination and lower IFRS 9 forward-looking indicator provisions as the interest rates and inflation economic forecasts have marginally improved during the period. The retail CLR has performed better than expectations at this time last year, when customer affordability pressures were coupled with a shallow rate cutting cycle, sticky inflation, persistent debt counseling inflows and weak house prices that at the time resulted in a weak credit outlook for retail. Retail's origination thesis and proactive responses to some of these challenges, including improved collection processes has resulted in a better income than expected at the time. The full year CLR has improved to 1.98%, with slowing NPL and debt counseling inflows and overall improved arrears. The secured portfolio's performance continues to be dependent on asset values with homeland LTVs remaining under pressure despite the gradual improvement in overall house prices. We expect that it will take some time before house price growth exceeds the NPL interest roll-up, but the overall trend during the period is viewed as net positive. WesBank VAF continues to perform ahead of expectations with its credit charge driven mainly by the front book strain from strong advances growth of 10%. Turning to the unsecured CLR. It benefited from lower front book strain than the prior period, with advances up 3% this year. Credit performance has improved in the second half of the year, and we expect advances growth to pick up as new origination vintages are showing better resilience. As a note, the FNB card CLR tended slightly up, but this is predominantly due to sluggish book growth and flat average balance utilization, which impacted the overall denominator in the CLR formula. As a final comment on retail, improving inflation and interest rate outlook have positively impacted the performing portfolio's FLI impairment stock. As expected, the commercial arrears emergence has lagged retail by 12 to 18 months, and we note that the commercial CLR has trended much higher during the period, a significant increase in the second half of the year. Key drivers of this growth can be attributed to the 10% total growth in commercial advances, which results in Stage 1 front book strain and in particular, the multiyear strong high double-digit growth in the SME unsecured advances portfolio, which has seen some arrears emergence. The strain is predominantly attributed to older credit vintages originated around 18 to 24 months ago under a less mature scorecard at the time. The business utilizes a data-led credit strategy and has made significant improvements to its scorecard since then. New origination under the refreshed scorecard has resulted in dramatically improved underlying arrears performance, and the back book credit emergence has been adequately provided for. In addition, the 2 customers that went into default during the period resulted in a 13 basis points impact to the overall commercial CLR. Both these migrations into NPL have a client-specific circumstances and factors that we do not believe inferring to the rest of the portfolio. Whilst the workout process is expected to be lengthy, there is good collateral underpin to the value of the exposures. And notably, one of the customers has made a partial repayment post year-end. RMB's credit performance continues to perform ahead of expectations with an overall good outcome. The main call-out is similar to that noted during the interim presentation, whereby a few counters migrated from Stage 2 to NPL during the first half of the year. These are debt restructures that were already in the group Stage 2 watch list and adequately provided for in anticipation of migration to Stage 3 during the period. As a final comment, overall RMB coverage remains prudently struck at 1.66%. The U.K.'s operations credit performance remains a little noisy due to the base impact of the NOSIA provision release. Normalizing for this reflects an improving overall underlying CLR performance from 0.14% to 0.1% and includes some further cost of living overlay releases as overall customer affordability continues to gradually improve. Furthermore, advances growth picked up in the second half of the year particularly in buy-to-let property finance, which resulted in some front book strain. Broader Africa's credit performance was impacted by various country-specific pressure points, particularly in Mozambique, Namibia and Botswana. But despite this, the overall core credit performance of our client segments remained robust with the broader Africa CLR remaining below the TTC range. Only the Namibia commercial portfolio had some emergence of client-specific credit strain and has been adequately provided for with the appropriate credit responses implemented to date. I've already covered some of the key call-outs on the NPL formation for the group. But in summary, NPLs remain sticky with year-on-year growth of 10%. Most of this growth manifested in the first half of the year and relates predominantly to the RMB and commercial NPLs, I've already highlighted. Turning to costs. Operating costs are up 2%, including the impact of the U.K. motor provision. And without the provision, core cost growth also came in below average inflation at just under 3%. This outcome is as a result of management's deliberate focus on reducing the absolute level of the group's variable cost base. Furthermore, the group is evolving its cost management strategy to institutionalize costs under its financial resource management frameworks, which focuses on managing costs as a finite resource with similar allocation discipline as capital and funding. Whilst it is still early days, we believe this focus has achieved and is generally showing directionally positive results. During the period, a deliberate decision was also made to invest in frontline marketing, advertising and sponsorship costs as our franchises invest in long-term customer growth and embedded brand value. This marketing investment spend was offset by a reduction in some of the controllable costs in other expenses. On this slide, other expenses also includes the U.K. motor provision raised during the period of ZAR 2.7 billion and I will cover the provision in detail shortly. Structurally, costs were also lower due to the at acquisition Aldermore intangible asset that was fully amortized in the prior period and also benefited from the non-consolidation of MotoVantage due to the current period held-for-sale classification. I can also note that the sale process for MotoVantage has already been concluded in the new financial period. IT and platform costs continued to grow above inflation as the group invests in modernization initiatives and maintaining the in-force tech stack. Staff costs make up around 61% of the total group cost base and increased 5%, which is generally in line with the average salary increase during the period and was partially offset by a reduction in contingent staff costs. This good cost outcome has resulted in an improvement in jaws of 3.7% which translates into a significantly improved cost-to-income ratio of 50.8% and 48.8% without the provision. Once the impact of the provision is out of the base, the group expects its cost-to-income ratio to be anchored below the 50% level. In summary, the group has produced a very resilient overall top line performance that was enhanced by good cost and credit outcomes. And I will now turn to unpack the motor provision in some more detail. Upfront, I'd like to note that the group welcomes the U.K. Supreme Court judgment, which has given legal clarity on this matter, and we're pleased to have successfully appealed the key grants related to the duties of credit brokers under common law. As a note, we have included a detailed write-up in the analysis of financial results booklet to summarize the pertinent facts related to this matter, and I will use this presentation to lift out some of the key items that are relevant in understanding the group's current position. A key starting point is to first recap how we got to where we are and how the matter has evolved from claims in the lower county courts and complaints to the Financial Ombudsman Service into a potential FCA redress scheme. If we go back to January 2024, the FCA had noted a large influx of commission-related claims in the lower county courts. Importantly, at that stage, the group was successfully depending the majority of these on the basis of the underlying facts thereof. At the same time, the FOS ruled against 2 other lenders on DCA matters. These and other factors led to the FCA launching a Section 166 skilled persons review. Shortly after this, the FCA also noted that firms should at all times maintain adequate financial resources based on their own understanding of their data and complaints processes. This led at the time to the group raising an accounting provision of GBP 127.4 million, which considered only DCA agreements between the period 2007 to 2021 and was based on a wide range of scenarios and possible outcomes as there was limited information available at the time. It also considered some of the factors and approaches observed from the lower courts and previous redress schemes. In October last year, the U.K. Court of Appeal released its judgment on 3 cases, namely Johnson, Wrench and Hopcraft. Over this period, the group was granted leave to appeal on all 6 grounds and at the time, chose not to revise its provision as it was the appellant to 2 of the claims. However, we noted other lenders not involved in the court appeals chose to increase their provisions for possible outcomes from the Supreme Court process during their own respective reporting periods. The U.K. Supreme Court process concluded in early April and its decisive judgment was subsequently handed down on Friday, the 1st of August 2025. Critically, the U.K. Supreme Court overturned the most substantive appeal grants, which relates to the fact that motor dealers in their role as credit brokers do not owe fiduciary duties to customers and therefore, all the related grounds to this matter, including a tort for bribery or lender dishonesty was superseded. However, in the Johnson case only, the Supreme Court decided that there was an unfair relationship under the U.K. Consumer Credit Act. After the judgment, the FCA announced its plans to consult on an industry-wide redress scheme related to motor commissions and noted that post the Supreme Court judgment, it would also consult on including non-DCAs or fixed commissions in the scope of the scheme. Off the back of these new developments, FirstRand decided to increase its U.K. motor provision to GBP 240 million, and I will now unpack some of the considerations in arriving at this. The provision continues to consider multiple probability-weighted scenarios using all the additional information obtained from both the Supreme Court judgment and the statements made by the FCA to date. And this slide summarizes some of the key assumptions and judgments as well as noting that the group's financial disclosures include a sensitivity analysis on some of these. At a high level, both sensitivity tests resulted in a potential provision impact of well less than 10%. The provision approach resulted in an increase of the provision to GBP 240 million with an increase in the redress costs relating to the MotoNovo front book, driven predominantly by the inclusion of scenarios for non-DCA post 2021. I won't be able to cover all the specific details driving the increase, but at a high level, the first key impact relates to the unfairness ruling by the Supreme Court and the financial measures they considered in determining this as well as the remedy awarded. Assumptions used do not specifically include fact-specific considerations that the Supreme Court stated must be considered in an unfairness assessment, and we'll await the FCA's consultation process to consider these further. Management did, however, include additional scenarios for the potential remedy outcome based on the Johnson case, which included a full commission refund plus commercial interest. The second important update relates to the inclusion of non-DCAs post 2021, which I have mentioned is the largest driver of the Aldermore provision increase. Thirdly, the considerations around a potential opt-out scheme does result in higher operational and legal costs that would arise from a long-dated -- long back-dated redress scheme. One positive is that the proposed interest rate by the FCA is much lower than management considered when arriving at last year's provision. It is important to note that there are some considerations that have not been included in arriving at the provision. As of now, the provision does not cater for any contingent recoverable amounts, including, for example, any credit broker potential liability. In addition, it is FirstRand's opinion that there is a counterintuitive commercial challenge when using the commission as a percentage of total charge for credit as a stand-alone factor when considering whether it contributes to a potential unfair relationship. As context, the charge for credit component of this calculation is made up predominantly of the sum of interest to be paid by the customer over the term of the agreement. With this understanding, a simple illustration to best depict our concern is that in a basic fixed commission agreement where the numerator is also fixed for a customer who has offered the lowest possible interest rate, let's for say, example, 5%, the dealers' commission as a percentage of the total charge for credit would result in a higher percent -- percentage versus if the same customer had received a much higher interest rate of, say, 15%. Therefore, if the customer gets the best possible interest rate, he or she could be flagged as treated unfairly because of the dealers' commission as a percentage of total charge, which would -- for credit, which would appear much higher. In our view, a similar approach to the Supreme Court, which recommended multiple financial and nonfinancial factors will be required in the overall balancing act to assess potential unfairness and harm. Management also believes the inclusion of non-DCAs in the final redress scheme will require some consideration and debate as they have a different inherent risk profile in determining customer outcomes to that of DCAs. In closing, something that will be important to assess in the overall outcome will also be proportionality. Thank you all, and I'll now hand you back to Mary to cover the group's prospects. Mary Vilakazi: Thanks, Markos. Good job. And I mean, I think it was important for Markos to unpack the U.K. motor provision, the assumptions we made at arriving at the GBP 240 million provision. Although this provision is material, it is still significantly lower than the amount we would have had to set aside if the substantive arguments on fiduciary duty made to the U.K. Supreme Court had been unsuccessful. So we welcome the Supreme Court judgment, which provides useful legal clarity. The subsequent statements by the FCA, however, have unfortunately created further uncertainty and we await the consultative paper on the proposed redress scheme, which is scheduled for October. The accounting provision, which we believe has been conservatively struck in light of this ongoing uncertainty. This provision does not take into account any potential recoveries, which we believe we would have a basis to pursue. But FirstRand believes that any FCA redress scheme must be proportionate and fair. It must be in accordance with the FCA's own principles that they have communicated that they will undertake in applying a redress scheme. And we also believe that the FCA redress scheme needs to comply with the legal principles as determined by the U.K. Supreme Court. If this does not prove to be the final outcome, the group reserves its right to protect the interest of its various stakeholders. We hope that in the next year ahead, this matter will be behind us. So as I finally come to prospects, the macro underpin in our prospects is an expectation of a further easing in South African monetary conditions and a greater degree of inflation certainty. That said, ongoing global policy and economic uncertainty, alongside the government's tighter fiscal stance are significant risks that could upend the expectations of further policy relief. We expect Botswana and Mozambique to continue tough macro conditions. And we expect -- although the structural economic reforms taking place in South Africa look like they are slow, but we do expect that there will be positive momentum and trickle-down effect that starts coming through the system. I'm excited by the group's prospects looking ahead despite some of the challenges we continue to face. I expect FirstRand to deliver another strong operational performance in the coming year, the drivers of which are unpacked on this slide. Again, the group is expected to significantly outperform its long-term stated target range for earnings growth and the ROE will trend up to the top end of our 18% to 22% target range. The combination of growing the top line and managing costs will result in positive jaws, something this management team is fully committed to. This brings me to the end of the results presentation. I'd like to thank employees across the FirstRand Group for their diligent efforts in looking after our franchises and ensuring that the group executes on its vision of delivering shared prosperity to our customers, employees and the communities that the group serves. You can be proud of what the group has delivered for our shareholders. Lastly, thank you to our customers across the group. Your trust in us inspires us to innovate, to support your current and evolving needs. I will now take -- I will now pause here and take questions. I am joined by various members of the senior leadership team to field any questions that Markos and I feel they can add better context to. Thank you. We start with the questions of the people in the room as we get the online questions. Unknown Analyst: Congratulations on the results. I'm a little confused on the numbers of your U.K. provision. If you look at Page 29. The provision is set to grow from GBP 127 million to GBP 240 million, which is GBP 113 million. Then if you go to Page 17 -- sorry, excuse me, on Page 22, you talk about GBP 150 million and I'm afraid those numbers don't make sense to me. Mary Vilakazi: Thank you for the question, Markos, I think provide some clarity here. Markos Davias: Yes. So there is some context that is in the booklet around this. I think I didn't hear you clearly. I think it's GBP 115 million on that slide. On which slide is that, sorry? Yes, 115, sorry. It was GBP 115 million. Yes, GBP 115 million. And the difference of around GBP 2 million was that in setting up the scheme for last year, some of the operational costs were utilized against the provision, but only the delta raised in the current year in the income statement. So there's a small difference between the two. Apologies for that. Mary Vilakazi: Thank you for keeping my accountant in check. Unknown Analyst: In your slide on the bottom, what is covered by the distribution cost against the origination? Is that your operating costs? Mary Vilakazi: So that is our strategy where RMB, in particular in this year, originated assets and assets that we believe are probably better placed onto other balance sheets. So assets that ultimately get owned by pension funds as an example. So those are longer tenured assets, for example. So RMB undertook this activity this year to distribute these assets. So that's what we refer to as distribution. So they originated up to 8% and then manage to syndicate and pass on some of those assets to different parties. Unknown Analyst: [indiscernible] significant part of your business? Mary Vilakazi: It's something that we would like to ensure that we continue doing because RMB, as I showed, the structuring fees are quite -- the structuring and advisory fees we get from these mandates are quite significant. And in certain instances, the bank's balance sheet, due to higher regulatory capital requirements is not actually the best place to put those long-tenured assets. So this is something we'd like the business to continue doing. We're pleased that they got going this last 6 months. Unknown Analyst: Your ROE in Aldermore of 10.7%. What would you say is a long-term target ROE? Mary Vilakazi: So our aspiration for this business is for the ROE to be between 14% and 15% in pound terms. So that's obviously still way off. The one place where the strategy execution lagged in this year was the capital optimization. So because of the uncertainty with the court, we took long for us to start getting a dividend from Aldermore. So as I mentioned, we started that process. The other two places where it's going to improve in the ROE is, I think if they carry on with the origination as they are doing at good margins, be a lot more efficient because that's the one place where we look at the business and we -- our cost-to-income ratio could be a lot better. And I think ultimately, that's what's going to -- and then obviously, an improvement in our motor business ROE, which we said that's actually the one that's got a drag. So if we get all those things right, the ROE should lift. And that is still our strategy for the medium term. Okay. There seem to be no more questions in the room. Sam Moss: Okay. Mary, we've got some questions from the webcast. Warren Riley from Bateleur I think you've answered his first question already. His second question is, will the investment in the U.K. be reviewed post the U.K. motor matter conclusion? Mary Vilakazi: So the simple answer is that I think we, as a disciplined management team, have to review all our businesses on an ongoing basis. We are quite comfortable that the strategy execution that the Aldermore business is on that I think we are on track. So that part is fine. What we've had to navigate in this last year is reputational issues as a result of the industry matters. So it's obviously quite important to see where the FCA redress scheme lands. If it's obviously not proportionate and fair, it leaves us with very little resources as we think about going forward. So I would have to say that, okay, we've got the legal cases behind us, the court cases behind us, let's wait to see the FCA redress, understand what the U.K. market presents. But let's separate issue from the U.K. market to also our business, which I think you need to trust us that we will manage the business prudently, grow it and do the right thing. Sam Moss: So there's a few questions from Charles Russell. So the first one is, can you comment on the impact of lower diamond prices on your Botswana business, noting 7% increase in FNB Botswana in full year '25? Mary Vilakazi: Andries, can I pass this one on to you. Did you hear the question? Andries Du Toit: So Botswana is going through a very difficult macro environment linking to the diamond prices. Through our Botswana activities closely involved with government and the various actions they've deployed, they've also hired international advisers. But through the short to medium term, we see more headwinds than tailwinds. And from a forecast both on GDP and inflation will be obviously GDP low and high, but we actively manage as part of the ongoing balance sheet. Sam Moss: So actually, James Starke has got some follow-up questions on Botswana, Andries. He said, what mitigations can be put in place, if any? And to what extent preemptive provisions have already been taken? Andries Du Toit: Okay. So first of all, it is a, let's call it, a macro crises, fiscal crisis for the country. Fortunately, Botswana has high investment grade. They're sitting with 5 months reserves and have capacity to borrow. So I can't -- only from a fiscal, that's where to start. So we assume that if the [ fiscus ] make the right decision, but obviously, we, as a banking institution, first and foremost, is a robustness and stability of our deposit and country. And we've already taken strengthening origination franchises, also lengthening the profile and also reduce some of our long-term funding in that business. Mary Vilakazi: Yes. But Botswana is one that we are concerned about. As Andries says, we are watching this closely. And, I guess, already some provisions have been taken in light of the fact that it is going to be a tougher macroeconomic environment going forward. Sam Moss: I'll go back to Charles' second question. What do you think the probability is of further provisions post the FCA consultation later in the year? Mary Vilakazi: Look, I mean I think we have gone to great pains to say, okay, we've now raised this provision despite not having full information on the redress scheme, but we've made assumptions where we believe we've been conservative. And it's all based on what we know now. I mean, I think we obviously await the redress scheme. But from where we sit, beyond this number, I think it's really inconceivable to think how that's possible at this point in time. But all of that is qualified by the fact that I don't know. But I believe Markos has been very conservative in setting up this provision. Sam Moss: So Ross Krige also has a question on this, which I'll just cover before I go back to Charles. He's asking what are the key sensitivities in your assumptions that could have the largest impact on an eventual liability? Mary Vilakazi: Are we still in the U.K. provision? Sam Moss: Yes, we are. Mary Vilakazi: It's great to come back to the rest of our group and our franchises. But Markos, please answer that. Sam Moss: We're nearly at the end of these questions. Markos Davias: Thanks, Ross. I mean, there's -- obviously, it's multiple scenarios. And I guess kind of using the anchors that if you think back to the Supreme Court judgment on that percentage charge of credit, the percentage of advance as a calculation from a financial perspective, some of the factors that in the booklet, you'll see we call-out that the FCA is going to use from a qualitative perspective and how those all measure. The most sensitive factor will be where they decide harm begins on those as a starting point. Sam Moss: Okay. Charles's last questions about WesBank, please. Can you elaborate on the increased risk appetite in WesBank in recent months? Mary Vilakazi: Harry, can I give this one to you. I'm looking at the execs and... Hetash Kellan: So I mean, you would have a consideration around where you look at the macro environment and the rate environment -- interest rate environment. And that actually is a forward-looking view of customer affordability rate cycle. And as Mary has covered, we are expecting one more rate cycle and then effectively a pause that way, you would see marginal change in terms of the risk appetite for higher risk. You would see something similar in home loans as well. So it's in the secured asset classes that you'll see both sides. Mary Vilakazi: And Ghana, I mean, not so long ago, you were the CEO of WesBank. Do you want to add? Ghana Msibi: Yes. Thank you for that. So I think on top of what Harry is saying is our deeper play into the FNB bank base allows us to be able to go deeper on the back of the data that we've got. So I think that's helping us quite substantially. And I think the backdrop of the strength of the partnerships that we've built over the last 2.5 years equally allows us to better price and better select as a function of the schemes that we're able to put together. So I think it's a combination of factors, but we still remain, I think, quite disciplined in terms of the parameters where we're playing from a risk perspective. Mary Vilakazi: Okay. Thanks Harry and thanks Ghana. Sam Moss: I'm going back to Ross' second question. Do you expect a strong recovery in global markets NIR after the worse-than-expected second half performance? Or will this take a bit longer to eventuate? Mary Vilakazi: I will start by saying I do expect a better performance on global markets, but I'll give Emrie to give color to this expectation. And Emrie, I think you can comment on how the last 2 months have been. Emrie Brown: Thanks, Mary. Yes, I think that for us, the last year, as Mary and Markos have said, has been a disappointing performance, but we have thought deeply about our strategy. And the focus really for us is to build this part of our business to be more diversified from a client geography and product perspective. And in that, we are confident that we'll see the necessary lift in our NIR line. And to Mary's point, the first 2 months have already been a strong performance in that part of our business. So we have made the necessary investments in our systems and our platforms, and now it is really about growing our top line. And the big thing in the last year was the concentrated positions, and that is being actively addressed by the team. So we believe that outlook for global markets is good. As Mary has also indicated on a slide where she spoke around corporate and enterprise banking that is a part of our client base that we have got significant growth opportunities in, and that part of our strategy comes together nicely, which actually further supports our outlook for that part of our business. Mary Vilakazi: Thanks, Emrie. Sam Moss: Question from Harry Botha. How should we think about full year '26 NIR growth potential, excluding private equity realizations? Mary Vilakazi: With private equity realizations, I think we've said with -- at least overall NIR -- expectations of NIR growth is to grow strongly. And the private equity realizations, we think that we are at a level where the run rate is sustainable. And I think the big recovery on that NIR line is going to come from global markets. I think the other sources of NIR will continue at similar rates to how they've been growing. So -- and the big shift really will be global markets. Anything else you are expecting, Markos? Markos Davias: No, I think you've covered it, Mary. I think on the private equity side, if you think about the base created this year, most of the guidance is actually coming from the rest of the portfolio, the other factors in NIR actually. Sam Moss: Yes. Laurium Capital. Previously, you spoke about insurance as a major driver of growth. It's not listed today as a growth focus in this year's presentation. Is it fair to say that they have found it more difficult to compete in underwritten life and the open short-term insurance market? Mary Vilakazi: I did cover insurance. I think there were 2 slides that we used to reflect on the insurance business. But in short, I can say it's still an important strategy of diversifying our NIR of further entrenching our customers and our solutions in the group. And I also highlighted the fact that to date, non-credit life business. So that is underwritten life, core life, the business we sell into commercial, that all of that accounts now for 75% of the insurance business. So I think all of that shows the growth that's happened in all these other product lines that we've been investing in. Underwritten life has been difficult. And I think we considered that clearly, this is an advice. It's a product line that requires advisory capacity. We started investing in increasing the number of advisers we have. And it's pleasing now that I think the contribution they're making is starting to come through. So underwritten life, when you look at our booklet, it's down 15%, but that's because the life simplified product. I think that we have reduced sales on significantly because the claims experience was not great. But the core underwritten life, I now believe that we are on track to start growing it because now we've actually got a fair number of advisers, and we continue to invest in that channel. So I don't think we've -- I mean, we found it difficult, but I think we have made plans along the way to have the right strategies to provide advice. And short-term insurance, by the way, I think they made a record -- they had a gross written premiums at ZAR 1 billion this year. So it is a business that is growing. Sam Moss: Question from Chris Steward from Ninety One. Is the current structure of the corporate banking entities across the group sustainable? Or is the more fundamental restructuring required to achieve the full benefit of the opportunity available to the group? Mary Vilakazi: Chris, I'll say that I think what we have is a big start -- is a bold start. And let's see. I mean, I think we've got Muneer Ismail that's joined us from July. He is working very well and closely with the teams. And I think we will be able to understand what needs to be done in the business to unlock the strategy. But he's working closely with the FNB and FNB teams and commercial and as well as Emrie in RMB. So, so far, I think we are on track. And I think if there's anything that requires to be changed, I'm sure they will do it as a normal course of business. Anything you want to add there? Unknown Executive: No. All good. Okay. Mary Vilakazi: Yes, Chris, we at least have started the journey. Sam Moss: Okay. A question from Stephan Potgieter from UBS. Cost growth has been very low at 2.7%. Could you unpack the initiatives driving this and to what extent this is sustainable? Mary Vilakazi: Markos? Markos Davias: Thanks for the question. I guess I called out two large items that are more structural in nature. One is that we have completely amortized the intangible assets from Aldermore at acquisition. That had a base impact, if you check in the booklet from last year that is now no longer there this year. And the second one is, obviously, we're looking to optimize our variable cost base, which this year, we structurally reduced some of the property-related expenses, if you look in other costs quite significantly, and we don't expect those to have a significant bounce back in cost base. They're now lower as we've exited some of the costs themselves. The piece that we remain focused on is obviously some of the larger technology contracts reprice, and we have to renegotiate. So we remain focused on those renegotiations and ensuring that we get the best outcome for the group from those renegotiations. So really, I mean that point I made on focused on variable costs or controllable costs has really delivered this year, and that has created the step change in that core cost outcome. The MotoVantage sale has obviously also removed the gross-up of those costs on consolidation from the base on a permanent basis and the new structure that will be in place will not have those repeat going forward. So those are kind of some key call-outs to give you a feel for the cost outcome. Sam Moss: A question from Chris Logan. In looking ahead, FirstRand is pleasingly set to deliver higher earnings growth and ROE in the year ahead. Does FirstRand believe this positive outlook will lead to growth in NIACC or economic profit, which has been flattish over the last number of years? Mary Vilakazi: Thank you. I think the -- yes, the growth in earnings and the return profile that we aim to sustain will result in growth in NIACC unless our cost of equity goes up, that naturally should flow through. And Chris, I mean, I think if I look at -- we've disclosed the numbers at the bottom of the slide where we show economic profit, and we show you the impact of that U.K. provision on economic profit. So I think the ZAR 2 billion [indiscernible] economic profits over the last few years is really the reason why our NIACC has actually not gone up. But it remains a key performance measure for the group. And we are confident that when we have this noise behind us, that those [indiscernible] only just go up. 12% increase in this current year to ZAR 11.5 billion is decent. Sam Moss: That was the last question on the webcast, Mary. Unknown Executive: Mary, there might be a question from the conference call. Irene, are there any questions? Operator: At this time, we have a question in the queue from Simon Nellis of Citi. It seems there's no response from Simon's line. And we have no other questions in the queue. Mary Vilakazi: Okay. With no further questions, let me thank you for listening into our results presentation and attending, and I wish you a good day further. Thank you.
Mor Weizer: So good morning, everyone. Thank you all for attending today. It's good to see a lot of familiar faces here. So on to Slide 2. I'll begin with the highlights before handing over to Chris, who will take you through the financials and the outlook. I'll then update you on our progress against our strategic priorities. Turning now to Slide 3. I'm pleased to report a strong performance in the first half with adjusted EBITDA of EUR 92 million, consistent with the upgraded expectations communicated in last month's trading statement. The overall performance reflects the revised terms of Caliente Interactive agreement. We saw solid underlying growth within the B2B business. At the same time, we continue to make excellent strategic progress in core markets, in particular, the Americas, where we have laid the foundations for significant growth in the U.S. and Brazil. The disposal of Snaitech, which completed in April, has bolstered our balance sheet, giving us the flexibility around capital allocation. Given the solid start to H2, we are on track to deliver full year adjusted EBITDA for 2025 ahead of expectations. As we transition back to our roots as a pure-play B2B business, the Board remains confident in our ability to execute our strategy over the medium term. I will now hand over to Chris, who will take you through the financial performance and outlook. Chris McGinnis: Thanks, Mor. And on to Slide 5, please. Before we look at the numbers, I think it's important to note the 2 major events that took place in the first half of this year, which are, of course, the completion of the sale of Snaitech as well as the revised terms of our agreements with Caliente Interactive taking effect. These big changes have fundamentally reshaped Playtech, and we are pleased that the financial performance of the group, which includes these -- the impact of these changes has come in ahead of expectations. Now looking at the numbers. Group revenue for the first half came in at EUR 387 million, down 10% year-on-year due to the impact from the revised agreement with Caliente Interactive. As a quick reminder, under the revised agreement, which came into effect on the 31st of March, the additional service fee will no longer be collected, reducing revenue while direct costs are also slightly reduced. As previously communicated, our share of income from associate as a 30.8% direct equity holder is now included within group adjusted EBITDA. We've put a slide in the appendix that walks through the comparison and changes at revenue and EBITDA level, so you can see the effect of the new Caliente Interactive agreement has had in the period and how underlying group earnings have grown. Excluding the Caliente Interactive impact, group revenue was flat year-on-year in the first half. This performance also absorbed several headwinds we saw in the first half of the year, such as the Brazil regulatory transition issues, the implementation of the VAT in Colombia and the exit of a major operator from Asian markets. Adjusted EBITDA in the first half came in at EUR 91.6 million, ahead of consensus expectations prior to our August trading update. On an underlying basis, adjusted EBITDA grew 5% year-on-year in the first half, reflecting the strength of our core operations. We have maintained a strong balance sheet, ending the period in a net cash position due to the net proceeds from the Snaitech sale. Finally, our free cash flow generation in the first half was impacted by the timing of dividend payments from Caliente Interactive totaling USD 20 million, which were received post period end. Turning to Slide 6. Looking at the B2B division in more detail, H1 revenues declined 9% to EUR 348 million. On an underlying basis, revenues grew by 3%. Also, on an underlying basis, Latin America saw revenue growth of 5% as the tailwind from Brazil's inclusion within regulated markets in our reporting was partially offset by the previously flagged headwinds in Brazil and Colombia. The U.S. and Canada region continues to see very strong momentum with revenues increasing 64%. Looking at Europe, excluding the U.K., revenues grew 4%, driven by Poland and Spain. In the U.K., revenues declined 3% due to the continued impact of an operator in-sourcing their self-service betting terminals. Elsewhere in unregulated markets, revenues declined, reflecting the reclassification of Brazil as a regulated market. From a cost perspective, and you can see more details with the breakdown in the appendix, continued investment into strategic areas such as Live in the Brazil and the U.S. was largely offset by tight cost control, which resulted in B2B costs increasing by only 2%. Now on to Slide 7, where I will take you through the performance of our B2C division. B2C revenue declined 17% year-on-year to EUR 41 million in the first half, while adjusted EBITDA loss narrowed from EUR 4.3 million to EUR 1.5 million. HappyBet saw a 10% decrease in revenue -- sorry, 19% decrease in revenue, driven by the closure of the Austrian business and the ongoing winding down of the German operations. Adjusted EBITDA losses narrowed significantly to EUR 2.3 million for the same reasons. As announced in May, we have initiated the disposal process with another German operator, which includes the transfer of HappyBet's German franchise partners and associated hardware subject to negotiations. This marks a key step in our exit from the noncore HappyBet business. Elsewhere, our Sun Bingo and other B2C operations were impacted by enhanced regulatory requirements in the U.K., which contributed to a 17% decline in revenue and a reduction in adjusted EBITDA. Turning now to Slide 8, where we look at our net debt bridge from the end of 2024 to the end of June 2025. Following the disposal of Snaitech and the payment of the special dividend, we received just over EUR 300 million in net proceeds. As a result, we ended up with a net cash position of EUR 77 million as at the end of June. It's worth flagging that this net cash position is elevated as there are outstanding liabilities from the Snaitech disposal totaling just over EUR 90 million. These liabilities, which are not due until 2026 and 2027, include a portion of management bonuses related to the deal, taxes on the Snaitech sale and dividends to holders of unvested LTIPs. Adjusting for these on a pro forma basis, we would have had a slight net debt position of EUR 15 million at the end of the period. Turning to our borrowing facilities. In Q2, we successfully repaid the remaining EUR 150 million outstanding under our EUR 350 million March 2026 bond using a portion of the Snaitech proceeds. This leaves us with a single EUR 300 million bond, which matures in June 2028, alongside our recently secured EUR 225 million revolving credit facility, which replaced our previous facility and currently remains fully undrawn. On to Slide 9, Playtech continues to maintain a strong balance sheet, which provides us with the flexibility to allocate capital in a disciplined and strategic manner. Our approach is focused on driving long-term growth while delivering value to shareholders. We are actively deploying capital to high-growth areas such as the U.S., Brazil and Live Casino, where we see strong momentum and scalable opportunities. In addition, we're investing in both new and existing structured agreements that support our expansion into regulated markets and reinforce our B2B leadership. Our M&A strategy remains disciplined. We are open to accretive acquisitions that align with our strategic priorities and regulatory trends with a clear focus on enhancing Playtech's position as a pure-play B2B technology provider. At the same time, we continue to evaluate mechanisms for returning capital to shareholders, including dividends and buybacks, ensuring that any action taken is both sustainable and value accretive. This balanced approach allows us to invest in growth, maintain financial resilience and deliver returns, all while remaining agile in a dynamic market environment. Turning to Slide 10. As you recall, at our 2024 full year results, we introduced a new medium-term adjusted EBITDA target of EUR 250 million to EUR 300. We have a starting point of approximately EUR 150 million in adjusted EBITDA for 2024 when you adjust for the revised Caliente Interactive agreement. I'll now walk you through the key levers we're deploying to reach this target. First, our U.S. business is in growth phase and as a result, has annual losses of approximately EUR 15 million. This is primarily due to the significant investment being made within the Live segment as we have 3 studios now operational in the U.S. with small but rapidly growing revenue. Given the structural growth drivers and demand from operators, we see a clear path to profitability over the coming years, a strong operating leverage on the revenue growth translate into narrowing EBITDA losses and then ultimately positive EBITDA. Secondly, we have identified underperforming businesses within the Playtech Group that contributed more than EUR 20 million in annual EBITDA losses. Of that, a significant amount relates to HappyBet, which we've discussed and where there's a process underway to wind down that business. The remaining underperforming businesses will be addressed in the coming periods with actions already being taken. Next, as Mor will talk about in more detail, we are well positioned in markets such as Brazil and Mexico, partnering with the biggest and most ambitious brands, which should drive further earnings growth over the medium term. Finally, we continue to identify inefficiencies across our processes and footprint while taking steps to eliminate duplication. This will ensure our B2B business operates with the right cost base and that our resources are focused on the growth areas that we've just discussed. And finally, moving to Slide 11 and our outlook. We've seen a solid start to H2 with performance tracking in line with normal seasonality. We plan to continue to increase investment in the second half, particularly in the U.S. and Brazil, where we see strong and sustained demand for our products. Despite the increased investment, we're on track to deliver full year 2025 adjusted EBITDA ahead of expectations, reflecting the strength of our core business. For guidance, we now expect full year 2025 CapEx, which includes capitalized development to be between EUR 80 million to EUR 90 million, which is a reduction from our previous guidance of EUR 90 million to EUR 100 million, which is due to lower capitalization rates and a disciplined approach to capital spending. We maintained our effective tax rate guidance of between 25% to 28%. our financial performance and good strategic progress in the first half of the year keeps us firmly on track to meet our medium-term adjusted EBITDA and free cash flow targets of EUR 250 million to EUR 300 million and EUR 70 million to EUR 100 million, respectively. With clear strategic priorities, strong execution and a strong balance sheet, the Board remains very confident in Playtech's prospects for the remainder of 2025 and beyond. I'll now hand back to Mor to take you through our strategic priorities. Mor Weizer: Thanks, Chris. On to Slide 13. I'll begin by highlighting 2 landmark milestones completed in H1 that fundamentally reshaped Playtech into a highly focused B2B business. Let's start with Snaitech, a transformational deal and a clear example of our commitment to deliver shareholder value. We acquired Snaitech in 2018 for EUR 846 million at an attractive EV/EBITDA multiple of 6.1x. Alongside the Snaitech team, we successfully transformed this business from a predominantly retail operator into a higher-margin, less capital-intensive technology-driven omnichannel leader. In September last year, we announced the sale of Snaitech to Flutter Entertainment for EUR 2.3 billion, representing a premium EV/EBITDA multiple of 9x. This transaction completed in April 2025, delivering a cash return of more than 3x our initial investment with EUR 1.8 billion distributed to our shareholders through a special dividend paid in June. On to Caliente Interactive, our most successful structured agreement to date. After a challenging period, we restored our strong and collaborative relationship with Caliente Interactive by signing a revised strategic agreement in September 2024, which completed at the end of March this year. This agreement represents a good outcome for both parties and lays the foundations for the next phase of growth for our partnership. Under the new structure, Playtech now owns a 30.8% equity stake in Caliente Interactive, a newly formed U.S. incorporated holding company for Caliente's online business. And importantly, this partnership is already delivering cash returns. Caliente Interactive declared and paid its first dividends to Playtech in early H2. On to Slide 14, where I will outline Playtech's investment case. There are 2 elements that are important to understand when looking at the company and its prospects following the Snaitech sale. Firstly, operationally and commercially, we are a high-growth B2B business, providing technology to the majority of the leading brands in the industry. We provide these brands with our market-leading innovative content across a range of verticals, including the rapidly growing Live Casino segment, where we are gaining market share in key markets. One of our greatest strength is our presence in some of the fastest-growing regulated markets in the world, including the U.S., Brazil and Mexico. And we offer a range of innovative business models to ensure we are able to extract the appropriate level of value for the software and services that we provide. Taken together, we have an attractive set of levers that will see us deliver on our ambitious medium-term adjusted EBITDA and free cash flow targets set 6 months ago. Secondly, we have a collection of highly valuable assets on our balance sheet with a total book value of over EUR 1 billion. And of course, book value is generally regarded by the market to be a conservative estimate of realizable value. Nevertheless, in the interest of prudence, we will use this measure. The largest asset by far is our 30.8% equity stake in Caliente Interactive, which has a book value of EUR 726 million. Our other assets are at an earlier stage in their development, yet they have the potential to grow strongly and ultimately generate significant value for Playtech shareholders. In the U.S., our low single-digit equity stake in Hard Rock Digital gives us strategic exposure to a rapidly growing business with a market leadership position in Florida's online sports betting market. In Brazil, we also hold a nominal cost option on 40% of the equity in Galera.bet, which was amongst the first batch of operators to be granted a license in the newly regulated Brazilian market. I'm really excited about this business, and you'll hear me explain why in a few slides. In Colombia, we hold a nominal cost option on 50% equity in a leading online gaming operator, Wplay, representing a strategically valuable asset. Next, we have a valuable 49% equity stake in LSports, the real-time sports betting data provider covering over 100 sports with some of the lowest latency rates in the market, and the business is growing rapidly. Finally, we have equity stakes in various other assets such as Algosport, whose profits have continued to grow as well as assets such as Northstar and The Sporting News. And underpinning our investment case is our commitment to deliver shareholder value, including through shareholder distributions. So in summary, Playtech offers access to a high-growth B2B business complemented by highly valuable assets and a strong commitment to delivering shareholder value. On to Slide 15. Here, I'll briefly outline the strategic priorities that will drive our progress towards achieving our medium-term adjusted EBITDA target of EUR 250 million to EUR 300 million. Firstly, we will continue to prioritize regulated and regulating markets with a clear emphasis on those offering the greatest long-term growth potential. Markets such as the U.S. and Brazil are currently in the investment phase but we are confident they will deliver substantial returns over time. Others like Mexico are already highly cash generative and provide a strong foundation for scalable growth. Secondly, we will concentrate our product investments in areas with the highest potential for profitability and return on capital. Playtech is renowned for the breadth of its product offering but there are certain verticals that provide the greatest opportunity. We believe that live and casino present the greatest opportunity for growth supported by our market-leading PAM+ platform and our value-accretive services business. Thirdly, our transition into a highly focused B2B technology company is a natural moment to review our operational efficiency and agility, as Chris touched on. This means addressing underperforming businesses, streamlining operations, eliminating duplication and building a leaner, more responsible organization that can adapt quickly to changing market dynamics and customer needs. By executing on those core priorities, we will optimize resource allocation, reduce structural complexity and improve cash generation, positioning Playtech for sustained long-term success. On to Slide 16. Let's now turn to one of the most exciting strategically important growth drivers in our B2B business, our successful partnership with Caliente Interactive. The overall Mexican online market is set to grow 21% in 2025. But despite its scale, we think there is capacity for further growth in the years ahead. According to industry analysts, GGR per adult in Mexico averages $35. This compares to $65 in the Philippines, a market with similar demographics and digital infrastructure but a much lower GDP per capita, suggesting a significant opportunity for further growth in Mexico. As many of you know, Caliente Interactive has long been the undisputed market leader in Mexico's online sector. Over the years, its technology platform has been finally tuned to reflect the unique preferences and behaviors of local consumers, giving it a distinct competitive advantage. At the same time, Caliente's scale enables it to invest aggressively in marketing, reinforcing its leadership position. This sustained investment has created a brand that is unrivaled in Mexico. For example, Caliente sponsors 13 out of 18 teams in the Liga MX, the country's top football league. With Mexico set to cohost the 2026 FIFA World Cup, Caliente's dominance is expected to reach new heights as the tournament will significantly amplify its visibility and further solidify its brand leadership. Beyond Mexico, Caliente's ambitions extend to other markets. Later this year, the company plans to enter Peru's newly regulated market, marking the first step in a broader expansion strategy across Latin America. At the same time, Caliente is actively exploring other markets across the region, carefully evaluating the most exciting opportunities for future expansion. Moving to Slide 17, where I'll provide an update on the current and future growth drivers of our U.S. business. After signing partnerships with all of the major operators throughout 2024, we have seen very strong momentum in the first half of this year with revenue growth surpassing 100%. A key factor behind this growth has been our ability to expand wallet share amongst Tier 1 operators. Our Live Casino business made material progress following a successful launch with DraftKings across the 3 largest iGaming states. By the end of June, we were operating more than 50 active live tables in our U.S. studios, and we continue to invest in additional capacity to meet the strong and growing demand of our products. Our expansion with existing operators into new states creates a further avenue for growth. In June, we announced our entry into West Virginia, our fourth iGaming state, where we launched with major operators, including DraftKings, Rush Street and BetMGM. We also expanded our relationship with Delaware North, launching online sports in Arkansas and multiple products in West Virginia. Through our equity stake in Hard Rock Digital, we benefit from their unique leadership position in online sports betting in Florida. The cash generated from Florida supports Hard Rock digital expansion into other states across the U.S. and other international markets where we are also positioned to capture value from their growth. Margin-accretive platform deals are especially attractive given the value that accrues to Playtech when operators use both our PAM+ platform and content. We now have 3 U.S. operators utilizing our platform with revenue from this subset growing significantly, and we expect this to be an increasing contributor to our U.S. growth. Finally, we continue to prioritize the development of innovative content tailored to the U.S. audience as we look to increase wallet share amongst operators. In H1, we released 20 new games, including branded titles such as RoboCop: Collect 'Em and Deadliest Catch. Our content strategy is delivering results. Multiple Playtech titles consistently rank amongst the top 25 games in industry reports, underscoring our ability to compete with established suppliers and reinforcing the strength of our content portfolio. As we deepen our U.S. presence, our focus remains clear: Innovation; operational excellence; and supporting our partners to capture long-term growth opportunities. Moving to Slide 18. Let's turn to Brazil, one of the most exciting and fastest-growing markets in the world. The official launch of Brazil's regulated online gambling market in January marked a historic milestone for the industry and a major opportunity for long-term growth. Industry analysts project the market to grow at 15% annually, reaching GGR of $17 billion by 2030. That said, as with any major regulatory shift, there have been some well-publicized bumps in the road to begin with. Brazil introduced some of the strictest onboarding requirements globally, leading to unusually high KYC rejection rates and as a result, lower-than-expected volumes across the industry in the first half of the year. Given our strong partnerships with leading Brazilian operators, this has had an impact on us as a B2B supplier. But let me be clear, we see this as a temporary headwind. Our conviction in Brazil's future is reflected in our decision to invest further in the country. We are building a state-of-the-art live casino studio in Sao Paulo on track for completion by the end of 2025. This will allow us to deliver localized premium content with native-speaking live dealers creating an authentic experience for Brazilian players. To support this, we are scaling our local presence. Our team in Brazil is expected to grow to over 100 people this year, and we are continuing to invest in talent and infrastructure to capture this opportunity. We have signed partnerships with some of the country's leading operators, strengthened our position through our structured agreement with Galera.bet, and we are in the final stages of securing an agreement with a major player, which has the potential to be one of the largest operators in the Brazilian market. Let's now turn to Slide 19, where I'd like to cover our progress in Live Casino. Throughout the first half of 2025, we saw strong and sustained demand for live with revenues up 9% year-on-year. A standout region was the United States, where we delivered over 300% revenue growth following a series of successful launches with DraftKings across the 3 largest iGaming states. Across our 15 studios, we now have over 470 tables, an increase of 5% versus the end of 2024. In response to strong demand, we are investing in further capacity expansion across all of our U.S. studios to capture the growing opportunity we see. We are also expanding across Latin America. Live Casino is proving to be highly popular in Brazil. While our new Sao Paulo studio is under construction, we are expanding our Peru facility to meet the surge in demand and reinforce our leadership in the region. On the product side, we are building on the success of our landmark partnership with MGM Resorts International. Earlier this year, we launched a dedicated studio on the MGM Grand casino floor, bringing the energy of Las Vegas directly to online players in regulated markets outside the U.S. Along with the game show Family Feud, the studio also broadcast a variety of interactive table games, all hosted in a fully transparent glass studio on the MGM Grand casino floor visible to the public 24/7. We also introduced Vision Blackjack, a game that replicates the look and feel of a live table while operating entirely on RNG technology. Unlike traditional live dealer games, it eliminates the need for human dealers and video streaming, enabling faster gameplay, lower operating costs and highly scalable deployment. Live Casino continues to be a high-growth, high-margin vertical for Playtech. With strong performance in the U.S., expansion across Latin America and Europe and continued product innovation, we are well positioned to capture the next phase of growth in this space. On to Slide 20, where I want to highlight the growing importance of our services business, which is set to remain a key contributor to B2B revenue growth. Through partnering with over 200 licensees globally, Playtech has amassed significant knowledge on the gambling industry, including customer acquisition and retention, risk management and operational know-how. In addition, Playtech can optimize its products to maximize their value for operators. Our services have been hugely valuable to partners, particularly those with strategic agreements in place. This is a key competitive advantage and an important contributor to their success. To meet strong demand, we are now rolling out our services offering to a broader set of operators, enabling a greater proportion of our licensees to benefit from optimization of Playtech's products and our marketing and operational expertise. Given our revenue share model with operators, this should act as a tailwind to revenue growth, providing a win-win model for both Playtech and its licensees. Finally, Slide 21, where I summarize Playtech's investment case. Playtech has clear levers for medium-term growth. In terms of geographies, we see the greatest opportunity in the Americas, most notably the U.S., Brazil and Mexico. From a product perspective, we expect Live Casino to be an increasingly important contributor. Given the significant investment across these areas and our ongoing work on operational efficiency and addressing underperforming businesses, the foundations are in place to achieve our medium-term adjusted EBITDA and free cash flow targets. We own highly valuable assets such as our stakes in Caliente Interactive and Hard Rock Digital. Both of them, along with our other assets, occupy strong positions in their local markets, and we see significant potential for them to continue increasing in value. Our strong balance sheet provides the flexibility to pursue both organic and inorganic growth opportunities while also supporting future shareholders' returns. We are confident in continuing to deliver shareholder value over the medium term, and I'm really excited about what is in store as we embark on the next chapter at Playtech. Thank you all for listening. Chris and I will now be very happy to take any questions you may have. And a quick reflection on the age, right? So I just turned the glasses. I just turned 50 two weeks ago, a big milestone for me. And I just celebrated my 20th year anniversary with Playtech. So you should all go easy on me. Unknown Executive: So just moving on to Q&A. So we'll first take questions from inside the room. And then once all of those are exhausted, we'll then move to the conference call line and take any questions there. David Brohan: David Brohan from Goodbody. Three for me. Firstly, on the live from Playtech product. Is there any KPIs you can share on how this has performed versus comparable games in your Live business? And then on the SaaS business, another very strong period of growth. How long do you think the future runway of growth is in that business? And then finally, on the U.S., any kind of sense on timeline for the U.S. to get profitability? Chris McGinnis: The first one, David, can you repeat that live comparable? I didn't catch. David Brohan: Yes. So just any KPIs you can share on how customers -- customer metrics look on your Live from Vegas versus your other Live product? Chris McGinnis: Yes. I think the Vegas one, it was interesting. It was a new concept, right. And we were, I think, both MGM and us quite excited about it. Obviously, it's -- we're still ramping it up. And I think 12 months ago, when many of us were at G2E in Las Vegas, we had a couple of tables operational at De Bellagio and a couple at MGM Grand, which were dual play. But in recent months, we've opened the whole studio in the MGM Grand. And in parallel to all of that, we've been ramping it up with customers and rolling it out. Obviously, it's not available to anyone in the U.S. but it's being broadcast elsewhere. I think we had modest expectations but the KPIs have probably surpassed our expectations. It's still modest. I would describe it as a new adjacent product in terms of innovation and offering something new and a key part of what we're doing. So I think the KPIs are probably better than expected. However, overall, I would say, in terms of impact, it's relatively modest and you look at the 400-plus tables we have across the whole business, and you're talking relatively small number. But nonetheless, it's something we've been quite excited about. Mor Weizer: If I may just [ elaborate ] further, I think that it's too early to suggest and quantify it, right? I think that what we do see is a very strong demand by various operators that decided to take the product. You have to understand that when you roll it out and we indicated that it is for online customers outside of the U.S. in regulated markets, which means basically that we need to go through the certification and licensing in each and every country where we would like to offer that because it's a new product streamed from Vegas. We see strong demand for customers. The pipeline is there already secured. We are rolling out in different territories. And I think that we will be -- sometime next year, we'll be in a better position to quantify that but it's looking very, very encouraging. We are very excited about this opportunity as evidenced by the increased investments further extending the relationship to Family Feud game show and additional tables. So very encouraging, yet too early to quantify, still small in size, given that it's early stage, early days. On SaaS, maybe I'll pick up -- I'll continue with SaaS. We still believe that there are a long list of -- there is a long list of customers that will onboard onto our product. We use now SaaS not only as a model for small, midsized operators but also certain operators such as in the U.S., such as in Brazil, the long tail in each and every country, in each and every regulated country. And therefore, we still see a lot of demand, and we still see the pipeline growing. Having said all that, there is also a very, very attractive opportunity for Playtech to increase market share. Today, Playtech represents less than 5% on average, Playtech represents less than 5% of the overall market share for the small, midsized operators. If we only double that to become 7% or 8% or double it to 10%, we double the business together with the existing customers. So it's horizontally to additional customers in additional territories where existing customers extend together with us to additional countries, such as Brazil is a good example, even in the U.S. And beyond that, obviously, vertically where we can grow together with them and grow the market share of Playtech, we are developing -- we developed earlier this year an entire program of campaigns, working together campaigns, including promotions together with the operators to expose the Playtech portfolio within the portfolio that they had before. Remember, these are small, midsized operators. Some are also big operators, and they never had Playtech. It's for the first time they have Playtech, and we now work together with them on a program to expose Playtech, expose it to end user customers. And this is why we believe that it still has a lot of potential going forward. Chris McGinnis: Then on U.S. profitability, it's a bit of a -- to be honest, it's a bit of a moving target but that's a positive. In that what we're seeing in the U.S. is as we build the infrastructure, which is largely Live Casino but more than that but a big majority of the investment is Live Casino, both CapEx and then OpEx to run these facilities. As we're building and expanding, it's just leading to more demand, which then requires more building and expanding. So if we stopped sort of expanding, we could probably get to a breakeven in profitability in, I don't know, 18 to 24 months. However, that would not be the right thing for the medium to long term for Playtech. So at the moment, what we're seeing is a demand and we're sort of trying to keep up with it, to be honest. So that requires more investment. So that's going to delay profitability. So at this point, it's probably a few years away for being honest. But again, it's a very positive thing because we're seeing a lot of demand for our products in the U.S., particularly Live. Roberta Ciaccia: It's Roberta Ciaccia from Investec. So I have 3 questions on the same subject, actually. Sweepstakes in the U.S., there's been a lot of noise on the press regarding the court case in California. Other companies have been involved or haven't been mentioned but I wanted to know if you can. Firstly, if you can quantify what is your exposure to that business? Secondly, which states you actually operate in? And third, what is your position going forward? If you're doing it, do you want to keep doing it? Or will you select state by state? What's your view going forward on that? Chris McGinnis: I'll take the first part on quantifying it and then the rest to Mor. On quantifying, I mean, overall, we see it as immaterial. But just to give you a bit more color around that, circa 1% of group revenues or single-digit millions kind of amount on a revenue basis. So a small amount that we largely consider immaterial. Mor Weizer: Yes. And I'm happy that Chris started because he put it into context, right? It's 1% of overall group revenues. I will say that we always took a conservative approach. And this conservative approach meant that we only worked with a very selected few operators of size that we knew obtained certain legal advice alongside Playtech in only selected few states. So from the outset, Playtech has not been involved in many of the states that some other operators do operate in and other suppliers supply their software and services into. Our approach is very conservative. We monitor the developments. Our models in each and every state is somewhat different. I won't get into the individual states. There is a list, not a very long list, by the way, left. And we obviously take a very conservative and prudent approach towards sweepstakes. We were one of the first to pull out of California, even ahead of anything happening there. And -- but this is the nature of Playtech. Sometimes you pull out of the market. Sometimes you buy into Hard Rock Digital before the market is regulated when there is still certain -- obviously, certain concerns about whether Hard Rock will be able to operate in Florida. And I think that it's the natural development. Putting it back into context, it's 1% of revenues. We take a very conservative approach. We will follow the fluid -- the changing and fluid regulatory environment in the United States. And we will continue, and this is the most important thing, we will continue to further establish ourselves in the regulated states across the U.S. with the largest and leading online gaming operators, and this is our focus. It was the focus. It is the focus and will remain the focus going forward. I think it's evident by the growth, the 100% growth in the U.S., 300% growth in Live Casino. We only just started. And I think this, alongside the fact that it's only 1%, puts it in context and our approach to the U.S. and the activity in the U.S. altogether. Roberta Ciaccia: Can you just confirm these revenues are classified under unregulated revenues? Chris McGinnis: Yes. Mor Weizer: That is correct. As was Brazil before it was regulated, even though many refer to it as regulated. James Wheatcroft: James Wheatcroft from Jefferies. Just a couple from me, please. Firstly, just in terms of capital allocation, like a sort of newish slide. What would you be comfortable with in terms of leverage going forward, either for buybacks or M&A? Secondly, just in terms of U.K. tax discussions, have you got a view on what we should expect and the implications for Playtech? Chris McGinnis: Yes, I'll take the first one on capital allocation and leverage and then more can touch on U.K. regulation. On leverage, and this is -- there's no change. This is what I've said in the past but I see it more as a medium-term sort of target and not something we would look to get to immediately. But 1x to 2x net debt to EBITDA is, I think, where we feel comfortable operating. Obviously, the numbers you've seen today, we're in a net cash position, so it's very underlevered. However, I did flag some of the liabilities that sort of aren't captured in that number, which takes us to a small net debt position. But obviously, that gives us flexibility to increase leverage. I think we would do that in a measured way, not in one fell swoop but it's something I think we will look to do over time is to get that leverage back to a probably more efficient level. Mor Weizer: And the second question was the implication of the tax reform in the U.K., right? James Wheatcroft: And maybe if you have a view around what you think that might be? Mor Weizer: I don't think that we have a view. Remember that we are one step removed. We already adapted to any changing market conditions, including changes of regulations, regulatory changes as well as tax increases. However, I will say that we truly think that it is -- it's important that the government engage with the operators and understand the implications of such increase in taxes. We understand policymakers. We understand the fiscal pressures. However, sometimes there are some unintended consequences. You take the Netherlands, for example. What happened in the Netherlands, they increased the taxes and it pushed the industry towards illegal activity. At the same time, it created a shortfall in tax receipts of EUR 200 million. So sometimes there are some intended consequences for increases in tax I will add that it's not yet clear because we have gone through certain changes in other territories. However, we also changed from the -- we also experienced that in the U.K. when they first introduced the tax. And I can say that it's not yet clear how it will evolve and develop because sometimes what happens, like I said, some go to illegal, but the government -- the U.K. government has a better enforcement approach in the market but it does lead to operators leaving the market because it's not sustainable for them. And in this case, the type of customers that Playtech has, i.e., the largest and leading operators in the market, as a matter of fact, may over time benefit from an increase in tax. So increase of tax is, by definition, not a great thing day 1, may have unintended consequences but the longer-term implications are not yet clear for certain type of operators, i.e., the leading and largest, which are the type of operators that Playtech has. Ivor Jones: Ivor Jones from Peel Hunt. Happy birthday again. Mor Weizer: Thank you very much. Ivor Jones: I'll speak clearly. You talked about cost cutting. You talked about, I think, cost growth in the first half of around 2%. Can you just help us give some way of scaling what the cost-cutting potential is within the plans to increase investment in certain parts of the business, that building block towards the EBITDA target? Secondly, Brazil more, you talked about hoping to sign up another big licensee. With and without that licensee, is there a way of you talking about your percentage share of the Brazilian market? We can make a forecast of the total but what do you think your share might be of your part of that market? And then last one, following up on David's question about the U.S. It sounds like it's like a fully costed local business. So does that mean its mature margin is 20% EBITDA? Or is it drawing on a lot of group costs and it's a 40% or 50% contribution type of business? How should we think about scaling that opportunity? Chris McGinnis: Yes. So I can take the first and the third and Mor can take the middle one. Cost growth and cost cutting, I think when you -- if you look at the slide in the appendix, the numbers won't be exactly like that every time. But I think that's sort of our goal going forward in that. What you don't see in those numbers is that we've removed costs from the business. So costs have gone down. So you can see the lines like operational costs, things like that are generally flat. However, Live, an area of investment, you can see a significant increase in cost because we're still investing. And all of that together leads to a relatively modest increase in overall costs. So we're -- we took -- in 2024, we took over $20 million of costs out of the business. Again, cost overall still went up a little bit in 2024 but there was a, I'd call it, a significant amount of cost cutting that happened. The year is not over, so I won't give a number in 2025 but we've taken further costs out of the business but then continue to invest in other areas. One thing that I think is a given is the underperforming businesses that I flagged that have been a drag. Whether you consider that cost cutting or not, it's an underperforming area, which is a drag on EBITDA, and we will address that. We will not be sustaining $20-plus million of EBITDA losses indefinitely. Obviously, we've talked about the HappyBet business, and that's being addressed, and we're in that process, and we started processes around other assets as well. So that's an easy one to say that, that in the future, that $20 million of loss will not be there. Maybe just since I'm already talking, I'll jump to U.S. margins and more. So in U.S. margins, I think they will be lower than group margins. For the main reason, it's Live Casino and you have to build live casino facilities in each -- not necessarily every state but West Virginia is allowing you to use facilities in the other states. But the big states so far, New Jersey, Michigan and Pennsylvania have required you to have facilities in state. And obviously, Live Casino is a scale business. And you look at our facility in Latvia, Romania, some of the big ones, we can serve from there, many, many locations around the world. So you get a lot more operating leverage and scale benefits out of those facilities. The U.S., the way it's at least gone so far, it's not the same model, right? You need to build multiple facilities. So that will put a cap on margins, so to speak. So without putting numbers on it, I do think U.S. margins over time will probably be a bit lower than, say, some of the group overall. But that being said, the U.S. margin -- sorry, the U.S. opportunity is so significant, and we're so underpenetrated there still from a market share perspective. that, yes, maybe margins will be a bit lower than the group but the magnitude of the opportunity there for Playtech, it can be one of our largest markets over time. So we're as convinced as ever about the investment we're making in the U.S. Mor Weizer: Yes. On Brazil, as you know -- not probably, as you know, the market has turned into a regulated market in the beginning of the year. They introduced the strictest onboarding process and the strictest set of regulations worldwide, more than the U.S., which had a severe impact on the operators. Some operators saw an impact of 20%. Other operators saw an impact of 70% on their business. However -- and this is why we were very focused in the first 4, 5 months of the year in order to ensure that our software and our platform will accommodate the new onboarding requirements, and we'll do that at the best -- and we'll do that in the best way. Today, Playtech customers onboard fastest in the market. It's being measured every month. And within 4 to 5 months, not only we improved it, we are now market leaders in terms of the onboarding process in Brazil. Given the fact that the numbers are picking up, the levels of GGR that we see -- we saw in August is at the same level we saw before regulations were put in place after the market went backwards significantly. Remember that there is tax involved. So there is -- I'll be very open and say there is still a small impact from -- not small but there is still impact of the tax because it's now deducted. So from a royalties perspective, we are not yet where we need to be but it's growing. We see accelerated growth. We see all the operators improving the onboarding processes. In terms of market share, it's hard for me to estimate because we have a partnership where I know we are -- we have more than 50% market share across all content and products that are provided by the operators. And we have other operators, Betano, bet365 and a long list of other well-established operators where Playtech obviously is amongst many others, and it does not provide a platform and it does not provide sports. So we believe that our market -- our share of wallet is more 5% to 10%. I think that the way we approach it now that we -- now that the market is stable and growing fast, the way we think about it is growing organically with existing customers, extending to new customers that are not yet our customers or that we already secured an agreement with but have not yet gone launched -- or have not yet launched, sorry. Extended the relationship that we have with the group of Galera.bet, which consists of today 4 brands, right, not just Galera.bet, it includes also Luva.bet, F12 and Brazilbet. And as we indicated earlier, I can't name it as of yet but we are in advanced stages of discussions with what we believe will be one of the largest operators in Brazil. I can tell you that it's a name, it's a brand name. It's a company that I -- in my entire 20 years in Playtech, never had as many positive feedbacks about the potential of a company like that across all jurisdictions, including the U.S., just to put it into perspective. Again, we can't name them as of yet, but it's a massive opportunity for us. They have access into the market, and they are very well established in the market, not yet in online sports, betting and gaming but definitely a very significant opportunity for Playtech. So market is growing. Market has gone through the first cycle of regulatory changes that had a severe impact on the business. Now stable, fast growing. Playtech extends its reach together with existing customers, new customers, partner -- its partnership structured agreement with Galera.bet and hopefully soon, a new agreement that will have a significant -- that presents a significant opportunity for Playtech in Brazil going forward. Ivor Jones: Is the new relationship potentially another 2% on top of your 5% to 10% or another 10% on top of your 5% to 10%? Mor Weizer: What do you mean the 2% to 5%, sorry? Ivor Jones: You said maybe you thought roughly your market share of operators in Brazil? Mor Weizer: In certain operators in the largest well-established operators like the Betano, bet365 and others, I believe that Playtech is 5% to 10%, right, for each, right, amongst them. For the -- for Galera.bet, for example, given the fact that we work together, they use our PAM+ as part of their infrastructure. They have our sports. So they onboard through sports, they onboard through casino as well but a lot of the customers come from sports and then convert to gaming. Playtech has a 50% market share -- 50-plus percent market share. With this customer, I believe that Playtech will have a significant share. Ivor Jones: I understand now. Sorry, I didn't understand the first answer. I was trying to understand Playtech share of the whole Brazilian market. I think you're answering about Playtech. Mor Weizer: Yes but it's very hard to estimate. I need to do the -- I don't have it out on the top of my head. I apologize because I need to calculate the 50% of Galera.bet and its share within the market. And then the operators that we have the 5% to 10% of those we operate with, those that just launched, those that will be launched and then this new opportunity. But I think that the way I described it just indicates and is evident -- it's evidence that Playtech is -- why Playtech is so excited about Brazil. I will come back to you. I'm not trying to avoid it. I simply don't want to give you a number that I can't stand behind, right? So I'll do the calculation. And hopefully, by the end, later this year, we will have a clearer view because the numbers are also changing. Remember, some of our operators tripled over the course, those that went down 70%, right, tripled the business since the beginning of the year to date, right? So a lot of changing -- a lot of moving elements there. I will come back. I'll try to come back with some answers, so you can also model that, and we will try to be as helpful as possible in this matter. Richard Stuber: Richard Stuber from Deutsche. Two questions, please. One on of Caliente and another on Brazil as well. In terms of Caliente, you mentioned that they may be looking to expand outside Mexico. Are they a well-recognized sort of brand or have any sort of presence outside at the moment? And in that case, would you expect them to have to sort of invest quite heavily? And consequently, do you expect any impact on potential of dividend and payouts? Or do you expect dividend and payouts to continue to grow despite them having to invest in new markets? That's the first question. And in terms of Brazil, just to follow up what Ivor was saying. Is this new partner, which you will be announcing shortly, is that going to be more of a structured agreement? Or is it more just kind of a rev share, is it? So -- and would you expect over time to outperform the Brazilian growth market, so to grow more than 15%. So given your positioning at the moment in terms of in some of the larger names but partners with some of the smaller names, do you still expect to grow more than 15% over the next sort of 5, 10 years? Mor Weizer: Okay. So on Caliente, I will say that Caliente is a very well-recognized brand also outside of Mexico. They do a lot of marketing activities that are picked up by different neighboring countries. There is also one other or 2 elements that are kind of almost one and the same, and it is the marketing. You have to understand when people -- when someone advertise on ESPN, ESPN has a certain -- just as an example, right but it's the same for other media providers. Certain media providers are shared among certain countries, clusters of countries across Latin America. So when you advertise on ESPN, it will be picked up by definition. Caliente advertise on ESPN on a certain video stream, it will be picked up by all the audiences in the countries that ESPN streams into. And therefore -- and this is why not only not only it will be picked up, but it will be alongside people that follow the Mexican league. So some people will follow the Mexican league but you can argue that certain people in Peru will not follow the Mexican league. But the countries that they are looking into share the same media channels that they already use and invest into. And therefore, by definition, the end user customers are exposed to the brand Caliente. And this is part of the approach that they take when they select where it is best for them to establish themselves, also, obviously, the competitive landscape, the market entry point, market access, licenses, et cetera, et cetera. Has this answered the question? Richard Stuber: Yes. I guess the question is if they have to -- normally, when you enter a new market, they'll be of loss-making for a short time. I guess it's very cash generative in just Mexico at the moment. So will that impact your... Mor Weizer: One of the Yes. So I will say they look at the competitive, they look at the development of the market, right, how young the market is. So Peru is a relatively new market, right? It's only just been regulated. So it's level playing field, right? Secondly, the competition, they looked at competition. They saw that they can compete well against the other competitors. Yes, it will come with certain investments into marketing, specifically into Peru, alongside certain other marketing activities that they already do that are picked up by the end user customers in Peru. But they believe and we strongly support their view that they have more than a fair chance to become one of the leading operators in Peru. They will all operate it centrally from their existing operations, obviously. So there are some operational leverage there. So altogether, it answer it ticks all the boxes for them in terms of licensing, the development of the market, the competitive landscape, the marketing being used already, and the marketing investment they intend to allocate to the -- for the Peru market. Chris McGinnis: And maybe just to add, I think you were getting at financial implications. I think they -- I think they're going to be relatively modest in entering these new markets. So they're not going to come and be uber aggressive with marketing spend to the point where it's going to impact our share of income drastically or our dividends, right? There may be an impact or maybe you wouldn't see the same level of growth. Remember, there's still growth to come in Mexico, as more outlined on his slide. So I think they can balance continued growth and use some of that for expansion in these other markets without having a very material impact. Mor Weizer: Yes. On Brazil and the 15%, right, 15% is a big number. So I don't want to get ahead of myself and commit to more than 15%. However, I truly believe that we laid the foundations for accelerated growth that potentially can be more than the 15% or the market growth. If the market grows at 15%, that Playtech will be able to grow vertically with existing customers, horizontally with additional customers, alongside that with Galera.bet Group and alongside that with this potential customer of Playtech. I think that when you add all of that together, Playtech has the potential to exceed the market growth, whether it is 15%, 17% or 12%. But I'm not yet ready to commit. Once we announce, I believe that we will be in a better position because it will be another building block, which will be significant, which brings me to the second part of your question, whether it is a structured agreement. Structured agreement is -- the definition of structured agreement for us is the combination of software and services. So you can argue that it's structured agreement, but it will likely not be equity -- involve equity or an option for equity. It will be a very comprehensive relationship that will involve software and services that is very lucrative and attractive for Playtech. Unknown Executive: Are there any more questions in the room? Harvey Robinson: Harvey Robinson from Panmure Liberum. Just a quick question in terms of going forward in terms of disclosure and KPIs as you become more software and services again. Have you got intentions to give us much a feel for where gross margins would be on a more traditional basis? Would you be looking at things like net retention and churn that we would look in software? Are those things you might start talking to over time? I don't expect it to happen overnight but... Chris McGinnis: Yes. I think disclosure as a whole without necessarily referring to the specific KPIs you mentioned, Harvey but disclosure as a whole, I think is something we're looking at. It's something, I think, as any company evolves, your disclosure and KPIs you provide needs to evolve as well. And obviously, Playtech this year, in particular, has undergone significant change, kind of as Mor said, back to our roots as a B2B technology provider. So I think looking at the KPIs we provide and if there's -- are the ones we're giving now the right ones? Are there any additional ones? Or is something we do need to consider. And even just looking at our B2B business, it has changed a lot in recent years with SaaS that we've talked about. So I think alongside that, we need to keep looking at which KPIs we provide. And some of the ones you mentioned are certainly ones we'll give strong consideration to. Mor Weizer: Yes. I don't want to put Chris on the spot here but I will be keen to develop the conversation. I think that is extremely important now that we move back to our pure-play B2B status. I think that once people will understand the barrier to entry, the stickiness of the Playtech products as well as the low churn rates, I think that people will start understanding better the quality of the offering of Playtech, which will value -- which will allow people to value the relationship. Some of our relations -- I joined in 2005, like I said, 20 years in Playtech. So -- and I remember having -- I remember bet365 back then, right? And Betano is a customer from day 1 and still is the case. And so -- and it is the same with Betfred and the Tote that joined -- now the Tote is part of Betfred that are customers of Playtech for the last 20 years, never left us. And the same goes with other customers that joined Playtech, like I said, very low churn rates. So I'm very keen to better understand how Playtech and what KPIs will allow people to understand better Playtech and highlight the strength of Playtech because I think that there are a lot of strengths that are not fully understood, maybe understood but not fully understood by the market and the shareholders of Playtech, and it can be very helpful. It will also help us to improve where we need to improve, right? Ivor Jones: Ivor Jones from Peel Hunt. Can I go back to Rich's question? Is there cash sitting in Caliente to fund investment? Because I guess we would probably both assume it would come out of operating cash but is there a cash pile sitting there to fund it? And the second thing, on Slide 24, when you show adjusted EBITDA, excluding the Caliente impact, and you get to EUR 61.9 million, is that taking out the contribution in the first quarter from the old arrangements but not adding back in pro forma what you might have got under the new arrangements. Is it quite a hair surety number? Chris McGinnis: So the first part in terms -- so the first part of your question, they keep working capital. And now that can change if they're -- not that they've done an M&A but hypothetically, if they were doing small M&A, they could keep a little bit extra cash for a period. But generally, they keep a few months of working capital in line with the shareholder agreement we have in place. So they're not sitting on loads of cash or anything like that. They generally return it other than sort of a few months of working capital needs. In terms of the Caliplay numbers, maybe we take it offline and we can walk you all through it later, Ivor or anyone else. But generally, we've tried to adjust both numbers to make them apples-to-apples so that you can see the trend in the numbers on a like-for-like basis. But let's maybe take that offline, and we can walk you through it step by step. Unknown Executive: If there are no more questions in the room, can we move to the conference line and see if there are any questions from there that we can take. Operator: [Operator Instructions] We have a question from Andrew Tam with Rothschild & Co Redburn. Andrew Tam: Just one question for me. Could we get some more color on your unregulated exposures? So on my numbers, there's about 19% of group revenues in unregulated, and we've heard U.S. sites is just 1%. Can you give us some more color on where the other 18% is? And then second to that, can you give us an outlook on what you expect to happen to those unregulated revenues? Do you expect those to shrink? Are you actively shrinking those? Is that a part of the market that will be increasingly less of a focus over time and just naturally shrink by attrition? And then finally, I just wanted to think about, I guess, what are the longer-term impacts on that? Do you regard those exposures to be higher margin? And what do you think will happen as that shrinks? Chris McGinnis: Yes. So unregulated, I'll run through some of the numbers. I think our percentage might be a little bit higher than what you suggest, Andrew, particularly if you include Sun Bingo and HappyBet, which are fully regulated. So I think it's -- we're well into 80% being regulated. So a relatively small amount unregulated certainly compared to others in the industry. Unlike perhaps in the past at Playtech, we don't have a very high degree of concentration in any unregulated market is quite a long tail. But to give one example, one of the biggest is the unregulated parts of Canada. So obviously, Ontario and Canada goes under regulated but the other parts of Canada are unregulated. And I use that as an example because that's the type of unregulated markets we want. Similar to Brazil, which last year was an unregulated and now it's regulated, we expect further parts of Canada to regulate. So I wouldn't use the word attrition that you sort of used in your question, Andrew. I think it's more -- it's our strategy. Our strategy is to focus on regulated and soon-to-be regulated markets. So you'll see this transition over time. And yes, unregulated should go down, but it's not about us necessarily targeting to exit or reduce it. It's us targeting markets that we expect to regulate. So they'll stay in unregulated. Sometimes these unregulated markets grow like Brazil did in advance of regulation. So you might see it go up in a period but then it will take a step down when it moves to unregulated. So I think that's the way to think about unregulated both numbers and sort of how they fit into Playtech. So they are not a focus other than markets that are unregulated where we see a path towards regulation. So that's what we focus on. But there's no particularly high degree of concentration there, like I said, and it's markets like the unregulated parts of Canada, I think that make up most of that with a relatively long tail of different jurisdictions. Operator: We now turn to [indiscernible] with DNB Carnegie. Unknown Analyst: I just have one. Have Playtech or anyone affiliated with Playtech procured the so-called short report on Evolution AB written and released by the Israeli company, Black Cube back in 2021. Mor Weizer: I'm not sure what was the question. Unknown Analyst: Had Playtech or anyone affiliated with Playtech procured the so-called short report on Evolution AB written and released by the Israeli company, Black Cube in 2021? Mor Weizer: Obviously, we can't -- it's nothing -- not a question for us. It's a question for people involved in this matter. Operator: We have no further questions. I'll hand back to the speaker team. Unknown Executive: Right. If no more questions yet, that's it for now. So I'd just like to thank you all for attending, and the team will see you in 6 months for the full year results. Chris McGinnis: Thanks, everyone. Mor Weizer: Thank you.
Ignacio Sison: Good morning to all. Thank you for joining Del Monte Pacific's results briefing for the first quarter ending July of fiscal year 2026. Representing Del Monte in this call are Cito Alejandro, Chief Operating Officer of Del Monte Pacific and President and COO of Del Monte Philippines; Parag Sachdeva, CFO of DMPL and DMPI; and I'm Iggy Sison, Chief Corporate Officer of DMPL. This morning, we'll go through some financial and market slides just to provide an overview and then proceed to the Q&A. Parag Sachdeva will now present our results followed by Cito Alejandro. Parag Sachdeva: Good morning, everybody. Sharing with you on this slide, the key financial highlights. DMPL did sustain its growth trajectory in first quarter of 2026 following a strong Q4 performance in last fiscal year. Our sales of $203.7 million was up 13%, driven by both the domestic business in Philippines as well as international markets. Our net profit at $5.5 million increased from $0.4 million, driven by improved sales and margins. I would also like to highlight that effective 1st May 2025, the company's U.S. business has been deconsolidated from DMPL. Next slide. In terms of strategic priorities and outlook, very consistent with last quarter. DMPL remains focused on growing the Asian operations to drive long-term growth and profitability. DMPL's subsidiary, DMPI, continues to perform well with resilient consumer demand in both domestic and international business and supported by a strong and stable supply chain. The immediate key priorities include reinforcing market leadership in beverage, culinary and packaged fruit that constitutes our core business in Philippines. And we continue launching new products in adjacent categories to broaden the consumer base. From a channel perspective, convenience stores, away-from-home drug stores and schools continue to provide avenues of accelerated growth. On the international side, we continue to maintain leadership in fresh MD2 pineapples across North Asia. Operations also has been seeing very favorable trajectory and that's also reflected in our gross margins, which we will dwell into in a minute. And cost management-wise, the focus continues to proactively reduce waste, manage inventory and lower inventory write-offs. Capital structure, which is one of the biggest priorities for us. We continue working on all avenues to raise equity to lower leverage and offset the NPLs capital deficit resulting from U.S. impairments in fiscal 2025. And barring unforeseen circumstances, the company does expect to be profitable in fiscal 2026. Next slide. Now a deep dive into our first quarter results. Our turnover grew at $203.7 million grew 12.9% with a very good mix on both pricing as well as volume. From our Philippines market perspective, we achieved a double-digit growth in local currency, and that was equally helped by pricing, which was in line with inflation and wall mix, which grew at 7%. When it comes to international business, overall, we saw a growth of 6.4%, driven mainly by fresh, which grew double digit at 10.2%. In terms of our gross profit, the growth was significant at 32.8%, driven by improved pricing across both international business as well as Philippines, increased volume. We also saw favorability in mix. Let me give you an example of that. Our fresh business had higher sales of Deluxe variety, which obviously augurs well for us from a gross profit and margin perspective. And similarly, we saw sales of our key core businesses in -- in Philippines market to grow that have higher margins. On the plantation side and calorie side, we saw improvement in cost. That was driven by a favorable trend on processed pineapple productivity, which was at 150 metric tons per hectare. And more importantly, the trajectory of this has continued to improve in line with our previous commitments that Cito had outlined. So with that, gross margin driven by pricing, favorable mix and improved productivity across operations has meant that we improved by 490 basis points in the first quarter. EBITDA in line with gross margin improved and despite an unfavorable impact from unrealized FX loss of close to $5 million that has been booked in Q1, we achieved an 11% improvement in EBITDA. The unrealized FX impact was mainly due to devaluation of peso at the end of July, where it spiked to 58.2 versus average levels of 57. Net profit driven by operating profits, EBITDA at 5.5 million was significantly higher than last year. And debt also at $1.02 billion was lower by 5% as we continue to generate internal cash and stretch our working capital to lower our leverage. In terms of net debt to EBITDA, there was an improvement of 2.6x and cash flow from operations, as I mentioned before, driven by profitability and continued focus on working capital has improved significantly at $76.8 million. With that, let me hand it over to Cito and Iggy to cover the balance of the presentation. Luis Alejandro: Good morning, everyone, and welcome to this investor meeting. I shall now talk about the Philippines. First of all, the NPL sales, 13% up versus a year ago at $204 million. Philippines sales at $88.4 million, 10% in peso terms and 15% up in USD terms. We continue to realize growth in the Philippines, driven by strong demand across our core categories. And if you were to summarize our growth strategy, it would be twofold. Number one is market share grab, particularly in categories with deep competition. And the second is increased usage of the product among current as well as tapping into new users. In the beverage category, we continue to strengthen leadership by sustaining relevance with health-conscious consumers. 100% pineapple juice led by Heart Smart, reinforcing juice as part of a heart healthy daily habit. Also functional benefits such as digestive wellness with fiber enrich and immunity building with the 100% ACE juice. Innovation also took a part in our growth with the successful launch of our Fruity Zing and Fit 'n Right Green Apple, which expanded the company's footprint in the ready-to-drink PET segment, targeting younger lifestyle-driven consumers. In culinary, we drove penetration through -- by positioning most of our culinary products as a nutrient-rich ingredient with Lycopene, vitamins A and C and iodine to improve family nutrition. This was further supported by our nationwide Nutrilicious advocacy, which aligned the brand with the national agenda of addressing malnutrition by promoting nutritious, delicious and affordable meals for everyday consumption. In packaged foods, we are seeing traction in our sales and marketing efforts to extend usage beyond holiday occasions into year-round celebrations and everyday dessert. At the same time, nutrition-led campaigns expanded the role of pineapple as a super food for everyday cooking, highlighting its phytonutrients that support immunity when paired with proper diet and exercise, okay? Let's now go to the international business. Okay. Sales in International grew by 6% to $98 million. This was primarily driven by higher fresh pineapple sales, particularly in China and Japan, supported by improved product mix and better pricing. Our premium S&W Deluxe pineapple, which is now our hero product, if I may say so, continues to grow and now accounts for a higher share of the company's exported fresh pineapple. We have also introduced and are seeing some increased traction in our fresh cut-packs in China to further boost demand for the company's pineapple product. Pleased to note that S&W was awarded Supplier of the Year by Good me, China's biggest food chain with more than 10,000 stores across the country. And in Japan, fresh pineapple sales increased by 20% due to higher demand of fresh cut in retail plus the entry of the S&W Deluxe pineapple with a new customer. In summary, if I were to look at the market share of fresh in North Asia, we now have a commanding leadership share of 50% in North Asia. And this is driven by our leadership share of 72% in China, leadership share of 42% in Korea and our strong #2 position in Japan at 23%. So that about sums up our -- the status of our business, both in the Philippines and international. So Iggy, we will now open the floor to questions. Ignacio Sison: And Jennifer Luy will moderate the Q&A. Thank you, Cito and Parag. Jennifer Luy: [Operator Instructions] We have some questions sent in advance. So I will start with these questions first. The first question is gross margin increased significantly to 32.5%. Will this be the norm for the next 3 quarters? Or is it just an extraordinary instance? Parag Sachdeva: So thank you for the question. We expect the margins to sustain. And we are seeing the same trajectory, both from a revenue perspective as well as costs are also trending the same way, including commodities. So we expect the margin improvement to be sustainable in the coming quarters. Jennifer Luy: Thank you, Parag. Related to that, what kind of savings or cost reductions have been achieved at the DMPL holding level given only one remaining operating subsidiary? Parag Sachdeva: So we have a clear outlook and our focus, as you know, is mainly to optimize our leverage. That's what we are focused on, and that's reflected in our debt reduction. That's the majority of the cost that we have at the holding company level. And as you can see, over the last 12 to 18 months, the parent debt has considerably reduced, thereby having a lower interest cost at the parent level. So that's what our focus is when it comes to our holding company financials. Jennifer Luy: Thank you, Parag. For Cito, how sustainable is the growth in international sales? Luis Alejandro: It is fairly sustainable, if I may just summarize it. There are 2 components in international sales. The first component is the processed pineapple products, mostly canned products. That part of the business is very much sustainable because we anticipate an undersupply of the market in the next 3 to 4 years. And this is primarily driven by the lower tonnage -- pineapple tonnage right now in Thailand. And as you know, in Thailand, the farmers have shifted to other commodities where they would be more profitable and earn money. And more than 10 calories in Thailand have already closed down. So that is a critical development for us as far as sustaining our package business is concerned because in the past, Thailand was the #1 country, not just the #1 competitor, but the #1 country in pineapple tonnage. So that is the part of the packaged pineapple business, where there are really just 2 big players in packaged pineapple in Asia, meaning Del Monte Philippines or PhilPaC, which is our export operation and also the other big plantation in Indonesia, PT Great Giant. So that is going to be sustainable. The second part of the business in international is the fresh business. Even though we are seeing a lot of higher market share in the categories in the countries we compete in we have not yet exhausted the demand. As you know, the health consciousness of global consumers have actually escalated. In fact, even in other countries, you will see that more of the packaged fresh pineapple are the ones that are growing faster. And this is the same trend that we are seeing in Asia Pacific. From a fresh pineapple standpoint, we're not yet maxed out in China. We have not yet exhausted Tier 2 and even Tier 3, Tier 3 cities, we're not yet there. We're just in the core and entering the Tier 2 cities. And that is going to be our greatest driver. As far as competition is concerned, there are really 2. One is Fresh Del Monte, and they have a farm actually in Mindanao, but our tonnage and our spans of control is bigger. And the other one, of course, is Dole, which is predominantly focused on the Japan and the Korea market. And we are also selling in Japan and Korea. Beyond that, we also have shipments to the Middle East. So from a global or region demand standpoint, it is solid and growing. From a supply standpoint, it is undersupplied in packaged pineapple. But as far as fresh pineapple is concerned, we are the largest actually in Asia right now. We are ahead of Dole and Dole is the other player and other small players as far as hectarage and total shipments are concerned. Jennifer Luy: Thank you, Cito. Next question is with the deconsolidation of DMFI, does it mean DMPL will get nothing from this investment? Parag Sachdeva: That's what we are -- what we have assumed in our fiscal '25 results. We have taken a view that considering continued losses that have been incurred in fiscal '24, '25 and a significant increase in financing costs. Parent has decided not to invest. And accordingly, we have impaired our investments to 0 in our fiscal '25 results that have been recently finalized and were also shared with you on an unaudited basis at the end of July. Jennifer Luy: Thank you, Parag. Still on the DMFI, since DMPL still has significant ownership, what are the lenders, bondholders or the new Board doing with the DMFI? Were they able to turn things around or find a seller? Parag Sachdeva: As we know, the selling process is underway and is expected to conclude by November or December of 2025. So we will have to wait and see as to how the final process concludes. They have appointed -- the Board has appointed an investment banker to manage the process, and we continue to get updates through our Board members from time to time. In terms of performance, as we understand, the Board is focused on managing and optimizing cost, working capital and also focusing on growing the branded business and further downsizing any private label or nonstrategic businesses. Jennifer Luy: Thank you, Parag. On our loans of around $1 billion, what is the average lending rate? And how much will a 1% drop in interest rate affect the cost this year? And are the loans in U.S. dollar or in peso? Parag Sachdeva: Thank you, Jen. Most of our loans are in U.S. dollars. The split between U.S. dollar-denominated and peso-denominated loans would be around 80-20. That's the rough split. In terms of our average cost of borrowing, it's around 6.5% to 7%. That's what we are able to secure on our borrowings and 1% drop in interest rate would mean a reduction in interest expense by around $7 million to $8 million annually. Jennifer Luy: Thank you, Parag. Okay. Is there any update on capital raising activities such as the IPO of DMPI? Any time line for these activities? Parag Sachdeva: The process has been initiated by our DMPL and DMPI Boards. And clearly, this is a big priority for us. In terms of specifics due to confidentiality reasons, it would be difficult to share more details at this stage. Jennifer Luy: Thank you, Parag. From the internal cash flows, how much of our debt can be paid this FY '26? Parag Sachdeva: As we have demonstrated, our debt continues to be lowered. We were at $1.04 billion at the end of April. We are down to $1.02 billion to $1.03 billion. So we continue to lower our debt. But at this point of time, the main avenue of addressing capital -- addressing leverage would be some sort of an equity injection or a selected sale of assets. So that would be the main focus because there is a limit to which we can stretch working capital across the board, which we have done very well in the last 2 to 3 years. So main source would be of leverage reduction would come from equity raise, which we are prioritizing. Jennifer Luy: Thank you for the clarification, Parag. Our last question is, how much dividend is paid to the holding company to pare down the higher cost debt at the holding company last year? Is there any dividend payment policy for your subsidiary? Parag Sachdeva: Yes. In the last couple of years, our focus has been to upstream dividend from DMPI to DMPL so that the parent could continue meeting its obligations on a timely basis, which we have delivered on. Overall, the dividend payout has been between 75% to 100%. That's what we have followed and we think that would pretty much continue until we change the capital structure in the coming quarters or coming year. Jennifer Luy: Thank you, Parag. We don't have any more questions. So in case the audience has questions that they want to send, you can e-mail to me at jluy@delmontepacific.com, j-l-u-y@delmontepacific.com. Ignacio Sison: So thank you for [ joining ] our results briefing.
Operator: Welcome to the IBEX Fourth Quarter, Full Year 2025 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. To note, there is an accompanying earnings presentation available on the IBEX Investor Relations website at investors.ibex.co. I will now turn this conference over to Mr. Michael Darwal, Head of Investor Relations for IBEX. Michael Darwal: Good afternoon, and thank you for joining us today. Before we begin, I want to remind you that matters discussed on today's call may include forward-looking statements related to our operating performance, financial goals and business outlook, which are based on management's current beliefs and assumptions. Please note that these forward-looking statements reflect our opinion as of the date of this call, and we undertake no obligation to revise this information as a result of new developments, which may occur. Forward-looking statements are subject to various risks, uncertainties and other factors that could cause our actual results to differ materially from those expected and described today. For a more detailed description of our risk factors, please review our annual report on Form 10-K filed with the U.S. Securities and Exchange Commission on September 11, 2025, and any other risk factors we include in subsequent filings with the SEC. With that, I will now turn the call over to IBEX'S CEO, Bob Dechant. Robert Dechant: Thanks, Mike. Good afternoon, and thank you all for joining us today as we share our fourth quarter and fiscal year 2025 results. Before we get into the details of our results, I think it might be helpful to step back and look at how our business has evolved over the past decade and why we are confident in our continued ability to outperform the market. In FY '16, when I joined as CEO, we undertook a strategic journey of transforming IBEX into a differentiated customer experience company. This strategy was built on 3 key pillars: one, the blend of our culture, engagement and branding; two, our purpose-built technology, we call Wave X and three, our deep analytics and business insights capabilities. We call this BPO 2.0. Today, we believe we are best-in-class in each area. And the result of this is a differentiated company that is and can continue to outperform the competition. These capabilities, those 3 key pillars have enabled us to consistently win trophy new logo clients who are looking to a partner who can disrupt the status quo. Equally important, these attributes do in fact, empower us to outperform our competitors and consequently, win new market share. The thesis is if you have an extremely engaged employee, powered with great technology and analytics, you will outperform your competition, delight and retain your clients, and our financial results continue to validate our differentiation. In FY '24, as the market began to look at the intersection of AI and CX as a threat, we set our new vision to BPO 3.0 with the goal to extend our capabilities and become an industry leader in delivering AI solutions to our clients, and as a result, create an even stronger company. I am proud to report that FY '25 saw IBEX make great strides in this strategic next step. We've been able to deploy AI internally to enable our operational teams to execute more effectively and efficiently for our clients, while at the same time, we have jumped ahead of our competitors in deploying AI agent solutions like chatbots and voice bots to solve less complex interactions. What we have found is that having a seamless integrated solution from AI agent to human agent uniquely positions us to support customers along the entire customer journey. This gives us a competitive advantage. Importantly, this strategy and our ability to execute against it helped IBEX deliver on the most impressive results in our history as a company in FY '25 and has us well positioned to perform in FY '26 and beyond. FY '25 was a transcendent year for IBEX, where we significantly outperformed the BPO market and achieved all-time bests across a number of key financial metrics. In FY '25, we delivered record fiscal year revenue of $558.3 million, up 10% from a year ago. We finished the year with Q4 revenues increasing to a blistering 18% from prior year. We delivered record adjusted EBITDA of $72 million for the fiscal year, up more than 10% from a year ago, while making key investments into new markets like India, geographic expansions into our highly profitable offshore regions and into our Wave iX tech stack. We achieved record adjusted EPS of $2.75 up 31% from a year ago on record adjusted net income of $43 million, up 12% from a year ago. And we posted our strongest free cash flow quarter ever of $23 million in Q4 and a record $27 million for the year. The IBEX brand is stronger than it has ever been. Our growth has been driven by operational excellence with our embedded base clients, enabling us to win significant market share from our competition while our differentiated value proposition resulted in continued new logo wins with trophy clients throughout the year. Importantly, this past quarter marked the shift from proof of concept for our AI solutions to full-scale deployments setting the table for future growth. Fiscal 2025 was a milestone year across many fronts, including our successful entry into India. When we IPO-ed the company in August of 2020, we were early in our strategy and a work-in-progress company. We believed in ourselves and our strategy and what an amazing journey this has been. Today, we have built IBEX into a structurally strong company that is outperforming the market and is well positioned for the future. Let me highlight the current state of IBEX. We are a growth leader. Revenue grew 10% in FY '25 when many of the largest players were low single digit or negative. We have a strong margin profile that continues to expand, driven by double-digit revenue growth in our highest-margin services and geographies. We have built one of the finest rosters of trophy clients in the industry each with significant outsourcing spend. Our balance sheet is very healthy with 0 net debt and strong free cash flow generation. More than 80% of our business is higher valued digital-first and integrated omnichannel support. We have a powerful new logo engine that continues to win high-profile clients and an operational team that outperforms. And we believe we are the early leader in bringing compelling AI CX solutions to market for our clients. All of this gives me, our leadership and our Board great confidence as we look ahead to the next 3 to 5 years. With these results in mind, I'd like to thank my team and the whole IBEX family for a tremendous quarter and fiscal year. Fiscal 2025 was a statement year, one for the record books and highlights the strength of IBEX and this team. Last year, at this time, I said we believed we've reached an inflection point for IBEX with a return to growth. The momentum we amassed throughout the fiscal year showed exactly that delivering record results. We are now well positioned for another strong year in FY '26 and beyond. With that, I will now turn the call over to Taylor to go into more details on our fourth quarter and full year FY '25 financials as well as FY '26 guidance. Taylor? Taylor Greenwald: Thank you, Bob, and good afternoon, everyone. Thank you for joining the call today. In my discussions of our fourth quarter and fiscal year 2025 financial results, references to revenue, net income and net cash generated from operations are all on a U.S. GAAP basis, while adjusted net income, adjusted earnings per share, adjusted EBITDA and free cash flow are on a non-GAAP basis. Reconciliations of our U.S. GAAP to non-GAAP measures are included in the tables attached to our earnings press release. Our fourth quarter results are once again among the strongest in our history, with record results across the board for revenue, adjusted EBITDA, EPS, adjusted EPS and free cash flow. Fourth quarter revenue was $147.1 million, an increase of 18.2% from $124.5 million in the prior year quarter. This was our highest growth quarter in approximately 3 years. Revenue growth was driven by vertical growth in Retail & E-commerce of 25%, HealthTech up 19%; Travel, Transportation and Logistics up 10% and outstanding growth in our digital acquisition business. Our focused efforts to grow our higher-margin offshore delivery locations are continuing to have a favorable impact on bottom line results. Offshore revenue grew 17% from the prior year and comprised 49% of total revenue, allowing us to maintain our strong gross margin of 31.4%. Revenue mix in our higher-margin digital and omnichannel services also continues to be strong. Digital and omnichannel delivery represented 82% of our total revenue, an increase from 77% in the prior year quarter and grew 25% versus the same quarter a year ago. For context, digital and omnichannel comprised roughly 65% at the time of our IPO in 2020 and was basically negligible when we started this journey in 2016. We expect that we'll continue to be successful driving growth in these higher-margin regions and services as new client wins and growth in our embedded base continue to be focused in these areas. Fourth quarter net income remained relatively consistent at $9.6 million compared to $9.8 million in the prior year quarter, results were primarily driven by the meaningful growth of work in higher-margin offshore regions of 17% year-over-year for the quarter, offset by higher selling, general and administrative expenses related to investments in our teams, technology and the Workday implementation as well as our expansion into India. We also incurred severance and impairment expenses of $2 million related to long-term assets, no longer carrying value for us and the closure of a very small business loan. Net interest expense was $400,000 in the quarter versus $400,000 of net interest income in the prior year and our tax rate was 19% versus 26% in the prior year. Fully diluted EPS was $0.66, up from $0.56 in the prior year quarter. Positively impacting EPS growth were fewer diluted shares outstanding due to our share repurchases totaling 3.9 million shares during fiscal 2025, which includes the repurchase of 58,000 shares in the fourth quarter for $1.7 million. Our weighted average diluted shares outstanding for the quarter were $14.5 million versus $17.6 million 1 year ago. Moving to non-GAAP measures. Adjusted EBITDA increased to $20.5 million or 13.9% of revenue from $17.9 million or a record of 14.4% of revenue for the same period last year. Adjusted net income increased to $12.6 million from $10.2 million in the prior year quarter. Non-GAAP fully diluted adjusted earnings per share increased to $0.87 from $0.58 in the prior year quarter, which was driven by the impact of higher revenue, strong operating performance, a lower tax rate and fewer diluted shares outstanding, offset by higher net interest expense. As a BPO company, we are pleased with the client diversification we have established over the last several years. For the fourth quarter of fiscal year 2025, our largest client now accounts for less than 10% of revenue due to the strong growth in the rest of the business. And our top 5, top 10 and top 25 client concentrations remain consistent with the prior year at 36%, 54% and 79%, respectively, of overall revenue, representative of a well-diversified client portfolio. Over the past decade, we have done a tremendous job retaining our top 25 clients and are excited to see one of our signature client wins from fiscal year '24 now move into the top 15. Switching to our verticals. Retail & E-commerce increased to 25.3% of fourth quarter revenue versus 24% in the prior year quarter, and HealthTech and Travel, Transportation and Logistics remained strong at 14% and 13.8% versus 13.9% and 14.8%, respectively, in the prior year quarter. These changes were driven by continued growth in multiple offshore geographies and our continued ability to win significant new clients in these verticals. Conversely, our exposure to the Fintech vertical decreased to 10.6% of revenue for the quarter versus 13.7% in the prior year quarter. We expect the Fintech vertical to stabilize as we move forward based on the strength of our pipeline in this vertical. Moving on to our fiscal year 2025 results. Revenue increased 9.8% and to $558.3 million compared to $508.6 million in the prior year. Revenue growth was driven by vertical growth in HealthTech of 23%, Travel, Transportation and Logistics of 14% and Retail & E-commerce of 13%, along with outstanding growth in the digital acquisition business. We grew in both our onshore and offshore regions throughout the year. Onshore revenue, which comprised 24% of total revenue during the fiscal year, increased 13% and offshore revenue, which comprised 51% of our total revenue, increased 15% versus the prior year. Our nearshore region, which comprised 25% of our total revenue, declined slightly at 3% versus the prior year as some of this business shifted to our offshore locations. Fiscal 2025 net income increased to $36.9 million versus $33.7 million in the prior year. The increase was driven by revenue growth and gross margin expansion, particularly in our higher-margin offshore regions offset by increases in selling, general and administrative and net interest expense. Our effective tax rate was 19.7% versus 17.9% for fiscal year 2024 which was attributable to changes in revenue mix across our taxable jurisdictions and discrete items recorded in the prior year. We expect our normalized tax rate going forward to be in a 20% to 22% range benefiting from higher net income and lower diluted shares outstanding, our GAAP diluted earnings per share increased 28% to $2.36. Reviewing non-GAAP measures for the full year, adjusted EBITDA increased to $72 million or 12.9% of revenue compared to $65.2 million or 12.8% of revenue for the prior year. Adjusted EBITDA margin increased slightly as growth in our higher-margin offshore locations and in our digital acquisition business as well as our site optimization efforts over the past year was largely offset by increased SG&A expense. Adjusted net income increased 12.1% to $43 million compared to $38.4 million in the prior year. Non-GAAP fully diluted adjusted earnings per share increased 31% to $2.75 compared to $2.10. The increase in adjusted net income and non-GAAP fully diluted adjusted earnings per share was primarily driven by the top and bottom line operating performance discussed earlier and our lower share count. This was offset slightly by increased net interest expense compared to the prior year. Net cash generated from operating activities was a record of $45.7 million for fiscal 2025 compared to $35.9 million for fiscal 2024. The increase was primarily driven by an increase in revenue and a lower use of working capital. Our DSO ended the year at 72 days for the quarter, consistent with the DSO at the end of last year. We expect our DSO to remain stable in the mid-70s on a go-forward basis. Capital expenditures were $18 million or 3.3% of revenue for fiscal year 2025 versus $9 million or 1.7% of revenue in the prior year. This increase was primarily driven by expansions to meet the strong demand in our highest margin regions. Free cash flow for fiscal 2025 was a record of $27.3 million, up from $27 million in the prior year. Our record operating cash flow was offset by the increase in capital expenditures of $9.5 million as discussed above. We ended the fourth quarter with $15 million of cash and debt of $1.6 million for a net cash position of $13.7 million, an improvement of $21.2 million compared to net debt of $7.6 million at the end of our third quarter. When compared to our net cash position of $61.2 million as of June 30, 2024. This reflects the impact of $77.2 million in share repurchases during fiscal 2025 including our $70 million TRGI share repurchase. To summarize our 2025 fiscal year, we achieved outstanding top and strong bottom line results during the year allowing us to enter fiscal 2026 with great momentum. We delivered a multiyear high top line performance with 10% revenue growth for the year and 18% for the fourth quarter. Our adjusted EPS of $2.75 for fiscal year 2025 was up 31% over the prior year and was a record for our business. The fourth quarter was also our strongest quarter ever in generating free cash flow of $23 million. Our continuing strong financial results and healthy balance sheet are enabling strategic investments in our growing AI capabilities and sales resources as well as further expansion into strategic markets and in our top-performing geographies. Importantly, with the backdrop of a fluid market environment, we maintain continued confidence in the business to provide the following guidance of growth in the first quarter and fiscal 2026. For fiscal 2026, revenue is expected to be in the range of $590 million to $610 million. Adjusted EBITDA is expected to be in the range of $75 million to $79 million. For first quarter of fiscal year 2026, revenue is expected to be in the range of $143 million to $146 million. First quarter adjusted EBITDA is expected to be in the range of $17.5 million to $19 million. Capital expenditures are expected to remain in the range of $20 million to $25 million for the year. Our business is well positioned for today in the years ahead, and we are excited about the momentum we've built as we head into fiscal year 2026. With that, Bob and I will now take questions. Operator, please open the line. Operator: [Operator Instructions] Our first question comes from David Koning with Baird. David Koning: Yes. Guys, great job again. Robert Dechant: Thanks, Dave. Yes. We're really pleased with the quarter, the year and the trajectory. So thank you. David Koning: Yes. Everything looks really good. And I guess maybe to kick it off, the quarter itself, when we've looked at Q4s in the past, I think, every quarter since we've covered the stock, it's been a flat to down sequential quarter. This quarter, you were up 5% sequentially. And I guess, a, is there anything in there that was a little bit onetime in nature? And b, there's a vertical called kind of other that doesn't fit the other the other verticals that you often talk about. And that one was up a lot, I think, over 100% year-over-year, about $8 million sequentially. Was there something in there that maybe a new client that's coming on? And is that sustainable? Robert Dechant: Yes. So great question, Dave, and good call out on our Q4, which historically does not jump up like we like it has this year. Here's the cascading down of the growth. And I would -- to your question, is any of this a onetime? And the answer to that is no, this is all kind of sustainable annuity-type business. But what we did exceptional in this quarter is win market share in our embedded base, driven by our great performance. The team on the operational side just continues to outperform the industry and our client services and biz dev team has done an amazing job of leveraging that to win market share, which is growing into new markets. We talked about India. Those are growth vectors and margin -- or market share expansion vectors. And we did that across many, many clients -- of our existing clients. And I'll give you an example of that. Our second largest client, [ Big E-commerce ] company, we grew in every market with them, massively in Pakistan massively in Philippines. And now we even got the go ahead in Central America. It's kind of the one market we didn't have for them. And so we feel really good kind of Q1. And so that was, I think, the first big element is winning market share. Number 2 was our digital acquisition business, the digital marketing business that we've referred to. Under Mike Darwal's leadership, that part of our business accelerated enormously, with focus and execution and just really leveraging kind of those capabilities, our data marketing type capabilities, et cetera, to drive a lot of customer acquisition for our clients. And we see that continuing into this -- in the first half of this year, kind of the power of that. And then the last element, just to touch on was our new logo team just continues to kind of do well and has consistently done well over the years. And you put those together with no client loss and you have the makings of just a powerful growth business? David Koning: Yes. That's all good. And then maybe just a follow-up. We talk with you and then a lot of your competitors, and there's been obviously this fear about GenAI and the impact. But when we do our survey, the majority of you and your peers tend to say, yes, there are some volumes we might lose over time, but net, it's probably going to be a positive, and it's just following the normal cadence of automation over time that you've seen for decades, really a little different type, but right? And maybe some commentary just GenAI, how you feel about it positive, negative, et cetera. Robert Dechant: Sure, so -- and your comments are pretty well grounded in what we've seen. And again, what's exciting is this Q4, Dave, we went from proof of concept to some full-scale production implementations with our clients. So we've learned a lot as you do that. And what we have seen is there's a lot of opportunity for automation. But you know what's more important is actually the entire customer journey and owning that journey. And so as we've jumped out into the -- and we believe clearly we have a leadership position in this. And as we've jumped out into the leadership position of bringing those solutions to bear, but having that whole embracing the connection from AI agent to human agent and having that end-to-end value proposition, what we've seen as our clients see that as enormously valuable, enormously rich, and I think that's helped drive -- help us create another vector of growth for us. And so I think what you're hearing is right, I think we're further along than anybody. And I think we've also have more data around that end-to-end journey that anybody in this industry has, and we're able to leverage that to our advantage. Operator: This concludes the question-and-answer session. I would now like to turn it back to CEO, Bob Dechant, for closing remarks. Robert Dechant: Thanks, Daniel. And I'll be brief. I couldn't be more proud of what IBEX has done and of what my management team just continues to deliver quarter-over-quarter, year-over-year, and we are well positioned for FY '26. So look forward to chatting in the next quarter, but we're really proud of everything that we've done in this space and how we've created ourselves into a truly differentiated company. Thank you all. Have a good day. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Good morning, ladies and gentlemen. Welcome to Empire First Quarter 2026 Conference Call. [Operator Instructions] This call is being recorded on Thursday, September 11, 2025. I would now like to turn the conference over to Katie Brine, Vice President of Investor Relations. Please go ahead. Katie Brine: Thank you, Ludy. Good morning, and thank you all for joining us for our first quarter conference call. Today, we will provide summary comments on our results and then open the call for questions. This call is being recorded, and the audio recording will be available on the company's website at empireco.ca. There is a short summary document outlining the points of our quarter available on our website. Joining me on the call this morning are Michael Medline, President and Chief Executive Officer; Costa Pefanis, Chief Financial Officer; and Pierre St-Laurent, Chief Operating Officer. Today's discussion includes forward-looking statements. We caution that such statements are based on management's assumptions and beliefs and are subject to uncertainties and other factors that could cause actual results to differ materially. I refer you to our news release and MD&A for more information on these assumptions and factors. I will now turn the call over to Michael Medline. Michael Medline: Thanks, Katie, and good morning, everyone. Fiscal 2016 is off to a solid start. EPS was $0.91. And the core business, which excludes other income and share of earnings from equity investments improved 14.3% over last year. And while our results on same-store sales are a little softer than we've gotten used to, with our strong bottom line result this quarter, we are very encouraged with what we can do on this front with a stronger top line. I'm going to keep this short. Today, we're going to focus on 2 topics: our results and market trends during Q1 and then the current environment. First, our results and market trends. Sales, excluding fuel, grew 2.6% this quarter with same-store sales growth of 1.9%. There are some good onetime reasons for our same-store sales comp. Last year, there were a few anomalous events that worked in our favor and drove new customers into our stores. Foremost was the boycott campaign against Loblaws last year. Another competitor in the West experienced a cyber event which led to service disruptions and supply shortages for a period of time. And finally, there was a nearly 1-month long LCBO strike, which meant more customers purchase beer and wine in our stores. We were cycling these onetime events in Q1. And while they were all relatively contained events, collectively, they had an impact on our same-store sales comp this quarter. And two, on our Q4 call, we noted that we were happy when we moved into June and began to see warmer weather patterns. Q1 started with an unseasonably cold May, as many of you will remember. In fact, Toronto saw its coldest May in the last 50 years. Typically, May marks the start of the summer season, specifically the started barbecue season and outdoor eating, which drives purchases in fresh and prepared foods. That unusual May weather dampened sales, especially in Full-Service. Our same-store sales were supported by continued growth in both Full-Service and Discount. Consumer sentiment is showing improvement, and we are encouraged to see basket size continuing to improve. Gross margin continues to improve, driven by disciplined execution and targeted efficiencies in our stores. Margin improvement of 63 basis points again underlines how good our execution has become. This continues to be driven by several smaller but meaningful changes. For example, we are using very advanced analytics to provide us better granularity on inventory data, and this, in turn, allows us to be more efficient to controlling and managing our inventory and is another lever to reduce shrink. On to our current environment. CPI food inflation purchased from stores was 3.1% this quarter. Internally, we were way below the CPI number. So tonnage was relatively flat this quarter. Given the approach we took to managing tariffs, which was to protect customers by ensuring that reactionary or unnecessary costs were not accepted and passed on, this comes as no surprise to us. Given the removal of some Canadian retaliatory tariffs, products in our stores that were subject to tariffs will no longer bear this additional cost. As we discussed before, we took a very hard stance on not accepting the vast majority of tariff-related cost increases, which has now proven to be the right approach for our customers and for Canadians. We've also been very accurate in predicting inflationary patterns over the last few years, the most accurate, I might say, and that has been helpful for us. Last September, we stated our expectations were 2% to 4% and that, in fact, has proven to be the case. Other than typical fluctuations on a few commodity-linked products like coffee, we are not seeing anything out of the ordinary. Even with the recent development on the removal of some Canadian retaliatory tariffs, we continue to see Canadian product sales continue to outpace U.S. product sales. However, over the last few months, the Buy Canadian sentiment has moderated slightly from previous highs seen earlier in the year. The silver lining in all of this is that we now have an increasingly diversified source of supply that will enable us to continue to be incredibly resilient for years to come. And through all of this, we strengthened and identified new and existing supplier relationships that will be advantageous for us and our customers for the long term. And one last thing before I hand it over to Costa. Over the last year, there has been a lot of real estate activity in the market, I'm hearing a significant uptick over prior years. This has created plenty of discussion around the right amount of growth for grocers. All I will say on this topic is that this remains a competitive market, and there is always room for us to grow. For our part, we will be opening about 20 new stores this year, 2 this quarter and grow our square footage by about 1.5%. These builds are aimed at filling gaps in our network. We see opportunities to gain market share in areas where we do not have significant presence, and we do not greenlight new stores just because we can. We are disciplined and precise about growth, and the bar for new store approvals remains high. With that, I'll turn it over to Costa. Constantine Pefanis: Thank you, Michael. Good morning, everyone. I'll first provide some color on our quarterly performance and then introduce a key technology project, which is well underway before opening it up for your questions. In Q1, we delivered a solid start to the year with adjusted EPS of $0.91. Our results last year benefited from higher contribution from other income and share of equity earnings. When excluding these earnings streams in both years, our core operations delivered year-over-year adjusted EPS growth of 14.3%. Clearly, we executed well in our stores to make up for the tempered top line growth. And like Q4, we were also impacted in this quarter by higher incentive program expenses and accruals, such as LTIP and Retirement Arrangements, which put upward pressure on SG&A. I'll discuss this further detail a little later on. While our food same-store sales in Q1 was higher than last year's result of 1%, it tapered from Q4. As Michael said, top line performance was impacted by annualizing several small nonrecurring benefits last year, which in concert with unseasonable weather this year, primarily in May, made it tougher to generate same-store sales to levels we saw in Q4. In Q1, our gross margin rate, excluding fuel, increased by 63 basis points versus last year. We saw strong performance in our Full-Service banners, and we continue to benefit from disciplined execution and target efficiencies in our stores, including planned initiatives aimed at refining our data and improving our inventory control, which reduces shrink across our store network. As well, gross margin rate benefited from better promotional mix control. Over the last couple of years, we have been performing above our medium-term gross margin expectations of delivering 10 to 20 basis points of gross margin per year, given our execution continues to improve, and many of our initiatives are outperforming initial expectations. And now let's move on to SG&A. In Q1, adjusted SG&A, excluding depreciation and amortization, grew by 4.7% and our SG&A rate, excluding depreciation and amortization, increased by 60 basis points. This largely reflected higher labor costs, higher incentive program costs and continued investment in our business. Specifically, we estimate that the incentive program costs were higher year-over-year by $20 million, and that had a negative $0.06 impact on earnings per share. Looking at SG&A dollars, we anticipate Q1 will represent the peak spend for the fiscal year. At the end of the day, we delivered solid core earnings growth this quarter, which is a testament that our investments in the business over the last few years have set us up well and will continue to drive growth in the future. There is more work that can be done on SG&A, which is one of my primary focuses as CFO. I'm confident that our cost savings and efficiency initiatives across strategic sourcing, supply chain and Voilà will help drive stability with our SG&A growth. In addition, future operating leverage will also benefit from our other drivers, including the new store expansion program that will accelerate our top line growth. Other income and share of earnings from equity investments came in as anticipated. It was about $25 million higher than last year. We are maintaining guidance for this real estate-related income at the lower end of our range of $120 million to $140 million. We expect the quarterly cadence to be unchanged at 20% in Q2, 25% in Q3 and 30% in Q4. If there are shifts in timing of certain transactions, we will provide an update to this cadence throughout the fiscal year. Our effective tax rate for Q1 was 26%, which was higher than 22.9% last year. Last year's tax rate was unusually low due to the nontaxable portion of higher other income and the revaluation of tax estimates, most of which are nonrecurring. For fiscal '26, excluding the effects of any unusual transactions or differential tax rates on property sales, we continue to estimate that our effective income tax rate will be between 25% and 27%. With regards to capital allocation, our Q1 CapEx totaled $138 million, mainly on store renovations, construction of new stores and technology investments. In the quarter, we repurchased 1.5 million shares for total consideration of $80 million. One last item we called out a key project related to our technology platform in our disclosures today. This involves the migration of our legacy ERP system and has already been a part of our budgeted IT spend for the last 2 fiscal years. This ERP project is foundational in nature and aims to streamline financial reporting, procurement and supply chain operations. Shifting to the upgraded ERP platform will also allow us to execute more quickly against our growth plans and initiatives in addition to improving our productivity gains over time. In fiscal 2026, we will move on to the execution and implementation stage. The project is both on pace and on budget and implementation will be phased across the next 2 fiscal years. To wrap it up, I'm pleased with our ability to execute this quarter, but there's always room for improvement. We delivered solid adjusted EPS growth in the core business despite lighter sales growth, which shows we can do better delivering bottom line results as we look to grow our top line. Our team at Empire has built resilience over the last several years through the pandemic, through a period of high inflation and through the tariff uncertainty this year. And these challenges have enabled Empire to be stronger at execution. This reinforces our confidence in our ability to achieve our long-term adjusted EPS growth target as set out in our financial framework. And with that, I'll hand the call back to Katie for your questions. Katie Brine: Thank you, Costa. Ludy, you may open the line for questions at this time. Operator: [Operator Instructions] With that, our first question comes from the line of Chris Li with Desjardins. Christopher Li: Michael, over the last couple of quarters, I think you've mentioned that you've seen some green shoots from the consumer. I was wondering, is that continuing? And are you continuing to see some trade-up in fresh? Michael Medline: Yes. I'll do the first part, and I'll talk -- and Pierre is even more knowledgeable than I am about the fresh right now. So I'll just say that, yes, we continue to see green shoots. I wouldn't walk back any statement that we made over the last number of quarters, including Q4. We continue to see progress in terms of the customers. They're not trading down. In fact, in many areas, they're trading up. We're offering a very strong promo offers, but that promo offer isn't being taken up quite as much as people are spreading their purchases over a larger basket. No, we're not seeing anything in a negative direction in terms of the consumer for our business. I only talk about our business. I can't talk about the whole industry. And we're especially seeing that in full serve, which is good because we're -- we've got a lot of full serve. Do you want to talk about fresh? Pierre St-Laurent: No, we're pleased with the progress we're making. It's a big area of focus for us, the fresh category, and we're seeing progress with programs we launched. So the trend is pretty good compared to the peak of inflation where people trade down, like Michael said. But right now, we're trending in the right direction. It's a big area of focus, and we believe that we're in a strong position to win in the fresh department. Christopher Li: Great. And then my follow-up is just, Michael, you also mentioned in your opening remarks about an uptick in square footage growth for the industry. Have you seen any notable changes just in terms of the general competitive environment recently? Michael Medline: That's a great question, and we've been asked that more recently than usual. So what we did, I asked to see all the new store and new square footage put in over the last 10 years and broke it out by every province, broke it out by every kind of way you could break out new stores. And what you see there is that what's going on right now is not atypical actually, in terms of new square footage. You do see a bit of a rhythm to it. Like every 3 or 4 years, there's a little bit more square footage than that seems to fall, and it's different competitors putting up more square footage at a different time than totally dropping off. And so I think you know after almost a decade of hearing from me that I don't think there's any sudden shifts in any business or any industry. And that -- so I don't think there's some sudden scary uptick in terms of real estate because we're so confident in our own business right now, we're putting a little bit more in than we have over the last few years, which I think is a good decision, and we'll get good returns from that. And we're doing it in areas where we don't have stores for the most part. So I'm not too worried about that. I think it's always a competitive market, and we've got to compete against some very, very tough players. But I wouldn't get my knickers in a knot over the real estate being put in. I think it's mostly normal if you look at a 10-year trend. The one thing I'll point out is there's a slight uptick in the number of stores, but there are some smaller stores being put in. So you got to differentiate between the number of stores and the square footage being put in. But I like facts. I don't like talking about things I don't know about. That's why we did quite a bit of work on this before this call. Operator: And your next question comes from the line of Irene Nattel with RBC Capital Markets. Irene Nattel: I was intrigued by something that you just said, Michael, around promotional intensity or penetration in the basket. Can you talk about what you're seeing and whether, in fact, we're seeing that reverse? Pierre St-Laurent: We're seeing a normalized, very normal penetration and promotion right now. So compared to last year, last year, we had a peak in the promo penetration. And right now, we're trending in a more normal way. So this is why this contributed to the gross margin expansion. But right now, the thing we're seeing is we are in the range where we consider that normal. Irene Nattel: That's really interesting. And are there specific sort of categories within the store where you're seeing sort of, I guess, consumers being slightly less sensitive on promotions? Pierre St-Laurent: It's a good question. I think fresh is competitive, especially meat because we're facing higher prices, especially in the beef. So customers are sensitive to price on beef right now. But other than that, it's pretty equal by category, but fresh meat, especially. Michael Medline: Yes, center of stores is very normal right now compared to a year ago. Pierre St-Laurent: Exactly. Irene Nattel: That's really interesting. And then you were mentioning something in the prepared remarks about better analytics and using data to make better decisions. Can you talk about where you are in that process and the degree to which that may be contributing to some of the gross margin gains? Michael Medline: Yes. Thanks. It's a great question. Behind the curtains, we have made enormous strides in our use of advanced analytics to make business decisions that help our customers and help us. Great strides. We don't talk about it a lot, but you can see in the results. So I would say we're quite advanced and one of the most sophisticated retailers, I think, on doing that. Certainly, retailers of our size, for sure. In terms of AI, we have started to make early gains, and we are getting quite good at it on the business, especially on the merchant side of the house. But I'd say we're in earlier innings on AI than we are on the advanced analytics, I do differentiate the 2. And I would say, though, that absolute kudos to our Chief Technology Officer and our technology team and our merchants in the way they work together. And we have a Chief Technology Officer who understands the business is really paying dividends. And she and [ Luke ] and a bunch of others are making huge gains. We just had a presentation from buyers this week, taking us through their day-to-day, how they're operating. And as you know, I don't get too emotional, but I was pretty emotional seeing how sophisticated we are, especially when I compared it to where we were 9 or 10 years ago. But it was a good question because we are -- we don't make a big deal about it, but we are becoming highly sophisticated, and we have momentum. Operator: And your next question comes from the line of Vishal Shreedhar with National Bank Financial. Vishal Shreedhar: I was looking at the outlook commentary and nothing necessarily surprising there. But I was reflecting on the CEO transition and where Empire has gone from and to, and how there will be a transition in leadership. I'm just wondering, I know this may not be exactly a fair question for you to answer, but wondering how we should think about Empire's evolvement on a management transition? Is it more of -- will it be more of what we expected over the last several years? Or do you anticipate the company moving in a different direction, to the extent you can answer? I know it's a tough question. Michael Medline: Obviously, we have a really strong Board of Directors, and they're doing a good job thinking through this. I mean obviously, I think we're on the -- this is Michael talking. We're on a really good track here. You can see it, gone from making $0.13 in the quarter to $0.91 in a quarter. You're on the right track, and I don't think we're anywhere near done. At the same time, one of the reasons I wanted to step down was it will be almost a decade in the seat, and we need some -- I'd like to see some fresh eyes and some -- and have others be able to take us to greater heights. So I think the direction is good, but I do -- I think that the team that leads this and the CEO that leads this company afterward will take us higher because they'll just -- they'll be able to build -- honestly, I had to spent 6 years just putting infrastructure in place and now we're benefiting from. And we have all the infrastructure and tools necessary to do really well. Company is structured correctly, has great people. So I was going to say that whoever takes over has a much easier job, but it's never easy. And -- but at least they've got all the tools to take us to great heights. So I feel good about that, and I feel good about how the Board is thinking about it. Vishal Shreedhar: Okay. And -- it does. And I know it's more of a Board question, but thank you for your perspective. And with respect to the large initiatives that Empire is working on, could you help prioritize and help me understand what are the bigger initiatives? There's so many things going on, and I'm having difficulty of wrapping my head around what are the larger initiatives that are driving growth. Is that a fair question? Or is it really just a little bit of everything? Constantine Pefanis: I think, Vishal, it's Costa here. I think that the way I've been thinking about it for the last couple of months is that it's a little bit of everything, but it's a prioritization where we can realize some short-term benefits that gives us the momentum to continue. Michael alluded to the fact that we're working on advanced analytics that's giving us really good data sets to work with to improve on execution within the store. And I think that with our ERP implementation and going to SAP S/4, I mean that's going to translate into further improvements around our processes, the way we look at the way we do business on our supply chain. So I think it's a prioritization of many things that we've already looked at to see where we can get the best return in the shortest period of time without sacrificing the long-term ability for us to continue to improve. Operator: And your next question comes from the line of Etienne Ricard with BMO Capital Markets. Etienne Ricard: It's interesting to see internal food inflation remaining below CPI. My question is how sustainable is this given I presume you've had more difficult conversations with suppliers recently? Or is this driven by partnering with new suppliers? Michael Medline: I'll make a general statement, and I'll turn it over to Pierre on the suppliers. My general statement is I said we were way below CPI, which we were. So there's only 2 reasons for that. It can only be 2 reasons. One is CPI is not measuring the correct basket, which is in a normal grocery store and/or our competitors have higher inflation than we do. I don't know which one is true because I have no idea what -- I'm not running the CPI and I'm not running our competitors. But those are the only 2 reasons. And so any time we have -- we're always thinking to the customers. Anytime we have our inflation below -- way below CPI, I'm on a happy camper. And Pierre, I'm going to say I think that is sustainable. But why don't you comment? Pierre St-Laurent: You're absolutely right. The CPI is a very small basket compared to the way we are measuring internal inflation. It depend on this basket versus total business at Empire. Sometimes it's below, sometimes it's higher because we're not comparing apples with apples with the CPI. That being said, we're trending lower than the CPI, which is a good sign. We delivered strong margin in the same time, which is better. Again, to your question with suppliers and the way we handle tariff and the hard line we took on tariff, I will remember you that U.S. product, it's less than 10%. So this is not material to the overall inflation. But yes, the hard line we had a small contribution to that lower inflation level, but not material. Michael Medline: And how do you feel like -- how do you -- why don't you say how you feel the discussions and relationship with suppliers right now are? Pierre St-Laurent: Our relationship is very strong. I think we have very honest conversation with suppliers. They understand why we took this position to protect that customer. So when we bring this argument to the table, they are in the same -- they have the same purpose. They want to be relevant for customers. So generally speaking, we're aligning on the purpose. The way to get there, sometimes we have to -- we need -- we have tough conversation, but they understand what we're trying to do. And based on what we've done and what we're seeing right now, I think we have to admit that we took the right approach, and they are respectful for that. So this is how we feel when we are sitting in front of them. They respect our position. We're sharing data. We're explaining why we're making decision even if it's not necessarily to their benefit short term, but long term, it's how we handle our business with supplier. Etienne Ricard: Interesting. Appreciate your comments. And I want also to focus on competitive dynamics in the province of Quebec. Given some of your competitors have pulled back from the Full-Service market, what traffic trends are you seeing there? Pierre St-Laurent: Again, year-over-year, we're seeing positive trends. The peak of inflation is behind us. As you know, we had no Discount stores in Quebec, but we're overlapping that big time right now, and we're seeing very positive momentum. The other thing is we're more active on the real estate side. We did open new stores last week, a very high store. And we have a couple in our pipeline right now that will open in the next couple of months. So I think the Quebec business is in the right direction. Our dealers are highly engaged to please customers, and we have a very good strategy right now to have a very good value proposition for our customer at IG, and we're seeing benefit of it already in our numbers. So yes, it's a competitive market. We've been always a competitive market. We have a strong brand, strong NPS, strong network of franchisees. So we feel good about the future. Operator: And your next question comes from the line of Mark Petrie with CIBC. Mark Petrie: Again, on the gross margin, this isn't the first time you've called out shrink as a tailwind. But is it fair to say that the impact was bigger this quarter than maybe the last couple of quarters? And so you're still seeing incremental benefits sequentially? And would that remain a tailwind for the next couple of quarters? Pierre St-Laurent: It's -- the first quarter, we're having tailwinds with shrink. I think for the last year, we did improvement on shrink. So again, the shrink is one of the component of the overall gross margin. I think this quarter, the results are because many small things, supply chain did contribute to the improvement in the gross margin. As I said earlier, the promo penetration is lower than last year. Shrink is one of the components. Again, shrink is a big thing. I know a lot of people are talking about it, but the way we approach shrink is, again, on a very disciplined manner. Going too hard on shrink could cause top line decrease, and we want that -- we don't want that. So we have a very disciplined approach around shrink. And over the last years, we made progress on a smart way on shrink, and we will continue to look at shrink because it's a component of the gross margin. So this is the answer. We'll continue to look at shrink to improve that because everything we can reduce there, we can reinvest in different element of the business to be more relevant with customers. But again, nothing specific to mention this quarter on shrink. Mark Petrie: Okay. And then on the ERP implementation, could you just walk through the time lines in more detail and how you see execution risk evolving over the 2-year time frame? Constantine Pefanis: So the way I would think about it is that we've planned this out over the last 1.5 years to 2 years to take an approach that over the next 2 years on a regional basis, we're going to be deploying the implementation to manage and mitigate any kind of execution implementation risk. The impact of that is going to be on a continuous basis, looking at what needs to be improved in order to continue to look at this from an operational point of view that doesn't disrupt anything that we're currently working on or doing. Operator: And your next question comes from the line of John Zamparo with Scotiabank. John Zamparo: I would like to touch on a couple of other items related to consumer behavior. Could you talk about the delta in the same-store sales that you saw on your Full-Service versus Discount stores and whether you saw any changes to private label penetration in the quarter? Michael Medline: We saw some changes between Full-Service and Discount. We saw the smallest gap when we look at it that we've seen in years. And what was your second point, John? John Zamparo: On private label penetration, please? Pierre St-Laurent: The private label continue to outperform total store. Assortment is great. We're improving assortment. So the penetration is growing quarter after quarter. This product -- private label are very popular right now for customers looking for value, and we are. We feel good with the progress we're making here with the assortment we have in our stores and promotions. John Zamparo: Okay. That's helpful. And then my second question, it's kind of a higher-level question. I wonder if there's been an evolution in your best returns on capital spending. I think if we go back a couple of years, this had been renovations and then you saw inflation on those projects increase and then the top returns pivoted to new stores. Is that still the case on your latest iteration of new stores? Are those providing your highest returns? And is there any delta on the returns of new Discount banners versus Full-Service? Michael Medline: There's still good returns on renovations when we do them, but we're seeing -- there was a big gap before. And part of that was just growing pains as we were modernizing our fleet of stores across the country. So we had to renovate quite a bit. Now we're seeing stronger returns, especially with inflation. The cost of doing a new store is not that much different in some cases than doing a renovation. So the returns are so much better. And we're also strategic too, that we feel that we are in a position from a store design and an execution standpoint that we can really do well on new stores, and we're picky with them. So I just think it's a matter of balance and waiting, and we have shifted from mostly renovation or -- and we're doing a lot of conversions as well for a long time there. And there's still some conversions here and there, but you'll see more stores more heavily in our capital spend. Operator: And your next question comes from the line of Michael Van Aelst with TD Cowen. Michael Van Aelst: You covered quite a bit, but a few follow-ups. First, on the same-store sales trend. I know May obviously was tough because you're lapping the boycott and the bad weather. But clearly, June and July were better. Would you say that trend of above -- has continued above 1.9% heading into -- in the early stages of Q2? Michael Medline: Yes. Although I'm always loath to talk with the quarter we're currently in because Q1 was -- had so many anomalies, I will say something of that is that I can definitely say that Q2 has started ahead of the Q1 result. Michael Van Aelst: And then Costa, you mentioned that the OpEx in Q1 was the peak or that was peak spend. Was that on a dollar basis or percentage growth or rate? What was the guidance you're trying to provide? In dollars? Constantine Pefanis: Total dollars. Michael Van Aelst: Okay. And then could you just also clarify Pierre's remarks on -- when he was answering Mark's question, I think it was on the gross margin expansion of 63 basis points in Q1, asking if that was -- if that's something that we could see continuing through the next few quarters as you cycle some of these benefits. Is that -- was there something in Q1 that -- Pierre's comments made it sound like maybe it was sustainable, but was there something in Q1 that might not be as repeatable? Pierre St-Laurent: No. It's -- what we have in terms of objective is what we said before, we think we can continue to improve gross margin by 10 to 20 bps. There's some element year-over-year that we have to consider in our results like in this quarter. As I said, the promo penetration was elevated last year at the same time. This is one of the reasons this year at a normal rate, we saw benefit in our gross margin. But again, the gross margin performance is related to that. It's related to the private label penetration. It's related to supply chain. It's related to promo mix management. It's a lot of small things. But I think this quarter, the reason why we have a high gross margin expansion, it's versus last year's situation more than the trend we're expecting for the future. Michael Medline: I realize that we have credibility in a lot of things, but our credibility on this 20 basis points is sort of evaporating as we continue to beat it. I think what Pierre and I are saying is don't go modeling 63 every quarter. But that if we see ways to execute better, and we're seeing a lot of different ways to execute better, including AA and AI, et cetera, we're not going to hold it down to 20, but we just think that very few retailers can keep up the kind of margin performance of what we're doing now is very, very good. But we're doing it. I mean this is 27 straight quarters of gross margin improvement, not because of price increases, but because of good execution. And if management continues and our teammates continue to execute, we'll continue to see good gross margin performance. So I do believe that we have lost some credibility, Michael, but we'll always do our best. So if we can beat it, we'll beat it. Michael Van Aelst: Yes, you do keep beating it. But when it's tough to compare the gross margins between the different grocers just because there's different components in it at times. But would you -- to the extent that you can compare, do you think your gross margin is comparable or better now? Or do you think -- are you catching up to them, and that's why your gains are stronger? Michael Medline: I told our Board yesterday because I do believe 27 quarters in a row is a world record and who's going to prove me wrong, right? But I did say to the Board, I think that this company, the way it's going, can sustainably continue to increase its margin by doing business better. But I also did say that we were -- in the early years that we were starting further back than our competitors, and we had more room to grow it. So I think that is a fair comment, Mark (sic) [ Michael ]. Michael Van Aelst: Okay. But more recently, at this stage, do you think you're pretty much comparable? Michael Medline: No, we probably -- I -- no, I don't think so. I think we still -- I think we started out the race, and we've really, really closed the gap, but I think we still have a bit of a gap. Operator: And we have no further questions at this time. I would like to turn it back to Katie Brine for closing remarks. Katie Brine: Thank you, Ludy. We appreciate your continued interest in Empire. If there are any unanswered questions, please contact me by phone or e-mail. We look forward to having you join us for our second quarter fiscal 2026 conference call on December 11. Thank you. Operator: Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Morning, and welcome to The Kroger Co. Second Quarter 2025 Earnings Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Rob Quast, Vice President, Investor Relations. Please go ahead. Rob Quast: Good morning, thank you for joining us for The Kroger Co.'s second quarter 2025 earnings call. I am joined today by The Kroger Co.'s Chairman and Chief Executive Officer, Ronald Sargent, and Chief Financial Officer, David John Kennerley. Before we begin, I want to remind you that today's discussions will include forward-looking statements. We want to caution you that such statements are predictions, and actual events or results can differ materially. A detailed discussion of the many factors that we believe may have a material impact on our business on an ongoing basis is contained in our SEC filings. The Kroger Co. assumes no obligation to update that information. After our prepared remarks, we look forward to taking your questions. In order to cover a broad range of topics from as many of you as we can, we ask that you please limit yourself to one question and one follow-up question if necessary. I will now turn the call over to Ronald Sargent. Ronald Sargent: Thank you, Rob. Good morning, everyone. Thank you for joining our call today. I am happy to report another quarter of strong results, which demonstrates the clear and measurable progress we are making on our key priorities: to simplify the organization, to improve the customer experience, and to focus on work that creates the most value. Today, I want to talk about what we have accomplished, the proof points we see in our quarterly results, and how our priorities are positioning The Kroger Co. for sustained long-term growth. Over the last several months, we have made good progress to position the company for future success. A key part of that success is a strong leadership team. During the quarter, we continued to upgrade our team. We promoted a top division president to lead our brands, one of our key growth initiatives. We hired a new head of product sourcing who will help us lower our cost of goods sold and close the gap with the industry's best in class. We welcomed a new general counsel. We continue to elevate strong retail leaders across the company, including several new division presidents. As we continue to build our leadership team, we are also looking at our costs, especially those expenses that do not directly support our priorities or deliver value to our shareholders. As we shared last quarter, we have begun closing approximately 60 unprofitable stores. Last month, we also reduced our corporate administrative team by nearly a thousand associates. While these decisions are difficult, they are also necessary for the company's long-term success. Additionally, in order to create greater focus and simplify our business, we are reviewing all non-core assets to determine their ongoing contribution and role within the company. Finally, we recently put an issue behind us by reaching a legal settlement with C&S Wholesale Grocers. We are pleased to resolve the claims so that we can remain focused on serving our customers and running great stores. Our efforts to create greater focus are showing up in today's second quarter results. Identical sales without fuel grew 3.4%, which was ahead of our expectations. This is our sixth consecutive quarter of identical sales without fuel improvement. Sales growth was led by pharmacy, e-commerce, and fresh categories. We know that fresh products are important to our customers, so specifically in meat and produce, these categories continue to outpace center store sales and reflect the growing demand for healthier options. Our sales growth in the fresh category shows that we are making strong progress in the categories our customers care most about. Improving grocery volume is also important to us. We are making strategic price investments, which led to another quarter of sequential improvement. In fact, since the beginning of the year, we have lowered prices on more than 3,500 incremental products across our stores, which is improving our price spreads against our major competitors. As we lower prices for our customers, we are committed to doing so in a way that keeps our gross margins stable. We are making our promotions simpler and have continued to reduce complex promotional offers. Additionally, we are making it easier for non-digital customers to take advantage of all the value The Kroger Co. offers by reintroducing paper coupons in every store. Our customers are recognizing these changes, and they are giving us credit for them. We know this because customer price perception improved in nearly every division this quarter, and we saw another quarter of sequential improvement in share. Beyond the price on the shelf, families are also looking for quality and value. Our brands' products had another strong quarter with sales growth again outpacing national brands. Our brands offer unique products with high quality and represent a point of differentiation for The Kroger Co. Simple Truth and Private Selection brands again led our growth. Looking ahead, we see our brands as a critical strategic asset, helping us grow sales and build loyalty with customers. E-commerce also continues to be an important and growing part of our business. Sales were strong in the second quarter with 16% growth, led by good performance in delivery. We continue to make progress on improving profitability, and we saw improvements in both pickup and delivery profitability on a quarter-over-quarter basis. E-commerce remains a top priority for us. Running great stores is also critical to our future, and our store teams are delivering on the basics: being in stock, showing clean and uncluttered aisles, and making shopping easier for our customers. Our internal composite scores, which track key metrics like in-stock levels, fresh product quality, and customer service, are showing consistent quarter-over-quarter improvement. As we are improving our store and e-commerce shopping experiences, we are also taking meaningful steps to reduce our cost structure. In the second quarter, we were pleased with our OG&A rate improvement, and we will continue to aggressively look for ways to reduce costs throughout the company. We believe that many cost opportunities remain. To summarize, we have made strong progress so far this year, and we also know that we have a lot more work to do. Looking ahead, we are focused on investments that will grow our core business. The first of these is new stores. We are on track to deliver 30 major store projects in 2025, and we are accelerating new store projects with more efficient layouts and faster construction timelines. In 2026, we expect to increase store openings by 30%, helping us grow both in-store and online sales faster. While we are growing our physical footprint, we are also modernizing our business to operate more efficiently and serve customers better. Artificial intelligence is one of the key tools to help us get there. Accelerating our AI efforts is a natural step for The Kroger Co. given our long history of leadership in data and machine learning. Where we have implemented AI in different parts of the organization, we are seeing results. More competitive pricing, shrink improvements, and faster fulfillment, which enables two-hour pickup for customers, are just a few examples of what AI is doing to help us better serve our customers, with more and bigger opportunities ahead to both support our associates and improve the customer experience. E-commerce will also continue to have a meaningful and growing impact on our financial results, which is why we announced a thorough strategic review last quarter. We are progressing with two key objectives in mind. First, we will improve the customer experience by using our stores to deliver groceries faster. Stores are our most important asset, and when we use our stores to fulfill online orders, the inventory is closer to customers, and the last-mile delivery costs are lower. As demand for convenience grows, we can leverage our store footprint to reach new customer segments and expand rapid delivery capabilities without significant capital investments. This leads to our second objective: improving profitability and reducing our cost to serve. We are examining all aspects of our business to drive greater efficiency, including a full site-by-site analysis of our Kroger automated fulfillment network. Where we have seen strong demand in high-density areas, these facilities deliver better results than those facilities where density is lower and customer adoption has been slower. We continue to evaluate all options across all facilities to improve profitability while continuing to provide a great customer experience. We expect to share an update on our strategic review during the third quarter. We are confident that the outcome of our work will lead to both stronger e-commerce capabilities and a clear path toward profitability. Finally, we are starting the foundational work to refresh our go-to-market strategy. This involves a deep dive into customer data and a rigorous assessment of our competitive positioning. This important work will set us up for even stronger performance in the future. I will now turn it over to David John Kennerley, who will review our financial results in more detail. David John Kennerley: Thank you, Ronald, and good morning, everyone. This quarter, The Kroger Co. delivered strong results, which reflect continued progress in our core grocery business and robust growth in e-commerce and pharmacy. Momentum in our core grocery business is being driven by improved execution as well as a disciplined approach to price investments. By reducing the complexity of our promotions and investing more in everyday prices, we are sharpening our price perception with customers and driving volume improvements while responsibly managing our margins. I will now walk through our financial results for the second quarter. We achieved identical sales without fuel growth of 3.4%. Our sales growth was led by strong pharmacy, e-commerce, and fresh results. We are encouraged by the continued improvement in grocery volumes, particularly in the perimeter of the store. Food inflation was slightly lower in the second quarter compared to the first quarter but continues to trend in line with our original expectations from the beginning of the year. Our pharmacy business delivered another strong quarter driven by core pharmacy scripts and growth in GLP-1s. Although strong growth in pharmacy sales impacts our margin rate, it drives positive gross profit dollar growth and improves our overall operating profit. This quarter, we have been pleased to welcome more ESI customers back into our stores. We continue to expect that the full return of the business will take time, and in Q2, ESI had a roughly 15 basis point positive impact on our ID sales. We continue to keep a close watch on the changing tariff environment. As a domestic food retailer, we expect a smaller impact than some of our competitors. We continue to be proactive to address exposure where we do have it, and our approach remains to raise prices as a last resort to ensure that we keep prices as low as possible for our customers. Tariffs have not had a material impact on our business thus far, and as of now, we do not expect them to going forward. Our FIFO gross margin rate, excluding rent, depreciation, and amortization, fuel, and adjustment items, increased 39 basis points in the second quarter compared to the same period last year. The improvement in rate was primarily attributable to the sale of Kroger Specialty Pharmacy, lower supply chain costs, and lower shrink, partially offset by the mix effect from growth in pharmacy sales, which has lower margins and price investments. After excluding the effect from the sale of Kroger Specialty Pharmacy, our FIFO gross margin rate decreased nine basis points, largely in line with our expectations to remain margin neutral. The slight reduction in our FIFO gross margin rate was primarily due to pharmacy mix, with good progress on rate in the rest of the business. We have many levers to improve our gross margin rate over time, and we will continue to use those to balance incremental price investments that improve our value perception with customers. We expect our gross margin rate for the full year on an underlying basis to be relatively flat as we balance the impact of pharmacy mix, margin enhancement initiatives, and price investments. The operating general and administrative rate, excluding fuel and adjustment items, decreased five basis points in the second quarter compared to the same period last year. The decrease in rate was primarily attributable to improved productivity and a favorable comparison to the prior year, which included certain nonrecurring charges, partially offset by the sale of Kroger Specialty Pharmacy. After adjusting for the effect from the sale of Kroger Specialty Pharmacy, our adjusted OG&A rate significantly improved, decreasing 41 basis points on an underlying basis. Cost optimization is one of our top priorities, and driving productivity has long been a core competency of this company. We will continue to build on that strong track record by identifying new and innovative ways to deliver cost savings across our business, and our teams are actively pursuing opportunities across multiple areas. One of the areas we are prioritizing is sourcing. We see significant opportunities to optimize our costs across both cost of goods sold and goods not for resale. We also have a significant and continuing opportunity to modernize work across the enterprise, making us more agile and efficient and leading to a more streamlined operating model going forward. Our adjusted FIFO operating profit in the quarter was $1.1 billion. Adjusted EPS was $1.04, reflecting 12% growth compared to last year and our strongest growth rate since 2023. Fuel is an important part of The Kroger Co.'s strategy and offers an additional way to build loyalty with customers through the fuel rewards in our Kroger Plus program. Fuel sales were lower this quarter compared to last year, attributable to a decrease in the average retail price per gallon and fewer gallons sold. Fuel profitability was also behind the same period last year, and we expect gallons sold to remain lower on a year-over-year basis for the remainder of 2025. Our e-commerce business delivered 16% growth this quarter, driven by an increase in both households and order frequency. This growth was led by delivery with orders fulfilled from both our stores and centralized fulfillment centers. We are seeing a clear trend of customers opting for faster delivery times, an area where we are well-positioned based on our conveniently located store network coupled with our delivery partner, Instacart. Today, we can offer delivery in under two hours from 97% of our stores. This capability is resonating with our customers, and we continue to see more orders placed in these short windows. This digital momentum directly fuels our Retail Media business, which had a strong quarter and is a key contributor to profitability. While we are encouraged by the performance in the quarter, we believe we have an opportunity to meaningfully accelerate our growth. To support this, we are actively reviewing the operating model and how we engage with retail media clients to ensure we are strategically positioned to maximize growth in this area of our business. I would like to take a moment to provide a brief update on associate and labor relations. We made significant progress on agreements this quarter, which provides certainty for our associates and our business. In total, we ratified new labor agreements covering approximately 54,000 associates. We continue to meaningfully improve wages and benefits, and we value our strong working relationships with our unions. By working together, we are better able to support associates and improve the experience we provide customers. These collective efforts have helped us build a more stable workforce with improved retention rates, which in turn drives a better customer experience. I would now like to turn to capital allocation and financial strategy. The Kroger Co. delivered strong adjusted free cash flow this quarter, which reflects the strength of our operating performance. Free cash flow is important to our model, providing liquidity for our operations and strengthening our balance sheet. At quarter-end, our net total debt to adjusted EBITDA ratio was 1.63, which is below our target ratio range of 2.3 to 2.5. This provides us with significant financial flexibility to pursue growth investments and other opportunities to enhance shareholder value. We expect to return to our target leverage ratio over time. Our capital allocation priorities remain consistent and are designed to deliver total shareholder return of 8% to 11% over time. We are focused on investing in projects that will maximize return on invested capital over time while remaining committed to maintaining a current investment-grade rating, growing our dividend subject to Board approval, and returning excess capital to shareholders. In the second quarter, we raised our quarterly dividend by 9%, reflecting the strength of our free cash flow and our commitment to returning capital to shareholders. Our quarterly dividend has grown at a compounded annual growth rate of 13% since its reinstatement in February 2006, and this marked the nineteenth consecutive year of dividend increases. Dividend increases are just one component of our broader total shareholder return strategy, and we plan to continue returning capital to shareholders through share repurchases. We expect our $5 billion ASR program to be completed in 2025. The ASR is being completed under The Kroger Co.'s $7.5 billion share repurchase authorization. After completion of the ASR program, we expect to resume open market share repurchases under the remaining $2.5 billion authorization. We expect to complete these open market share repurchases by the end of the fiscal year, which is contemplated in full-year guidance. A key priority for The Kroger Co. is to improve ROIC, which includes reallocating capital towards higher return projects such as new store openings. We are pleased with the progress we are making on these projects and are on track to complete 30 this year. As Ronald mentioned earlier, we plan to accelerate these store projects beyond 2025 and expect them to be an increasing contributor to our growth, with a 30% increase expected in 2026, positioning us for sustained expansion and market share growth. I would now like to provide some additional detail on our outlook for the rest of the year. We are pleased with our second quarter results, which reflect continued momentum in our business. Sales have been strong, led by e-commerce, pharmacy, and fresh, and we are encouraged by the improvement in grocery volumes. As a result, we are raising our identical sales without fuel guidance to a new range of 2.7% to 3.4%. For Q3, we expect identical sales without fuel to be slightly below the midpoint of our full-year range. We are also raising the lower end of our adjusted FIFO net operating profit and net earnings per diluted share guidance to new ranges of $4.8 billion to $4.9 billion and $4.7 to $4.8, respectively. I will now turn the call back to Ronald Sargent. Ronald Sargent: Thanks, David. The team continues to make progress in running great stores. We are more focused on our core business and our customers, moving with speed, and we are simplifying the company. We are executing better in our stores, and we are seeing it in the results, both our quarterly financial results and our customer metrics. Our customers are telling us they like lower prices and simpler promotions, care about quality and value, and they appreciate better store conditions and better service. Our work is far from finished. I am proud of the team and the progress we are making. Before we move into Q&A, I would like to comment briefly on the CEO search. There is no specific news to share at this time, but the board remains actively engaged in the process. We will now open it up for questions. Operator: Thank you. Star followed by one on your telephone keypad. And if you would like to remove your question, that's star followed by two. Our first question for today comes from Leah Jordan of Goldman Sachs. Your line is now open. Please go ahead. Leah Jordan: Good morning, Ronald. Ronald Sargent: Good morning, Leah. Leah Jordan: Thanks for all the comments today. I mean, the biggest call out for me that was new is it seems like you plan to use your stores a bit more for e-commerce fulfillment. Can you help us understand how you plan to implement that? You know, any color on timing and cost? You know, how much capacity do you have in your stores today? And then, you know, will you have to rework the back of stores? And how are you thinking about labor? And I guess, ultimately, you know, how does this all balance with your CFC network today as well? Thank you. Ronald Sargent: Sure. Let me start with that. I mean, we are using our stores very heavily now to fulfill e-commerce orders every day. So, you know, it's really not much of a change in that regard. We are taking a hard look at some of our automated facilities. But, you know, we had a very strong quarter in both e-commerce sales as well as profitability. And significantly, this quarter was the first time that delivery sales passed store pickup sales. So I think that indicates that delivery is really important to our customers. In terms of the strategic review, you know, we are nearly complete. We plan to update you in the third quarter. And to be clear, you know, we feel like e-commerce is incredibly important to our customers. It's also important to our business. We understand that the path to profitability is also equally important. But in terms of reworking stores, there's not much that we need to do. I mean, we are doing it now. We are delivering, you know, the bulk of our e-commerce is done by stores today. And we adjust volumes all the time. I think new store openings will help us as well. But really, not a lot of work. We think it's a kind of an asset-light delivery possibility, and it also allows us to get deliveries to customers within, you know, a couple of hours' time. And if they want to pay for it, even earlier than that. Leah Jordan: That's very helpful. Thank you. And then I wanted to switch and ask about price investments. You called out lower prices on, I think, 3,500 products, and that's a step up from 2,000, I think you said, last quarter. And I know you've changed in how you're presenting some of these promotions as well. But, just has anything changed in the competitive environment? You know, how do you view your price gap today? Is that 3,500 the end of the line? And are you still making these investments in a margin-neutral way at this point? Thank you. Ronald Sargent: Yeah. Let me answer that one. You know, the competitive backdrop on pricing remains very rational out there. Our priorities currently are to really simplify our pricing strategy. We do want to lower prices. We have done that with, you know, the 3,500. We will continue to do that. Any cost increases, we've tried to absorb them as much as possible. Occasionally, the tariffs will have an impact on some of our pricing. But pricing in general is very rational. We are going to continue to do it. And we are reducing our spreads versus our competition. We did that in Q2, and I think we will continue to do that in Q3. When you, you know, look at pricing, you know, we are a different model than some of our competitors. But when you look at promotional pricing, we are very, very competitive with everybody out there. David John Kennerley: Yeah. It's David. Just one more thing to add just on the margins. You know, obviously, doing this in a responsible way is an important priority for us. We feel we were able to do that in Q2, balancing investments we want to make with a range of cost-saving initiatives. I'd expect us to be able to continue to do that through the balance of the year. Leah Jordan: Great. Thank you. Ronald Sargent: Thanks, Leah. Operator: Thank you. Our next question comes from Rupesh Parikh of Oppenheimer. Rupesh Parikh: Good morning, and thanks for taking my questions. So just going back to your ID sales momentum, now two consecutive quarters above 3%. How does your team feel about, you know, sustaining close to that level of momentum going forward? David John Kennerley: Rupesh, hey. It's David. Let me take that one. I mean, we are very happy with the ID sales performance that we've seen so far this year. You know, good growth from multiple different areas of the business. Obviously, we've, you know, we've updated the guidance range, which obviously, you know, we feel confident about our ability to deliver that. I think maybe just the one thing that is important to note is the first half of the year was definitely our easiest from a year-over-year comparison perspective. So as we get into the back half of the year, the comparisons do get a little harder. That's reflected, obviously, in the guidance. And if you look at the two-year stacks on our ID sales for the balance of the year, we expect to deliver very healthy and continuing to improve two-year stacks. Ronald Sargent: And Rupesh, the only thing I would add is that, you know, I think our customers are responding to simpler promotions, you know, lower prices, better service, you know, cleaner, less cluttered stores. And, you know, to also give credit where it's due, our merchants and marketing team are, you know, offering promotions that customers are responding to, and the divisions and the store associates are executing very well. So trying to make less busy work and more customer work. Rupesh Parikh: And then maybe my one follow-up question. Just on retail media, the comment here appears more positive on retail media this quarter versus recent quarters. Is my understanding correct, and what do you think is driving that improved performance? David John Kennerley: Yeah. Rupesh, I'd come back to the fact that we've just got a really good offering. I mean, we really like the offering that we've got here. You know, we really think it gives the clients that use our retail media assets the ability to do things that others cannot do, you know? And, you know, I think, you know, customers are responding to that. So we feel good about the growth that we're seeing. It is a little bit more positive. We did see a slight acceleration in that business this quarter relative to last quarter. We still think this is a very meaningful opportunity for us. We are tweaking some things in the way that we talk to clients about this, which gives us confidence that this can be a continued growth driver for us both in the balance of the year and also into next. Rupesh Parikh: Great. Thank you. I'll pass it on. Operator: Thank you. Our next question comes from Simeon Gutman of Morgan Stanley. Your line is now open. Please go ahead. Ronald Sargent: Good morning, Simeon. Simeon Gutman: Hey. Good morning, Ronald and David. Morning. Good morning. Hey. So if you take the first to second quarter comp, so it got a little bit better sequentially. And the press slide deck said that there were some sequential improvements in volume. I think it still implies that maybe volume is not positive, but it improved quarter to quarter. Can you explain which one moved more? Was it ticket growth or volume growth sequentially, or was it about the same to get to the 3.4%? David John Kennerley: Here's the way I'd try and explain that one. So I think a couple of things. So we saw the kind of inflation number quarter on quarter was actually slightly more moderate in the second quarter than we'd seen in the first. And our units improved. So I think it's pretty balanced. But it was more of a unit improvement than it was an inflation improvement. Ronald Sargent: And just to kind of add a little color commentary there. The grocery units have certainly improved for the last several quarters, and at this point, we're almost flat year over year. Simeon Gutman: Got it. Okay. And related to that, and then I'll put the follow-up, it sounds like then the back half, even though inflation does look like it's picking up a little bit, it's the comparison, which I think you've said is tougher by about 100 basis points. Why the back half doesn't get even stronger? So that's the follow-up to that question. Other question, Ronald, I wanted to ask, not the e-commerce strategic review, but it sounds like there's a lot of evaluation of everything in the business going on. Wanted to ask about the value proposition. And if there is a debate around the pricing architecture and whether there is a debate around even moving to a strict EDLP pricing architecture. Ronald Sargent: Yeah. There's no debate about moving to an EDLP pricing. I mean, you know, The Kroger Co. is a retailer that for many, many years has been a promotional retailer. Our customers respond to that. Our customers come to us for that. So I don't think there's going to be a dramatic change. On the other hand, you know, you look at white shelf or white tag shelf prices, and you want to narrow that spread on the everyday price items. So I don't think there's just a fundamental shift in our pricing strategy, but we're going to be sharper, we're going to be more focused, and we're going to be simpler. David John Kennerley: Yeah. Let me just, Simeon, come back to the question on, you know, ID sales through the balance of the year. Listen. You rightly point out that we cycle, you know, stronger results in the second half of the year. I mean, that is a big factor. And definitely an important one as we reflected on both our plans for the balance of the year and, of course, where we set the guidance. We feel comfortable about where we've set the range. You know? And our priority remains, as we've said, is improving grocery volumes whilst being responsible in price investments that we're making, managing margins, and that's the delicate balancing act that we've got to continue through the balance of the year. Simeon Gutman: Thanks. Good luck. Ronald Sargent: Thanks, Simeon. Operator: Thank you. Our next question comes from Michael Lasser of UBS. Line is now open. Please go ahead. Ronald Sargent: Good morning, Michael. Michael Lasser: Good morning. Thank you so much. Morning. Thank you so much for taking my question. With each passing day, it does seem like you have more and more players across the industry who are looking to the core grocery sector to grab either wallet share or drive other elements of their business and use that as a funding mechanism to harvest other portions of the profit pool across retail, which could put downward pressure on the profit pool within the grocery sector. It seems like your message, Ronald, is, listen. We still have a lot of room for internal improvement in repositioning our assets. How much further can you drive improvement from these actions while maintaining a margin rate that's been around 3.1% for the last few years? Ronald Sargent: Michael, I think the short answer is much further. I mean, we've got lots of opportunities to improve our margin rate. I mean, I can go through kind of a long list of those if you would like. But, certainly, we've got opportunities on pricing. We've got opportunities on our brands. E-commerce, certainly, sourcing is a big opportunity that we're working really hard on. Yeah. I get what you're saying about competitors, but, you know, the food industry is always competitive. In terms of, you know, the pricing environment out there, I think, you know, our competition continues to be, you know, very, very rational. All deep retailers are dealing with kind of similar issues. And, you know, our focus is simplifying and focusing on the things that matter most to our customers. David, you want to comment? David John Kennerley: Yeah. Maybe just to reinforce the point about the cost opportunity that we think we have. You know, Michael, we're saying, you know, Ronald's already mentioned sourcing. We believe that we've got a very significant opportunity on cost of goods sold as well as on goods not for resale. You know, we've made some, you know, people reorganizations in that area to help us really get after it. We think there's continued opportunity in our OG&A. And we also think what I would call sort of modernizing the operating model. So I think as we think about what is undeniably a very competitive environment, you know, what we're very, very focused on is finding the fuel, you know, to help us manage that and invest back into the business. I think we feel that we've got quite a long runway on that across the coming months and years. Michael Lasser: Understood. Thank you for that. My follow-up question is can you unpack the back half guidance a little bit more? You raised the ID outlook. You lowered your tax rate. You took up the low end of both your operating profit outlook and as well as your EPS outlook. So what changes from a margin or below-the-line perspective have you made to help us frame how we should be thinking about the second half of the year? Thank you very much. David John Kennerley: Yeah. So listen, I think on IDs, you know, we've already talked about, I think, you know, we've got much tougher comparisons as we get into the back half of the year. You know, improving grocery volumes, I think we feel good about where we've set the range on that. I think if I understand your question, it's more around the sort of profit puts and takes. So I think a few things that we've got going on there. Number one, listen. It's undeniable. We still have a consumer environment that is still pretty uncertain. And whilst we have not yet seen what I would call sort of consumer sentiment translate necessarily into action, that remains an area that we continue to watch very, very carefully. I think the second thing is that our pharmacy business, we expect it to continue to grow, you know, ahead of the rates of the rest of the business. And whilst that will give us dollars, it does create pressure on mix. The third thing is really around fuel headwinds. You know, we expect that, you know, obviously, it's not in our IDs, but it is in our profit number. Expect that to create a headwind for us for the balance of the year, as it has done so far year to date. We're working very hard, as we said, to offset, you know, all of those things with as much sort of cost and efficiency initiatives as we can. The tax rate you called out, it's very, very marginal. We had a couple of things really kind of move around mainly on state taxes, and, candidly, it's, you know, we're talking decimal points that move that. And so that was the reason that, you know, we felt confident enough to kind of raise the floor on the profit guidance but did not change the top end despite the improved ID sales. Michael Lasser: Understood. Thank you very much, and good luck. Ronald Sargent: Thanks, Michael. Operator: Thank you. Our next question comes from Seth Sigman of Barclays. Your line is now open. Please go ahead. Seth Sigman: Hey, good morning, everyone. Thanks for taking the question. Wanted to ask about e-commerce and follow-up there. The growth that continues to accelerate, is there a way to think about the quality of what you're seeing there, thinking about new customers versus existing customers? Because you're also obviously seeing non-e-commerce IDs improve as well. And then, I guess, a related question is just thinking about the shorter delivery windows. What are you seeing? What is the consumer looking for as they look for that quicker delivery? Thank you. Ronald Sargent: Yeah. I'll start, David. Feel free to add in. But consumers are looking for, you know, kind of the things they look for when they shop our stores, but more. I mean, they want, you know, they want the product to be fresh. They want it to be priced right. They want the orders complete. And they want it delivered fast. I think a few years ago, we might have said next-day delivery on food items works just fine. I think today the customer is looking for speed, and they're willing to pay for it. So I think we've tried to, you know, adjust kind of how we do business to how the consumer wants us to do business. I'm not sure, you know, if I can really say much more, but, you know, I think more and more, you know, people are willing to pay for incredibly fast service within two hours. David John Kennerley: Yeah. Maybe let me take the sort of comment around incrementality. I think a couple of things here. So number one, we're adding new households. I mean, that's really, really important because those new households are new households to The Kroger Co. And we're also growing order volumes with consumers that are already shopping with us. And one of the things that our data tells us, and I think this is why it is really, really important, is if people enter our ecosystem through e-commerce, they then shop the entire ecosystem, and they become more valuable customers to us overall. So I think that gives us a good sense of there is incrementality there. Of course, you get some switching. Some people will drop out of a store and order online, but people are generally shopping multiple different ways through The Kroger Co. ecosystem. Seth Sigman: Okay. Thank you for that. That's helpful. And then I wanted to follow-up on the pharmacy performance in the quarter. To what extent do you think the script share gains are translating into improvements in other parts of the business, obviously, with IDs accelerating? And then how are you thinking about vaccines for the second half of the year, just given there has been a lot of noise there? Thanks so much. David John Kennerley: Yeah. So let me take that one. Listen. On vaccines, listen. I think, obviously, there's some sort of delays in the approvals. I think we'll see that normalize as we get through the sort of later into the year. So I don't think it's just a delay more than anything. So we expect that to pick up. Listen. I come back to the sort of ecosystem comment, which is that, you know, when people shop in pharmacy, when they're in the store, it does provide incrementality to the rest of the business. We don't disclose that metric, but, you know, we feel great about when somebody walks in and fulfills their prescription or whether they're doing a regular shopping trip. We've given them the option to do those things within a Kroger store or online. Seth Sigman: Okay. Thank you both. Ronald Sargent: Thank you. Operator: Next question comes from Paul Lejuez of Citigroup. Your line is now open. Please go ahead. Paul Lejuez: Hey. Curious if you could talk about performance by your different income segments where you're seeing stronger versus weaker results. Also, if there are any callouts regionally. And then I just wanted to go back to the inflation versus unit discussion. If you could share your assumptions for the second half. And if you do expect units to turn positive at some point? Ronald Sargent: Okay. Let me walk through several of those here. First of all, you know, we're seeing overall retail food spend has been very stable. I think customers are probably cutting back in other areas, but spending on retail food has been kind of flattish. I think the cutting back is probably on discretionary visits, discretionary purchases, and restaurant visits. But I think at the same time, customers are feeling pretty stressed about the economy. They're doing things to save money. When you look at the income cohorts, low and middle-income households are really looking for deals. They're using coupons more. They're making smaller but more frequent trips. And they're buying more private label products. They're also eating out less. When you look at the higher-income households, you know, while they're also concerned about the economy and food prices, they're still spending. And they're splurging on, you know, some of the premium products when you look at the growth in our brands, Private Selection, and Simple Truth, where premium products are leading the way. They also are buying, you know, larger pack sizes. I think they're also interested in, you know, value for serving. So, in both groups, we're seeing less of the maybe discretionary spending. We're seeing some declines in snack categories, adult beverages. So looking ahead, I think we think that the consumer is going to remain cautious. Consumer sentiment continues to be low historically. And customers continue to be sensitive about, you know, food pricing. And I think, in terms of regional basis, I don't know that there's really been a lot of differences across, you know, The Kroger Co. in terms of regional differences in that pattern. I think it's a kind of a bit of a tale of two cities. And in terms of inflation, you know, our internal assumptions are one and a half to two and a half percent. And as David said, we were, you know, lower than the midpoint, I think, this past quarter. We don't expect it to be beyond, you know, our range. Operator: Thank you. Our next question comes from Thomas Palmer of JPMorgan. Your line is now open. Please go ahead. Thomas Palmer: Hi, and thanks for the question. Maybe to start out, I just wanted to follow-up on Leah's question on price investments. You did note FIFO gross margin, excluding fuel and specialty pharma, was down around nine basis points year over year in the quarter. How are you thinking about the trajectory of FIFO gross margin fuel as we look toward the second half of the year? David John Kennerley: Let me take that one. And what we've said is, you know, we're expecting for the full year that number to be relatively flat. So that should give you sufficient to be able to work out the assumption for the balance of the year. And I think, listen, you know, what we're trying to do with that is, and as I said, I think we've done a good job of that through the first half, is balance obviously, wanting to offer great prices to our consumers, you know, with obviously a whole range of multiple margin initiatives that we've got going on. The important thing, I think, just to note is that if you look at the second quarter and strip out kind of pharmacy, you know, the impact from pharmacy mix, our gross margins on the core business were really pretty healthy, and we feel good about where they are. Thomas Palmer: Okay. Thanks for that. I know there's not yet a significant update on the CEO search, but I did want to ask on this. I mean, one, any, I guess, traits that you're looking for in a CEO? And then second, there seem to be a lot of different initiatives already under review absent a permanent CEO. Are there areas that you're holding off on reviewing or making decisions on until the seat is filled? Ronald Sargent: Short answer to that is no. We're moving forward aggressively in virtually all areas of the business to position the company for success over the long term. In terms of what you know? And I don't want to speak to the search committee, but, you know, there's probably no surprises here. You're looking for critical experiences in people's backgrounds. I think you're looking for competencies in terms of expertise of things they've done. You're looking at personal attributes around leadership and style and people skills. So there's really no surprise there. But, you know, it's a unique company, and the scale is large. And that's why I think that, you know, they're being very careful and very cautious, but I remain confident they're going to find a, you know, an outstanding leader for The Kroger Co. In the meantime, I'm trying to help, you know, our talented team in any way I can. But, no, we're going full speed ahead in virtually every area of the business to kind of position us for longer-term success. Thomas Palmer: Okay. Thank you. Operator: Thank you. Our next question comes from Ed Kelly of Wells Fargo. Your line is now open. Please go ahead. Ronald Sargent: Good morning, Ed. Ed Kelly: Yes. Hi. Good morning, guys. Nice quarter. Ronald Sargent: Thank you. Ed Kelly: I guess first thing, LIFO charge higher than expected. I mean, I think higher than expected this quarter given, you know, what you accrued in Q1. If you extrapolate that for the full year, it's like 10¢ a share or so. I mean, how should we be thinking about LIFO as it relates to the back half of the year here? David John Kennerley: Yes. So let me take that one. So, you know, as we have, whilst inflation's kind of in the guidance range that we expected, it's probably more towards the midpoint of that range. And so as a result, what we did in the second quarter is we made sure that we kind of reset the accruals on LIFO on a year-to-date basis. So what you've got in there is two things. You've got a catch-up from what we assumed in Q1 into Q2. And then, you know, you've got, therefore, the assumption of what I would say, you know, inflation broadly kind of where we're running extrapolated for the balance of the year. And that's why the LIFO charge went up. So I don't think that LIFO charge is reflective. And, you know, that incremental charge, you'd expect to see that through the balance of the year. You'd split that in two between catch-up and then ongoing. Ed Kelly: Okay. And then, my second question is around the free cash flow guidance. Which you didn't take up today even though you have $100 million in EBIT. I mean, maybe slightly higher LIFO, I guess. But then the other thing is, you know, maybe some benefit from big beautiful bill. So why isn't the free cash flow guidance higher? What's the offset within that? Thank you. David John Kennerley: Yeah. I mean, I'd come, you know, back to, you know, sort of some of the things I've already spoken about. I mean, you know, obviously, we didn't raise the EPS guidance, consumer environment remaining uncertain, pharmacy mix, etcetera. Yeah. And then as, you know, as we have already said, we're looking to make smart investments back into the business that deliver long-term value from an ROIC perspective. And so we're balancing, you know, all of those things and didn't feel, therefore, prudent to touch the cash flow guidance at this time. Ed Kelly: Okay. Thank you. Ronald Sargent: Thanks, Ed. Operator: Thank you. Our next question comes from John Heinbockel of Guggenheim. Line is now open. Please go ahead. Ronald Sargent: Hi, John. John Heinbockel: Hey, guys. Ronald, maybe first question. I know sourcing, you guys see as a big opportunity. How do you think about sizing that? Is that, you know, billions of dollars, you know, over time? And then what do you need to do differently? I know you brought somebody in from the outside. Do differently than you've been doing to capture that, and how quickly does that occur? Ronald Sargent: Yeah. We think sourcing is a big opportunity, not only the COGS sourcing but also the indirect sourcing. You did reference, you know, somebody coming in. That was Ed Oldham, a background at Smart & Final and Walmart, and, you know, kind of a long deep sourcing background in his history. We think the opportunity is big. I don't know that we've sized it in a way that we can share with you or the timing of that. But we do feel like we are benchmarking against other competitors, and we are trying to see if there's a bigger opportunity here than we have realized so far. I think part of that is simplifying. I've talked to a lot of, you know, our CPG partners over the last six months. And I think our CPG partners would say, we need to reduce the cost to serve you guys, and we need to have simpler promotions with you guys. I think we're working on both of those. And CPG support has been, you know, really terrific the last several months. So I'm not sure I want to, you know, commit to, you know, how much and when. I'm not even sure I should at this point. But we do think it's an enormous opportunity that we have yet to realize. John Heinbockel: And then the follow-up would be, right, you think about speed of delivery. You're talking about the two hours. What, you know, what can you do inside the store to speed that up further, right, to where you could get to, you know, half that time? Is it how you pick the orders? I think we've talked about this. You know, do you pick by quadrant? And remind us, electronic shelf labels. You know, do you, I don't know how broadly you've utilized those. Is that an opportunity to speed the picking process? Ronald Sargent: Yeah. I think there's a lot of things we're doing to speed things up, and we can get you your order even less than two hours. But there's probably going to be a different delivery fee associated with doing that. So it's not a, but most customers are very pleased and very happy with two-hour delivery. I think you're right. Technology is a big part of the answer. And whether that's AI, which we're already using, to pick multiple orders at the same time, electronic shelf tags, we are rolling out across the company. I'm not sure what percentage of our stores we have those in yet, but that is also another kind of improvement in speed. In some stores, depending on the delivery volume, you may have special picking areas. So we're looking at that as well. So there's a lot to be done, I think, in in-store picking. And I think as part of our strategy refresh on e-commerce, we'll be sharing, you know, not only what's going on inside the store but also the last-mile delivery because I think we've got some good news to share there as well. John Heinbockel: Thank you, guys. David John Kennerley: Thanks, John. Ronald Sargent: Thanks, John. Operator: Thank you. Our next question comes from Robert Ohmes of Bank of America. Your line is now open. Please go ahead. Ronald Sargent: Hey, Robert. Robert Ohmes: Oh, hey, Ronald and David. I was hoping you guys could talk a little more, and maybe it's not that significant as it could be, but just the non-digital customers and the shift back to paper coupons and how significant can that be? Is that a new incremental driver or significant tailwind? Ronald Sargent: Well, I think it's certainly going to help. I mean, when you, you know, you think about the customers in our stores, and believe me, I've talked to, you know, hundreds and hundreds over the last six months in virtually every division where we operate. And what you heard over and over again is that, you know, older customers are not as digitally proficient as maybe younger customers. And older customers are feeling like, you know, they want the same deals that the person with the smartphone is getting. And so we wanted to make them on an equal playing field, and I think, you know, the end result will get incremental business from that. I think the other customer group that we weren't responding to very well were people who don't have a $600 iPhone. And those people also were a little bit disenfranchised with our digital coupons. So, you know, we're really trying to appeal to a broader customer segment, not only people that, you know, are very digitally savvy but also people who are not or not able to be. Robert Ohmes: And is it pulling a lot of new customers? And, you know, and I also wanted to ask, on the fuel being down, is there any changes in the fuel rewards program on the digital side or anything going on there? David John Kennerley: Well, let me take the first piece around that. I mean, the way that we're looking at these paper coupons is, is it generating lift? And I think it is. So we're seeing unit lift from this, and it's part of the overall equation that we look to balance to make sure that we're offering great prices to customers. I think the other important thing to add on to Ronald's point is this is something that we measure. So we're measuring customer feedback on this, and we're getting good feedback from customers, which I think is an important part of our retention strategy and recruitment strategy, you know, as we look to give great offers to our consumer. No immediate plans to change the fuel rewards within our Kroger Plus card offerings. Robert Ohmes: Thank you. Operator: Our next question comes from Jacob Aiken-Phillips of Melius Research. Your line is now open. Please go ahead. Ronald Sargent: Good morning, Jacob. Jacob Aiken-Phillips: Hi. Good morning, everyone. Good morning. I did want to say that my mom appreciates the paper coupons in case you wanted an anecdote. But I wanted to ask about pharmacy. So there's obviously a lot of share to gain from, like, closures. Then I think, like, you said that it's incremental when they start shopping in-store, but also on the flip side, I think, like, a good portion of current customers don't even realize that the stores have pharmacy. So can you talk a little bit about what you're doing to kind of close the gap both ways to get people to shop the store more accretively? Ronald Sargent: It's a great point. First of all, thank your mother for shopping at The Kroger Co. We always appreciate that. In terms of, you know, pharmacy, you're right. A lot of our customers don't have an awareness that we even have a pharmacy, and we think that's a big opportunity. And I think what we're going to be doing going forward is one, positioning it better in the store but also trying to tie it into a whole HBC strategy because HBC, health and beauty, products are a growing category. We think that we've kind of buried that in the store as well. So I think it's probably a merchandising shift to kind of tie in pharmacy, which has operated kind of separately in the past, to tie it in with the rest of the store in a way that, you know, HBC becomes a kind of a shop of its own, much like, you know, the meat department or the deli bakery, etcetera, etcetera. I don't know, David, anything you want to add? David John Kennerley: Nothing to add. I mean, I think it's an important part of the business. We've got a very big opportunity. Tying that into the kind of overall progress ecosystem through loyalty is a big opportunity for us. Our pharmacy team is doing a really nice job, and we think there's a big opportunity in pharmacy given the, you know, the Rite Aid closures and, you know, the new ownership structure at some of our competitors. We think there's an opportunity to continue to grow pharmacy better than the house. Jacob Aiken-Phillips: Great. And then so you mentioned AI as, like, a key modernization tool. Do you have any, like, concrete examples of where it's driving measurable improvement or where you'd expect to see improvement going forward? And then, I guess, more generally, just, like, what's the strategy for rolling out different tools or use cases? David John Kennerley: Let me take that one. I think the way that we think about AI is it's really the natural kind of evolution of many things that we've been doing for quite some time. So, obviously, we've got, you know, a couple of decades worth of unbelievable data, our loyalty program, which is an enormous data asset, which obviously is a terrific foundation for us to have. And we've also actually got a deep bench of data science capability and other capability primarily in our 84.51° division. If I think about things that we've done so far, we've got a couple of good examples. I'm really just going to highlight one. We've deployed an AI tool specifically against shrink, which is an area that we've been performing well in. We can see the direct result of the AI tool that allows us to see much better inventory levels, sell-through on a buy-store level, you know? And we're actually now kind of trying to transition that less or sort of away from just being a shrink tool actually into an opportunity for us to accelerate the top line as well by identifying sales opportunities primarily on seasonal items more efficiently. So I think we've got some good proof points, and that's a really good one. As I think about what we do next on this, we've got lots of things that we are experimenting with. I think, one, it's an opportunity for us to deepen customer engagement. So using it as a sales acceleration tool, and we have plenty of opportunity there. But I think there are some obviously more obvious ones around what I would call sort of operational excellence and efficiency that we have a lot of opportunity to go after and sort of links to my comments around sort of modernizing the way we work, you know, and the operating model. Ronald Sargent: And just to throw out a couple of other examples, it's going to be really important and already is in scheduling by department by hour of the day. Planogramming is going to be very helpful to us in terms of using AI. And then finally, the whole, you know, customer personalization is going to be utilizing a lot of AI tools as well. Jacob Aiken-Phillips: Sounds good. Thank you. Ronald Sargent: Thanks, Jacob. Operator: Thank you. Our final question for today comes from Michael Montani of Evercore ISI. Your line is now open. Please go ahead. Ronald Sargent: Morning, Michael. Michael Montani: Thanks for taking the questions. Good morning. Just wanted to ask, first off, if there's any way to kind of concept the potential profit impact from the strategic review. I know we've been thinking several hundred million potentially, but secondly, would that be included in the guide, or is that external to that? Ronald Sargent: Yeah. You're talking about e-commerce specifically? Michael Montani: Yeah. Yeah. E-commerce. Ronald Sargent: Yeah. I think what we will do is kind of talk in general terms about our path to profitability and with a timeline associated with that. But in terms of the amount, I think it's probably not a number we would disclose, nor are we ready to disclose it in any case, because we're still doing a review as we speak. David John Kennerley: Yeah. And to be clear, it is not included in the guide. Operator: Thank you. At this time, I'll now hand back to Ronald Sargent for any further remarks. Ronald Sargent: Well, thank you all for your questions. We really appreciate them, particularly the comment from Jacob's mother. As you know, before we conclude our earnings call, we'd like to share a few comments with any of our associates who are listening in. I'd like to thank our associates for the strong improvement that we saw in customer equity scores. As I shared, our customers are seeing we're improving store conditions, how we're improving freshness, and how our team is improving the shopping experience. You know, setting priorities and developing strategies is really only half the battle. I think the hard part is executing the business, and that's the challenge. And our teams are doing a really terrific job. So thanks, everybody, for joining us on the call this morning. We look forward to speaking with all of you again soon. And we hope to see you in our stores. Operator: Thank you all for joining today's call. You may now disconnect your lines.
Operator: Good afternoon, and welcome to the Farmer Brothers Fiscal Fourth Quarter and Year-End 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded. Today, the company filed its Form 10-K and issued its fourth quarter and year-end results press release, which are available in the Investor Relations section of the Farmer Brothers website at farmerbros.com. The release is also included as an exhibit on the company's Form 10-K and is available on its website and the Securities and Exchange Commission's website at sec.gov. A replay of this audio-only webcast will also be available on the company's website approximately 2 hours after the conclusion of this call. Before we begin the call, please note that all financial information presented is unaudited and various remarks made by management during this call about the company's future expectations, plans and prospects may constitute forward-looking statements for the purposes of safe harbor provisions under the federal securities laws and regulations. These forward-looking statements represent the company's views as of today and should not be relied upon as representing the company's views as of any subsequent date. Results could differ materially from those forward-looking statements. Additional information on factors which could cause actual results and other events to differ materially from those forward-looking statements is available in the company's release and public filings. On today's call, management will also reference certain non-GAAP financial measures, including adjusted EBITDA and adjusted EBITDA margin in assessing the company's operating performance. Reconciliation of these non-GAAP financial measures to their most directly comparable GAAP measures is also included in the company's release and SEC filings. I will now turn the call over to Farmer Brothers' President, Chief Executive Officer, John Moore. Mr. Moore, please go ahead. John Moore: Good afternoon, everyone, and thank you for joining us. Fiscal 2025 was a strong year for Farmer Brothers. We realized significant operational and financial improvements despite market headwinds. We ended the year with gross margins above 43%, a more than $14 million year-over-year improvement in adjusted EBITDA, continued decreases in SG&A expenses and significantly paid down debt. We also captured a number of internal efficiency gains from both an organizational and cost structure perspective, as a result of our manufacturing, sales and network optimization initiatives. With the successful launch of our Sum>One specialty brand this past March, we fully realized the completion of our SKU rationalization and brand pyramid good, better, best positioning initiatives. Early response to Sum>One has been encouraging with several promising opportunities in the pipeline. In fact, we are currently working with a few of our larger customers to launch Sum>One branded cafe experiences across their locations and look forward to sharing more with you in the coming months. In distilling a multitude of brands and coffee types into our core Farmer Brothers, Boyd's and Sum>One brands, we leveraged a significant and differentiating capability in Farmer Brothers, our coffee sourcing, quality control, roasting and manufacturing teams. In addition to flexing this core competence for SKU rationalization, the team was also able to reconstitute our sourcing methodologies to enhance elasticity and provide more resilience. This is of particular importance given the current state of the green coffee markets. We've also continued to differentiate ourselves from competitors with our ability to provide a fully comprehensive set of coffee solutions. Our sourcing and product development team enable Farmer Brothers to engineer solutions from soil to sip. Our small batch and nimble manufacturing capability allows us to provide coffee finished goods ranging from more value-engineered commercial applications to the highest of quality specialty coffee types. These services can be provided in both LTO and large-scale volumes in our SQF and LEED Silver certified Portland, Oregon roasting and manufacturing facility. With the appointments of Brian Miller in sales and Travis Young in field operations to our leadership team, we formally separated those responsibilities. This heightened focus in each respective area is allowing leadership to better align team KPIs and incentive structures with customer and team member needs. In each area, we are seeing heightened focus, attention to detail and improved execution. We also further strengthened our customer service efforts with the full reintegration of our revived services team back into our field operations organization. Revive is home to one of the largest coffee service networks in the country and provides installation, maintenance, repair and restoration services for coffee, tea and other beverage equipment. Emphasizing and investing in our refurbishment capability while improving controls and ROI expectations allowed us to make significant reductions in CapEx related to brewing equipment expenditures. Thanks to our partnerships with leading equipment manufacturers. Revive continues to be a true market differentiator for Farmer Brothers and a key component in our customer retention efforts. Across the board, we spent much of 2025 focused on improving our technology platforms and systems. We completed an upgrade of all our hardware for Route Sales Representatives and Revive team members as well as several improvements designed to enhance our supply chain optimization and flexibility efforts. We also launched a new CRM tool in early fiscal 2025, which is providing the organization with better customer analytics. This data will allow us to better target products and pricing and provide further insight into supply and demand forecasting going forward. The macro and microeconomic environments, however, continue to present significant challenges for the coffee industry as a whole. As such, we saw total coffee volumes decreased by 10% on a year-over-year basis just shy of GBP 20 million in 2025. According to recent commerce department data, U.S. restaurants and bars saw one of the weakest 6-month periods of sales growth in the past decade during the first half of 2025. Leaders in the QSR restaurant and C-store channels have all reported further evidence of softness in consumer purchasing patterns, particularly in the breakfast daypart. Overall, this year has shown weaker growth in the Food services sector than that during the COVID-19 pandemic when restaurants and bars were closed due to lockdown orders. This downturn in overall foot traffic across our customer base, coupled with a 65% plus rise in green coffee prices over the past year makes for a particularly challenging market environment. The impact of potential tariffs, especially the 50% tariff on goods imported from Brazil, which went into effect in early August has also yet to be fully realized. While Farmer Brother's exceptional access to global coffee markets creates flexibility for our planning and procurement teams, we do anticipate we will see a significant increase in our overall cost of goods in fiscal 2026. Our proactive pricing strategy helped us stay ahead of these challenges in fiscal 2025. We believe we have maximized this strategy and do not plan to make additional price adjustments at this time. As such, we expect pressure on our top line and gross margin in fiscal 2026. Despite these challenges, we remain committed to driving company growth and creating value for our shareholders, as highlighted in our July announcement of the formation of our Strategy Committee. The committee is continuing to explore opportunities and we will provide more information if and when it is appropriate. Looking to fiscal 2026, we are committed to addressing customer and coffee pound degradation and driving top line revenue. We are focused on unlocking the full power and potential of our DSD network. With Travis Young driving DSD field operations, we are creating a culture of accountability that is focused on driving product penetration within existing accounts while also adding new ones. Farmer Brother's white-glove service value proposition will continue to be a key driver in customer retention and loyalty, focused on growth across our restaurant, coffee shop, cafe, bagel and doughnut shop channels as well as continuing to expand with GPOs nationally. We believe we can meet the needs of our customers regardless of their size with our good, better, best brand pyramid value proposition. With Brian Miller at the helm, we are cultivating a unified sales team through a comprehensive organization-wide training and KPIs. We will also look to leverage our core coffee capability as we grow our white label customer portfolio and better utilize our Portland, Oregon roasting and manufacturing facility. Our unique seed to sip value chain engineering capabilities allow us to offer diverse quality and packaging possibilities, making us particularly attractive to potential white label customers. While we do expect market challenges to continue throughout fiscal 2026, we believe the changes we have made over the recent years have created a strong foundation from which we can grow. With that, I'll turn it over to Vance to discuss our financial results in more detail. Vance? Vance Fisher: Thanks, John, and good afternoon, everyone. As John mentioned, Farmer Brothers delivered very strong results in fiscal '25, despite a challenging market environment. We achieved significant year-over-year improvements in adjusted EBITDA gross margins and SG&A and significantly improved our cash flow generation, which allowed us to strengthen our balance sheet. Overall, our adjusted EBITDA for the fourth quarter was $5.8 million and $14.8 million for the full fiscal year, a year-over-year improvement of more than $7 million for the quarter and more than $14 million for the full fiscal year. Our adjusted EBITDA results were supported by healthy gross margins. Gross margin in the fourth quarter was 44.9%, a year-over-year increase of 610 basis points. For the full fiscal year, gross margins were 43.5%, a 420 basis point increase compared to the prior year. Our proactive approach to pricing continued to positively impact gross margins throughout the year as we strategically stayed ahead of the rising green coffee market. However, as John mentioned earlier, we believe we have maximized the benefits of this strategy. And at this time, we do not have plans to take additional price in the near term. As a result, we expect pressure on gross margins throughout fiscal '26 as we realize the impact of the rising green coffee COGS in our results and expect gross margins to drop into the high 30s range over the coming quarters. From a top line perspective, net sales during the fourth quarter were $85.1 million compared to $84.4 million during the prior year period. For the full fiscal year, net sales were up slightly to $342.3 million compared to $341.1 million in the prior year. Operating expenses increased $14.3 million to $150.4 million for the year. This increase was almost exclusively a result of a $20.2 million year-over-year decrease in net gains related to the sale of branch properties and other assets as we had far fewer branch sales in fiscal '25 compared to fiscal '24. Excluding asset sales, operating expenses decreased by $6 million or 190 basis points as a percentage of net sales. This reflects the progress we've made in driving efficiencies in our SG&A cost structure and better positions us to manage a challenging operating environment. For the fourth quarter, Farmer Brothers recorded a net loss of $4.7 million compared to a $4.6 million net loss in the fourth quarter of fiscal '24. For the full fiscal year, we recorded a net loss of $14.5 million compared to a loss of $3.9 million in the prior year. The current fiscal year included noncash losses of $7.7 million related to pension settlements and a $20.2 million decrease in net gains on asset sales due primarily to fewer branch sales in the current year compared to the prior year, as I mentioned earlier. We made meaningful progress strengthening the balance sheet during the year. As of June 30, 2025, we had $6.8 million of unrestricted cash and cash equivalents and $14.3 million in outstanding borrowings under our credit facility. This represents a roughly $10 million decrease in our net debt position over the course of the year, and we ended the year with $32.6 million of additional borrowing capacity under our credit facility. Free cash flow generation was much improved in fiscal '25. For the fourth quarter, free cash flow was $7.5 million and $6.5 million for the full fiscal year, representing a year-over-year increase of $12.1 million for the quarter and $34.5 million for the full fiscal year. This significant improvement in free cash flow is a testament to our progress in driving better operating performance, improved working capital management and CapEx efficiency and puts us in a much stronger overall financial position. Looking ahead, we expect market conditions to continue to be challenging throughout fiscal '26 as the green coffee market has continued to stay elevated and uncertainty remains regarding tariff impacts. These elements will put pressure on our gross margins and overall financial results throughout fiscal '26. With that said, we are pleased with our fiscal '25 performance as it reflects the significant progress Farmer Brothers has made to improve our operating results and financial position and believe it demonstrates our potential to generate significant long-term value for our shareholders under more favorable market conditions. With that, I'll turn it back over to John. John? John Moore: Thanks, Vance. Farmer Brothers has come a long way in a fairly short amount of time. Fiscal 2025 was a year of tremendous improvement both financially and operationally despite significant market headwinds. While we take great pride in that, as you've heard me say time and again, there is still much work to be done. As such, we remain committed to driving top line revenue growth, increasing overall coffee volumes, strengthening our customer retention and expansion efforts and delivering an exceptional customer experience in fiscal 2026. Before we open it up for questions, I want to take a quick moment to thank our team. Their leadership, perseverance and determination continue to be what drives our successes, both big and small, and how we continue to build connections over coffee. They are what makes Farmer Brothers great. Thank you all again for joining us on the call today. Operator, we will now open it up for questions. Operator: [Operator Instructions] And your first question today will come from Eric Des Lauriers with Craig-Hallum Capital Group. Eric Des Lauriers: Sincere congratulations on the execution that you guys have done over the past year, certainly a tough macro backdrop, but really impressive results. So hats off to you guys. John, you cited a couple of areas where you're continuing to focus on operational efficiency and margin improvements. Obviously, there's been -- you guys have done a lot of execution on the operational efficiency front already. Brand pyramid is now complete. Could you maybe sort of rank order those areas where you're focusing now? Or maybe help us understand where there remains the biggest opportunity to kind of further improve efficiency. I'm just kind of wondering how much is left considering all that you guys have done. John Moore: No, thanks for the question, Eric. I would categorize it as somewhat of a pivot at this moment, a pivot from pricing action and optimization to performance and execution. I think that we did a great deal of work over the last year or 2 years of refining many of our systems, many of our processes we've talked in the past about route optimization efforts, et cetera. And I think at this point now, we put new leadership in place, Travis Young on the field operations side, Brian Miller on the business development side. Both gentlemen are adding tremendous value and really getting their feet under them. And at this time, we're able to pivot more again into sort of addressing that degradation in pounds, addressing that degradation in customer counts and trying to focus much more on our customer-focused white-glove service and fulfillment. I think we've got a 100-year history of industry leadership in that space. We've got one of the largest coffee centric DSD networks, if not the largest in the country. We've got one of the largest, if not the largest equipment servicing, coffee-specific networks in the country. We've got arguably one of the most talented and accomplished green coffee sourcing, roasting manufacturing and fulfillment coffee operations in the country. And I think what we're really looking to do is lean on all of those core competency areas to drive value both for our customers and our shareholders. And that's what you're going to hear us focusing on over the next fiscal year. Eric Des Lauriers: Great. That's helpful. And I suppose it's a bit of a related question here. I mean it sounds like this is where the focus is now. But as we kind of think about customer churn levels, I know, I guess, about a year ago or so at this point, order fulfillment was one of the biggest -- or maybe the lowest hanging fruit there. It sounds like you guys have improved that significantly over the past year, but maybe kind of comment on any order fulfillment progress that there -- that remains, if any? And then, just at this point, to the extent that you've had this visibility, I'm wondering if you're seeing more of the churn now coming from simple macro headwinds. You commented on how food service industry is basically as pressured as it's been over the past decade. So to the extent that you're still seeing some churn, could you just kind of comment on, I guess, the levels of churn overall, how your order fulfillment rates have been progressing here? And just what you're seeing from a sort of like forced error on your guys' part from causing customer churn versus just sort of the whole bit of macro headwinds at this point? A bit of a wordy question there, but just if you can just expand on the dynamics there would be helpful. John Moore: Sure. I appreciate the question, and I think it gives me an opportunity to highlight some great work done by Craig Newham and his team in coffee and in general, the planning and procurement functions in the company. There was definitely a challenge to that team to address what had been a really difficult out-of-stock situation. And I think that also speaks to the final execution with the brand pyramid strategy. I mean that, as we've said in the past, it impacts a number of different facets of what we do. It makes everything more efficient from sourcing to manufacturing line time to roasting to distribution throughout the network. There's a fair amount of complexity there that we removed from the system just and finally, executing that initiative. But I have to again tip my cap to the planning and procurement team. I think they did a tremendous job. They recognize the challenge for what it was. And then it was really a complete team effort. So the operation -- field operations team, the communication between those groups. It deserves extra attention because at this point in time, I would say, knock on wood, we've actually solved that almost completely. So I'm very happy to report, as we often said, when we show up on time with the products that we should have for the customer, we think we win. Given our white-glove service commitment, the fact that our DSD network is so strong and those Route Sales Representatives provide such a comprehensive service when they go into a 4-walls environment, they rotate stock, they calibrate equipment, they wipe down a coffee servicing area, they really do take care of all of the customers' coffee, beverage fulfillment needs so that the customer can focus on their core business, servicing their customers for their downstream. So I'm very happy to report. We've done a pretty good job on that side. Eric Des Lauriers: That's great to hear. Congrats again on all the execution over the past year plus. Operator: And your next question today will come from Gerard Sweeney with ROTH Capital. Gerard Sweeney: On the growth side. I know headwinds, you gave a little bit of macro backdrop for the industry. But at some point, you can't cut yourself to profitability. You had to start growing, and this is a tough environment for that. But is there ability to -- what's the opportunity to drive better penetration, reduce churn and stabilize volumes, things like that? Can we do that in this environment where we're going to be just -- have to grind through this? John Moore: Thanks, Gerard. I think it's definitely a difficult macro environment to operate in, in the moment. There are a number of headwinds that are sort of truly macro, and then there are headwinds that are macro specific to coffee. We've discussed those at length. I think over the last couple of years, as we've discussed, we were able to maintain some integrity in top line and really drive the gross margin improvements through a great deal of pricing action. And one challenge with pricing action, of course, is it does put pressure, particularly on the customer retention piece. As we've discussed, we're looking to pivot a little bit away from leveraging that lever, so to speak, and now we're really emphasizing the execution at Street level. And so I think that will -- that should have some kind of positive impact when it comes to the customer retention piece. I think when it comes to the pounds and the pound's degradation, we've spoken in the past about, in some cases, you can maintain an apples-to-apples customer on comparison, but in some cases, customers seem to be potentially ordering a little bit less than they used to for a number of macro reasons. We are really looking to aggressively engage and activate our DSD network, not just in terms of product penetration, but also in terms of acquisition. We think we have a very talented group. It's our largest street-facing representative group, well over 200 or so routes running every single day. And we think given the tools, the training and the incentives we can activate that group to do more business active -- business acquisition effort. So really looking forward to seeing what Travis Young can do with his team on that side. And then, of course, again, Brian Miller and his team are more focused than ever, particularly in a differentiated group of target account types. I think really looking to grow with some of the larger enterprise value groups in the country. You and I have talked about this in the past and we've discussed it in previous calls, but I do think Farmer Brothers is somewhat unique in the scale that we bring to the equation. And when there are restaurant groups of hundreds of locations that have a diverse geography around the nation, there's really no other coffee company in the country that can service as comprehensively as Farmer Brothers can. And I think looking to engage with organizations like that, while maintaining our service levels with mom-and-pop operations in every channel, I think that will be the winning equation for us. Gerard Sweeney: Have you -- how much traction have you gotten with the larger restaurant group? Are we still early in that process? John Moore: No, Gerry, I'd say we do a fair amount of work in that space already. So it's not as though this is unknown territory for us. And again, it goes back to having a pretty diverse set of client types and multiple channel types. We work with customers large and small across the various parts of the food and beverage industry, whether that's the restaurant side, coffee shops, bagel shops, doughnut shops but also in health care, gaming, institutional catering, Farmer Brothers has a strong presence, and it's a national presence that can be sorted in all contiguous states. So we are in these spaces, but we have opportunity to grow. Gerard Sweeney: Is this a function of -- I mean you split the operations there between Brian and -- sorry, I forgot his same. But just give -- Travis, if you're listening, I apologize. But for Brian, does just give him the ability to focus more on these restaurant groups, I mean, obviously, you've had a lot on your plate and you're pushing more and more behind you. But does this give the opportunity to focus a little bit more on these larger restaurant groups from a sales perspective? John Moore: It does, I think -- and there are 2 sides to that, right? We have -- Brian has done a tremendous job of realigning and reprioritizing our business development efforts throughout the organization. And I think we have a tremendous opportunity to grow through referrals because we are present with many of the top food and beverage organizations in the country. And when we do an outstanding job, they tend to refer us to their peer sets, and that's how we can get a fair amount of business. But we also are providing new KPIs and new incentive structures for pure business development activity, people there are really just hunting not doing any gathering. And I think that we'll start seeing the results of that over the next fiscal year. Gerard Sweeney: Got it. One more question. I know I've asked a couple, but -- and you talked about activating engage -- actively engaging, activating and you said business acquisition. I'm assuming that's acquisition of new customers or meaning yes, not necessarily acquisitions. okay, which leads me to the next question. Is coffee enough? You have a lot of allied products, and I don't think the queue is out. I didn't see what's going on there. But there's -- with such a broad distribution channel or -- yes, channel, can you add anything on to that or other opportunities to sort of leverage that white-glove service and footprint? John Moore: Yes, there are, without question. And keep in mind, we do quite a bit of what we had referred to as allied goods. It's a significant part of our book of business. And there's no question when we stop a truck, we want to sell as many products off of that truck into a 4-walls environment as possible. And we are always running various initiatives to drive interest in specific segments, different product types. And we will continue to do that to try to really get aggressive and meet our customers where they are. Again, we have an opportunity with the good, better, best portfolio now really cleanly and clearly defined. I think our inventory levels are an appropriate place. Our working capital is being as efficient as it's been. But at the same time, we're able to get the products and the appropriate mix to the customers in a way that's arguably better than it's been in years. So excited to see what kind of work can be done there with the activation of the DSD network. Operator: This will conclude our question-and-answer session as well as conference call. Thank you all for attending today's conference presentation. You may now disconnect.
Operator: Welcome to Lesaka Tech's Results Webcast for the Fourth Quarter of Fiscal 2025. As a reminder, the webcast is being recorded. Management will address any questions you may have at the end of the presentation. [Operator Instructions] . Our results press release and investor presentation are available on our Investor Relations website at ir.lesakatech.com. During this call, we will be making forward-looking statements. I ask you to look at the cautionary language contained in our press release, Form 8-K and results presentation regarding the risks and uncertainties associated with forward-looking statements. As a domestic filer in the United States, we report results in U.S. dollars under U.S. GAAP. However, it is important to note that our operational currency is South African rand, and as such, we analyze our performance in South African rand, which is non-GAAP. This assists investors in understanding the underlying trends in our business. I will now turn the webcast over to Ali. Ali Zaynalabidin Mazanderani: [Audio Gap] welcome. FY 2025 has been a strong year for Lesaka. From a financial performance perspective, we finished the year with net revenue of ZAR 5.3 billion and EBITDA of ZAR 922 million, in line with our guidance for the year. Our adjusted earnings for the year of ZAR 186 million was up substantially from ZAR 51 million last year and resulted in adjusted earnings per share growing from ZAR 0.80 to ZAR 2.29. From a balance sheet perspective, in March 2025, we refinanced our existing debt facilities and expanded our banking relationships to include both RMB and Investec. Our gross debt increased as we raised debt to fund acquisitions. And accordingly, our net debt to group adjusted EBITDA increased to 2.9x if we use 12-month trailing EBITDA. However, if we annualize Q4 adjusted EBITDA, this would be 2.2x, approaching our target of less than 2x leverage ratio. From an M&A perspective, in October 2024, we completed the ZAR 1.7 billion acquisition of Adumo. In March 2025, we completed the ZAR 507 million acquisition of Recharger. In June 2025, we announced the ZAR 1.1 billion acquisition of Bank Zero, and we sold our entire stake in MobiKwik for ZAR 290 million. From a people perspective, we have augmented our executive team, launched our graduate recruitment program and implemented our employee share ownership plan. We strive to be the employer of choice for those driven by mission and purpose. From a stakeholder engagement perspective, in January 2025, we launched the Association of South African payment providers with Lincoln Mali assuming the association's presidency to work in closer collaboration with regulators and industry stakeholders. In March 2025, we held our first Investor Day to better explain our business and the opportunity to the investor community. Our 3 business units are at different stages of evolution. Our merchant business has grown materially this year with net revenue of ZAR 3 billion, up 46% year-on-year and EBITDA of ZAR 657 million, up 20% year-on-year, but this has been partly driven by acquisition. The businesses are still being integrated and the focus in the short-term will be on completing that process and the unit economics, after which we expect to see an acceleration in organic growth. Our Consumer business has had a standout year, growing net revenue by 35% to ZAR 1.7 billion and EBITDA by 83% to ZAR 435 million. Our Enterprise business reported net revenue declining 9% to ZAR 651 million and EBITDA declining from ZAR 55 million to ZAR 24 million as we closed down noncore business units and invested in building a leading enterprise business to form the third pillar of the Lesaka platform. We can already see this bearing fruit in Q4, and our Enterprise business will be a material EBITDA contributor to the group and driver of growth in the year ahead. At the end of this presentation, I'll provide more color on the transformative Bank Zero acquisition, which we signed and is pending regulatory approval as well as looking ahead to FY '26 and our guidance. I'll now hand over to Dan to give more details on our performance for the past quarter. Daniel Smith: Thank you, Ali, and good day, everyone. As Ali has highlighted, Lesaka is going through a period of significant transformation, marked by strategic acquisitions, balance sheet optimization and internal restructuring as we continue to build out a fintech platform. Despite it being a very busy period in evolution, we have consistently delivered on our guidance. This quarter marks our 12th consecutive period of meeting profitability guidance, underscoring the consistency and reliability of the execution of our strategy. This quarter reflects strong financial momentum with positive contributions to both net revenue and profitability from all 3 of our divisions. Our Consumer division delivered another excellent quarter with robust growth in both top line and bottom line performance. In our Merchant division, we accelerated the integration of our micro merchant and merchant businesses as we build an integrated multiproduct platform, serving merchants of all sizes. This includes the unification of our brands under a single Lesaka identity. Some of these actions has resulted in reorganization costs being incurred as well as additional intangible amortization charges as we shortened the deemed useful lives of some of our brands. In our Enterprise division, it's been a year of build. We've refreshed our strategy, refined our core product offering and realigned the business. These changes incurred once-off reorganization costs, but Q4 now reflects the fully scaled up Enterprise division aligned with a new strategic direction. Pleasingly, the strong performance of the recently acquired Recharger business has come through for a full quarter for the first time, leading to a growing overall contribution from our Enterprise division. We completed the disposal of our major noncore asset, MobiKwik, for ZAR 290 million with the proceeds received at the end of June. These funds have been included in our cash balances and used to partially offset our debt, in line with our stated intention. We continued to optimize our balance sheet through the refinancing of the merchant blending facility, resulting in an upsize to ZAR 400 million in capacity to fund growth and a 75% basis point reduction in the overall funding cost. Turning to the numbers. Q4 has been another positive quarter with the Lesaka shape now being represented wholly for the first time through full 3-month contributions of both the Adumo and Recharger acquisitions. Net revenue was 47% higher at ZAR 1.5 billion, with group adjusted EBITDA of ZAR 306 million, up 61% on last year. Our adjusted earnings, which we believe is the most appropriate measure of our overall performance, has grown almost threefold to ZAR 80 million this quarter. On a per share basis, adjusted earnings is up from ZAR 0.32 to ZAR 0.99, representing an increase of over 200%. Our net debt to group adjusted EBITDA ratio increased from 2.5x to 2.9x at year-end. As mentioned by Ali, given this is the first quarter of full representation for Lesaka, annualizing our Q4 adjusted EBITDA results in a leverage ratio of 2.2x, approaching our target of 2x. Our focus is on net revenue as a top line KPI, which recognizes only the commissions earned on the sale of certain types of vouchers, thus eliminating volatility caused by changes in sales mix. Net revenue increased 47% year-on-year, driven primarily by the inclusion of Adumo and a stellar Consumer division performance. Enterprise division net revenue reduced 17% for the year, reflecting the restructuring of the division and the closure of noncore lines of business. At an adjusted EBITDA level, we reported a 61% year-on-year growth for the quarter to ZAR 306 million. The Merchant division's growth of 37% was primarily driven by the inclusion of Adumo this quarter compared to last year. During the quarter, we also continued to make technology investments in the micro merchant business, which are mostly recognized as operating costs and therefore, impacted our overall EBITDA growth. In the Consumer division, we have seen standout performance with growth of 106%, reflecting the increased scale of our customer base as well as success in our insurance and lending cross-sell initiatives. We also had Adumo payouts this quarter compared to the prior year with a positive contribution. The Enterprise division adjusted EBITDA increased 66%, reflective of being a bold year with the investment in the platform, closure of unprofitable business activities and reorganization costs of ZAR 8 million for the quarter. This was offset by the inclusion of recharger for the full quarter. Taken as a whole, Q4's performance with group adjusted EBITDA in excess of ZAR 300 million provides a good indication of our current quarterly earnings run rate before taking into account seasonality, organic growth and cost savings we expect to extract as we consolidate and scale our platforms. Standing back, 2025 and this quarter in particular, had multiple significant anomalies in the income statement. This shifted the strong growth in group adjusted EBITDA to a significant overall net loss position. Let me unpack this in a bit more detail. Firstly, we recorded ZAR 239 million of transaction costs, of which ZAR 225 million arises from the post-combination compensation charges related to the Recharger acquisition. Here, the deferred portion of the purchase price paid to the seller is required to be accounted for as a compensation charge given he is providing consulting services to Lesaka for a period of time post acquisition. This is nonrecurring. Secondly, we incurred additional amortization charges related to our intangible assets, specifically brand names. As a result of the unification of our Merchant division, we accelerated the amortization of the useful lives, resulting in a noncash charge of ZAR 46 million for the quarter with a further ZAR 160 million accelerated charge expected next year. Thirdly, we recognized ZAR 335 million in noncash goodwill impairments during the quarter. It's important to note that our assessment of goodwill in aggregate has increased across each of the acquisitions we've made relative to initial assessments at the time of each transaction. However, under accounting standards, goodwill is assessed at the level of the individual cash-generating units acquired. As a result, some of the individual CGUs required impairment with there being no equivalent mechanism to raise or write up for increases in assessed goodwill and other CGUs to offset this. This is a noncash accounting charge and does not reflect the change in our confidence of the strategic value of our acquisitions nor the price paid. Fourthly, we realized a loss of ZAR 101 million on the sale of MobiKwik. Finally, we recognized a benefit of ZAR 210 million arising from the reversal of deferred tax valuation allowance. This adjustment reflects the improved profitability in our consumer lending entity, which has strengthened our confidence in the use of the significant assessed losses. This reversal is a noncash accounting benefit and it highlights the positive trajectory of our Consumer division's performance. We believe adjusted earnings per share is the most accurate reflection of our operating performance. Adjusted earnings per share accounts for fully diluted shares, including those issued for acquisitions and related to stock-based compensation. In quarter 4, our adjusted earnings per share grew by 211% to ZAR 0.99. And for the full year, it increased by 187% to ZAR 2.29. This increase underscores the strength of our underlying business and the successful execution of both organic and inorganic growth strategies being value accretive for our shareholders. We continue to see strong growth in cash generated from business operations with operating cash flow increasing by ZAR 101 million quarter-on-quarter, reaching ZAR 370 million in quarter 4. This is consistent with the sustained quarterly growth trajectory we have observed in prior periods. Working capital movements remain volatile, largely due to the timing of transactions around quarter ends, particularly in our Merchant and Enterprise divisions. In quarter 4, we utilized ZAR 42 million in working capital. We also saw increased funding requirements of ZAR 230 million, driven by strong growth in our consumer and merchant loan books. In our micro merchant business, we took advantage of bulk discount opportunities with a net ZAR 34 million investment in inventory. We paid provisional tax of ZAR 49 million in the quarter. Interest paid for the quarter increased to ZAR 139 million, primarily due to 4 months of accrued interest payments being settled in June 2025. As you'll recall, in quarter 3, only 2 months of interest were payable, owing to the timing of the conclusion of our debt refinance at the end of February 2025. The net result for the quarter is net cash utilized in operating activities of ZAR 116 million. While our net cash flow may fluctuate quarter-to-quarter, we remain confident in the cash-generating capacity of our business. Our net debt to adjusted EBITDA increased marginally from 2.8 to 2.9x. We received the proceeds from the sale of our MobiKwik shareholding this quarter, which boosted cash holdings. Our medium-term target is a net debt to adjusted EBITDA ratio of 2x, which is comfortably serviceable and an appropriate capital structure for Lesaka. Our gross debt at ZAR 4 billion does not take into account any impacts of the proposed acquisition of Bank Zero, which we anticipate closing before the end of our 2026 financial year and from which we see significant opportunity to reduce both our cost of funding and overall gross debt levels. We spent ZAR 103 million on capital expenditure this quarter and ZAR 378 million for the year. Key expenditures include the continued rollout of our new Smart Safe product, capitalized development costs and the rollout of POS acquiring devices. ZAR 33 million was spent on maintenance CapEx, primarily related to POS devices and cash vaults. Looking ahead to 2026, we expect our annual capital expenditure to remain below ZAR 400 million, in line with our disciplined investment approach. This will be roughly flat compared to 2025 despite continued growth in group adjusted EBITDA. Looking back on the quarter, we've made significant progress in establishing a scalable fintech platform. Our platform is now almost fully represented. Looking forward, we remain focused on driving sustainable growth, maintaining capital discipline and enhancing shareholder value. I will now hand over to Steve to address key developments and results in our Merchant division. Steven Heilbron: Thank you, Dan. When we announced the acquisition of Connect in 2022, which included offerings for small to medium merchants and micro merchants under the Kazang brand, we outlined a clear vision, one that remains unchanged today. In setting this vision, the opportunity presented included the inevitable digitization of South Africa's economy driven by secular trends and solving for the pain points of under-serviced merchants in Southern Africa. We set out to build an integrated multiproduct platform serving merchants of all sizes, ranging from micro merchants to small to medium merchants. We've been involved for 3 years and during that time, we've made significant progress in executing on this vision. The division has scaled organically and through acquisitions, product integration and cross-selling. The merchants we serve face challenges that extend well beyond accepting card payments. Our goal is to provide comprehensive solutions that help them manage their finances, operate their businesses more efficiently and ultimately succeed. We strive to build multiproduct relationships. The more services we layer, the more value we create for our merchants and the more efficient and scalable our merchant platform becomes as we integrate our tech stack. Our growth strategy remains balanced between organic initiatives and inorganic initiatives being strategic acquisitions, each designed to deepen our customer base or expand our product set as we build a scalable fintech platform. In a competitive landscape where banks, retailers and MNOs are all buying for merchant engagement, we believe Lesaka stands apart. Our comprehensive product suite spends both the formal and informal merchant sectors, giving us a differentiated value proposition with the ability to execute at scale. We are still in the early stages of our journey, but we've reached a pivotal point in the evolution of our merchant division. Let me walk you through our four key developments that impact both the year under review and our focus for the year ahead. Firstly, scale and product augmentation through the Adumo acquisition. We acquired Adumo, South Africa's largest independent payments processor to significantly scale our merchant footprint and broaden our product offering. This transaction added more than 23,000 merchants to our base. It expanded our geographical presence and opened new verticals, most notably hospitality point-of-sale software through GAAP. GAAP is the leading provider of integrated point-of-sale software and hardware to the hospitality sector in Southern Africa, servicing in excess of 9,600 sites with on-the-ground operations in South Africa, Botswana and Kenya. This acquisition positions us to ultimately offer a bundled solution of software, card acquiring, cash lending and Alternative Digital Products, creating a compelling cross-sell opportunity and reinforcing Lesaka's role as a natural consolidator in Southern African fintech. By broadening our product offering, we can put more hooks into our merchant value proposition and thereby enhance the stickiness of our relationship with each merchant. Cross-selling and bundling are central to improve our unit economics and achieving operating efficiencies which supports margin expansion in the merchant division. Secondly, integration, optimization and brand consolidation. We have seen good organic growth over the past 3 years and have brought together Kazang and Connect and then added to Adumo and GAAP. We believe we have made some early progress in integrating our merchant businesses through extracting efficiencies and executing on cross-sell opportunities, but most of this opportunity is in front of us. Naturally, we have inherited duplication across product sets management structures and distribution channels. As Dan mentioned, we are consolidating our brands under a single Lesaka identity. This streamlining effort is essential to reduce complexity, eliminate duplication and unify our go-to-market strategy. This isn't the first time Lesaka has faced the challenge of streamlining operations and unifying its go-to-market strategy. A few years ago, in our Consumer division, we successfully realigned our sales force, implemented targeted sales force training and deployed a new front-end platform, Bonngwe to enable a 360-degree view of the customer. This allowed us to identify cross-sell and upsell opportunities more effectively, driving improved customer engagement and delivering better unit economics. We are now applying the same disciplined approach to our merchant division with the integration of multiple product offerings into a single and efficient platform, early but meaningful progress has been achieved. Notably, we have started to see our operating margins increase from 19% in Q3 '25 to 23% in Q4 '25. However, we recognize there's still work to be done, particularly on extracting efficiencies and executing cross-sell initiatives across Adumo and Connect. Our integration plan is underway, and consolidating our merchant brands under the Lesaka identity is a key step towards simplifying our go-to-market strategy and unlocking the same efficiencies we achieved in our Consumer division. Key levers to enhance unit economics and support our multiproduct offering include optimizing our solution set with best-of-breed technologies, unifying our digital distribution channels to maximize reach and enhance cross-sell potential and maximizing platform efficiencies. Ultimately, it's about delivering more and better products to more merchants or from a single unified platform. Thirdly, cross-sell momentum. We are seeing early signs of success in cross-selling across our merchant ecosystem with two key facets emerging. Firstly, we are driving cross-sell of cash and lending solutions into our merchant acquiring base and vice versa. This is early stage, but we have already seen positive results as merchants increasingly adopt bundled offerings that help them manage their business. Secondly, we are cross-selling merchant acquiring into our GAAP software base. Although still in its early stages, the potential is considerable. Currently, only about 10% of our software customers utilize our point-of-sale acquiring solutions, compared to global benchmarks of over 50% on the front book and 100% on the back book. This creates a clear opportunity to increase product penetration and boost merchant value. We are seeing a compelling opportunity to take this even further. Once merchant software and card acquiring are integrated, we plan to layer in lending and cash solutions. Over the medium term, we also intend to introduce an integrated banking offering, enabled by the completion of our recently announced Bank Zero transaction, further expanding the appeal of our merchant value proposition. This strategy positions Lesaka to deliver more products to more merchants, more efficiently while driving stronger unit economics and long-term growth. Globally, the most successful fintechs have distinguished themselves not by offering the lowest price per product, but by delivering comprehensive end-to-end solutions with a clear and compelling value proposition for merchants. Hence, our focus is on solving real business problems, integrating payments, software, lending and financial services into a unified platform that drives efficiency, growth and stickiness. And lastly, expansion into the licensed tavern market. Following on from our Touchsides acquisition, we have furthered our push into the licensed tavern market, a vibrant and underserviced segment of the micro merchant economy. The tavern base is now fully integrated into our micro merchant business, allowing for a shift in management's focus to selling more product to taverns specifically focusing on merchant acquiring through Kazang Pay, supplier payments through our wallet ecosystem and credit opportunities as these merchants manage their working capital cycles. We are seeing encouraging results as we layer additional products into the space, further deepening our reach and relevance in the tavern vertical. Turning to our KPIs for the quarter and the year under review. Our merchant acquiring footprint expanded to 84,541 points of presence by the end of FY '25, up from 51,880 a year ago, and includes devices from the Adumo acquisition. Most recently, our Q3 to Q4 '25, total points of presence grew by 4%, indicative of a 16% annualized growth. Kazang Pay devices grew 10% organically for FY '25. We expect mid-teens growth going forward driven by expansion in the licensed tavern vertical and conversion of ADP merchants to our acquiring platform. Throughput for the year reached ZAR 35.5 billion, including 9 months of Adumo with a 15% year-on-year growth attributable to Kazang Pay. Looking ahead, we anticipate stronger throughput growth in our micro merchant offering supported by deeper device penetration and cross-sell initiatives. In the small to medium merchant market, our focus is on increasing volumes per device through enhanced merchant engagement. GAAP sites in field increased 5% year-on-year, exhibiting steady growth, reflecting on our GAAP revenue performance and 8% year-on-year increase in subscription or rental revenue across both Q4 and the full fiscal year represents the strength of our recurring revenue base. These streams form the backbone of our annuity model and provide a consistent, scalable foundation for long-term growth. Our sales team is proactively moving to push unity, a more feature-rich cloud-based software solution that is priced to attract a wider customer base. This approach enables greater customer lifetime value prioritizes long-term growth and market penetration, ensuring we remain the go-to partner for restaurants looking to transform their success. GAAP Pay card processing volumes grew 26% year-on-year with only 10% of GAAP sites currently using our integrated payment solution. This is well below the global benchmark of approximately 50%. Given this cross-sell opportunity is still nascent, we are excited about the prospects related to increasing ARPU as we scale our cross-sell efforts. Our cash business reflects a tale of two cities. In the small to medium merchant sector, cash usage continues to decline with flat vault growth consistent with macro trends. In the micro-merchant market, cash remains prevalent, driving strong growth with our vaults digitizing cash by enabling merchants to deposit funds locally, avoiding bank fees and enabling instant wallet availability for stock purchases, supplier payments or transfers. Micro-merchant vault deposits grew 92% year-on-year from ZAR 7.2 billion to ZAR 13.8 billion. Now representing more than 10% of total vault throughput for the year compared to over 5% a year ago. This result is becoming a meaningful contributor to our business and a key differentiator in informal markets. Our push into this segment has opened a new growth vector, allowing us to expand in a space often seen as declining. Additionally, Adumo and Connect's integrated sales teams are unlocking revenue synergies, especially among large merchants with both cash and card needs, supporting our strategy of pricing the relationship, not the product. Our lending portfolio includes Connect's offering and Adumo's JV with retail capital. After a challenging macro environment, lending has returned to growth driven by an investment into a direct sales team dedicated to loan origination and customer relationship management and leveraging merchant transactional data. We've lowered the turnover threshold for loan qualification to improve qualifying merchants accessibility to credit. We have not changed our credit scoring criteria and have, to date, not experienced any change to our risk ratios. Our net loan book closed at ZAR 479 million with ZAR 234 million dispersed in Q4 and ZAR 917 million for FY '25. Our Alternative Digital Products offering in the Merchant division focuses in the main on the micro merchant market, offering prepaid solutions, including airtime, data, electricity, gaming, bill payments international remittances and supplier payments. The majority of our point-of-sale devices are also enabled to accept card payments, often referred to as Kazang Pay. Devices in the field grew 8% year-on-year, now exceeding 94,000. Throughput on prepaid solutions increased 6% to ZAR 19.1 billion. We believe we gained market share in that we grew by 6%, despite losses in throughput resulting from macroeconomic forces. These include direct-to-consumer digital penetration coupled with airtime volumes coming under pressure due to changing consumer behaviors and increased public WiFi access. Gaming throughput showed strong growth, partially offsetting airtime softness. Our supplier-enabled payments platform continues to show excellent growth as the risk and efficiency benefits of the digitization of business-to-business transaction gains traction, supply enabled payments increased 57% year-on-year to ZAR 23.4 billion. The product market fit for supplier payments is clear. Merchants benefit from instant settlement, enabling immediate use of funds for supplier payments and working capital needs. While supplier payments are lower margin, they create a positive pull-through effect encouraging adoption of our merchant acquiring solutions. Turning to the financial performance of the Merchant division. Net revenue was up 46% to ZAR 3 billion with segment adjusted EBITDA up 20% to ZAR 657 million for FY '25. This performance is a function of both organic and inorganic activity. FY '25 includes 9 months of Adumo contribution and has had a positive impact on this year's performance. As Ali stated in the Investor Day, our expectation for the merchant business over the next 12 months is to focus on bolstering our unit economics and extracting efficiencies on our merchant platform delivering on a bundled merchant offering. Although nascent, we are pleased to see an uptick in operating margins between Q3 and Q4 '25. In closing then, we remain well positioned to capture prevailing trends in our merchant market. Cash remains prevalent in the micro merchant market, but the shift towards digitization is accelerating. Micro merchants are increasingly recognizing the value of digital tools to enhance operational efficiency, streamline administration and mitigate risk. This growing adoption is reflected in transaction behavior with the average value per card transaction decreasing, indicating more frequent use for everyday purchases. The digitization trend is further reinforced by changes in supplier practices. Many FMCG suppliers serving micro merchants have stopped accepting cash payments, adding momentum to the shift. The number of supplier payment transactions grew by more than 10% in FY '25 compared to FY '24. The average value per transaction increased by over 40% and total throughput by approximately 60% over the same period. Ali will discuss the Bank Zero acquisition in more detail, but for the Merchant division, we are excited about what the transaction brings to our offering and capabilities. Bank Zero will enable Lesaka to offer merchant bank accounts and banking solutions tailored for small to medium merchants as well as for certain micro merchants such as taverns. Migrating Adumo merchants to Bank Zero will allow for a more competitive and comprehensive merchant offering. In the medium-term, our vertically integrated fintech platform will offer a banking service as an added feature for our merchants. The combination of Bank Zero's digital platform with Lesaka's broad product offering aligns directly with Lesaka's mission to deliver customer-focused, low-cost financial services. The Merchant division is at a pivotal stage in its development. Our objective is to operate under a single brand and extract efficiencies as we integrate our merchant platform. I'm pleased to welcome Kagiso Khaole and Roland Naidoo to the team. We look forward to their contribution and leadership as we take on the task of driving our merchant division through its next phase of growth. Lincoln will now take us through the performance of the Consumer division. Lincoln Mali: Thank you, Steve. I want to take a moment to recap what has been an extremely busy and rewarding year for the consumer team. Through a combination of innovation and disciplined execution, we've seen several strategic developments that have significantly strengthened our position. Our unwavering focus and relentless commitment have driven the continued increase in our market share within the grant beneficial market. This translated into 35% revenue growth and an 83% increase in EBITDA for this division for financial year 2025. These results are a testament to the team's dedication and strategic clarity. And they have set a strong foundation for sustained success going forward. We launched Bonngwe at the start of the financial year. Bonngwe is our sales front engine and offers our service consultants a comprehensive view of each consumer enabling them to deliver a significantly improved service to our existing clients, supporting cross-sell efforts for lending, insurance and ADP while assisting with sign-up and onboarding new EPE customers. Bonngwe has equipped our frontline staff with the tools to serve consumers efficiently and has achieved excellent results. In our lending business, after thorough research into our consumers' financial needs and borrowing habits, we introduced a revised loan product that has been very well received. Consumers often resorted to unregulated lenders. So we increased our maximum loan amount and extended repayment terms. We did not alter our lending criteria during this process. We also completely rebuilt the lending system. It's more customer-friendly, scalable and allows us to better manage risk. Many of our consumers have taken advantage of the new lending product positively contributing to higher ARPUs. We have invested in our distribution capabilities, both talent and infrastructure. We've expanded our frontline teams and plan to open 50 new branches in financial year 2026 and add 50 branded service points. All of this is part of our effort to better serve our customers and provide convenient access. We are now more present in rural communities than ever before, which is significant for both attracting new customers and serving our existing ones. We have continued investing in our digital platforms. We rebuilt our USSD platform to make it more reliable and user-friendly. This allows our customers to access our services digitally from anyway, saving them time and money. The usage of our USSD platform continues to grow exponentially. Turning to our addressable market and future prospects. Since we repositioned our consumer business to focus on customer experience through investment in training, brand enhancement, distribution and IT platforms, we have increased our permanent grant beneficiaries by 23% year-on-year. And over a 2-year period, our market share has increased from 9.1% to 13.6%. This growth has primarily come at the expense of the Post Bank, which experienced a sub-decline in share following its various challenges. What has been encouraging for us is that we've been receiving a large share of the Post Bank migration with approximately 20% of Post Bank customers signing up to Lesaka in financial year 2025. Moving forward, we believe we can sustain this momentum for another 12 to 18 months and attract further Post Bank customers at an accelerated rate that exceeds our market share. Lesaka is evolving rapidly along with our customer offerings. Beyond the core grant beneficiary market, we see a new opportunity in the payout business as we invest in this platform. Also, with the success of our insurance offering, we're in the process of opening this up to non-EPE bank account holder. We have recently completed the systems work to allow for this and we anticipate commencing trial in [ quarter 2 ]. Finally, the proposed acquisition of Bank Zero presents a significant opportunity for us to expand our consumer offering beyond the ground market, which is very exciting. During the quarter, we implemented a strategic refinement on how we report and measure our consumer base, aligning our evolving monetization strategy and increased focus on unit economics. Historically, we segmented our grant beneficiary base into permanent and non-permanent categories. However, both segments are revenue generating. And as such, we now report them as a combined consumer base. This approach better reflects the financial and operational performance of the division as well as the revenue-generating engagement of our entire consumer base. More accurately tracking our current and future monetization strategy for the division. While we have historically presented these metrics separately, it's worth noting that approximately 90% of our active consumer base consists of permanent grant beneficiaries. This underscores the stability of our core customer segment, which in turn strengthens our ability to drive cross-sell opportunities. An active consumer is defined as any EPE consumer permanent or temporary grant beneficiary who has completed a voluntary debit or credit transaction within the last 90 days. Consumers who are charged a monthly bank fee, but have not made any voluntary transaction during this period are excluded from the active count. This tighter definition more accurately captures revenue-generating engagement and aligns with our monetization strategy. We will continue to show the EasyPay Payout out separately given that this follows a different monetization model. The fourth quarter saw another rise in net active consumers to 166,000 and 348,000 for financial year 2025. A year ago, for the comparative quarter, we saw an increase of 34,000 active consumers and 235,000 for financial year 2024. We are proud of this achievement, which reflects the investment we have made in our service offering and distribution and continues the momentum in customer acquisition. Under the revised methodology, our ARPU is ZAR 85 per active customer per month, representing a 23% growth over the previous 3 years. Turning to our KPIs. We now have 1.9 million customers, up from 1.5 million last year, representing a 23% increase. Of this space, approximately 90% are permanent grant customers, with 40% of them now holding a lending product and 34% of them having an insurance product. As I mentioned earlier, we launched a new lending product this year, which has been very well received. While we did not modify our credit scoring criteria, we increased the maximum loan size and repayment terms, which has contributed to an 82% growth in our learning book, to ZAR 996 million at the end of the year, with a total origination of ZAR 2.5 billion for the year, up 48%. The loan conversion rate continues to improve following the implementation of several targeted consumer lending campaigns and encouraging results from our digital channels. Our loan loss ratio has remained consistent at approximately 6% for the year. With the rollout of the new lending product targeting larger loans for a longer term, we expect a modest and non-material increase in the portfolio loan loss ratio going forward. In insurance, we also saw encouraging growth with gross premiums increasing 38% for the year. We've maintained our high collection ratio and lapse rate on our insurance book, a sign of the value that our customers place on these products. These excellent operational KPIs have been reflected in our financial performance, with revenue increasing 35% annually to ZAR 1.7 billion and adjusted EBITDA up 83% to ZAR 435 million. I understand our consumer team for their tireless efforts and commitment. I will hand over to my brother, Naeem, to take you through our plans and performance for the Enterprise division. Naeem Kola: Good day, everyone, and thank you, Lincoln. Today, I'm excited to share the latest developments, key performance indicators and strategic direction for Enterprise division as we close out fiscal year 2025. Let's begin by reflecting on some of the major milestones and key developments from this quarter and fiscal year 2025. This fiscal year has been transformative for our Enterprise division as we developed a much clearer business and strategy. There have been material developments relating to channel expansion, technology updates, inorganic strategy and business reorganization. First, we made significant strides in expanding distribution channels for our Alternative Digital Payments or ADP solutions. We are now integrated and successfully went live with Standard Bank, Nedbank and Shoprite to provide ADP solutions. This expansion helps us further gain market share by embedding our services within trusted enterprise environment. Second, we completed the acquisition of electricity private utility business, Recharger and are well underway with the migration of the meter hosting infrastructure into our proprietary Enterprise technologies. This acquisition strengthens our utilities vertical and demonstrates our ongoing commitment to integrating and scaling high-value infrastructure. Third, we began the migration of the merchant acquiring volumes that have traditionally been processed through third-party providers. This strategic move will allow us to have tighter control over processing and is expected to deliver a full volume migration over the course of FY '26. Lastly, we executed the shutdown of legacy business units, sharpening our focus on our core product offering. It's important to note that this reorganization led to one-off costs of ZAR 17 million. However, this step positions us for sustainable focused growth in the years ahead. I will briefly take you through each business vertical within our enterprise business, outlining the solution and the revenue model. Our Alternative Digital Payments, or ADP business is one of the largest ADP aggregator and solutions provider in South Africa. The ADP network effect creates a powerful force multiplier by selling into downstream enterprises, we enable them to reach their own customers efficiently, which in turn improves economics and scalability of our upstream partnerships. Our ADP product suite includes both payments, provides a platform for consumers and businesses to settle accounts or invoices through our platform. We currently have over 620 billers on our platform. These include municipal bills, DStv, all telco companies and other organizations. The significant investment and integration with billers enables us to be in a unique position to allow our clients one integration, and they have access to all our billers. This position is hard to replicate by competitors. We typically earn a fixed fee per transaction process. ADP prepaid solutions, we are amongst the largest providers of electricity, airtime, data and gaming vouchers, primarily to banks, retailers and fintechs. Voucher sales allow consumers to purchase vouchers at retail outlets or online to top up the required services. This is a B2B product offering. Our revenue model is based on commission percentage of rand volume processed. Utilities, our core products here are electricity voucher generation and prepaid utility meters. We service a range of clients, including private landlords, property managers and municipalities. Currently, our primary channel is large retailers such as Builders Warehouse, Leroy Merlin, ARB and BUCO. We generate revenue both as a percentage of volume processed for voucher generation and through unit sales for meters. Once the meters is installed, the tenants recharge the meters through vouchers that they purchase through retailers or online. This is a high double-digit margin product offering, providing a predominantly recurring transaction-based revenue stream. Payments, we are developing proprietary payment solutions such as PRISM Switch and PRISM HSM, to enable payment acceptance for both the group and external enterprises. This area is seeing growth in transaction volumes and device sales. All these products and services are delivered through robust enterprise channels, and our customers include banks, retailers, telcos and content providers. Moving on to our financial and operational performance for the quarter and the year. Enterprise division delivered a net revenue of ZAR 190 million in Q4, and ZAR 651 million for fiscal 2025, and a group adjusted EBITDA of ZAR 15 million in Q4 and ZAR 24 million for fiscal 2025. The group adjusted EBITDA includes ZAR 17 million of reorganization costs incurred in closing hardware business related to POS terminals and cards. Given the focused core offering of enterprise, we've presented our core products. In terms of the relative contributions in Q4 2025, ADP accounted for 60% of net revenue, utilities accounted for 35% of net revenue and payments represented approximately 5% of net revenue. In fiscal 2025, Enterprise was not a meaningful EBITDA contributor to the group. This was a year of consolidation and build to gear up for FY '26, as we've mentioned in previous earnings calls. Q4's EBITDA result of ZAR 15 million for the quarter includes the impact of restructuring costs, excluding these costs, Q4 2025 implies a run rate of over ZAR 30 million per quarter. In FY 2026, we're expecting the Enterprise division's contribution to total segment adjusted EBITDA to be north of 10%, thus becoming a meaningful part of the business going forward. I will now hand back to Ali. Ali Zaynalabidin Mazanderani: Thanks, Naeem. We go into FY 2026, excited at the prospects for our business. Clearly, one of the most significant events for the company is the expected completion of the Bank Zero transaction, which we signed at the end of this past financial year. Bank Zero is a South African neobank with a modern proprietary scalable technology stack with a very efficient cost structure that relies on digital onboarding. We do not believe there is a more efficient banking operation in the country nor one that has less third-party dependencies on its platform that is primed for growth. This transaction is, in fact, more an augmentation of capabilities and team than an acquisition, in that the purchase consideration is predominantly being settled in Lesaka shares, and the Bank Zero team will be joining Lesaka. They saw an ability for us to accelerate their growth given our distribution and complementary product offering, just as we see their ability to accelerate ours. It is an exceptional, experienced and entrepreneurial team who share our desire to change the game and better serve consumers and merchants in our country. I've had the personal fortune of working with several members of the team in the past, and it is a delight to have the opportunity to do so again. We look forward to welcoming Michael Jordaan, former CEO of FNB to the Board; and [ Yatin Narsai, former CEO of Retail Banking at FNB to our executive leadership. The size of the prize is big. I think it's easiest to think of the rationale for the transaction in three buckets. Firstly, the [indiscernible] this is both in terms of the product we can offer and the cost. In terms of product, it should reduce dependencies on third parties, improve our responsiveness to clients, increase availability, reduce friction and can expand the range of customers we can address. In terms of cost, we currently have expenses we incur associated with bank sponsorship both in terms of direct fees and indirectly in foregone interest or float revenue, which have a negative drag on our P&L. We believe in a collaborative and interoperable payment ecosystem, so we intend to maintain some third-party bank relationships. However, dependencies will be reduced and our optionality will increase. Secondly, the acquisition will increase the range of products that we can offer. Notably, we will be able to offer banking services to our merchant base and also to enterprise customers, cross-selling banking into our merchant base and supporting fintechs and others with an alliance banking offering that is poorly catered for in the South African market. In addition to this, Bank Zero is in the process of applying for an FX license, pending approval, which would open up cross-border opportunities for our customers. Thirdly, following completion of the transaction, we believe we can reduce gross debt by about ZAR 1 billion by holding a substantial portion of the consumer and merchant book in the bank. We will also have greater flexibility in expanding the book and doing so at a lower cost as we build customer deposits. Another development in the coming year will be the consolidation of our office and brand footprint. We currently have 41 offices in the group outside of our branch network, and multiple brands across the group. We will be rationalizing this over the financial year to less than 20 offices with a particular focus on consolidating our office environments in Johannesburg, Cape Town and Durban. The three cities where we have the greatest number of employees. We are also in the process of consolidating our brands and in due course, we'll unveil a refreshed umbrella brand, aligning our representation to stakeholders, employees and customers across the segments we address and allowing us to concentrate marketing resource and spend. The consolidation process will have the most material impact on our merchant business as has been touched on in this presentation previously. And to lead that process, we are excited that Kagiso has joined us as the CEO of our merchant business. He is an exceptional leader who's experienced SpaceX, Starlink, Uber and Samsung, ideally positions him to take the merchant business forward. We're excited and delighted that we can attract the very best in the country and on the continent to our mission. And indeed, Kagiso will join other standout leaders in the executive team over the coming months, including Roland and Akash, who we also mentioned earlier this week will be joining us. These are three of several executive hires who we've made over the last few months, raising the depth and breadth of our bench strength. Turning to outlook. we are pleased to reaffirm our net revenue, group adjusted EBITDA and positive net income guidance for FY '26. In addition to that, we are providing Q1 2026 guidance for net revenue and group adjusted EBITDA. We are also pleased to introduce, for the first time, adjusted earnings per share guidance. It is worth noting that in 2024, our adjusted earnings per share was ZAR 0.80. This year, we achieved ZAR 2.29. Our guidance for FY 2026 is more than ZAR 4.60 per share, an increase of more than 100% year-on-year. We have the team, the assets and the market opportunity. We look forward to executing against this potential over the coming year and continue to drive value for the consumers, merchants and enterprises we serve as well as our shareholders. We will now take any questions you have. Operator: [Operator Instructions] We have our first question on the conference call line. Please, can we open up for Theo O'Neill from LHR. Theodore O'Neill: A couple of questions. First question on the Consumer division. It looks like you have a full plate of growth opportunities, and I was wondering if you could rank or talk about the near-term opportunity between your three core products and overall market share and maybe rank where you think the strength will be in near-term? Lincoln Mali: Thanks. This is Lincoln. Firstly, the most important thing for us is always account growth. We have taken more market share from the Post Bank migration. We've taken the largest chunk than our natural market share. We've taken about 20% of those customers that are migrating. So we think that's important for us. We have also launched our lending product. We see a lot of room for that, and we think that, that's an important one. And the third one is us growing beyond our EPE based on our insurance. There's about 4 million customers who don't have access to funeral plans who are grant beneficiaries. We see that opportunity. So we see ourselves growing within this space. And of course, in the medium-term, we do see opportunities when the Bank Zero transaction has been consummated for us to give more opportunities beyond just the grant space. So that's the way we would like to think of our business and the growth opportunities we see. Operator: Anything else from your side Theo? Theodore O'Neill: Yes. I wanted to ask the same question on the Enterprise side. If you could rank or talk about the near-term growth expectations there across the core products and market share? Naeem Kola: Theo, as you mentioned, for the Enterprise division, this was a transition year. We invested significantly in the platform. We've also grown our distribution network and we've now fully integrated the Recharger business. As I've mentioned during my script, if you look at the last quarter, the run rate of around group adjusted EBITDA of about ZAR 30 million is what we want to build on. And we're also looking at the Enterprise division will be contributing north of 10% of the guidance forecast that Ali provided for the full year. Operator: We have another call -- another question from the Chorus Call line. This time, it's from [ Ross Krieger ] at Investec Securities. Unknown Analyst: Hello, everyone. Can you hear me, okay? Operator: We can hear you well. Thank you, Ross. Unknown Analyst: Okay. Great. I have quite a few questions. Sorry, just bear with me. Just maybe I'll split -- I'll go one at a time. The first one is a 2-part question just on the pending Bank Zero acquisition. I'm just wondering, so on 2 points here on the first, the integration of Bank Zero, I'm just wondering how you see that playing out in terms of the time it takes to integrate and the cost incurred in doing that? And then secondly, just regard -- regarding the expectation that there will be a profitable contribution in year 1, is that net of all the factors that you mentioned earlier on the call? Or was that as a stand-alone entity? Yes, let me pause there. Ali Zaynalabidin Mazanderani: Thanks, Ross. I mean on the integration, if I can ask Steven to chat too. On the profitability, Ross, obviously, we don't know exactly when the transaction will complete. But my belief is that certainly, if the business is not profitable at the time of completion, it will be close to and with synergies that can be easily and quickly realized it will be. So I don't think there'll be a material gap. That's excluding the more material, I suppose, revenue opportunities that were touched on in the presentation. On the integration, Steve? Steven Heilbron: From an integration perspective, we've got very detailed plans, which we're busy working on and we will be ready on the day the transaction close to affect those integration plans. Clearly, we'll be putting the aspects of our consumer and merchant businesses that are engaged in banking activities into the bank. It won't change the way we ultimately report in terms of consumer and merchant. But the integration aspects are well planned. And we think in the end, this is a business, I think we are taking on about 45 people. So it's very easily integratable. From a culture perspective, I think we're very well aligned. And to a large extent, much of what we are getting with Bank Zero is a part of the platform that we don't have. So it's complementary to what we do and very easy to integrate. Operator: Thank you, Steve. Ross, do you want to shoot with your next question? Unknown Analyst: Thanks both. Okay. Just on the goodwill impairment, I was just hoping to get a bit more detail on the -- I understand the different moving parts there. And that is noncash. But just on the CGUs impacted, just wondering what those were, if you can give any more detail on that and the reasons behind that? Daniel Smith: So, goodwill, Ross, as you know, is obviously a very large number in our balance sheet, roughly $200 million, ZAR 3.5 billion. And it comprises basically the excess of the price we paid relative to the fair value of the underlying assets, both tangible and intangible that we acquired. When we bought the business, as I put them into the buckets, the Connect Group and the Adumo Group and the Recharger Group. Obviously, as integrated groups, they had a number of underlying businesses or cash-generating units. As we go through our impairment tests, we need to value each and every one of those cash-generating units. So I'll use, for example, Adumo, we bought one Adumo Group. But in effect, we've got seven different CGUs. So as we've been iterating the businesses, the business models within those combined seven has obviously given rise to an expectation of different levels of cash flows from each of those underlying seven different business units. When we run our goodwill impairment tests, some of those then have ended up with a lower carrying value than what we originally described for that specific CGU when we bought it, giving rise to then a handful of impairments of roughly ZAR 300 million in aggregate. The flip side of that is, obviously, some of the other underlying CGUs, our valuations have increased. But in terms of the accounting standards, we can't write up goodwill from over and above what we acquired at, but we are required to write down. So when I take them in aggregate, the businesses we bought, very comfortable that the valuations have appreciated but some of my parts in effect, don't equal whole from a goodwill impairment perspective. Maybe give you one specific example would be around our ME business, where we have iterated the business model, exiting some of the unprofitable lines. That obviously is a different view we had on the business and when we acquired it. And of course, when I run it through a DCF cash flow, that then gives rise to necessity for an impairment. I use it as a specific example. When I look across the whole chain, there's a number of these instances, which give rise to the combined impairment of just over ZAR 300 million. Operator: Thank you, Dan. Ross, does that answer your question? Unknown Analyst: Yes. Thanks, Dan. That's helpful. Moving on, just -- look, I know you've been very clear in your Capital Markets Day and today in general, about your competitive advantages. But just in light of Nedbank's acquisition of [ Ecokar ], I think first [indiscernible] today flagging their success so far in the SME space and the intention to keep pushing there. Just an update on the competitive environment in general would be helpful. Ali Zaynalabidin Mazanderani: So I mean maybe I'll start, if it's relating specifically to the SME environment, I'll also ask Steve afterwards for his thoughts. The first thing is, I think -- it's a recognition of the opportunity that exists in the market that multiple parties are highlighting it. I think we should be slightly concerned if it wasn't acknowledged that this is clearly a material growth vector in our country and indeed in our region, and that's why we are positioned for it. So I think that if you're attracting a big opportunity, you should expect that other parties will also participate in that. I also think that more than one party will succeed in addressing that opportunity. And I think that, that's good. There can also be mutually beneficial outcomes. As a business, we're not focused on trying to maximize our share of the pie. I think we are very focused on trying to increase the pie by providing customers with better solutions than exists today by innovating, by creating opportunity and not fighting over a legacy profit pool. And so we can work effectively with other parties in that respect. I think we do have specific differential features associated with how we engage in the merchant business specifically, we are focused on businesses that are not seeking a single product solution. We are focused on businesses, for example, in the micro merchant space, on the informal space where we connect a collection of solutions, alternative digital payments, cash needs, supply payments needs with the merchant acquiring. So you registered, for example, [ Ecoka ] as a business aspect to Nedbank. It's a narrower subset of offering. And in the more formal space, again, we are very focused on the integrated solutions. Specifically also through our software business in GAAP. And we think that we are irregular as a business in the breadth of offering that we can provide for those segments. And ultimately, we are also regular in that while we are a technology-first business, we have our own distribution channel dedicated to those customer needs. So we differentiate ourselves in those ways. I think as we've discussed in the investor presentation. And we welcome other businesses, engaging with our customers to help us better serve those customers. Operator: Okay. Is that it guys from your side on that? Steven Heilbron: So I think the only thing that I would add possibly is that, as Ali said, first of all, it endorses our thesis, which is the interest in the segment endorses why we've positioned ourselves there. And the other point I would simply make is that we are not a proxy for the market. We are an insurgent. We have a very small market share, a substantial TAM and so we have the ability to grow significantly based on our current positioning. Operator: Thanks, Steve. Ross, any further questions? Unknown Analyst: Just on the last one, just on the regulatory developments. I was wondering if there's anything on the horizon through ASAPP engagements or anything -- any other channels that we should be aware of in terms of the other beneficial regulatory developments? Lincoln Mali: Thanks so much, Ross. We have had an engagement with the Reserve Bank where they had published the draft exemption to the bank's act. We, through ASAPP gave comprehensive feedback and comments. And the essence of the comments were to make sure that the regulator doesn't create many banks, doesn't create more onerous requirements to the industry and create an environment for more competition and more innovation. The Reserve Bank convened, a few weeks ago, a session where they reported back, and there was a positive sentiment from the ASAPP members that there was positive movement that has been done that they've heard a lot of the sentiments that were coming from the fintech community. We are now waiting for something in the next few weeks where the final proposal will come out. So we are waiting with bated breath to see what that indications will be. Obviously, we still have other engagements that we've made on other issues like the governance of the sector and meaningful participation by fintechs and we've also made representations on an interchange. So we're still waiting for feedback on those. But on the broad opening up of the payment system, directionally, it looks like the Reserve Bank is going in the right direction. Operator: Ross, does that answer the question? Anything else? Or we're good... Unknown Analyst: Yes. Thanks, Lincoln. It does. Thanks, everyone. Appreciate your time. All the best. Operator: I'm going to take the last question from the conference call, and then we'll move to the questions on the webcast. The next question is from Mike Steere at Avior Capital Markets. Michael Steere: Can you hear me all right? Operator: Yes. Michael Steere: I have a few. I think I'll just read them all out at once, and then happy to repeat if necessary. So firstly, in light of the recent Cell C news, how does the restructuring effect Lesaka's current 5% shareholding. Are you supportive of the restructuring? And do you see any benefit accruing to the group if the restructuring and listing is successful, and there is a subsequent revaluation of that business? Next one is just around the Shoprite disruption now that they've entered the banking sector. Just any color on how you perceive this -- how you perceive this threat and how you plan on coming out on top in this competitive environment? And then finally, a strong quarter, but please maybe unpack the impairments and PPA acceleration in a bit more detail. I understand these are noncash items, but so we got to understand how much more is to come? I think you mentioned ZAR 160 million next year. But is there any anticipated increase to this number following that the Bank Zero acquisition? Ali Zaynalabidin Mazanderani: All right. Thanks. Okay. So three topics, Cell C, Shoprite and PPA. On Cell C, I know, Dan, do you want to talk to briefly? Daniel Smith: Sure, Ali. See, it's -- we currently hold a 5% stake in Cell C. We've all seen the public announcements and the path towards IPO, towards the back end of this calendar year. Are we supportive? Well, we're engaging in the underlying detail around those respective conversion steps. We currently carry the stake in our books at a zero valuation. So of course, we'd be absolutely delighted to see the Cell C IPO get away and be able to then carry our investment in Cell C at whatever the market deems as the appropriate market valuation once listed. We, of course, need to make sure that we do preserve our rights and our valuation -- the potential valuation of our stake. And so we'll obviously work through the broader restructuring details with both Cell C management team and obviously, the sponsors. Ali Zaynalabidin Mazanderani: Okay. On the Shoprite thing, I mean, I think as Steven referred to in the consumer business space, we're coming from a very low base, very low market share. Relatively Shoprite, launching their proposition, I think, has -- is another of many entrants into the market, and there's much bigger players today in the market who also have strategic relationships with them. I don't think that we see anything other than as an opportunity to continue to ensure that what we are providing for our customers meets their expectations, focus on the differentiation that we offer. We have a different distribution model. We have specific focal areas, which are distinct from theirs. We also have good collaborations with them. And I don't expect that to change through their banking offering. I don't know, Lincoln, if you have anything to add there? Lincoln Mali: Yes. Just to again echo what Ali and Steve had said, again, this is another indication of a segment of the market that we've chosen on the consumer side, that other players are trying to come in there. Secondly, to also echo something else that Ali and Steve said that in certain of these environments, we're going to compete. But on some of these things, we will collaborate and we have some collaborations with Shoprite, but I think the main point is that we're clear about what we offer. And we offer a much more comprehensive solution than other players in this specific market. We offer transactional account. We are offering lending proposition, offering insurance and we offer Alternative Digital Products. And so we think that we have a comprehensive proposition and that's what we will offer to our clients. And we've got a unique distribution model for that customer base. So we will continue to do what we do and try and win the support of our customers. Ali Zaynalabidin Mazanderani: I think ultimately, our principal competitor is always going to be inefficiency. Our principal competitor is always going to be what we are capable of delivering for our customers rather than other parties. And as long as we maintain that as our access and our true north, I think we'll continue to be successful. I think when other businesses are there, we can learn, and that is helpful. but it shouldn't be our focus. The third question you asked was on the PPA. I think there was quite a lot that was provided before. I don't know, Dan, if there's anything you want to add to what you did before? Daniel Smith: Happy to recap the principles around PPA... Operator: Mike, is there anything specific that would be helpful? Michael Steere: I think you actually did capture it [indiscernible]. No worries. Yes, that's all from my side. And thanks for the opportunity to ask questions, and congrats on the results. Ali Zaynalabidin Mazanderani: Thanks, Mike. Appreciate it, and thank you for the questions. Operator: I'm going to move to the questions. We've got 10 minutes left. There are four questions on the webcast chat. So let me start with the first one. It's from Viwe Kupiso at RMB Morgan Stanley. The question is -- and I'm going to break this question into parts because there's four aspects to it. First one, what are the main risks to achieving greater than 100% growth in EPS and achieving positive net income in FY '26, especially given the macroeconomic environment? That's the first question. Should we go with that first? Ali Zaynalabidin Mazanderani: Yes, sure. Let's take that first. I mean, what I'd say is, again, we're not a proxy for the macroeconomic environment. I think we are positioning ourselves where there's tailwinds and the digitization of society and serving the underserved. But ultimately, I think our growth represents the fact that clearly, we have a different trajectory. We've been consistent in our ability to deliver on our profitability guidance as I think was mentioned in the presentation, over 12 consecutive quarters, and we have every expectation to continue to do so. When we set the EPS guidance with a minimum bound, which means that clearly, we have an expectation of exceeding that, the same with the net profit guidance. So we have every expectation that we will do that. If you're asking where would I be concerned? We obviously can always be subject to exogenous shocks to things that we today don't recognize or don't see and this can come in different contexts. I think you could also have potentially certain noncash impairments like we have experienced through the integration process of our merchant business. But on the flip side, there's other things that could positively impact, for example, there was the mention of our position in Cell C, which we value at 0. So we are certainly very, very hopeful that when we have this conversation in a year's time, it is by exceeding those targets. Operator: Thanks, Ali. The next part of Viwe's question is, what are the current trends in credit quality and loss rates in both the consumer and merchant lending books? Are you seeing any warning -- early warning signs of stress? Ali Zaynalabidin Mazanderani: I think on the consumer, I'll go to Lincoln and then maybe, Steve, on the merchant. Lincoln Mali: We have not seen any stress in the quality of our book. We have had the same loan loss ratio of below 6%. We monitor that book very, very closely. And even with the changes that we've made, we've not seen any change in the quality of the book. And we think that the changes we've made, which is a longer term from 6 to 9 months, more from 2,000 to 4,000, all of that augurs well for the quality of the book forward. So we don't see any of the things that are happening in the economy directly translating into a change or deteriorating of quality in that book. Steven Heilbron: From the merchant perspective, likewise, for the year that we've just had, our impairment ratios are sitting at about 1.4% of all originated debt, which is pretty consistent with the history. If anything, we are starting to see a slight improvement, it feels like some of the stress in the SME space is coming off. And I think our biggest challenge is really focusing more on getting the origination and scaling into those -- into the space. But impairments is certainly not an issue for us at this point. Operator: Anything else, guys, on that one? Okay. I've got -- we can -- we have time for two last questions. The first one is from [ Frank Yang ] at [ Brywood ]. Some strong guidance provided here please unpack your FY '26 guidance drivers speaking specifically to each of the divisions and please confirm that it excludes Bank Zero. Ali Zaynalabidin Mazanderani: Thanks, Frank. So yes, it excludes Bank Zero. And obviously, once that regulatory approval happens in the transaction, hopefully completes, we will have to reassess. But we don't have an expectation that it would materially impact FY '26. In terms of the guidance, I mean, the EBITDA at the midpoint of the range guidance that we provided is a 46% year-on-year growth. Clearly, you can't grow at that rate without there being growth, I think, through all three, frankly, of the pillars of our business: Consumer, Enterprise and Merchant. And our expectation is that all of those pillars, they will grow at different rates, but certainly north of 20% in each case and in some instances, materially more than that. I don't know if the guys want to mention any of the particular dynamics in the Consumer, Merchant, Enterprise business, but I think we don't break down the specific segment growth. The general principle, I would say is that in each context, we have a driver associated with the number of consumers in the consumer business and the ARPU. In our consumer business, we expect both the consumer base continue to increase as we take share and the ARPU to continue to increase as we cross-sell. In the Merchant business, likewise, we expect to see growth in our merchant base as our value proposition is distinctive. And we expect to see the growth in our ARPU as we cross-sell increasingly the products through the integration of those businesses. And in the Enterprise business, where the drivers is really processed volume and a take rate. We have seen material contract wins over the course of this last quarter. And so we expect to see the growth in volumes attributable to that. And the take rate, we expect to also be increasing through the mix effect as our utility business is growing the fastest and it has a higher margin, relatively speaking to the ADP business. So on each of the key KPIs against each of the key segments, we expect to see good growth, leading in the aggregate to the midpoint of the growth that we've articulated. I'd say, maybe just as a final point, as a business, we actually have an enormous amount of resilience in terms of the contributions. We have these three segments, all of which are pointing in the right direction and each of which has a number of customers, our Consumer business, close to 2 million end customers. Our Merchant business north of 100,000 customers and our Enterprise business also a material footprint in terms of customer base. So we don't have single points of dependency in that respect. Operator: And then the last question for today and for the people whose questions we didn't get to, I will respond to you separately after the call. I'm going to take a question from Craig Smith at Anchor Securities. Thank you for your time today. Exciting transaction, so I presume you're referring to Bank Zero. What is still required for the transaction to close? And what is the expected timing on this? Any updates you can provide. He then asks, does this transaction mean that Lesaka is now becoming a bank? And how quickly can we expect the Consumer and Merchant loan books to move across to Bank Zero and retire the ZAR 1 billion of gross debt? Ali Zaynalabidin Mazanderani: So I'll let Steve talk to the completion time line. But just on the specific point of Lesaka becoming a bank. So I think -- I don't think we're becoming a bank any more than we've become an insurance company. We have an insurance business, which is a subsidiary, and that helps provide insurance propositions to our customers. I think having a bank as a subsidiary of part of the group will help enable us to provide consumers and merchants with better solutions. But as the transaction structure is the bank as a subsidiary of Lesaka Technologies. I don't know, Steven, if you want to talk to the time lines or? Steven Heilbron: Just in terms of time lines, we -- clearly, the transaction is subject to PA approval and also competition commission approval. We have finserv approval, but from a time line perspective, we are hopeful that by the end of March, April, we should be in a position that the transaction goes unconditional. But we're factoring that we expect this transaction to close before June '26. If I can just say, we're incredibly excited about this acquisition. As I mentioned earlier, we'll be integrating our issuing business and our credit businesses into the banking business. This is a well-engineered neobank. We are excited not just about the synergies that will flow from this transaction, but also some of the very creative organic strategies that sit within the bank. In terms of funding the loan books that currently sit within our consumer business and our merchant business, the answer to that question will be as quickly as we possibly can. And to a larger extent, it will depend on the size of the deposit book when the transaction closes. We do anticipate though that the majority will be able to be exercised when the deal closes and the rest is just a timing difference as we grow the retail deposit base. Operator: I think that's it in terms of time. If anyone has additional questions, please reach out to me. Thank you for listening today, and thank you to the team.
Operator: Good day, and welcome to the Cheetah Mobile Second Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Ms. Helen Zhu, Investor Relations of Cheetah Mobile. Please go ahead. Jing Zhu: Thank you, operator. Welcome to Cheetah Mobile's Second Quarter 2025 Earnings Conference Call. With us today are our Chairman and CEO, Mr. Fu Sheng; and our Director and CFO, Mr. Thomas Ren. Following management's prepared remarks, we will conduct the Q&A section. Please note that the management's trade will be presented by an AI agent. Before we begin, I refer you to the safe harbor statement in our earnings release, which also applies to our conference call today as we will make forward-looking statements. At this time, I would now like to turn the conference call over to our Chairman and CEO, Mr. Fu Sheng. Please go ahead. Sheng Fu: Thank you, everyone, for joining us today. In the second quarter, we delivered our best results since Q1 2021. Revenue grew 58% year-over-year driven by a 39% year-over-year increase in Internet business and an 86% year-over-year increase in AI and other segments. Our operating loss decreased 86% year-over-year, while non-GAAP operating loss was down 97% from last year, almost breakeven. In the first half of 2025, our revenue grew by 47% year-over-year. We believe we can maintain fast growth in the second half of 2025, driven by about 100% year-over-year revenue growth in our AI and other segments, along with a stable Internet business. This shows our turnaround is working and gaining momentum. What is even more important is how we work today. We have made AIA core part of our process working in an AI native way. Our R&D teams are small and flexible using AI every day to design, test and build products, much like open source developers. This helps us move faster and use fewer resources ensures AI allows 1 person to do what once took a whole team. We have been investing in AI since 2016 and at the intersection of AI and robotics today, we now have advantages and experience that are hard to replicate. For example, depo our AI tool that turns video, audio and documents into summaries and my maps times with only 3 full-time employees. Our core Internet business remains solid, thanks to our shift from advertising to a subscription model, which has improved user engagement and retention Today, subscriptions make up about 60% of our Internet revenues. This healthy base gives us the room to invest in new AI products out staying financially disciplined. We are enhancing existing apps like Duba Anti-virus Wallpaper apps and PDF tools with AI agents. For example, in Duba Anti-virus, we are testing a new AI feature that helps users fix PC issues, especially long tail problems, it couldn't solve before and early feedback is encouraging. While we are still in the launch and improvement base for most AU utilities. We believe Chase has a natural advantage of utility applications. At the end of the day, the core value of AI utilities is to help people work more efficiently and productivity. If we can deliver on that, we believe users will be willing to use our products. On the service robotics side, we made solid progress. Revenues from service robots continue to contribute to growth in the AI and other segment. In late July, we completed the acquisition of new factor on of a few robotic on companies that is already profitable and earn small service revenue overseas, combining new factory strengths with Cheetah's distribution network and 100-plus global partners give us a clear advantage to scale globally. In fact [indiscernible] are already being used at scale in real-world scenarios. From assembly picking, painting and expensing tasks in factories to grabbing beverages, making coffee and beers and commercial applications, strawberry harvesting in agricultural setting and even in universities for robot research. We now have a broad range of robots and our piloting wheel robots with arms that can handle more physical tasks in more places. We believe the true breakthrough in robotics is not just in using the most advanced lab technology about finding technologies that match real-world use cases, which can scale and generate earnings for the company. While the future of robotics is exciting. Our years of experience tell us that real commercial adoption depends on delivering sustainable ROI that customers can clearly see. Our strategy is to stay optimistic, yet patient, moving forward steadily. We will continue to identify scalable use cases and grow the business gradually. That said, we want to caution investors that it is not something that will reach math deployment in the coming quarters. The service robotics market is still developing, but AI agents are making robots smarter and easier to use. Since adding agent OS, our next-generation voice system powered by AI agents. Earlier this year, our voice enabled robot revenue in China grew by about 100% in Q2 both driven by recurring demand from our existing channel partners alongside expansion into new high-quality customers in health care, education, health care and cultural institutions, such as the national center for the performing arts. In addition, this growth does not rely on 1 of large orders that comes from steady and repeat demand, especially in use cases like for guiding and reception, which shows it is sustainable. Few companies have both our global experience in consumer engine products and use of real-world robotics operations. This unique combination allows us to apply AI agent technology across both software and hardware, creating synergies that are hard to replicate, supporting our goal to become a leading service robot company in the coming years. Looking ahead, our core Internet business remains healthy and profitable. We will keep investing in AI tools and robotics with discipline, and we are on track to reach profitability in the near term. Our strong cash position and zero debt give us the flexibility to grow while keeping our finances strong. transformation is just getting started, but it is already producing results. We are building 2 growth engines, AI-powered utility apps and AI robots that work together as synergistic forces, combining software and hardware to create a stronger moat, expand our market reach and open new growth opportunities. At the same time, our solid Internet business and strong cash resource provides a stable base with over 7 years of R&D in AI focused strategy and a culture of innovation, we are confident about the world ahead. Thomas Jintao Ren: Thank you, Fu Sheng. Hello, everyone, and thank you for joining the call. Unless otherwise stated, all financial figures are presented in RMB. In the second quarter of 2025, we continue to make meaningful progress narrowing our losses and improving probability as we remain focused on execution, efficiency and financial discipline. In fact, on a non-GAAP basis, we almost reached a breakeven point on the operating level in Q2. Let me walk you through the key financial results in the quarter. Total revenue reached RMB 295 million, up 58% year-over-year and 14% quarter-over-quarter, marking a strong acceleration. Gross profit increased by 85% year-over-year and 19% quarter-over-quarter to RMB 22 million. Gross margin improved to 76%, up from 65% in the year ago quarter and 73% in the previous quarter. Operating loss narrowed to RMB 11 million, an 86% year-over-year decreased a 58% quarter-over-quarter decrease. On a non-GAAP basis, our operating loss declined $2 million, down 97% year-over-year and 6% quarter-over-quarter. Net loss attributable to Cheetah shareholders decreased by 82% year-over-year and 32% quarter-over-quarter to RMB 23 million. Loan net loss attributable to Cheetah Mobile shareholders now by 87% year-over-year at 35% quarter-over-quarter to RMB 14 billion. These probability improvements reflect our ongoing efforts to sharpen the focus, improve efficiency and optimize our cost structure, particularly as we string from early-stage experimentation to ROI focused execution in our AI initiatives in our PI Autobolics business, we have exited certain compute sensitive directions, such as playing our own foundation models, a strategic shift that significantly reduced infrastructure spend. At the same time, we have streamlined our R&D process by levering AI tools and refocused resources on AI utility applications that generate user value. For example, R&D expenses accounted for 24% of our AI and other segment revenue in the quarter, down from 39% in the year ago quarter and 28% in the previous quarter. These efforts have materially improved the operating profit of our AI and other segments where adjusted operating losses decreased 63% year-over-year. and 32% quarter-over-quarter. Looking ahead, we remain confident in our ability to achieve profitability with a clear and disciplined strategy. We see 2 key drivers for this path. First, our Internet business continues to deliver steady profits and serves as a solid financial foundation in Q2. Adjusted operating margin for this segment was 14%, up from 12% in the year ago quarter. Our transition from an ad centric model for user subscription-driven model is showing good momentum. We believe this momentum is sustainable, supported by loyal user cohorts and diversified distribution channels. Second, in RA and Other segment. We are building for long-term probability by growth in both our consumer-facing AI tools and enterprise-facing robotics for our robotics business we are prioritizing salable use cases with clear user demand and engagement, emphasizing our core competence. In powered voice interaction, including natural conversation capabilities similar to our LOM based ages and we best indoor mobility, which we believe offers the most reliable and cost-effective solution for scalable robot deployment, continuously improving our robust intelligence and product experience through agents maintaining a lean and at team structure. A recent milestone was our acquisition of new factor, 1 of the few profitable robotic arm companies globally, new factory brings a proven track record of profitable growth, clear market position and consistent value creation only aligned with our vision to scale differentiated robotic solutions over time. On the AI tools front, people an AI tool that suberizes video, audio, PDS and other documents is to concise takeaways and mind maps, has shown encouraging early user adoption, validating product market fit. Our balance sheet remains strong as of the 30th of June 2025, we have 282 billion in cash. and cash equivalents and USD 110 million in long-term investments. We generated RMB 362 million in operating cash flow during the quarter. This financial strength gives us the flexibility to continue investing in high potential growth opportunities while maintaining capital discipline. We will also remain open to strategic and can accelerate capability building in targeted verticals. To summarize, this was another quarter of measurable progress on our path to breakeven. We are encouraged by early signs of sustainable profitability supported by: one, our profitable and resilient Internet business; two, a disciplined ROI focused eye strategy; and three, strong capital flexibility to invest in long-term growth. Thank you. We are now happy to take your questions. Operator: [Operator Instructions] The first question today will come from Thomas Chong of Jefferies. Thomas Chong: [Foreign Language] Unknown Executive: [Foreign Language] Jing Zhu: Thank you. Operator, please move to the next question. Operator: Our next question will come from Vicky Wei of Citi. Yi Jing Wei: [Foreign Language] Unknown Executive: [Foreign Language] Jing Zhu: Thank you, operator. Please move to the next question. Operator: Our next question is from Nancy Liu of JPMorgan. Unknown Analyst: [Foreign Language] Unknown Executive: [Foreign Language] Jing Zhu: Operator, please move to the next question. Thank you. Operator: Our next question today will come from Brenda Zhao of CICC. Liping Zhao: [Foreign Language] Unknown Executive: [Foreign Language] Operator: Our next question today will come from [indiscernible]. Unknown Analyst: [Foreign Language] Unknown Executive: [Foreign Language] Jing Zhu: Operator, please move to the next question. Thank you. Operator: Our next question today will come from [indiscernible]. Unknown Analyst: [Foreign Language] Unknown Executive: [Foreign Language] Jing Zhu: Thank you. Operator, please move to the next question. Operator: The next question today will come from [indiscernible] Huang of Everbright Securities. Unknown Analyst: [Foreign Language] Unknown Executive: [Foreign Language] Jing Zhu: Thank you. Operator, please move to the next question. Operator: Our next question today will come from [indiscernible]. Unknown Analyst: [Foreign Language] Unknown Executive: [Foreign Language] Jing Zhu: Thank you. Operator, please move to the next question. Operator: Our next question today will come from [indiscernible] Haitong Securities. Unknown Analyst: [Foreign Language] Unknown Executive: [Foreign Language] Jing Zhu: Thank you. Operator, please move to the next question. Operator: Our next question today will come from Joanna Ma of CMBI. Joanna Ma: [Foreign Language] Unknown Executive: [Foreign Language] Jing Zhu: Thank you. Operator, please move to the next question. Operator: Our next question will come from Jack Yang of Mizuho. Unknown Analyst: [Foreign Language] Unknown Executive: [Foreign Language] Jing Zhu: Operator, can you please check if we have any further questions? Operator: Certainly. [Operator Instructions] At this time, I am not showing any additional questions in the question queue. Jing Zhu: Okay. And then we can just end up the call. Unknown Executive: Thank you. Jing Zhu: Thank you so much for joining our conference call today. So if you have any further questions, please just let us know. You can send us email or just give a call. Thank you so much. Operator: The conference has now concluded. We do thank you for attending today's presentation. And you may now disconnect your lines, and have a nice day.
Operator: Thank you for standing by, and welcome to the Haivision Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Thank you. I'd now like to turn the call over to Mirko Wicha, President and CEO. You may begin. Miroslav Wicha: Thank you, Rob, and thank you, everyone, on the call for joining us today to discuss the third quarter of our fiscal year 2025, which ended back in July 31. As mentioned on our earnings call, way back in January, we are now well into our 2-year strategic plan. And now we are demonstrating the company is delivering the double-digit revenue growth, we have been discussing in the past several calls. Our double-digit revenue growth will also help us return Haivision to our historical CAGR growth rate of approximately 20% per year, since the founding of Haivision. The focus this year and the next is all about building high revenue growth. As mentioned, 9 months ago, we have seen the bottom of the revenue curve back in January. Our key fundamental business model for the controller market, which is the move away from being an integrator to manufacturer, has been complete for a couple of quarters now. We are seeing a solid increase in our long-term sales pipeline. Our business forecast is compelling, and we are seeing strong orders and a revenue increase in this market, not just in the U.S. but worldwide. In fact, our poor product revenue in this market has now surpassed our revenue levels, which included all the third-party products such as the screens, which make up most of the deal revenues. As you are aware, we have been investing in many new product development initiatives and introductions throughout this year and some which are yet to come during our fiscal 2026. Now back in May, we also launched an exciting next-generation AI-based hardware tactical edge processor for the defense and ISR markets called the Kraken X1, the KX1 for short. It was extremely well received as it delivers incredible performance of AI-enabled and coding in real time. The KX1 is a ruggedized and AI-capable video processing appliance engineered for demanding ISR deployments, combining real-time encoding, transcoding, metadata processing and NVIDIA powered AI capabilities in a fanless and compact design. Now we expect the KX1 to be available and shipping in volume by the end of this quarter, and should create lots of excitement within the ISR community during fiscal '26 and beyond. We have also successfully showcased our next-generation transmitter platform called the Falkon X2, at the NAB Show back in April. And we are demonstrating it all this week at IBC show in Amsterdam. The Falkon X2 is also planned to be shipping in volume by the end of this quarter. Now the Falkon technology and platform is the beginning of our transition for our entire line of transmitters to advanced 5G private networking capabilities. We have incorporated some revolutionary technologies and create a lower cost structure, which will result in a better price performance and highly competitive product offerings for the future. This is another initiative that will help maintain our healthy margin profile over the long-term. Haivision has also won the prestigious IBC Innovation Award, the past 2 consecutive years, thanks to our strategic role for live 5G video at the Paris Summer Games last year, and we are poised this week to potentially win for a third straight year, which would be a rare feat as we are nominated and featured in the IBC Accelerator program to showcase what's named Conquering the Air Waves private 5G from land to sea to sky. Now this is really a first of its kind workflow, which was proposed by OBS, which is the Olympic Broadcasting Services, [indiscernible] with Neutral Wireless and of course, Haivision. This project looks to take private 5G to the skies, unlocking new creative possibilities by harnessing dynamic mobile connectivity for broadcasters to bring audiences closer to the action, while also enhancing athlete safety and event coverage. Now strategically, the company is landing landmark defense contracts installing large multinational operational controlling deployments, demonstrating clear leadership in private 5G networking and gaining industry recognition for our technology leadership. All these efforts are already bearing fruit as seen from our Q3 results and will continue throughout our fiscal 2026 and beyond. Now in closing, I would like to finish with a time glimpse into our fiscal 2026 direction, which happens to begin in about 6 weeks. Now our plan is to maintain a flat OpEx over 2025, while delivering double-digit revenue growth. This will obviously result in a healthy increase to our overall EBITDA as our cost structure and gross margins are well in control. Now double-digit EBITDA and double-digit revenue growth is what we expect for 2026 and 2027 and 2028 and 2029. This is what we have been working hard towards the past 18 to 24 months. In summary, I couldn't be happier with our Q3 double-digit revenue performance as we reiterate our continued focus and attention on revenue growth and higher profitability. Dan, please continue with the detailed financials. Dan Rabinowitz: Thank you, Mirko. Good morning, everyone, and thank you for joining us today. On our last call, I described the quarter as the end of the transition and the start of momentum. This quarter, we're beginning to see that momentum show up in the numbers. While there still work ahead, our third quarter demonstrates profitable growth and a stronger foundation for the future. Let's begin at the top line. Q3 fiscal 2025 revenue was $35 million, that's up 14.3% or $4.4 million over last year. Year-to-date, revenue was $97.5 million. That's still 1.9% behind last year, but we've made up a lot of ground since the weak first quarter. Both Q2 and Q3 exceeded prior year levels, closing the gap. Exchange rates, which helped us last quarter normalized this quarter. So unlike Q2, where FX tailwinds gave us a top line lift, Q3 performance came from the business itself. Importantly, revenue from our control room solutions, excluding third-party components has now surpassed last year's levels with those components. For the 9 months just ended, third-party component sales are down to 1/3 of last year's level, and we expect it to remain at that low level going forward. Our recurring revenue from maintenance, support contracts and cloud services continues to be a bright spot. This quarter, recurring revenue was $7.3 million, that's up 12% year-over-year. And year-to-date, it's at $21.5 million, an increase of 12.4%. Recurring revenue now represents 20.9% of Q3 revenue and 22.1% of year-to-date revenue. We continue to expect to see sound year-over-year growth in recurring revenue, as our total revenues continue to build. This is healthy, sustainable growth and because these contracts tend to be sticky, that give us visibility and stability looking ahead. Gross margins in Q3 were 72%. That's 300 basis points lower than last year. The biggest factor was the timing of deliveries under our U.S. Navy contract. On a year-to-date basis, margins are 72.3% essentially in line with our long-term average and only slightly below last year's 73.1%. As we've mentioned in prior calls, some quarter-to-quarter fluctuation is expected based on the timing of Navy deliveries, the seasonality and the mix of products shipped and software-only or virtual machine deployments, which have higher-than-average gross margins. Total expenses this quarter were $24.9 million. That is up $3.1 million from last year. The main drivers were about $900,000 in sales compensation and trade show activity, reflecting stronger selling efforts, roughly $800,000 in additional R&D investments consistent with our plan to add engineering resources for new products and business opportunities. About $500,000 is related to currency impacts from the weaker Canadian dollar and another $500,000 from noncash share-based payments, which can vary based on the nature and the timing of those grants. Adjusting for foreign exchange volatility, operating expenses have leveled off. While trade shows can shift the timing quarter-to-quarter, the underlying expense base is relatively fixed. Looking ahead, fiscal 2026 third quarter brings a significant milestone, the 4-year Anniversary of the CineMassive acquisition, which we now refer to as Haivision MCS. At that point, the technology purchase as part of the acquisition will be fully amortized, reducing amortization expenses by at least $600,000 per quarter or more than half of our quarterly amortization. For the 9 months, expenses totaled $75.6 million. That is up by $8.1 million from last year, but the increase reflects a number of factors. $1.9 million from currency impacts, although FX has stabilized, we've launched hedging programs on euro-denominated assets and liabilities to reduce the Canadian dollar exposure to such fluctuations. And this is going to be in addition to our hedging program for U.S. denominated assets and liabilities as well. $1.7 million of the increase is related to the nonrecurring litigation expenses related to the Vitec case. Although Vitec has appealed the judge's ruling, we have recorded the full liability, including damages, interest fees and trial costs. As a reminder, the award represented just 0.5% of Vitec's claim, a clear victory for Haivision. $1.7 million in incremental sales and marketing, again, primarily related to commissions, but it also included travel expenses and an increasing marketing calendar. And then $1.5 million in operations and support, we had built up our operations and support investments late in fiscal 2025, which continued through fiscal 2025. And then finally, or I should say, in addition, $1.4 million were those planned R&D investments that we conveyed earlier this year in support of new product introductions. And then lastly, $800,000 from non-share -- noncash share-based payments. The higher revenue in Q3 contributed to an incremental $2.2 million of gross profit, but with expenses up $3.1 million, operating income came in at $300,000 trailing last year by about $800,000. Year-to-date, the modest revenue shortfall reduced gross profit by $2.2 million, about 1/3 of which relates to year-over-year margin differences. Expenses had risen by $8.1 million for the reasons I outlined earlier, the result is an operating loss of $5.1 million compared to operating income last year. That's a swing of $10.3 million. We believe, though, adjusted EBITDA gives a clearer view by stripping out noncash and nonrecurring items like depreciation, amortization and share-based payments. So for Q3, adjusted EBITDA was $3.5 million compared to $4.1 million last year. The adjusted EBITDA margin was 10.1%. On a year-to-date basis, adjusted EBITDA was $5.8 million compared to $14.4 million last year. Now much of that decline in year-over-year adjusted EBITDA is tied to our first quarter. Revenue in our first quarter trailed the prior year by $6.4 million, resulting in gross profit trailing prior year by $4.9 million. The result of the revenue shortfall was that adjusted EBITDA in just that first quarter of fiscal 2025 was only $400,000, down $4.8 million from the prior year. That single quarter accounts for more than half the year-to-date gap. I think third quarter performance now demonstrates that we are back on track. We ended Q3 with $10.9 million in cash, that's down $900,000 from last quarter. Key drivers to the decline were a $2 million reduction in payables, a $1 million increase in trade and other receivables, $1.6 million that we spent repurchasing shares, $600,000 in loan and lease repayments and $300,000 in capital expenditures. These were partially offset by the $3.5 million of adjusted EBITDA and a modest $600,000 increase in our line of credit balance. So far, in fiscal 2025, we purchased about 885,000 shares for cancellation for an investment of $4 million. Over the last 2 NCIB programs, we purchased about 1.7 million shares for cancellation at a total cost of $7.6 million. Our credit facility remains strong at $35 million, with only $8 million drawn today and room to expand if strategic opportunities arise. Total assets at quarter end were $139.1 million, a modest decrease of $2.2 million from the end of fiscal year 2024. The decrease in total assets is largely related to the $5.6 million decline in cash, the $3.2 million decline in tangible assets, largely the result of ongoing amortization expense. And these declines were offset by increases in our income taxes and receivable and other receivables totaling $6.2 million. Total liabilities at quarter end were $47 million, that is an increase of $2.5 million from the end of fiscal 2024. The increase in liabilities is largely the result of the $5.7 million increase in the amount outstanding on the line of credit, but was offset by decreases in deferred revenue, lease liabilities and term loans and decreases in other payables. I suppose, at this point, no earnings call is complete these days without a few words about tariffs. So as a reminder, as a Canadian company, our proprietary products are covered by the USMCA trade agreement. So currently, there are no tariffs on products manufactured in Canada when sold into the U.S. Our transmitters, on the other hand, are still manufactured in France and as of August 29, are subject to a 15% U.S. tariff. For now, the impact is limited since transmitter sales into the U.S. are still an early initiative. And we're actively planning ways to mitigate the impact of these 15% tariffs with upcoming transmitter product launches. So for the time being, we intend to stay the course. So to summarize, in Q3, we delivered double-digit revenue growth, solid recurring revenue expansion and stabilized operating expenses. With that momentum, we've returned to double-digit adjusted EBITDA margins. And as growth continues, we're confident in reaching our long-term goal of 20% adjusted EBITDA. Although still in the planning stages for fiscal 2026, we expect overall revenues to approach volumes that will clearly illustrate the operational efficiencies we've discussed on earlier earnings calls. With that, I'll turn it back to Mirko for Q&A, and thank you again for joining us on today's call. Miroslav Wicha: Thank you, Dan. Rob, let's open up for questions. Operator: [Operator Instructions] Your first question today comes from the line of Robert Young from Canaccord Genuity. Robert Young: I thought I'd maybe lead off the question with a question just around guidance for the full year, if that's something that you're -- if I missed it, sorry, but I was hoping that you could update that. Or if not, is that expectation of double-digit growth, double digits EBITDA? Is that something we should be thinking about for this year or next year? Maybe you can put some time line around that, some consistency expectations quarterly, that would be very helpful for modeling. Dan Rabinowitz: Well, I think we are looking for double-digit revenue growth for 2026 and beyond. I think we're going to be knocking on that magical $150 million number that will actually be able to demonstrate that we can get to that EBITDA margin of 20%, although I just want to caution everyone when we threw out that $150 million number as where our belief would be to be able to recognize that 20%. That was a number of years ago. And that number may have gone up a little bit because of inflation and increased costs overall. But I think that is where we're looking at 2026 at the moment. We'll continue to be growing the EBITDA margin. We'll continue to be growing revenue at double digits, and that should set us up for a very buoyant 2027 and beyond. Robert Young: Okay. That's very helpful. Second question would just be around the -- if you could give us a little bit of insight into the growing commitments with NATO and where those would map to opportunities in your business? I know there's a number of products, a number of projects and programs that you have running with U.S. government in different ways that might be used by other NATO partners. And so I was hoping you could just maybe widen that out and give maybe a broader explanation of the opportunity there? Miroslav Wicha: Well, I can probably try to tackle that. I mean I think right now, what we're seeing is definitely an increase in activity within our international group, which includes obviously NATO and The Five Eyes. I think it's still a little bit too early to give any kind of indication, but we're seeing a very good strength in the U.S. as well as all throughout NATO. So it's all positive. We're also, by the way, seeing an increase in activity in just pure security, not just defense related, which is encouraging. So as defense ISR are proving to be strong, we're also seeing it in the cybersecurity, the banking industry, the utilities industry. So within our enterprise sector, where we have a huge customer base for control rooms, that's really picking up steam as well. So we're seeing it in all fronts. Robert Young: Is there a way to segment maybe give a rough idea of how much revenue today is driven by those end markets? Miroslav Wicha: Dan, I think that's some dissection, but we don't really go that deep. From a mission perspective, overall, we're roughly about 2/3 of our revenue, right, and 1/3 is our live sports and broadcast. Dan, do you have any other color you can add that? Dan Rabinowitz: Yes. I think it's -- I think it's a little bit difficult because we're seeing growth in both areas. And so we're not seeing that one area is outgrowing the other in any significant fashion. But I do think that we've been seeing the size of our pipeline growing. Those are the number of opportunities that are in front of us growing and the number of larger opportunities are also growing. So those are our signposts for future backlog and perhaps future sales, I should say, backlog that will eventually result in future sales. Miroslav Wicha: Yes. I mean the challenge, Robert, we have is that also the challenges, I would just add that within the mission market or the controller market, it's a much longer lead sales cycle, right? So that's very different from all of our other businesses. So it's kind of hard to -- at the moment to gauge exact revenue impact. What we're seeing is we're seeing a nice increase in the pipeline/forecast/bookings, but it translates into revenue a little bit longer than something like in our broadcast sports market, right, or our traditional encoder market. Robert Young: Okay. That's all very helpful. And then maybe last question for me would just be around the gross margins. I know there was the slight decline. You gave a bunch of drivers, Dan. Like there's one specific thing or maybe like are there a couple of things that might have driven that decline just to be more precise there? And then I'll pass the line. Dan Rabinowitz: Well, I would say that the timing of the Navy deal was -- had the largest impact on gross margins year-over-year. Sales or deliveries are tend to be a little bit bulky. And depending on which quarter they hit, they can have a big impact or a smaller impact on the business. I think when we were giving guidance before, we believed that most of the deliveries would take place in the fourth quarter. We had significant deliveries in the third quarter that brought down the third quarter margin earlier than what we had expected. So our fourth quarter expectation is that our margins will be a little bit better than what we had anticipated internally, but it doesn't change our overall view that the Navy transaction would impact margins by about 60 basis points for the year. Robert Young: Great to see the return to growth. Operator: [Operator Instructions] Your next question comes from the line of Jesse Pytlak from Cormark Securities. Jesse Pytlak: Just a single question for me. Just hoping to maybe get an update on how the training program is going with your international channel partners with respect to the MCS business? Miroslav Wicha: Good question. We've actually had several training sessions already in Atlanta, we actually built a professional training center in our facility. And we've been holding nonstop training classes now for the last several months. So it's ongoing. We're getting a lot of people through it. We did try to prioritize the U.S.-based partners in the beginning, but even though they do have reach into international, and we are now starting to see some of the international partners flow through. So it's progressing very, very well. I expect it's going to continue to be booked solid right through for at least the next 6 months because we're already backlogged on the training that's already being requested. So all in all is doing good with our new release 4.4 that we launched. That's what it's all -- the training is all based on. So we're very encouraged. Operator: And there are no further questions at this time. I will now turn the call back over to Mirko for some final closing remarks. Miroslav Wicha: Perfect. Well, thank you very much. That was like the least amount of questions I think we've ever had. Dan Rabinowitz: We gave them all the answers... Miroslav Wicha: I guess in close -- I guess, so I'd just like to say in closing, again, we're committed, right, to maximizing long-term value for all of our shareholders. And we're confident in our ability to execute on our strategic revenue growth plan and deliver solid growth for the future as promised. And I just want to thank all of our shareholders and analysts on the line today for their continued support of Haivision and look forward to speaking with all of you in around mid-January when we will discuss our Q4 performance as well as our entire 2025 year-end results. So thank you very much, and speak to you in January. Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to KalVista Pharmaceuticals operational update and First Fiscal Quarter Financial Results. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the conference over to Ryan Baker, Head of Investor Relations. Sir, please go ahead. Ryan Baker: Thank you, operator. Good morning, everyone, and thank you for joining us to discuss KalVista Pharmaceuticals fiscal year 2026 first quarter financial update and operating results. Please note we'll be making certain forward-looking statements today. We refer you to KalVista's SEC filings for a discussion of the risks that may cause actual results to differ from the forward-looking statements. On the call with me today from KalVista are Ben Palleiko, Chief Executive Officer; Nicole Sweeny, Chief Commercial Officer; and Brian Piekos, Chief Financial Officer. Dr. Paul Audhya, our Chief Medical Officer, will be joining us for the Q&A portion of the call. Ben will begin with a review of the company's progress during the 3 months ended July 31, 2025, including FDA approval of EKTERLY and other regulatory updates. Nicole will then review the company's commercial progress to date and Brian will cover the company's financial statements for the most recent quarter. We will then open the call for questions. With that, I will now turn the call over to Ben. Benjamin Palleiko: Thank you, Ryan, and welcome, everyone, to our first ever financial update conference call. It's been a momentous few months for KalVista, highlighted by our announcement on July 7 that the FDA approved EKTERLY as the first and only oral on-demand therapy for acute HAE attacks in adults and pediatric patients aged 12 and older. This approval has positioned EKTERLY to transform the treatment paradigm globally for people living with HAE. We initiated the U.S. launch immediately following approval and are pleased to report today our initial launch metrics. With EKTERLY, for the first time, people living with HAE had an oral on-demand therapy they can take at the first signs of an attack, achieving symptom relief in the same time frame as injectable therapies with a pristine safety profile. EKTERLY breaks through the barriers imposed by injections, and we believe it is poised to become the foundational HAE treatment globally. It enables people with HAE to adhere to treatment guidelines, which recommend treating attacks early and considering treatment of all attacks with the goal of achieving total disease control and normalizing lives. Since initiating our U.S. launch, the community response to EKTERLY has been overwhelmingly positive and early uptake is even greater than our expectations. People living with HAE, physicians and payers all have engaged rapidly, which speaks to the unmet need that EKTERLY addresses. In a few moments, I'll turn the call over to Nicole to discuss our commercial progress in more detail, but I will say that we are already seeing the results of the investments we made prior to approval in our commercial infrastructure and we are executing an outstanding fashion on a successful launch. The fact that already almost 5% of the entire U.S. HAE population has submitted a prescription for EKTERLY clearly speaks to all these elements, including the quality of the commercial team we have established. Beyond the U.S., we continue to make important regulatory progress in our efforts to bring EKTERLY to people living with HAE around the world. In Europe, sebetralstat received a positive CHMP opinion in July for the treatment of acute HAE attacks with a final European Commission decision expected in October. The Committee for Orphan Medicinal products also confirmed maintenance of orphan designation, underscoring the significant unmet need that sebetralstat addresses in the EU and granting a 10 years of market exclusivity upon approval. We anticipate a staged launch in Europe over the next 12 to 18 months commencing with Germany pending approval. Also in July, the U.K. MHRA granted marketing authorization of EKTERLY as well as adding it to the agency's orphan register. With regulatory approval secured, the process now moves to NICE for a health technology assessment to determine patient access and reimbursement. These discussions are essential to ensure broad availability. Based on the current time line, we anticipate a U.K. commercial launch in the first half of 2026. We continue to progress towards anticipated approval in Japan at the end of this year, and launch through our commercial partner, Kaken Pharmaceutical in early 2026. Our Canadian partnership is also progressing towards a regulatory filing and we are currently in discussions with multiple other potential partners worldwide. We believe this progress not only validates the universal need for EKTERLY, but also lays the foundation for meaningful commercial growth and long-term value creation for our shareholders. With that, I'll now turn the call over to Nicole, who will share more detail on early launch progress and some of the performance indicators we will be building on in the quarters ahead. Nicole? Nicole Sweeny: Thank you, Ben, and good morning, everyone. As Ben mentioned, our launch readiness activities have ensured that we were well positioned to deliver EKTERLY, the first and only oral on-demand therapy to patients as quickly as possible. While we remain in early days of the launch, I am very pleased with the progress we have seen to date. We are observing encouraging signs across several key performance indicators. From the patient perspective, interest in EKTERLY has been strong and continues to grow. Just days after launch, we attended the HAEA Patient Advocacy Summit in Baltimore where over 1,400 people living with HAE were present. It was an important opportunity to share information and introduce EKTERLY to the community. Within the first few weeks of approval, an additional 500 community members joined our database seeking information and updates on EKTERLY. Through the end of August, more than 4,000 individuals have joined our patient database. Additionally, we continue to host local and virtual education events to increase awareness of EKTERLY among patients and family members. Following our announcement of the FDA's approval of EKTERLY on July 7, I'm excited to share that in the 8-week period ending August 29, we received 460 patient start forms. Early demand has largely come from patients previously on Firazyr and icatibant as expected, but also from all other on-demand therapies, and we are seeing patients on all prophylactic therapies adopt EKTERLY at similar rates. On the access front, we know that formal coverage policies typically take up to 6 months to be established. Even so, we are pleased to see some patients gain paid access, consistent with our expectations. The Quickstart program and medical exception processes are proceeding as planned, and we are confident in our ability to secure broad access over time. For prescribers, our field sales organization is focused on engaging the top 1,000 HAE treating physicians who account for roughly 90% of prescriptions written in the U.S. As expected, early prescriptions have come from KOL to manage the highest number of HAE patients. Importantly, however, adoption has not been limited to the KOLs. We are observing strong interest in prescribing from a broad base of providers, even outside that top 1,000, which underscores the strength of our educational efforts and the clear unmet need EKTERLY is addressing. From launch through August 29, we have activated 253 unique prescribers with 38% of those starting multiple patients on EKTERLY. Over this same time period, our field sales team has reached over 72% of the total physician base, including 96% of the Tier 1 physicians. In addition to KPIs, our KalVista Care hub services are fully operational, helping patients navigate access and financial support. Early feedback from both patients and offices is very positive. Taken together, these early signals reinforce our confidence in EKTERLY's potential to become the foundational therapy for people living with HAE. Looking at future quarters as our launch progresses, we expect the launch KPIs will evolve. And so we will adjust our reporting metrics accordingly. I will now turn the call over to Brian for a review of the company's financial statements for the most recent quarter. Brian? Brian Piekos: Thanks, Nicole. Good morning. The press release we issued earlier today contains our full financial results, so I'll provide a few highlights for the 3-month period ended July 31. We are pleased to announce the first sale of EKTERLY reporting $1.4 million in net revenue for the launch period, primarily from stocking orders by the specialty pharmacies and our commercial distribution network. Total operating expenses for the period were $60.4 million, consisting of approximately $15 million in R&D expenses and approximately $45 million in SG&A expenses. The quarter-over-quarter increase in SG&A was driven primarily by external spending related to the EKTERLY launch. Looking ahead to the remainder of 2025, we expect operating expenses to remain relatively consistent as we continue to invest in the EKTERLY launch. Turning to the balance sheet. We had approximately $191 million of cash and investments as of July 31, 2025. We expect that balance together with forecasted EKTERLY revenue to fund the company's operations into 2027. Before turning it over to Ben for closing remarks, I'd like to remind everyone that as previously announced in March, we are changing our fiscal year end to December 31. As part of that transition, we will begin reporting on a traditional calendar quarter basis this fall, starting with the quarter ending September 30, which will capture the 3-month period from July through September. Ben? Benjamin Palleiko: Thank you, Brian. As Nicole described, we are pleased with the strong response we are seeing in the early days of our U.S. commercial launch. The level of engagement from people living with HAE and physicians underscores both the unmet need in HAE and the transformational potential of EKTERLY. The rapid adoption we are seeing reinforces our belief that EKTERLY can redefine the standard of care for people living with HAE. We remain focused on executing our commercial strategy with discipline, driving global expansion and continuing to deliver on our vision of bringing this meaningful life-changing treatment to people worldwide. And with that, we will now open the call to your questions. Operator? Operator: [Operator Instructions] And the first question comes from Stacy Ku with TD Cowen. Stacy Ku: Congratulations on a wonderful early update. We had a few questions, mostly towards Nicole. Can you just further speak to the Quickstart program? And just maybe help us and other investors understand the process on prior authorizations and medical exemptions. Maybe just talk through your expectations for timing to pay drug? And really, how should we think about that translation of the really impressive patient start forms to eventually getting paid drug. So just help us understand that piece. And then on top of Quickstart program, just maybe if you're willing to -- on top of the details you've provided so far, just talk about the type of prescribing patterns you're seeing. Just help us understand are patients going to be able to have chronic use of EKTERLY as needed. So that's kind of the first question on the Quickstart program and dynamics there. And then another is maybe another just expectations on timing. We get a lot of questions from investors on that 4,000, let's say, patient and caregivers that have signed up for EKTERLY updates. So just give us a sense of how many are individual patients or caregivers as a new treatment, would you expect most clinicians would want to see their patients in the office? And maybe what's the frequency of current visits? Just help us understand that cadence as we think about the high patient demand and how you will have to work through that patient number? Nicole Sweeny: Sure. Thanks so much, Stacy, for the questions. So [Technical Difficulty] we've been consistent that we look at the first 6 months [Technical Difficulty] of those months, access may be in the months 4, 5 and 6, which is really why [Technical Difficulty]. And in terms of Quickstart, the mechanics of it, if you will, the Quickstart program immediately provides access to EKTERLY at no charge. [Technical Difficulty], they submit the start form. And so when the start form comes in, it allows KalVista to work with the physician office to pursue a medical exception to gain [Technical Difficulty]. So the patient has Quickstart, again, while we work with the office to gain paid access. [Technical Difficulty] once the medical exception is approved, the patient's next shipment will be sent without [Technical Difficulty] the government payer. If medical exception, that time period, [Technical Difficulty], then they contact KalVista [Technical Difficulty] provided by KalVista. So I think in [Technical Difficulty]. And obviously, when the [Technical Difficulty] quickly as possible. Stacy Ku: I think it is coming in a little garbled, by the way, tough for me to -- and I'm guessing others to hear. Benjamin Palleiko: [Technical Difficulty] the next question is on the patents and the timing. Nicole Sweeny: Sure. Absolutely. In terms of the patient database, we're encouraged to grow so quickly after approval [Technical Difficulty] caregiver as well [Technical Difficulty]. What's most interesting is that when we look at the geography [Technical Difficulty] Tier 2 physicians. So to us, that's very [Technical Difficulty] representatives that are going in are connecting with the physicians that treat these patients and a number of our in-person education programs for patients that [Technical Difficulty] programs so that we can be [Technical Difficulty] same geographies is [Technical Difficulty] much to engage with those patients at a local level and help them [Technical Difficulty] therapy. [Technical Difficulty] you had is, I believe, on the visited [Technical Difficulty] a prescriber standpoint and so [Technical Difficulty] approach in terms of some physicians requiring a visit using telehealth and some not requiring a visit in order to prescribe therapy. Operator: And our next question comes from Paul Matteis with Stifel. Paul Matteis: Really appreciate it. A couple of questions from us. You talked about how the launch metrics may evolve as you move forward with this launch. Just curious what your expectations are moving forward? And I guess, later this year, is it possible that we could be getting actual number of doses prescribed for example, versus just start forms? And also, and again, this may have been answered. It was a little bit difficult with the audio. But just curious, are you able to confirm just sort of what we've heard previously on the insurance process that patients first receive 2 doses initially and then also afterwards received 2 doses of paid drug automatically if their insurance is approved? Just wanted to confirm that. And if so, how does that inform your perspective on the launch kinetics moving forward this year? Nicole Sweeny: Sure. So in terms of the script to address your first question, we recognize that as we get into months 4, 5 and 6 later in the year, that certainly some of the KPIs will be evolving and more interest in repeat prescribers as well as refills and certainly talking more about utilization of the product or consumption of our product on a per patient basis. So certainly recognize that. And as the year unfolds, plan to share more in terms of a view into other KPIs. And then it may be helpful just to -- I know there was an audio glitch. So it may be helpful just to kind of take a step back on Quickstart as well as paid. And so I think it's important to appreciate that when a prescriber -- a physician writes a script for EKTERLY, they write that start form and they send it into the KalVista hub. In parallel, they do send in a request for a Quickstart. And so how this works is that the Quickstart provides immediate access to treatment for EKTERLY at no charge, and then our staff works with the physician office to pursue medical exception and gain paid access. While a patient is on Quickstart, once that medical exception is approved, the patient's next shipment will be sent without delay and paid by the commercial or the government payer depending on who they have. If that exception requires more time, then we as a company will send a second shipment. And in terms of the other question, I believe you asked just in terms of script. Yes, patients are typically receiving 2 boxes for their initial prescription. And then it's really -- the refill is very much dependent on how that physician writes the prescription. And so if the refill is written as needed, a patient may receive 2 boxes or they may receive more depending on their burden of disease. And so that is something that, again, it's up to the physician as to how they write. Typically, they prescribe PRN for refills to allow patients flexibility to adjust the number of boxes in the future based on their burden of disease. Operator: And the next question will come from Tazeen Ahmad with Bank of America. Tazeen Ahmad: Congrats from me as well on a good start to the launch. I'm sorry if you already said this before, but maybe you can clarify, have you broken down of the 460 start forms? What percent were to a Quickstart, what percent are reimbursed and what percent may be coming from another source? I just want to get a sense of where you are in the early stages of reimbursement. And are we still going to be able to track these numbers quarter-to-quarter? And then the second question is, is it too early to know what the retreatment rates are? You're just still a few weeks into the launch, but any kind of anecdotes you can share some feedback from your sales force, it would be helpful. Nicole Sweeny: Sure, absolutely. So the -- when we share a start form number of 460, it is that 100% of those individuals also received Quickstart. And so again, as the programs are designed so that the forms come in together, so patients have immediate access to therapy. We certainly were very encouraged and have been encouraged to see that we have started just a few weeks after approval, EKTERLY paid shipments starting to go out to patients where the medical exception process went through rather quickly. Certainly, that's something that we continue to watch, and it does grow week to week. And also even more recently seeing our first refills for -- on the paid side of things was also very encouraging because to us, that's just signals not only positive sign from the payer side of things, but also that, that individual is really continuing to utilize the product and adopt it as their primary on-demand therapy. Benjamin Palleiko: And with regard to treatment, Tazeen, I mean, we've certainly heard some anecdotal feedback from the field already. It's all been, I think, very positive. We haven't really heard anything about any kind of second dosing. We -- but again, we continue to think that's not really an issue. The open label, we've talked about this publicly multiple times, the redose rate somewhere in the vicinity of the low 20s, 22%, 23%, which is actually even below the Firazyr rate. So we don't think that represents any issues with anyone, whether it's patients or payers. And again, because it just absolutely falls quite the lower end of what's seen in the world nowadays. Tazeen Ahmad: Okay. And then last question for me. Any feedback on side effects observed thus far, any laryngeal attacks or any kind of GI discomfort? Paul Audhya: This is Paul Audhya. No, actually, we've been hearing overall consistency between what we observed in the open-label extension and what we're seeing in terms of just any adverse event reports which have been pretty minimal. Typically in the first 6 months of the launch, that's the period in which it is most intense when the prescribers are getting used to the therapy. And so there's nothing that's come forward to date. Certainly, in terms of GI-related adverse events, we haven't heard about any during the course of the launch and actually over the open-label extension, we treated almost 1,000 abdominal attacks. And even in that setting, we're seeing extremely low GI adverse event rate. So I think really, this is a drug that's not associated with GI adverse events. Benjamin Palleiko: I really think the only anecdote we've heard so far has actually been favorable, which was we did have one person call our patient hub to let people know that it had a laryngeal attack and we're very pleased with the outcome. They said it worked quite well for them. So limited stories and tough to extrapolate, but everything so far has been favorable. Operator: And the next question is going to come from Maury Raycroft with Jefferies. Maurice Raycroft: Congrats on the progress and the update today. I'll ask one about the 460 start forms as well. Just wondering if you can provide a July versus August breakdown just in trying to get a perspective into how much was from rollover from clinical studies or a bolus waiting for the launch. And whether you think this early demand could suggest a linear trajectory? Benjamin Palleiko: Thanks, Maury. Nice to hear from you. The -- we chose to put out the August number because we had it, and I think there've been a lot of questions about whether -- how the trajectory is going to go. What I would say is, and we're quite pleased with this. This is -- this doesn't just simply represent a sort of a onetime bolus of rollover people or something. First of all, the open-label extension, even though it's big for HAE, isn't super big. So the people coming off who could plausibly move on are measured dozens, not hundreds. What this really represents is a sustained -- continually growing level of interest from people. And so demand certainly started off, I think, higher than we anticipated and it's continued to go from there. So the curve has been a fairly linear growth from here with really no surges along the way that would represent to us, this was a sort of onetime event. We've been very -- and this a little bit goes to the fact, and we talked about a little bit in the comments, the fact that patient interest has been very broad, certainly even broader than we thought it would be in terms of just people on prophylaxis as well as people with high or low attack rates. We've seen a really terrific breadth of prescriptions. And again, through -- ever since the launch and even continuing now past August, we've continued to see the same trends. Maurice Raycroft: Got it. That's helpful. And maybe just going forward, as we focus more on revenue numbers going forward, how should we think about just stockpiling as a dynamic there? Benjamin Palleiko: That's probably a good question for Brian Piekos. Brian Piekos: In terms of inventory at the SPs, like most rare disease launches, we expect long-term averages to SPs to hold 2 to 4 weeks of inventory. I think in the earlier part of the launch, that can move around a bit, but we don't expect anything different as compared to other rare disease launches, specialty medicines. Operator: And the next question will come from Joseph Schwartz with Leerink. Will Soghikian: This is Will on for Joe today. Congrats on the great quarter and strong start to the launch. So one question for us. Just want to drill down a bit more on the patient profile. So could you share anything beyond what their prior therapy might have been? And are you seeing any meaningful patterns on attack rate severity, attack frequency and what their typical attack rate might have been before initiating treatment? Nicole Sweeny: Sure. I'm glad to take that question. And heading into the launch, I think we had conducted a great deal of market research that indicated those patients with more severe burden of disease that those would be some of our earliest adopters. And certainly, we see adoption across a wide, I would say, array of patient types in terms of the burden of disease. But we have seen and are very pleased with the adoption with those high burden patients. And the profile certainly of the product was attractive to them, and we have certainly seen that population be some of our earliest adopters, but we absolutely have seen adoption across the burden of the disease base, if you will. Benjamin Palleiko: And across all prophylaxis therapies. Nicole Sweeny: Yes. Just something else to add is that we've seen -- when we look at the current use of prophylaxis with our patients, we do see that the utilization really lines up with the market share in terms of use of prophy overall. And then we actually see the brand share for prophylaxis lineup as well with the patient base we have launched to date. So again, it's very encouraging to just see this used by a very broad population, whether it's based on burden of disease or previous on-demand or current prophylactic treatment. Operator: And our next question will come from Pete Stavropoulos with Cantor Fitzgerald. Pete Stavropoulos: Congratulations on the quarter. Can you just remind us how many patients are in the OLE are actually U.S.-based? I know you said somewhere in the dozens. And what is the expected cadence or time lines to shift the majority of these patients to reimbursed -- commercially reimbursed scripts? And also from a non-access perspective, I've reached to patient, perhaps educational or informational programs. What's been the outcome to date for those efforts to sort of raise awareness of EKTERLY's profile? And do you have a sense of the proportion of patients from the 460 start forms that were directed from these efforts? Benjamin Palleiko: I guess I'll do the first one, Nicole, and you can do the second. So Pete, in terms of the OLE rollover, I mean it's important to note that the OLE at least from a U.S. patient perspective, was several dozen patients, not several hundred patients, for example, and some of whom had already gone on to the early access program when they finished and some of them are still actually continuing on the OLE for a while longer. So there is no dramatic sort of burst of people that would immediately switch on the commercial. I think -- and that's why I was saying earlier, our view is that these folks are coming on as part of this generalized demand uptake. And then effectively, their numbers are kind of subsumed by the larger demand we're seeing. So they're certainly out there, and I think we're comfortable they're moving over, but it's very hard for us to track just based upon the fact that, like I said, they're not an enormous immediate transition group. And over to you on the second one. Nicole Sweeny: Yes. So in terms of your second question, certainly, we see the earliest patient adopters. As I mentioned earlier, our -- when we've mapped them from a geography standpoint, obviously cluster around our Tier 1 and Tier 2 physicians, which connects back to our marketing list. But also we had a tremendous opportunity with the HAEA Patient Summit. We announced our approval on Monday. We went to that summit on Friday. There were 1,400 members of the community there. So that was also a chance for us to engage with full family members. And so since that time, our education efforts have been very much driven to do local education programs, trying to invite family members to come out certainly with the intent to provide more education and adoption for that individual, but also to help introduce EKTERLY to the family. And so that's certainly something that we've been doing since launch at the in-person conference in the dinner program sense, and we'll carry that approach certainly into the fall in addition to other nonpersonal marketing efforts, e-mails and things like that. Operator: And the next question will come from Serge Belanger with Needham. Serge Belanger: First question regarding securing formulary coverage. Maybe just give us an update on where you are and where you expect to be. And then our expectations that you'll still be at parity versus other products in terms of step-throughs, prior auths and quantity limits? And then just another quick one. I noticed on Slide 14 of your updated slide deck, you increased the size of the projected market growth by about 25%. Maybe just talk about the assumptions behind that increased growth expectation. Nicole Sweeny: Sure, absolutely. I think in terms of the access side of things, I would say, at this point in time, things are certainly progressing how we would -- how we anticipated utilizing medical exception and that we would see access to paid happen on a more limited basis rather quickly, but certainly that, that would grow over the time. And we certainly anticipate that. If we think about steady state from the access side of things, yes, we do still anticipate parity access to branded therapies in the market. And certainly going into launch, we were certainly aware that there may be some exceptions where a payer might choose to require a step-through generic icatibant. There's been one instance that we've seen to date. But it's really important to note that even where that instance has come up, patients actually have EKTERLY and are getting it paid. And the reason for that is because 80% of patients have either been on generic icatibant or are on generic icatibant previous to EKTERLY. So even in that instance where we have faced that one step at a policy, the patients have been able to move forward and already have their EKTERLY in hand paid for. So certainly, for us, we're continuing to advance our efforts. But again, at this point, we maintain the view that parity access to the other branded therapies will be expected. Benjamin Palleiko: And on the market number, Serge, first of all, kudos to you for reading the deck in detail before the call. Thank you for that. The second thing would be, it's pretty straightforward. When we've done those numbers, which was a while ago, we had obviously done it based on an estimate of the market size, total market doses, which we talked about a lot and also a branded price, which was down closer to the standard Firazyr price. As part of the update, we revised all that to reflect the fact that the branded prices in our expectation is meaningfully higher based upon our WACC and where the market sits nowadays. And so it's just a fairly straightforward exercise to market back to an updated expectation on the pricing and then you grow it a little bit from there. So that's really what it reflects. Operator: And the next question is going to come from Debanjana Chatterjee with Jones. Debanjana Chatterjee: Congrats on the quarter. So you mentioned about the generic step-through that might be required by certain insurers. What do you think these payers would like to see in terms of either safety or efficacy failure on icatibant to approve EKTERLY? And I have a quick follow-up. Nicole Sweeny: Sure. Well, one, as I just mentioned, it's important that the vast majority of patients have experience on generic icatibant, so they can move through that step rather quickly. So for the minority, which would be 20% of patients. The feedback that we hear from physicians is that actually describing a fail or a failure of icatibant to a payer is quite simple, and it could come down to injection site reactions. It could also be, for instance, that someone has a history of abdominal attacks and administering a subcu and the abdomen is difficult and challenging. They could have difficulties with hand swelling, so therefore, administering a subcu is really quite difficult. So again, we see that being an absolute minority of cases where we -- an individual would face it, but there is experience in the market with, again, those examples I gave you for overcoming and establishing that a patient has failed generic icatibant and can quickly move on to EKTERLY in this instance. Debanjana Chatterjee: That's helpful. And at some point, in terms of the KPI, would you be sharing percentage lives covered? Nicole Sweeny: I think that's something that as we continue through launch, we'll certainly share more progress in terms of our efforts from the payer side of things. The exact details and KPIs, I think that's probably to be determined at this point in time. But certainly, we recognize there's interest in providing more clarity on our efforts to ensure that there's ongoing paid access and establishing those policies. So I would just say stay tuned for further updates from the company, but certainly, we appreciate that there's a need to do so. Operator: And our next question will come from Jon Wolleben with Citizens. Catherine Okoukoni: This is Catherine on for Jon. A quick question about the number of scripts and patients that potentially account for the revenues reported in July. I know there's about 1.4 million reported. And also, when did EKTERLY become available in July? Is it immediately post approval? Benjamin Palleiko: Brian can answer the second question on the -- with regard to revenues. EKTERLY was available roughly 10 days following approval. We had [Technical Difficulty]. Brian Piekos: In respect to revenue...sorry, go ahead. Benjamin Palleiko: Just to tie that out. But just to tie that to start forms, though, just to be clear, we were getting start forms actually the day of approval. Our first start form came in before lunchtime on the day we announced. So start forms did predate actual shipments by 10 days. Brian Piekos: And just on the revenue recognition side, we have followed 606 as every other pharmaceutical company does. You'll see that our customer base is the specialty pharmacy. So we recognize revenue when a product is received by the specialty pharmacies. And then there is a lag from there when they go out and reach the patients. Operator: I am showing no further questions at this time. This does conclude today's conference call, and thank you for your participation, and you may now disconnect.
Mor Weizer: So good morning, everyone. Thank you all for attending today. It's good to see a lot of familiar faces here. So on to Slide 2. I'll begin with the highlights before handing over to Chris, who will take you through the financials and the outlook. I'll then update you on our progress against our strategic priorities. Turning now to Slide 3. I'm pleased to report a strong performance in the first half with adjusted EBITDA of EUR 92 million, consistent with the upgraded expectations communicated in last month's trading statement. The overall performance reflects the revised terms of Caliente Interactive agreement. We saw solid underlying growth within the B2B business. At the same time, we continue to make excellent strategic progress in core markets, in particular, the Americas, where we have laid the foundations for significant growth in the U.S. and Brazil. The disposal of Snaitech, which completed in April, has bolstered our balance sheet, giving us the flexibility around capital allocation. Given the solid start to H2, we are on track to deliver full year adjusted EBITDA for 2025 ahead of expectations. As we transition back to our roots as a pure-play B2B business, the Board remains confident in our ability to execute our strategy over the medium term. I will now hand over to Chris, who will take you through the financial performance and outlook. Chris McGinnis: Thanks, Mor. And on to Slide 5, please. Before we look at the numbers, I think it's important to note the 2 major events that took place in the first half of this year, which are, of course, the completion of the sale of Snaitech as well as the revised terms of our agreements with Caliente Interactive taking effect. These big changes have fundamentally reshaped Playtech, and we are pleased that the financial performance of the group, which includes these -- the impact of these changes has come in ahead of expectations. Now looking at the numbers. Group revenue for the first half came in at EUR 387 million, down 10% year-on-year due to the impact from the revised agreement with Caliente Interactive. As a quick reminder, under the revised agreement, which came into effect on the 31st of March, the additional service fee will no longer be collected, reducing revenue while direct costs are also slightly reduced. As previously communicated, our share of income from associate as a 30.8% direct equity holder is now included within group adjusted EBITDA. We've put a slide in the appendix that walks through the comparison and changes at revenue and EBITDA level, so you can see the effect of the new Caliente Interactive agreement has had in the period and how underlying group earnings have grown. Excluding the Caliente Interactive impact, group revenue was flat year-on-year in the first half. This performance also absorbed several headwinds we saw in the first half of the year, such as the Brazil regulatory transition issues, the implementation of the VAT in Colombia and the exit of a major operator from Asian markets. Adjusted EBITDA in the first half came in at EUR 91.6 million, ahead of consensus expectations prior to our August trading update. On an underlying basis, adjusted EBITDA grew 5% year-on-year in the first half, reflecting the strength of our core operations. We have maintained a strong balance sheet, ending the period in a net cash position due to the net proceeds from the Snaitech sale. Finally, our free cash flow generation in the first half was impacted by the timing of dividend payments from Caliente Interactive totaling USD 20 million, which were received post period end. Turning to Slide 6. Looking at the B2B division in more detail, H1 revenues declined 9% to EUR 348 million. On an underlying basis, revenues grew by 3%. Also, on an underlying basis, Latin America saw revenue growth of 5% as the tailwind from Brazil's inclusion within regulated markets in our reporting was partially offset by the previously flagged headwinds in Brazil and Colombia. The U.S. and Canada region continues to see very strong momentum with revenues increasing 64%. Looking at Europe, excluding the U.K., revenues grew 4%, driven by Poland and Spain. In the U.K., revenues declined 3% due to the continued impact of an operator in-sourcing their self-service betting terminals. Elsewhere in unregulated markets, revenues declined, reflecting the reclassification of Brazil as a regulated market. From a cost perspective, and you can see more details with the breakdown in the appendix, continued investment into strategic areas such as Live in the Brazil and the U.S. was largely offset by tight cost control, which resulted in B2B costs increasing by only 2%. Now on to Slide 7, where I will take you through the performance of our B2C division. B2C revenue declined 17% year-on-year to EUR 41 million in the first half, while adjusted EBITDA loss narrowed from EUR 4.3 million to EUR 1.5 million. HappyBet saw a 10% decrease in revenue -- sorry, 19% decrease in revenue, driven by the closure of the Austrian business and the ongoing winding down of the German operations. Adjusted EBITDA losses narrowed significantly to EUR 2.3 million for the same reasons. As announced in May, we have initiated the disposal process with another German operator, which includes the transfer of HappyBet's German franchise partners and associated hardware subject to negotiations. This marks a key step in our exit from the noncore HappyBet business. Elsewhere, our Sun Bingo and other B2C operations were impacted by enhanced regulatory requirements in the U.K., which contributed to a 17% decline in revenue and a reduction in adjusted EBITDA. Turning now to Slide 8, where we look at our net debt bridge from the end of 2024 to the end of June 2025. Following the disposal of Snaitech and the payment of the special dividend, we received just over EUR 300 million in net proceeds. As a result, we ended up with a net cash position of EUR 77 million as at the end of June. It's worth flagging that this net cash position is elevated as there are outstanding liabilities from the Snaitech disposal totaling just over EUR 90 million. These liabilities, which are not due until 2026 and 2027, include a portion of management bonuses related to the deal, taxes on the Snaitech sale and dividends to holders of unvested LTIPs. Adjusting for these on a pro forma basis, we would have had a slight net debt position of EUR 15 million at the end of the period. Turning to our borrowing facilities. In Q2, we successfully repaid the remaining EUR 150 million outstanding under our EUR 350 million March 2026 bond using a portion of the Snaitech proceeds. This leaves us with a single EUR 300 million bond, which matures in June 2028, alongside our recently secured EUR 225 million revolving credit facility, which replaced our previous facility and currently remains fully undrawn. On to Slide 9, Playtech continues to maintain a strong balance sheet, which provides us with the flexibility to allocate capital in a disciplined and strategic manner. Our approach is focused on driving long-term growth while delivering value to shareholders. We are actively deploying capital to high-growth areas such as the U.S., Brazil and Live Casino, where we see strong momentum and scalable opportunities. In addition, we're investing in both new and existing structured agreements that support our expansion into regulated markets and reinforce our B2B leadership. Our M&A strategy remains disciplined. We are open to accretive acquisitions that align with our strategic priorities and regulatory trends with a clear focus on enhancing Playtech's position as a pure-play B2B technology provider. At the same time, we continue to evaluate mechanisms for returning capital to shareholders, including dividends and buybacks, ensuring that any action taken is both sustainable and value accretive. This balanced approach allows us to invest in growth, maintain financial resilience and deliver returns, all while remaining agile in a dynamic market environment. Turning to Slide 10. As you recall, at our 2024 full year results, we introduced a new medium-term adjusted EBITDA target of EUR 250 million to EUR 300. We have a starting point of approximately EUR 150 million in adjusted EBITDA for 2024 when you adjust for the revised Caliente Interactive agreement. I'll now walk you through the key levers we're deploying to reach this target. First, our U.S. business is in growth phase and as a result, has annual losses of approximately EUR 15 million. This is primarily due to the significant investment being made within the Live segment as we have 3 studios now operational in the U.S. with small but rapidly growing revenue. Given the structural growth drivers and demand from operators, we see a clear path to profitability over the coming years, a strong operating leverage on the revenue growth translate into narrowing EBITDA losses and then ultimately positive EBITDA. Secondly, we have identified underperforming businesses within the Playtech Group that contributed more than EUR 20 million in annual EBITDA losses. Of that, a significant amount relates to HappyBet, which we've discussed and where there's a process underway to wind down that business. The remaining underperforming businesses will be addressed in the coming periods with actions already being taken. Next, as Mor will talk about in more detail, we are well positioned in markets such as Brazil and Mexico, partnering with the biggest and most ambitious brands, which should drive further earnings growth over the medium term. Finally, we continue to identify inefficiencies across our processes and footprint while taking steps to eliminate duplication. This will ensure our B2B business operates with the right cost base and that our resources are focused on the growth areas that we've just discussed. And finally, moving to Slide 11 and our outlook. We've seen a solid start to H2 with performance tracking in line with normal seasonality. We plan to continue to increase investment in the second half, particularly in the U.S. and Brazil, where we see strong and sustained demand for our products. Despite the increased investment, we're on track to deliver full year 2025 adjusted EBITDA ahead of expectations, reflecting the strength of our core business. For guidance, we now expect full year 2025 CapEx, which includes capitalized development to be between EUR 80 million to EUR 90 million, which is a reduction from our previous guidance of EUR 90 million to EUR 100 million, which is due to lower capitalization rates and a disciplined approach to capital spending. We maintained our effective tax rate guidance of between 25% to 28%. our financial performance and good strategic progress in the first half of the year keeps us firmly on track to meet our medium-term adjusted EBITDA and free cash flow targets of EUR 250 million to EUR 300 million and EUR 70 million to EUR 100 million, respectively. With clear strategic priorities, strong execution and a strong balance sheet, the Board remains very confident in Playtech's prospects for the remainder of 2025 and beyond. I'll now hand back to Mor to take you through our strategic priorities. Mor Weizer: Thanks, Chris. On to Slide 13. I'll begin by highlighting 2 landmark milestones completed in H1 that fundamentally reshaped Playtech into a highly focused B2B business. Let's start with Snaitech, a transformational deal and a clear example of our commitment to deliver shareholder value. We acquired Snaitech in 2018 for EUR 846 million at an attractive EV/EBITDA multiple of 6.1x. Alongside the Snaitech team, we successfully transformed this business from a predominantly retail operator into a higher-margin, less capital-intensive technology-driven omnichannel leader. In September last year, we announced the sale of Snaitech to Flutter Entertainment for EUR 2.3 billion, representing a premium EV/EBITDA multiple of 9x. This transaction completed in April 2025, delivering a cash return of more than 3x our initial investment with EUR 1.8 billion distributed to our shareholders through a special dividend paid in June. On to Caliente Interactive, our most successful structured agreement to date. After a challenging period, we restored our strong and collaborative relationship with Caliente Interactive by signing a revised strategic agreement in September 2024, which completed at the end of March this year. This agreement represents a good outcome for both parties and lays the foundations for the next phase of growth for our partnership. Under the new structure, Playtech now owns a 30.8% equity stake in Caliente Interactive, a newly formed U.S. incorporated holding company for Caliente's online business. And importantly, this partnership is already delivering cash returns. Caliente Interactive declared and paid its first dividends to Playtech in early H2. On to Slide 14, where I will outline Playtech's investment case. There are 2 elements that are important to understand when looking at the company and its prospects following the Snaitech sale. Firstly, operationally and commercially, we are a high-growth B2B business, providing technology to the majority of the leading brands in the industry. We provide these brands with our market-leading innovative content across a range of verticals, including the rapidly growing Live Casino segment, where we are gaining market share in key markets. One of our greatest strength is our presence in some of the fastest-growing regulated markets in the world, including the U.S., Brazil and Mexico. And we offer a range of innovative business models to ensure we are able to extract the appropriate level of value for the software and services that we provide. Taken together, we have an attractive set of levers that will see us deliver on our ambitious medium-term adjusted EBITDA and free cash flow targets set 6 months ago. Secondly, we have a collection of highly valuable assets on our balance sheet with a total book value of over EUR 1 billion. And of course, book value is generally regarded by the market to be a conservative estimate of realizable value. Nevertheless, in the interest of prudence, we will use this measure. The largest asset by far is our 30.8% equity stake in Caliente Interactive, which has a book value of EUR 726 million. Our other assets are at an earlier stage in their development, yet they have the potential to grow strongly and ultimately generate significant value for Playtech shareholders. In the U.S., our low single-digit equity stake in Hard Rock Digital gives us strategic exposure to a rapidly growing business with a market leadership position in Florida's online sports betting market. In Brazil, we also hold a nominal cost option on 40% of the equity in Galera.bet, which was amongst the first batch of operators to be granted a license in the newly regulated Brazilian market. I'm really excited about this business, and you'll hear me explain why in a few slides. In Colombia, we hold a nominal cost option on 50% equity in a leading online gaming operator, Wplay, representing a strategically valuable asset. Next, we have a valuable 49% equity stake in LSports, the real-time sports betting data provider covering over 100 sports with some of the lowest latency rates in the market, and the business is growing rapidly. Finally, we have equity stakes in various other assets such as Algosport, whose profits have continued to grow as well as assets such as Northstar and The Sporting News. And underpinning our investment case is our commitment to deliver shareholder value, including through shareholder distributions. So in summary, Playtech offers access to a high-growth B2B business complemented by highly valuable assets and a strong commitment to delivering shareholder value. On to Slide 15. Here, I'll briefly outline the strategic priorities that will drive our progress towards achieving our medium-term adjusted EBITDA target of EUR 250 million to EUR 300 million. Firstly, we will continue to prioritize regulated and regulating markets with a clear emphasis on those offering the greatest long-term growth potential. Markets such as the U.S. and Brazil are currently in the investment phase but we are confident they will deliver substantial returns over time. Others like Mexico are already highly cash generative and provide a strong foundation for scalable growth. Secondly, we will concentrate our product investments in areas with the highest potential for profitability and return on capital. Playtech is renowned for the breadth of its product offering but there are certain verticals that provide the greatest opportunity. We believe that live and casino present the greatest opportunity for growth supported by our market-leading PAM+ platform and our value-accretive services business. Thirdly, our transition into a highly focused B2B technology company is a natural moment to review our operational efficiency and agility, as Chris touched on. This means addressing underperforming businesses, streamlining operations, eliminating duplication and building a leaner, more responsible organization that can adapt quickly to changing market dynamics and customer needs. By executing on those core priorities, we will optimize resource allocation, reduce structural complexity and improve cash generation, positioning Playtech for sustained long-term success. On to Slide 16. Let's now turn to one of the most exciting strategically important growth drivers in our B2B business, our successful partnership with Caliente Interactive. The overall Mexican online market is set to grow 21% in 2025. But despite its scale, we think there is capacity for further growth in the years ahead. According to industry analysts, GGR per adult in Mexico averages $35. This compares to $65 in the Philippines, a market with similar demographics and digital infrastructure but a much lower GDP per capita, suggesting a significant opportunity for further growth in Mexico. As many of you know, Caliente Interactive has long been the undisputed market leader in Mexico's online sector. Over the years, its technology platform has been finally tuned to reflect the unique preferences and behaviors of local consumers, giving it a distinct competitive advantage. At the same time, Caliente's scale enables it to invest aggressively in marketing, reinforcing its leadership position. This sustained investment has created a brand that is unrivaled in Mexico. For example, Caliente sponsors 13 out of 18 teams in the Liga MX, the country's top football league. With Mexico set to cohost the 2026 FIFA World Cup, Caliente's dominance is expected to reach new heights as the tournament will significantly amplify its visibility and further solidify its brand leadership. Beyond Mexico, Caliente's ambitions extend to other markets. Later this year, the company plans to enter Peru's newly regulated market, marking the first step in a broader expansion strategy across Latin America. At the same time, Caliente is actively exploring other markets across the region, carefully evaluating the most exciting opportunities for future expansion. Moving to Slide 17, where I'll provide an update on the current and future growth drivers of our U.S. business. After signing partnerships with all of the major operators throughout 2024, we have seen very strong momentum in the first half of this year with revenue growth surpassing 100%. A key factor behind this growth has been our ability to expand wallet share amongst Tier 1 operators. Our Live Casino business made material progress following a successful launch with DraftKings across the 3 largest iGaming states. By the end of June, we were operating more than 50 active live tables in our U.S. studios, and we continue to invest in additional capacity to meet the strong and growing demand of our products. Our expansion with existing operators into new states creates a further avenue for growth. In June, we announced our entry into West Virginia, our fourth iGaming state, where we launched with major operators, including DraftKings, Rush Street and BetMGM. We also expanded our relationship with Delaware North, launching online sports in Arkansas and multiple products in West Virginia. Through our equity stake in Hard Rock Digital, we benefit from their unique leadership position in online sports betting in Florida. The cash generated from Florida supports Hard Rock digital expansion into other states across the U.S. and other international markets where we are also positioned to capture value from their growth. Margin-accretive platform deals are especially attractive given the value that accrues to Playtech when operators use both our PAM+ platform and content. We now have 3 U.S. operators utilizing our platform with revenue from this subset growing significantly, and we expect this to be an increasing contributor to our U.S. growth. Finally, we continue to prioritize the development of innovative content tailored to the U.S. audience as we look to increase wallet share amongst operators. In H1, we released 20 new games, including branded titles such as RoboCop: Collect 'Em and Deadliest Catch. Our content strategy is delivering results. Multiple Playtech titles consistently rank amongst the top 25 games in industry reports, underscoring our ability to compete with established suppliers and reinforcing the strength of our content portfolio. As we deepen our U.S. presence, our focus remains clear: Innovation; operational excellence; and supporting our partners to capture long-term growth opportunities. Moving to Slide 18. Let's turn to Brazil, one of the most exciting and fastest-growing markets in the world. The official launch of Brazil's regulated online gambling market in January marked a historic milestone for the industry and a major opportunity for long-term growth. Industry analysts project the market to grow at 15% annually, reaching GGR of $17 billion by 2030. That said, as with any major regulatory shift, there have been some well-publicized bumps in the road to begin with. Brazil introduced some of the strictest onboarding requirements globally, leading to unusually high KYC rejection rates and as a result, lower-than-expected volumes across the industry in the first half of the year. Given our strong partnerships with leading Brazilian operators, this has had an impact on us as a B2B supplier. But let me be clear, we see this as a temporary headwind. Our conviction in Brazil's future is reflected in our decision to invest further in the country. We are building a state-of-the-art live casino studio in Sao Paulo on track for completion by the end of 2025. This will allow us to deliver localized premium content with native-speaking live dealers creating an authentic experience for Brazilian players. To support this, we are scaling our local presence. Our team in Brazil is expected to grow to over 100 people this year, and we are continuing to invest in talent and infrastructure to capture this opportunity. We have signed partnerships with some of the country's leading operators, strengthened our position through our structured agreement with Galera.bet, and we are in the final stages of securing an agreement with a major player, which has the potential to be one of the largest operators in the Brazilian market. Let's now turn to Slide 19, where I'd like to cover our progress in Live Casino. Throughout the first half of 2025, we saw strong and sustained demand for live with revenues up 9% year-on-year. A standout region was the United States, where we delivered over 300% revenue growth following a series of successful launches with DraftKings across the 3 largest iGaming states. Across our 15 studios, we now have over 470 tables, an increase of 5% versus the end of 2024. In response to strong demand, we are investing in further capacity expansion across all of our U.S. studios to capture the growing opportunity we see. We are also expanding across Latin America. Live Casino is proving to be highly popular in Brazil. While our new Sao Paulo studio is under construction, we are expanding our Peru facility to meet the surge in demand and reinforce our leadership in the region. On the product side, we are building on the success of our landmark partnership with MGM Resorts International. Earlier this year, we launched a dedicated studio on the MGM Grand casino floor, bringing the energy of Las Vegas directly to online players in regulated markets outside the U.S. Along with the game show Family Feud, the studio also broadcast a variety of interactive table games, all hosted in a fully transparent glass studio on the MGM Grand casino floor visible to the public 24/7. We also introduced Vision Blackjack, a game that replicates the look and feel of a live table while operating entirely on RNG technology. Unlike traditional live dealer games, it eliminates the need for human dealers and video streaming, enabling faster gameplay, lower operating costs and highly scalable deployment. Live Casino continues to be a high-growth, high-margin vertical for Playtech. With strong performance in the U.S., expansion across Latin America and Europe and continued product innovation, we are well positioned to capture the next phase of growth in this space. On to Slide 20, where I want to highlight the growing importance of our services business, which is set to remain a key contributor to B2B revenue growth. Through partnering with over 200 licensees globally, Playtech has amassed significant knowledge on the gambling industry, including customer acquisition and retention, risk management and operational know-how. In addition, Playtech can optimize its products to maximize their value for operators. Our services have been hugely valuable to partners, particularly those with strategic agreements in place. This is a key competitive advantage and an important contributor to their success. To meet strong demand, we are now rolling out our services offering to a broader set of operators, enabling a greater proportion of our licensees to benefit from optimization of Playtech's products and our marketing and operational expertise. Given our revenue share model with operators, this should act as a tailwind to revenue growth, providing a win-win model for both Playtech and its licensees. Finally, Slide 21, where I summarize Playtech's investment case. Playtech has clear levers for medium-term growth. In terms of geographies, we see the greatest opportunity in the Americas, most notably the U.S., Brazil and Mexico. From a product perspective, we expect Live Casino to be an increasingly important contributor. Given the significant investment across these areas and our ongoing work on operational efficiency and addressing underperforming businesses, the foundations are in place to achieve our medium-term adjusted EBITDA and free cash flow targets. We own highly valuable assets such as our stakes in Caliente Interactive and Hard Rock Digital. Both of them, along with our other assets, occupy strong positions in their local markets, and we see significant potential for them to continue increasing in value. Our strong balance sheet provides the flexibility to pursue both organic and inorganic growth opportunities while also supporting future shareholders' returns. We are confident in continuing to deliver shareholder value over the medium term, and I'm really excited about what is in store as we embark on the next chapter at Playtech. Thank you all for listening. Chris and I will now be very happy to take any questions you may have. And a quick reflection on the age, right? So I just turned the glasses. I just turned 50 two weeks ago, a big milestone for me. And I just celebrated my 20th year anniversary with Playtech. So you should all go easy on me. Unknown Executive: So just moving on to Q&A. So we'll first take questions from inside the room. And then once all of those are exhausted, we'll then move to the conference call line and take any questions there. David Brohan: David Brohan from Goodbody. Three for me. Firstly, on the live from Playtech product. Is there any KPIs you can share on how this has performed versus comparable games in your Live business? And then on the SaaS business, another very strong period of growth. How long do you think the future runway of growth is in that business? And then finally, on the U.S., any kind of sense on timeline for the U.S. to get profitability? Chris McGinnis: The first one, David, can you repeat that live comparable? I didn't catch. David Brohan: Yes. So just any KPIs you can share on how customers -- customer metrics look on your Live from Vegas versus your other Live product? Chris McGinnis: Yes. I think the Vegas one, it was interesting. It was a new concept, right. And we were, I think, both MGM and us quite excited about it. Obviously, it's -- we're still ramping it up. And I think 12 months ago, when many of us were at G2E in Las Vegas, we had a couple of tables operational at De Bellagio and a couple at MGM Grand, which were dual play. But in recent months, we've opened the whole studio in the MGM Grand. And in parallel to all of that, we've been ramping it up with customers and rolling it out. Obviously, it's not available to anyone in the U.S. but it's being broadcast elsewhere. I think we had modest expectations but the KPIs have probably surpassed our expectations. It's still modest. I would describe it as a new adjacent product in terms of innovation and offering something new and a key part of what we're doing. So I think the KPIs are probably better than expected. However, overall, I would say, in terms of impact, it's relatively modest and you look at the 400-plus tables we have across the whole business, and you're talking relatively small number. But nonetheless, it's something we've been quite excited about. Mor Weizer: If I may just [ elaborate ] further, I think that it's too early to suggest and quantify it, right? I think that what we do see is a very strong demand by various operators that decided to take the product. You have to understand that when you roll it out and we indicated that it is for online customers outside of the U.S. in regulated markets, which means basically that we need to go through the certification and licensing in each and every country where we would like to offer that because it's a new product streamed from Vegas. We see strong demand for customers. The pipeline is there already secured. We are rolling out in different territories. And I think that we will be -- sometime next year, we'll be in a better position to quantify that but it's looking very, very encouraging. We are very excited about this opportunity as evidenced by the increased investments further extending the relationship to Family Feud game show and additional tables. So very encouraging, yet too early to quantify, still small in size, given that it's early stage, early days. On SaaS, maybe I'll pick up -- I'll continue with SaaS. We still believe that there are a long list of -- there is a long list of customers that will onboard onto our product. We use now SaaS not only as a model for small, midsized operators but also certain operators such as in the U.S., such as in Brazil, the long tail in each and every country, in each and every regulated country. And therefore, we still see a lot of demand, and we still see the pipeline growing. Having said all that, there is also a very, very attractive opportunity for Playtech to increase market share. Today, Playtech represents less than 5% on average, Playtech represents less than 5% of the overall market share for the small, midsized operators. If we only double that to become 7% or 8% or double it to 10%, we double the business together with the existing customers. So it's horizontally to additional customers in additional territories where existing customers extend together with us to additional countries, such as Brazil is a good example, even in the U.S. And beyond that, obviously, vertically where we can grow together with them and grow the market share of Playtech, we are developing -- we developed earlier this year an entire program of campaigns, working together campaigns, including promotions together with the operators to expose the Playtech portfolio within the portfolio that they had before. Remember, these are small, midsized operators. Some are also big operators, and they never had Playtech. It's for the first time they have Playtech, and we now work together with them on a program to expose Playtech, expose it to end user customers. And this is why we believe that it still has a lot of potential going forward. Chris McGinnis: Then on U.S. profitability, it's a bit of a -- to be honest, it's a bit of a moving target but that's a positive. In that what we're seeing in the U.S. is as we build the infrastructure, which is largely Live Casino but more than that but a big majority of the investment is Live Casino, both CapEx and then OpEx to run these facilities. As we're building and expanding, it's just leading to more demand, which then requires more building and expanding. So if we stopped sort of expanding, we could probably get to a breakeven in profitability in, I don't know, 18 to 24 months. However, that would not be the right thing for the medium to long term for Playtech. So at the moment, what we're seeing is a demand and we're sort of trying to keep up with it, to be honest. So that requires more investment. So that's going to delay profitability. So at this point, it's probably a few years away for being honest. But again, it's a very positive thing because we're seeing a lot of demand for our products in the U.S., particularly Live. Roberta Ciaccia: It's Roberta Ciaccia from Investec. So I have 3 questions on the same subject, actually. Sweepstakes in the U.S., there's been a lot of noise on the press regarding the court case in California. Other companies have been involved or haven't been mentioned but I wanted to know if you can. Firstly, if you can quantify what is your exposure to that business? Secondly, which states you actually operate in? And third, what is your position going forward? If you're doing it, do you want to keep doing it? Or will you select state by state? What's your view going forward on that? Chris McGinnis: I'll take the first part on quantifying it and then the rest to Mor. On quantifying, I mean, overall, we see it as immaterial. But just to give you a bit more color around that, circa 1% of group revenues or single-digit millions kind of amount on a revenue basis. So a small amount that we largely consider immaterial. Mor Weizer: Yes. And I'm happy that Chris started because he put it into context, right? It's 1% of overall group revenues. I will say that we always took a conservative approach. And this conservative approach meant that we only worked with a very selected few operators of size that we knew obtained certain legal advice alongside Playtech in only selected few states. So from the outset, Playtech has not been involved in many of the states that some other operators do operate in and other suppliers supply their software and services into. Our approach is very conservative. We monitor the developments. Our models in each and every state is somewhat different. I won't get into the individual states. There is a list, not a very long list, by the way, left. And we obviously take a very conservative and prudent approach towards sweepstakes. We were one of the first to pull out of California, even ahead of anything happening there. And -- but this is the nature of Playtech. Sometimes you pull out of the market. Sometimes you buy into Hard Rock Digital before the market is regulated when there is still certain -- obviously, certain concerns about whether Hard Rock will be able to operate in Florida. And I think that it's the natural development. Putting it back into context, it's 1% of revenues. We take a very conservative approach. We will follow the fluid -- the changing and fluid regulatory environment in the United States. And we will continue, and this is the most important thing, we will continue to further establish ourselves in the regulated states across the U.S. with the largest and leading online gaming operators, and this is our focus. It was the focus. It is the focus and will remain the focus going forward. I think it's evident by the growth, the 100% growth in the U.S., 300% growth in Live Casino. We only just started. And I think this, alongside the fact that it's only 1%, puts it in context and our approach to the U.S. and the activity in the U.S. altogether. Roberta Ciaccia: Can you just confirm these revenues are classified under unregulated revenues? Chris McGinnis: Yes. Mor Weizer: That is correct. As was Brazil before it was regulated, even though many refer to it as regulated. James Wheatcroft: James Wheatcroft from Jefferies. Just a couple from me, please. Firstly, just in terms of capital allocation, like a sort of newish slide. What would you be comfortable with in terms of leverage going forward, either for buybacks or M&A? Secondly, just in terms of U.K. tax discussions, have you got a view on what we should expect and the implications for Playtech? Chris McGinnis: Yes, I'll take the first one on capital allocation and leverage and then more can touch on U.K. regulation. On leverage, and this is -- there's no change. This is what I've said in the past but I see it more as a medium-term sort of target and not something we would look to get to immediately. But 1x to 2x net debt to EBITDA is, I think, where we feel comfortable operating. Obviously, the numbers you've seen today, we're in a net cash position, so it's very underlevered. However, I did flag some of the liabilities that sort of aren't captured in that number, which takes us to a small net debt position. But obviously, that gives us flexibility to increase leverage. I think we would do that in a measured way, not in one fell swoop but it's something I think we will look to do over time is to get that leverage back to a probably more efficient level. Mor Weizer: And the second question was the implication of the tax reform in the U.K., right? James Wheatcroft: And maybe if you have a view around what you think that might be? Mor Weizer: I don't think that we have a view. Remember that we are one step removed. We already adapted to any changing market conditions, including changes of regulations, regulatory changes as well as tax increases. However, I will say that we truly think that it is -- it's important that the government engage with the operators and understand the implications of such increase in taxes. We understand policymakers. We understand the fiscal pressures. However, sometimes there are some unintended consequences. You take the Netherlands, for example. What happened in the Netherlands, they increased the taxes and it pushed the industry towards illegal activity. At the same time, it created a shortfall in tax receipts of EUR 200 million. So sometimes there are some intended consequences for increases in tax I will add that it's not yet clear because we have gone through certain changes in other territories. However, we also changed from the -- we also experienced that in the U.K. when they first introduced the tax. And I can say that it's not yet clear how it will evolve and develop because sometimes what happens, like I said, some go to illegal, but the government -- the U.K. government has a better enforcement approach in the market but it does lead to operators leaving the market because it's not sustainable for them. And in this case, the type of customers that Playtech has, i.e., the largest and leading operators in the market, as a matter of fact, may over time benefit from an increase in tax. So increase of tax is, by definition, not a great thing day 1, may have unintended consequences but the longer-term implications are not yet clear for certain type of operators, i.e., the leading and largest, which are the type of operators that Playtech has. Ivor Jones: Ivor Jones from Peel Hunt. Happy birthday again. Mor Weizer: Thank you very much. Ivor Jones: I'll speak clearly. You talked about cost cutting. You talked about, I think, cost growth in the first half of around 2%. Can you just help us give some way of scaling what the cost-cutting potential is within the plans to increase investment in certain parts of the business, that building block towards the EBITDA target? Secondly, Brazil more, you talked about hoping to sign up another big licensee. With and without that licensee, is there a way of you talking about your percentage share of the Brazilian market? We can make a forecast of the total but what do you think your share might be of your part of that market? And then last one, following up on David's question about the U.S. It sounds like it's like a fully costed local business. So does that mean its mature margin is 20% EBITDA? Or is it drawing on a lot of group costs and it's a 40% or 50% contribution type of business? How should we think about scaling that opportunity? Chris McGinnis: Yes. So I can take the first and the third and Mor can take the middle one. Cost growth and cost cutting, I think when you -- if you look at the slide in the appendix, the numbers won't be exactly like that every time. But I think that's sort of our goal going forward in that. What you don't see in those numbers is that we've removed costs from the business. So costs have gone down. So you can see the lines like operational costs, things like that are generally flat. However, Live, an area of investment, you can see a significant increase in cost because we're still investing. And all of that together leads to a relatively modest increase in overall costs. So we're -- we took -- in 2024, we took over $20 million of costs out of the business. Again, cost overall still went up a little bit in 2024 but there was a, I'd call it, a significant amount of cost cutting that happened. The year is not over, so I won't give a number in 2025 but we've taken further costs out of the business but then continue to invest in other areas. One thing that I think is a given is the underperforming businesses that I flagged that have been a drag. Whether you consider that cost cutting or not, it's an underperforming area, which is a drag on EBITDA, and we will address that. We will not be sustaining $20-plus million of EBITDA losses indefinitely. Obviously, we've talked about the HappyBet business, and that's being addressed, and we're in that process, and we started processes around other assets as well. So that's an easy one to say that, that in the future, that $20 million of loss will not be there. Maybe just since I'm already talking, I'll jump to U.S. margins and more. So in U.S. margins, I think they will be lower than group margins. For the main reason, it's Live Casino and you have to build live casino facilities in each -- not necessarily every state but West Virginia is allowing you to use facilities in the other states. But the big states so far, New Jersey, Michigan and Pennsylvania have required you to have facilities in state. And obviously, Live Casino is a scale business. And you look at our facility in Latvia, Romania, some of the big ones, we can serve from there, many, many locations around the world. So you get a lot more operating leverage and scale benefits out of those facilities. The U.S., the way it's at least gone so far, it's not the same model, right? You need to build multiple facilities. So that will put a cap on margins, so to speak. So without putting numbers on it, I do think U.S. margins over time will probably be a bit lower than, say, some of the group overall. But that being said, the U.S. margin -- sorry, the U.S. opportunity is so significant, and we're so underpenetrated there still from a market share perspective. that, yes, maybe margins will be a bit lower than the group but the magnitude of the opportunity there for Playtech, it can be one of our largest markets over time. So we're as convinced as ever about the investment we're making in the U.S. Mor Weizer: Yes. On Brazil, as you know -- not probably, as you know, the market has turned into a regulated market in the beginning of the year. They introduced the strictest onboarding process and the strictest set of regulations worldwide, more than the U.S., which had a severe impact on the operators. Some operators saw an impact of 20%. Other operators saw an impact of 70% on their business. However -- and this is why we were very focused in the first 4, 5 months of the year in order to ensure that our software and our platform will accommodate the new onboarding requirements, and we'll do that at the best -- and we'll do that in the best way. Today, Playtech customers onboard fastest in the market. It's being measured every month. And within 4 to 5 months, not only we improved it, we are now market leaders in terms of the onboarding process in Brazil. Given the fact that the numbers are picking up, the levels of GGR that we see -- we saw in August is at the same level we saw before regulations were put in place after the market went backwards significantly. Remember that there is tax involved. So there is -- I'll be very open and say there is still a small impact from -- not small but there is still impact of the tax because it's now deducted. So from a royalties perspective, we are not yet where we need to be but it's growing. We see accelerated growth. We see all the operators improving the onboarding processes. In terms of market share, it's hard for me to estimate because we have a partnership where I know we are -- we have more than 50% market share across all content and products that are provided by the operators. And we have other operators, Betano, bet365 and a long list of other well-established operators where Playtech obviously is amongst many others, and it does not provide a platform and it does not provide sports. So we believe that our market -- our share of wallet is more 5% to 10%. I think that the way we approach it now that we -- now that the market is stable and growing fast, the way we think about it is growing organically with existing customers, extending to new customers that are not yet our customers or that we already secured an agreement with but have not yet gone launched -- or have not yet launched, sorry. Extended the relationship that we have with the group of Galera.bet, which consists of today 4 brands, right, not just Galera.bet, it includes also Luva.bet, F12 and Brazilbet. And as we indicated earlier, I can't name it as of yet but we are in advanced stages of discussions with what we believe will be one of the largest operators in Brazil. I can tell you that it's a name, it's a brand name. It's a company that I -- in my entire 20 years in Playtech, never had as many positive feedbacks about the potential of a company like that across all jurisdictions, including the U.S., just to put it into perspective. Again, we can't name them as of yet, but it's a massive opportunity for us. They have access into the market, and they are very well established in the market, not yet in online sports, betting and gaming but definitely a very significant opportunity for Playtech. So market is growing. Market has gone through the first cycle of regulatory changes that had a severe impact on the business. Now stable, fast growing. Playtech extends its reach together with existing customers, new customers, partner -- its partnership structured agreement with Galera.bet and hopefully soon, a new agreement that will have a significant -- that presents a significant opportunity for Playtech in Brazil going forward. Ivor Jones: Is the new relationship potentially another 2% on top of your 5% to 10% or another 10% on top of your 5% to 10%? Mor Weizer: What do you mean the 2% to 5%, sorry? Ivor Jones: You said maybe you thought roughly your market share of operators in Brazil? Mor Weizer: In certain operators in the largest well-established operators like the Betano, bet365 and others, I believe that Playtech is 5% to 10%, right, for each, right, amongst them. For the -- for Galera.bet, for example, given the fact that we work together, they use our PAM+ as part of their infrastructure. They have our sports. So they onboard through sports, they onboard through casino as well but a lot of the customers come from sports and then convert to gaming. Playtech has a 50% market share -- 50-plus percent market share. With this customer, I believe that Playtech will have a significant share. Ivor Jones: I understand now. Sorry, I didn't understand the first answer. I was trying to understand Playtech share of the whole Brazilian market. I think you're answering about Playtech. Mor Weizer: Yes but it's very hard to estimate. I need to do the -- I don't have it out on the top of my head. I apologize because I need to calculate the 50% of Galera.bet and its share within the market. And then the operators that we have the 5% to 10% of those we operate with, those that just launched, those that will be launched and then this new opportunity. But I think that the way I described it just indicates and is evident -- it's evidence that Playtech is -- why Playtech is so excited about Brazil. I will come back to you. I'm not trying to avoid it. I simply don't want to give you a number that I can't stand behind, right? So I'll do the calculation. And hopefully, by the end, later this year, we will have a clearer view because the numbers are also changing. Remember, some of our operators tripled over the course, those that went down 70%, right, tripled the business since the beginning of the year to date, right? So a lot of changing -- a lot of moving elements there. I will come back. I'll try to come back with some answers, so you can also model that, and we will try to be as helpful as possible in this matter. Richard Stuber: Richard Stuber from Deutsche. Two questions, please. One on of Caliente and another on Brazil as well. In terms of Caliente, you mentioned that they may be looking to expand outside Mexico. Are they a well-recognized sort of brand or have any sort of presence outside at the moment? And in that case, would you expect them to have to sort of invest quite heavily? And consequently, do you expect any impact on potential of dividend and payouts? Or do you expect dividend and payouts to continue to grow despite them having to invest in new markets? That's the first question. And in terms of Brazil, just to follow up what Ivor was saying. Is this new partner, which you will be announcing shortly, is that going to be more of a structured agreement? Or is it more just kind of a rev share, is it? So -- and would you expect over time to outperform the Brazilian growth market, so to grow more than 15%. So given your positioning at the moment in terms of in some of the larger names but partners with some of the smaller names, do you still expect to grow more than 15% over the next sort of 5, 10 years? Mor Weizer: Okay. So on Caliente, I will say that Caliente is a very well-recognized brand also outside of Mexico. They do a lot of marketing activities that are picked up by different neighboring countries. There is also one other or 2 elements that are kind of almost one and the same, and it is the marketing. You have to understand when people -- when someone advertise on ESPN, ESPN has a certain -- just as an example, right but it's the same for other media providers. Certain media providers are shared among certain countries, clusters of countries across Latin America. So when you advertise on ESPN, it will be picked up by definition. Caliente advertise on ESPN on a certain video stream, it will be picked up by all the audiences in the countries that ESPN streams into. And therefore -- and this is why not only not only it will be picked up, but it will be alongside people that follow the Mexican league. So some people will follow the Mexican league but you can argue that certain people in Peru will not follow the Mexican league. But the countries that they are looking into share the same media channels that they already use and invest into. And therefore, by definition, the end user customers are exposed to the brand Caliente. And this is part of the approach that they take when they select where it is best for them to establish themselves, also, obviously, the competitive landscape, the market entry point, market access, licenses, et cetera, et cetera. Has this answered the question? Richard Stuber: Yes. I guess the question is if they have to -- normally, when you enter a new market, they'll be of loss-making for a short time. I guess it's very cash generative in just Mexico at the moment. So will that impact your... Mor Weizer: One of the Yes. So I will say they look at the competitive, they look at the development of the market, right, how young the market is. So Peru is a relatively new market, right? It's only just been regulated. So it's level playing field, right? Secondly, the competition, they looked at competition. They saw that they can compete well against the other competitors. Yes, it will come with certain investments into marketing, specifically into Peru, alongside certain other marketing activities that they already do that are picked up by the end user customers in Peru. But they believe and we strongly support their view that they have more than a fair chance to become one of the leading operators in Peru. They will all operate it centrally from their existing operations, obviously. So there are some operational leverage there. So altogether, it answer it ticks all the boxes for them in terms of licensing, the development of the market, the competitive landscape, the marketing being used already, and the marketing investment they intend to allocate to the -- for the Peru market. Chris McGinnis: And maybe just to add, I think you were getting at financial implications. I think they -- I think they're going to be relatively modest in entering these new markets. So they're not going to come and be uber aggressive with marketing spend to the point where it's going to impact our share of income drastically or our dividends, right? There may be an impact or maybe you wouldn't see the same level of growth. Remember, there's still growth to come in Mexico, as more outlined on his slide. So I think they can balance continued growth and use some of that for expansion in these other markets without having a very material impact. Mor Weizer: Yes. On Brazil and the 15%, right, 15% is a big number. So I don't want to get ahead of myself and commit to more than 15%. However, I truly believe that we laid the foundations for accelerated growth that potentially can be more than the 15% or the market growth. If the market grows at 15%, that Playtech will be able to grow vertically with existing customers, horizontally with additional customers, alongside that with Galera.bet Group and alongside that with this potential customer of Playtech. I think that when you add all of that together, Playtech has the potential to exceed the market growth, whether it is 15%, 17% or 12%. But I'm not yet ready to commit. Once we announce, I believe that we will be in a better position because it will be another building block, which will be significant, which brings me to the second part of your question, whether it is a structured agreement. Structured agreement is -- the definition of structured agreement for us is the combination of software and services. So you can argue that it's structured agreement, but it will likely not be equity -- involve equity or an option for equity. It will be a very comprehensive relationship that will involve software and services that is very lucrative and attractive for Playtech. Unknown Executive: Are there any more questions in the room? Harvey Robinson: Harvey Robinson from Panmure Liberum. Just a quick question in terms of going forward in terms of disclosure and KPIs as you become more software and services again. Have you got intentions to give us much a feel for where gross margins would be on a more traditional basis? Would you be looking at things like net retention and churn that we would look in software? Are those things you might start talking to over time? I don't expect it to happen overnight but... Chris McGinnis: Yes. I think disclosure as a whole without necessarily referring to the specific KPIs you mentioned, Harvey but disclosure as a whole, I think is something we're looking at. It's something, I think, as any company evolves, your disclosure and KPIs you provide needs to evolve as well. And obviously, Playtech this year, in particular, has undergone significant change, kind of as Mor said, back to our roots as a B2B technology provider. So I think looking at the KPIs we provide and if there's -- are the ones we're giving now the right ones? Are there any additional ones? Or is something we do need to consider. And even just looking at our B2B business, it has changed a lot in recent years with SaaS that we've talked about. So I think alongside that, we need to keep looking at which KPIs we provide. And some of the ones you mentioned are certainly ones we'll give strong consideration to. Mor Weizer: Yes. I don't want to put Chris on the spot here but I will be keen to develop the conversation. I think that is extremely important now that we move back to our pure-play B2B status. I think that once people will understand the barrier to entry, the stickiness of the Playtech products as well as the low churn rates, I think that people will start understanding better the quality of the offering of Playtech, which will value -- which will allow people to value the relationship. Some of our relations -- I joined in 2005, like I said, 20 years in Playtech. So -- and I remember having -- I remember bet365 back then, right? And Betano is a customer from day 1 and still is the case. And so -- and it is the same with Betfred and the Tote that joined -- now the Tote is part of Betfred that are customers of Playtech for the last 20 years, never left us. And the same goes with other customers that joined Playtech, like I said, very low churn rates. So I'm very keen to better understand how Playtech and what KPIs will allow people to understand better Playtech and highlight the strength of Playtech because I think that there are a lot of strengths that are not fully understood, maybe understood but not fully understood by the market and the shareholders of Playtech, and it can be very helpful. It will also help us to improve where we need to improve, right? Ivor Jones: Ivor Jones from Peel Hunt. Can I go back to Rich's question? Is there cash sitting in Caliente to fund investment? Because I guess we would probably both assume it would come out of operating cash but is there a cash pile sitting there to fund it? And the second thing, on Slide 24, when you show adjusted EBITDA, excluding the Caliente impact, and you get to EUR 61.9 million, is that taking out the contribution in the first quarter from the old arrangements but not adding back in pro forma what you might have got under the new arrangements. Is it quite a hair surety number? Chris McGinnis: So the first part in terms -- so the first part of your question, they keep working capital. And now that can change if they're -- not that they've done an M&A but hypothetically, if they were doing small M&A, they could keep a little bit extra cash for a period. But generally, they keep a few months of working capital in line with the shareholder agreement we have in place. So they're not sitting on loads of cash or anything like that. They generally return it other than sort of a few months of working capital needs. In terms of the Caliplay numbers, maybe we take it offline and we can walk you all through it later, Ivor or anyone else. But generally, we've tried to adjust both numbers to make them apples-to-apples so that you can see the trend in the numbers on a like-for-like basis. But let's maybe take that offline, and we can walk you through it step by step. Unknown Executive: If there are no more questions in the room, can we move to the conference line and see if there are any questions from there that we can take. Operator: [Operator Instructions] We have a question from Andrew Tam with Rothschild & Co Redburn. Andrew Tam: Just one question for me. Could we get some more color on your unregulated exposures? So on my numbers, there's about 19% of group revenues in unregulated, and we've heard U.S. sites is just 1%. Can you give us some more color on where the other 18% is? And then second to that, can you give us an outlook on what you expect to happen to those unregulated revenues? Do you expect those to shrink? Are you actively shrinking those? Is that a part of the market that will be increasingly less of a focus over time and just naturally shrink by attrition? And then finally, I just wanted to think about, I guess, what are the longer-term impacts on that? Do you regard those exposures to be higher margin? And what do you think will happen as that shrinks? Chris McGinnis: Yes. So unregulated, I'll run through some of the numbers. I think our percentage might be a little bit higher than what you suggest, Andrew, particularly if you include Sun Bingo and HappyBet, which are fully regulated. So I think it's -- we're well into 80% being regulated. So a relatively small amount unregulated certainly compared to others in the industry. Unlike perhaps in the past at Playtech, we don't have a very high degree of concentration in any unregulated market is quite a long tail. But to give one example, one of the biggest is the unregulated parts of Canada. So obviously, Ontario and Canada goes under regulated but the other parts of Canada are unregulated. And I use that as an example because that's the type of unregulated markets we want. Similar to Brazil, which last year was an unregulated and now it's regulated, we expect further parts of Canada to regulate. So I wouldn't use the word attrition that you sort of used in your question, Andrew. I think it's more -- it's our strategy. Our strategy is to focus on regulated and soon-to-be regulated markets. So you'll see this transition over time. And yes, unregulated should go down, but it's not about us necessarily targeting to exit or reduce it. It's us targeting markets that we expect to regulate. So they'll stay in unregulated. Sometimes these unregulated markets grow like Brazil did in advance of regulation. So you might see it go up in a period but then it will take a step down when it moves to unregulated. So I think that's the way to think about unregulated both numbers and sort of how they fit into Playtech. So they are not a focus other than markets that are unregulated where we see a path towards regulation. So that's what we focus on. But there's no particularly high degree of concentration there, like I said, and it's markets like the unregulated parts of Canada, I think that make up most of that with a relatively long tail of different jurisdictions. Operator: We now turn to [indiscernible] with DNB Carnegie. Unknown Analyst: I just have one. Have Playtech or anyone affiliated with Playtech procured the so-called short report on Evolution AB written and released by the Israeli company, Black Cube back in 2021. Mor Weizer: I'm not sure what was the question. Unknown Analyst: Had Playtech or anyone affiliated with Playtech procured the so-called short report on Evolution AB written and released by the Israeli company, Black Cube in 2021? Mor Weizer: Obviously, we can't -- it's nothing -- not a question for us. It's a question for people involved in this matter. Operator: We have no further questions. I'll hand back to the speaker team. Unknown Executive: Right. If no more questions yet, that's it for now. So I'd just like to thank you all for attending, and the team will see you in 6 months for the full year results. Chris McGinnis: Thanks, everyone. Mor Weizer: Thank you.
Nicola Fiore: Good afternoon to everyone and welcome to EL.En.'s Half Year 2025 Financial Results Conference Call. Today's call will be recorded and there will be an opportunity for questions at the end of the call. With me on the call are Andrea Cangioli, EL.En.'s CEO; and Enrico Romagnoli, EL.En.'s Chief Financial Officer and Investor Relations Manager. Before we begin, please note that there are management remarks during the conference call regarding future expectations, plans, prospects and forward-looking statements. Certain statements in this call, including those addressing the company's beliefs, plans, objectives, estimates or expectations of possible future results or events are forward-looking statements. Forward-looking statements involve known or unknown risks, including general economic and business conditions in the industry in which we operate. These statements will be affected if our assumptions turn out to be inaccurate. Consequently, no forward-looking statement can be guaranteed and actual future results, performance or achievements may vary materially from those expressed or implied by such forward-looking statements. The company undertakes no obligation to update the contents or the forward-looking statements to reflect events or circumstances that may arise after the date hereof. [Operator Instructions] But at this time, I want to give the floor to Andrea Cangioli. Please go ahead, Andrea. Andrea Cangioli: Good morning. Thank you, Nicola and thank you, Bianca, for introducing this call. And thank you, everybody, who's attending, for being with us in this call following the release of our financial report as of June 30, 2025. Enrico Romagnoli will be on this call with me and I thank him for taking care of the details of our financial reporting that he will be sharing with you in a very short time. The numbers are out since last night. So you have seen that our performance in the 6 months was good in revenue generation. Revenues exceeded on a consolidated basis to EUR 285 million, up more than 5% compared to the same period in 2024, meeting our guidance and confirming the positive trend of the first quarter. The goal of overcoming 2024's result wasn't met at EBIT level. EBIT result was, in fact, quite strong, reaching EUR 34.6 million, meaning 12.1% EBIT margin but was lower than the EUR 37.2 million of the corresponding semester in 2024. While by slightly exceeding the initial expectation given the overall condition of the economic environment, the medical sector delivered an excellent performance. Revenue growth in the industrial sector was weaker than expected and its lower contribution to consolidated EBIT constitutes in full the delay of 2024-'25 consolidated EBIT versus last year. When I mention the overall economic conditions, I am referring to an overall climate of uncertainty in international relations stemming primarily from the failure of international diplomacy to bring to an end the wars in Ukraine and Palestine and from the trade war initiated by the U.S. administration that is reshaping the trade relation and also the political relation between the most powerful countries in the world, including Europe. While the wars are now in place from so long that notwithstanding the risk of further escalation, the markets are acting like they are accustomed to this status. The trade war for the time being is impacting on our business, making it more expensive to sell our products in the U.S., making it less profitable due to a weaker U.S. dollar and also inhibiting the reduction of interest rates in the U.S. due to the expected tariff-driven inflation. We disclosed before how interest rate and expectations about the change of interest rates impact on our capital goods market, where our customers predominantly fund their investments with debt and therefore, are helped in their investment decisions by lower interest rates. Of course, the conditions in our specific markets are affected by this general situation and are confirmed by the business trend of the financial results that are available concerning certain competitors of us. Below the EBIT line, all the entries -- I'm talking again of the consolidated financial results of the EL.En. Group and below the EBIT line, all the entries contributed to widening the gap between the results of 2024 and the result of 2025. Foreign exchange rate differences hit financial income for roughly EUR 3.5 million. The contribution of the Chinese activities on the verge of being divested and sold was a EUR 4 million loss in 2025, worse than the EUR 3.2 million loss contribution booked as of June 2024. And we finally had in 2024, a EUR 5 million extraordinary income booked as a remeasurement of our financial debt no longer due at the time, an entry which, of course, could not be replicated in 2025. So what the very bottom line is showing, a wide gap between the EUR 27.3 million income of 2024 and the EUR 17.9 million income of 2025 is not adequately depicting and reflecting our current performance. But rather than on this gap, which is mainly generated by uncontrollable events or by area of business, which are not part of the group anymore at the Chinese facilities, I want now to concentrate on the remarkable achievements that we met this year. First of all, revenue and EBIT increase in the medical sector. Both were up by more than 5% and this is the envelope results of a set of more specific achievement and successes. With the release of the Magneto urology laser system in late 2024, the leadership of Quanta System in the laser devices for urology application was confirmed and strengthened. Almost 900 urology system, including TFL lasers as well, I mean TFL or the fiber laser source-based systems, those not only including solid-state lasers like the Magneto, were delivered in the first 6 months of 2025, exceeding EUR 35 million in revenues. And as the installed base increases and also the manufacturing capabilities of our plant in Samarate are progressively moving upward, the revenue for the sale of sterile optical fibers, the consumable needed for each and every surgical procedure materially increased, exceeding EUR 20 million in the 6 months with close to 180,000 delivered fibers. As demand in our main aesthetic application segment, hair removal, is experiencing progressive softening throughout the last years, we concentrated our efforts on one side in improving the performance and effectiveness of our laser hair removal systems in order to fight the market slowdown. And on the other side, we concentrated in improving the performance and effectiveness of our systems and technology dedicated to anti-aging procedures and in providing them an adequate marketing support. I'm talking of technologies which improve the appearance of the skin, removing smaller wrinkles which stimulate collagen regeneration, providing shine and elasticity to the skin, which are tightening the skin, providing remedies to laxity, which are removing redness from the face and from the [indiscernible]. I am talking of RedTouch PRO and Onda PRO by DEKA, of Discovery Pico by Quanta and TORO by DEKA and of the CO2 laser product range, including Tetra PRO by DEKA and [indiscernible] laser by Quanta System. As I said -- as said, revenues stemming from these application domains sharply increased in 2025, offsetting the softer demand in other disciplines. Even if the overall performance in the industrial sector wasn't successful nor satisfying, especially due to a soft demand in the manufacturing markets in Italy, we can count several activities that in these 6 months set the foundations for a marked improvement of the ability to compete of our companies. The Chinese business, which was not contributing anymore to the performance of the group, has been sold and is not constituting a burden for management and financial resources anymore. The European subsidiaries network started up by LASIT in the market domain in the last 2 years is stabilizing and becoming an increasingly reliable source of revenue, also contributing to profit at least for the older subsidiaries. A similar pattern is now pursued by Cutlite Penta, which in rapid succession incorporated 3 subsidiaries in Poland, Germany and Spain, which for the moment are obviously weighing on expenses and on EBIT but we count on them being soon accretive in profit generation. Cutlite gained control of [ Nexam ], a small company based here around Florence, specializing in the manufacturing of automation systems that are strictly complementary to Cutlite's high-power laser sheet metal cutting systems. When jointly installed with the laser system, automation system by [ Nexam ] improve the overall performance and productivity of the laser system, providing to Cutlite a means of differentiation on its very competitive market through increased performance of the system and more extensive customization ability. Cutlite is pursuing competitive advantage on one side through the expansion of the offer, integrating it with automation systems and on the other side, through an increased level of service and of proximity to the end user through the organization of local sales and service facilities. Another point I would like to mention, if you look at our financial performance, one of the worst performance in terms of financial results in the 6 months was the industrial division of EL.En., the mother company of the group. But the development work performed both on the mid-power range CO2 laser sources for special manufacturing application and also in the performance of the scanning units based on our proprietary galvanometers are promising to be the grounds for a future rebound in revenues. Under this profile, I'd like to mention that the performance of our 1.5 kilowatt RF excited CO2 laser source are currently reaching such a level of stability that we are working and counting on the release of a 2-kilowatt laser source within a reasonable time span. Such achievement will extend the maximum power of our product range, meeting a threshold that could open up several interesting application markets. Another item I would like to touch on in my remarks is cash generation. The balance of the net financial position decreased by EUR 20 million in the period. I don't see in this contingent trend any particular problem as seasonality of the net working capital balance is always unfavorable for the group in the first 6 months. And as we paid out dividends for EUR 80 million and change and booked investment for EUR 50 million, out of which 6, I would describe as midterm liquidity investments. For sure, the net financial position is one of the historical strengths of the group. It's one of the components of the wealth of the group. The other components are much more intangible and sit in the capabilities of this organization to continually evolve and innovate its high-quality product range, confirming its recognized position among the world's leading players also through several solid commercial relationships built over the years. Thanks to the uniqueness and differentiation of its offering, the group is able to maintain a high customer perception of its value, which can be defined as an excellent market positioning. Despite the macroeconomic uncertainties of recent months, the offerings of our business units remained attractive to customers, thanks to effective product development, marketing support, training and the excellent technical assistance that accompanies aftersales service in all markets. One last thing before I hand the microphone to Enrico, a comment on the U.S. tariffs. The 50% tariff, which our products are called to pay when entering the U.S. constitutes today a cost increase in the chain that delivers our product to our end users in the U.S. The tariff-induced cost increase could either be absorbed in full by our distributors that could accept the minor reduction on margins that the cost increase would represent given the high resale margin that they often apply or could, if reverted to end users, be considered marginal price increase and do not affect demand maintaining the price in a range where demand is, let's say, inelastic to price or such cost reversal to end user could push prices in a range where demand could decrease due to elasticity to price. Those are all the theoretical possibilities. Both in our industrial and medical distribution, a key element for selling in the U.S. has always been the innovative content and quality perception of the product that allow us to sell it at premium prices and margins, which means keeping the market positioning of the product in an area in which the tariff costs do not materially affect margins and volumes for our distributors. And again, this directly ties our chances to effectively sell on the U.S. market to our innovation capabilities. It is difficult today to predict the midterm market adjustments that the new tariffs will cause. As of today, the reaction of our American customer has been positive and demand fluctuation has been limited and more related to specific acceptance of single products than to the extra tariff cost. Under this profile, we have to note that the implicit tariff that the weakening of the U.S. dollar is anyway levying on our sales to the U.S. will be more effective in the second half of 2025 when average foreign exchange rate will be steadily in excess of $1.50 for EUR 1 and the presence of the extra tariff cost on our distributors will make it difficult to neutralize as we have done in other circumstances, the ForEx penalization on our margins. Please, Enrico, go ahead with your comments on the financial report. Enrico Romagnoli: Thank you, Andrea and good morning to everybody. As for the year-end, the half yearly report has been prepared in accordance with IFRS accounting standards, excluding the consolidation line by line of Chinese activities, both in 2025 and in 2024 due to the ongoing negotiation for the sale of the division in accordance with IFRS 5. The majority stake of the Chinese companies was sold on July 15. In the first half of 2025, the EL.En. Group recorded consolidated revenues for EUR 285 million, up 5.1% compared to the EUR 271 million on June 2024. The medical sector up over 5%, while the industrial sector up over 3%. Gross margin was EUR 106 million (sic) [ EUR 126 million ], up 5% compared to the EUR 120 million on June 2024, with an impact on revenue of 44%, in line with the last year. It should be noted that in 2024, the group recorded proceeds for insurance and government reimbursement relating to the damages of the flood on November 2023 for an amount of EUR 1.9 million, 0.7% of the revenues. While in 2025, Asclepion accounted EUR 1.3 million as R&D grants, 0.4% on the revenue. Excluding both of these nonrecurring income and the impact on gross margin on sales, the gross margin would have improved by 0.4% in 2025, attributable to the improved sales mix. Operating expenses increased in value and in impact on sales, mainly in G&A, R&D and IT cost and sales and marketing activities. Staff cost increased -- the increase in staff cost is due to an increase in headcounts and in salaries. EBITDA was positive at EUR 42.2 million, down 2.7% compared to the EUR 43.3 million on June 2024. And EBITDA margin in 2025 was equal to 14.8% compared to the 16% of 2024. Depreciation, amortization and provision amounted to EUR 7 million (sic) [ EUR 7.5 million ] in 2025 compared to the EUR 6.1 million in 2024. The main reason of the increase was the reversal of the provision for risk and charges in 2024 for EUR 1.6 million due to some legal disputes that were resolved more favorably than expected. Net of this amount, the overall cost aggregate is in line with the previous year. EBIT for the 6 months was EUR 34.7 million, down 7% from the EUR 37.3 million in 2024. The margin on revenue was 12.1%, down compared to the 13.7% of last year. As already mentioned by Andrea, financial management recorded a loss of EUR 2.6 million. In details, the first 6 months, the interest income generated by liquidity was EUR 1.7 million, while the interest expenses on debt was EUR 0.9 million. Exchange rate differences had a strongly negative balance equal to EUR 2.5 million. But in addition, there is a onetime exchange rate loss recorded in Q1 for around EUR 1 million, following the release of the currency conversion reserve resulting from the sale of the majority in -- with us. In other income, last year was accounted the onetime income of EUR 5 million due to the remeasurement of the liabilities related to the earn-out to pay to former minority Chinese shareholders in case of IPO of Penta Laser Zhejiang. Income before taxes showed a positive balance of EUR 31.7 million, lower than the EUR 42.3 million on June 2024. In discontinued operation is summarized the net contribution to consolidated result of Chinese activities under disposal. The negative impact was EUR 4 million compared to EUR 3 million of last year. The main reason of the negative impact in 2025 is due to the devaluation of KBF equity investment in the first 6 months of 2025. The effective tax rate in 2025 increased to 32% from 27% of last year. And the main reason for this increase is due to the nontaxability of the EUR 5 million accounted in other income last year. Moving on the analysis of the balance sheet amounts, we can see an increase in total noncurrent assets and net working capital, while the net financial position decreased. The value of ratio net working capital on sales is close with the value of last year. In detail, cash flow for the period showed a reduction of approximately EUR 20.6 million in the group net financial position from EUR 110.6 million at the end of 2024 to EUR 90 million at the end of June 2025. This reduction was also due to dividends paid by the group, EUR 18.6 million, capital expenditure for EUR 10 million in fixed assets, EUR 6 million in mid-, long-term liquidity investment, EUR 2 million has been invested in own shares. And the seasonality [ expensive ] trend of the net working capital components resulted in a cash absorption of approximately EUR 20 million in the 6 months. Regarding sales analysis, in the medical sector, system sales showed strong growth in all major segments. In the aesthetics segment, plus 3%, the very favorable trend for anti-aging application continued. Among surgical application, plus 14%, urology system continued to record significant growth in sales as performance in physiotherapy, plus 7% was also very satisfactory, thanks to the significant incremental innovation in the range of products offered, a more widespread and effective coverage of international markets, together with relaunch of sales in Italy. Sales of consumable and aftersales services remained very satisfactory, driven by the sales of optical fiber for surgical application, which kept service revenue growth to 6% despite the low of service contract revenue from Japanese companies with us whose majority stake was sold in February 2025. In the industrial sector, the cutting segment, which no longer includes Chinese companies, maintained growth of over 6%, thanks to the excellent sales result of the Brazilian subsidiaries, plus EUR 6 million of revenue in the first 6 months and the inorganic contribution of [ Nexam ], EUR 1 million, a company dedicated to the manufacture of automation system for Cutlite Penta laser system, a majority stake of which was acquired in early 2025. LASIT also performed well in the market segment with the increased weight of its subsidiaries, while performance was more -- while performance was more challenging for all of us and the industrial area of EL.En., highlighted by the reduction in revenue from sources for industrial application, after sales service revenue remained stable. For what concerns the breakdown by area, revenue growth in Italy was entirely driven by the medical sector, while in the industrial sector, despite strong order intake, which bodes well for the rest of the year, overall revenue failed to match the already poor results seen in the first half of 2024. In European markets, growth benefited industrial company, which are gradually building the direct distribution network. LASIT has branches, some of which are almost fully operational in Poland, U.K., Germany, Spain and France from 2025. Also Cutlite has just launched branches in Spain, Germany and Poland. In the European market, the sales in medical sector increase of 13%. Revenue in the rest of the world declined slightly in both sector, penalizing the industrial sector by lower demand from American markets and in the medical sector by the challenging performance of the Middle Eastern market. Andrea, please go ahead on 2025 guidance. And you'll hear from Andrea. Andrea Cangioli: Here I am. Excuse me, I was talking with the microphone off. So I will close this section of prepared remarks with a few comments on the guidance. I would like to add just a small shade of color to the very clear statements we made in the press release, the goal of beating 2024's EBIT is harder to meet given the delay that we have after 6 months and considering certain unfavorable circumstances I described earlier in the call. But we can rely on the relevant backlog of orders and as usual, on our capabilities. Therefore, within the frame I outlined during my comments, we confirm the annual revenue growth target compared to 2024. And in the absence of external factors that could hinder further order intake in the coming months, which is needed in order to reach the yearly targets, in the 2025 financial year, EL.En. aims to improve its EBIT as well. With this, we are done with the prepared part of this presentation and ready for your questions. Bianca Fersini Mastelloni: Okay. We now open the Q&A session and we have 2 analysts in our list. I give the floor to Giovanni Selvetti from Berenberg. Giovanni Selvetti: The first one is on the medical division, which is growing nicely. If I look just at the sequential trends in the Q2, I can see a sharp increase in the surgical applications but a reduction year-over-year in aesthetics. And I was wondering what's driving that. And also, if I look at your comment on the press release of Asclepion, it seems like that this is the only company within the group that is not performing. And as far as I remember, this has been like problematic for the past 2, 3 years in terms of, firstly, sourcing materials, secondly, now sales. So I was wondering what's the story there. Then on the last comment you were saying on the guidance that given the order backlog that you see, you seem confident in reaching the guidance. Is this mostly medical or it's like an improvement in the industrial that you see that apparently is based on what you were saying at the beginning, the major reason for the difference in H1. It's a mix of both. So if you can give a bit of more color on the order backlog. And the third one is probably on staff cost. I could see that the incidence of the cost of personnel is going up quite significantly year-over-year. Here, the question is more -- so what's driving this? And Enrico said it's a mix of higher salaries and more staff. Is this more, let's say, related to the hiring of salespeople for new subsidiaries that, of course, are fixed cost now with 0 revenues attached? Or it's like any different dynamics that we should be aware of? Andrea Cangioli: Okay. Let me answer your question one by one. Yes, you are right. I mean it's on paper. The revenue for laser system dedicated to aesthetic application marked a small decline in the first 6 months. And as I highlighted also in my remarks, this is mainly due to the softening of demand in our main application segment, which is and still -- which was and still is hair removal. So if we look at the single performance of hair removal, hair removal is declining. We though offset for most of the decline in hair removal with the increase in these other applications. And we are pleased by this situation also because we can hope that there will be or there could be rebounds in the hair removal. We are working for that as well. But we are also acquiring a stronger -- a progressively stronger position in those other application other than hair removal where the market is growing and is expected to grow. So this is the general picture. For what concerned Asclepion, there are 2 circumstances, I believe that in this moment are impacting Asclepion's ability to effectively compete -- not compete, to effectively perform while competing on the medical aesthetic markets. The first is that we went through reorganization of our R&D capabilities, which is not easy in this moment in Germany because even though -- because we are in a fully -- full employment city like Vienna, where, I mean, we do not have the possibility to easily access to a certain level of employees or we do have the possibility of doing it by increasing the cost. And this also answered partially your question on the staff cost. If you look at the increase of staff cost in medical, this -- part of it is coming from Asclepion, where we had a sensible cost increase due to the need in order not to have people go -- we need to increase the average salary or the overall salary cost. And the second reason why Asclepion is struggling a little bit because within the companies of the group, it is the most -- the company that mostly relies on hair removal. It has products also for anti-aging and other application historically. But its main product, the [indiscernible] star, it's hair removal as a system. So it is strictly tied to the hair removal market. Of course, we are investing to differentiate. We have a new product for hair treatment, hair, not hair removal for hair treatment, the hair that stays on the head, which is very promising in the cosmetic field. But in the moment, we are a little bit struggling, fighting this not very positive moment in hair removal. Again -- and now I jump to question #3, which is the staff cost because you give me the -- I had the opportunity to jump on it when talking about Asclepion. Asclepion is one of the staff cost increase drivers. But I need to say that the staff cost increase, especially when compared to revenues was most evident in industrial, where we're hiring all those people with the subsidiaries, where we're hiring people also for R&D and where, as I said, revenue increased but we were expecting a sharp revenue increase. And therefore, we have a higher impact of the cost of staff on revenue. Of course, when you mention the reasons for the increased cost of staff, there are several causes. One is, let's say, the response to inflation that comes with contractual agreements to increase the salaries. Another comes on the need to keep attracting people by giving salaries higher than the average and so by giving benefits, bonuses and salary increases. And the third is actually the number of employees is growing in certain activities. Of course, we get a little bit more rigid to revenue fluctuation. But if we don't hire those people and if we don't increase the number of employees for a set of activities, which not necessarily are sitting in production capabilities but more also in support capability lies in the regulatory, the R&D, we won't be able to see revenues growing. So this is the answer for the question -- to the question for staff cost. Finally, back to your question #2, Giovanni, the backlog. Yes, we are pleased with the overall backlog, both in medical and in industrial. The backlog is stronger than in other phases, recent phases we experienced recently, both in the medical and then the industrial. Then you must know, we already -- we always told you that typically, only a very small part of our backlog of our order books is secured. Therefore, we have orders to deliver but -- and the customer need to confirm at the moment that we deliver their willingness to pay the delivery. And so the order books is a very good key indicator for the health of our market. But as I mentioned on the press release, as I mentioned also in my remarks, of course, we need this tension in demand. I mean, this positive tension in demand to be maintained over the period in order to have the confirmation that all the order backlog is converted into sales and is converted into sales within the end of the year in order to contribute to the revenues that would make the yearly revenues increase and by leverage effect would improve the EBIT with respect to the first 6 months and also with respect of the previous year. Giovanni Selvetti: Okay. May I have a follow-up on the hair removal and then I'll get back in the queue and then if there's enough time, ask a few questions after. On hair removal, is -- well, you said that partly it's Asclepion that is not performing, which is tilted to hair removal. Is it also due to Cynosure partly, because the sales going maybe to Cynosure are declining on the back of the new, I'd just say... Andrea Cangioli: Yes, I didn't want to mention it because it was like trying to find excuses and not finding excuses and saying what happens. You're right, Giovanni. Part of the decline in hair removal is due to the fact that Cynosure new property, new management is basically discontinuing the product line, Elite iQ because they will source similar product from their Korean partner, Lutronic. And you're right, part of the decline in hair removal is due to the missing Cynosure relation. But as this is relevant because it represents probably more than half of the decline in the 6 months of the revenues in hair removal and it doesn't cover in full the decline and therefore, the general trend is there anyway. Bianca Fersini Mastelloni: Next -- the next -- we have another question comes from Carlo Maritano. Carlo Maritano: Three questions from my side. The first one is again on the industrial sector. If I look at the geographical breakdown, I see that the main reason is Italy, as you previously mentioned. I was wondering if you -- what's the reason given that last year was already weak, is still Industry 5.0 that is struggling or if there is any other reason that you think are the reason of this weakness? The second one is on the medical business. If I look at the geographical breakdown, I see rest of the world in the second quarter it is a little bit weak. I was wondering if it is related to the consolidation of -- with us or if there are any geographical area that is struggling. And the third one, I know that laser sources are quite a small business for you, but I see that in this period, they are struggling. So I was wondering what's happening in this division and if you think that will improve going on. Andrea Cangioli: Thank you for this question that gives me the opportunity to treat with a little bit more detail, something which I didn't want to, let's say, be too long in my presentation. Yes, the industrial market, the market for manufacturing in Italy hasn't had a very strong rebound. We are seeing a positive buildup on the order books but we have been quite struggling, both in the cutting and also in the laser marking, in both situations. So we count now on a recovery because you're right, we are comparing to a weak year and being weak again and we really counted on a rebound. And this is -- when I say that we were expecting a stronger rebound, I'm mainly referring to the Italian market in the industrial. Second question is rest of the world in medical. What happened in the second quarter with us? I was trying to peak into the numbers and to see if with us -- of course, with us is part of the decline because we don't have with us revenues anymore. But well, I wouldn't say... Enrico Romagnoli: 2024 -- in 2024 the -- can you hear me? 2024 revenues by -- with us are EUR 5.6 million, while in 2025 are EUR 1.4 million because we consolidated only until February. So the difference is EUR 4 million, EUR 4.2 million. Andrea Cangioli: So yes, we had this difference, then we had Cynosure that Giovanni Selvetti mentioned. We just to be -- I mean, give you some more information, we had an excellent performance in Far East. I mean, in all the -- we had an excellent performance, weaker in the United States. And of course, Japan is missing with us, while Japan is building up nicely in the other medical applications after a low point in 2024. The third question was -- you had another question, Carlo. Enrico Romagnoli: Laser, laser sources. Andrea Cangioli: Laser sources. Yes, yes, yes. We experienced a very difficult transition phase because we have a large part of the lasers, which are dedicated to textile. You know that we sell laser sources for stone -- for the laser stone washing of denim. The whole market of clothing has been struggling, as you know, from the luxury brands to the more standard brands. And we are being hit by this kind of stagnation in the textile and clothing market. We had interesting cooperations in other 2 segments, one which we feel is still very valid, which is digital converting. So it's the packaging, the automation in the packaging industry. And we had a very important cooperation, which hopefully is down to a low point again with an Israelian company. It's a listed company, which quite unexpectedly filed for bankruptcy in the first quarter. So not only we lost the expected revenues but we also booked a loss, which is booked into accruals, the accruals line, so below EBITDA line for about EUR 450,000, I mean. So this is impacting heavily EL.En.'s division for laser sources. And the other segment in which we were counting to work is the electric motors manufacturing. But again, since our customers are based in Europe, mainly in Europe, also this market for what concerns European demand is quite struggling. And also some of our partners are not in the most -- in the best shape, our final partners because we are manufacturing, we are providing laser sources for manufacturers of hairpin stripping systems and for the manufacturing of electric motors, which provide devices for companies like Magneti Marelli. And you know that Magneti Marelli for instance, again, at least in the United States, filed for protection from creditors. I wanted to mention this department, this small business unit in my prepared remarks because notwithstanding the poor financial performance and revenue performance in the quarter, we are investing in R&D and we believe that the products could be the base for a rebound in revenues in the next quarters, maybe not in 2025, maybe later on. But I believe that even though certain of our customers are going through an unfavorable phase, we have a very interesting technology and this technology will again be accretive to our revenue and to our profitability. Bianca Fersini Mastelloni: We have one more question from Andrea Bonfa from Banca Akros. Andrea Bonfa: Very quickly on the duties issue, it wasn't mentioned, the fact that now Brazil is subject to a 50% duty. And for what I remember, Brazil was supposed to be one of the platform to export industrial laser in the U.S. If you can comment on that, if that is really an issue for you or if you can reroute that business from Italy. That's essentially my question for today. Andrea Cangioli: Thank you, Andrea. Our sales to Brazil go to industrial manufacturers in Brazil that mainly manufacture for Brazil. So in the past, for certain markets, the plastic cutting, our Brazilian customers were exporting their product, not the system, their product cut with a laser in the United States. But currently, the Brazilian market is, for us, a market which is, of course, affected by heavy duties but those are the duties for exporting in Brazil. There, we end. We do not use Brazil as a hub for exporting anywhere else. By the way, the performance of Brazil was exceptionally positive in this first 6 months of the year. I mean they had record revenues summing up close to EUR 10 million, which means given the weakness of the real, an absolute record in revenues in Brazilian real. And still, we are [ tonic ] on the market. And so we do not see, as of today, any negative effects driven by the U.S. tariffs on the Brazilian market. Andrea Bonfa: So -- and if I may, now the question is, how is the situation of exporting industrial laser to the U.S. considering that they haven't got any local production there, if I'm correct? Andrea Cangioli: I believe that what I said in relation to the U.S. tariffs in my remarks can be applied to the distribution of industrial laser system as well. By the way, we are in a very important week because this year, the FABTECH is being held in Chicago and is currently being held. So this is the week for the presentation of our products, especially for Cutlite Penta, which has a very large spend this year. And so big investment, Andrea and we're hoping a big return. What I can say is that currently, our offer is so diversified. I confirm there are no U.S. manufacturers that are able to offer on the U.S. market anything close to what we are offering. In certain specific segment, luckily, there are no competitors worldwide. We can have the kind of offer that we are offering in certain specific and smaller segment. Therefore, on the tariffs, what applies is the following. Since our distributors are applying interesting markups, they are able to handle the cost increase without affecting volumes and with only marginally affecting their margin and without -- not asking us to further reduce our margin given the fact that we are reducing our margin by 10% and more due to the weakening of the U.S. dollar itself. Anyway, before the FABTECH was starting, our view and our order backlog on the -- for the United States for the sheet metal cutting was positive. And so we could -- we were optimistic about then, I mean, next week, I'm waiting for the people to come back from this very important trade fair and to understand if the perception of our market positioning, which is very positive in the United States, is still confirmed with a high level of differentiation. Again, what I was saying in my earlier remarks, as long as we can provide a differentiated product and needs to be differentiated with a high perceived value in comparison with U.S. manufacturers or with other worldwide competitors as long as we maintain this perception of value, the 15% tariff which on laser cutting system could be a little bit higher since there is a little bit of steel in, a little bit, there's a lot of steel included in the laser systems. Anyway, the 50% tariffs does not change completely the value chain of the distribution in the United States and we can continue to be optimists in seeing the United States as an interesting market for selling our products. Andrea Bonfa: And finally, if I may, last question. I mean, your working capital level at the end of last year was quite important. I mean you are coming from years where the procurement or raw material was complicated to say the least. Are you planning to structurally lower this working capital or the stock? Or what are your thoughts on this? Andrea Cangioli: We sell in general, products which have relatively high margins and we can never run the risk of not being able to deliver because we don't have available materials to manufacture high-margin products. For these reasons, we have to plan ahead. Typically, the planning cycle has its peak working capital expansion in Q2 -- at the end of Q2 and Q3 because we then close the number for the end of the year, which corresponds also with the highest demand quarter. So we plan to improve our programming capabilities. We are investing in resources, in people, in softwares but basically, it's not easy to reduce the structural impact of working capital. So when I say that overall, the working capital increased by EUR 20 million in this first 6 months and I don't consider this a big issue is because I believe that it will be lowering in the next months and it will maintain more or less the same levels. Then if we will be able to trim 1 or 2 or 3 percentage points in the impact of net working capital on sales, this we will need to see. We are putting down policies in order to try to reduce but we do not want to run the risk to run out of parts because we try to control inventory because it's really -- it wouldn't be worth. This we know from history. Then I concur the level of net working capital is quite high. But good thing to know is that most of the things we have in stock will not lose value over time because they don't have any intrinsic obsolescence. They have obsolescence also, excuse me, only with innovation and we try to control innovation cycles in order not to leave in inventory older versions as we innovate the versions of our products. Bianca Fersini Mastelloni: Next question comes from Emmanuel de Figueiredo from LBV Asset Management. Emmanuel de Figueiredo: I have just 2 questions. The first one is on the medical, on the tariffs in the U.S. Can you just explain a little bit what your competitors are doing in terms of pricing? Are they absorbing the tariff and hitting their margins? Or are they increasing price? What is your view on that? And what are you doing? And then secondly, again, on the medical, what is your best, let's say, best-performing product this year in the medical? You said that hair removal is weak but what is your best performing product. Andrea Cangioli: Thank you for the question. Good to see you. I don't really know in detail. I haven't seen movements on prices in the U.S. market. So I can assume that everybody is trying to absorb the tariffs somewhere in the chain. I mean, I don't know if it's at the origin. I don't know if it's at distribution level. But we are not seeing, as of today, abrupt price changes, even though the United States is affected by inflation. So year-over-year, there is an inflation in prices. So this gives room to somehow absorb -- not absorb, revert part of the tariffs to the end user without creating a big difference in the approach compared to our other competitors. And about the successful products in the medical, of course, the magneto and the urology lasers are very successful. In aesthetic, we have 3 very successful products. One is Onda PRO. Onda, you remember very well, I'm sure our technology, which is based on microwaves, Onda in Italian means wave and it was originally a body contouring device. Onda PRO, this evolution launched last year adds a third handpiece, which is used for the face. And therefore, the system becomes also a skin rejuvenation device, having the ability to treat the skin of the face in order to tighten it. So it's a anti-aging device for tightening. The second very successful device is the RedTouch, which is a innovation, which introduces a laser emitting in the red for rejuvenation on the face and on the [indiscernible]. And I leave the third, the most successful of our technologies, I touched this earlier -- in earlier conferences is the CO2 laser. The CO2 laser, which is the first technology, the oldest technology that EL.En. has offered on the market and the technology that we master. And we improved its effectiveness starting from the technology base. Who visited our company knows that our facility has 2 kind of technology for CO2 laser source, the glass technology, DC excited, the metal technologies, RF excited. The RF excited technology has come to such flexibility in the modulation of the beam, which allows extremely dedicated curing on the skin and is the winning technology on the U.S. market, by the way, particularly on the U.S. market for the rejuvenation application. So Onda PRO, RedTouch and Tetra Pro are the game winners in this moment and are the units which -- with increased sales in the U.S. and in Far East are offsetting -- at least partially offsetting the decline in other disciplines. Bianca Fersini Mastelloni: And now we have Giovanni Selvetti with another question for you, Andrea. Giovanni Selvetti: I promise this is the final one. No, it was more of a curiosity on hair removal because I see that there's been quite a decent growth of, let's just say, self-made hair removal devices, laser devices as long -- at least here in the U.K., you see that a lot. So I was wondering if this is partially in a way, eating the market on your side because if people can do this thing alone without going to, like let's just say, a specific place, well, the demand just flows one way to the other, right? So I was wondering if this is something you see or if it's something that you believe it's a real concern going on? Andrea Cangioli: Again, I don't want to be blamed as superficial. But the home, the devices that remove hair or claim to remove hair for household use are not able to remove hair by themself for a simple physical reason that they do not deliver enough energy to effectively remove the hair. They could be used for a maintenance after they use a professional use. And so in these terms, they could limit the number of visits that you make at a professional site. But generally speaking, I don't think they are effective enough to -- for the technologies available today to eat up market shares to our professional market. I see more a competition coming from lower-cost manufacturers, which improved their performance, which is eating up the low-level competition and forcing us to compete in a share of the market, which is still large, which is the high end but which is smaller than the whole market. We need to continuously differentiate and improve the performances in order to stay on this market effectively. The performances in term of both financial ROI and therefore, effectiveness of laser systems for hair removal improved dramatically in the last years. And our sales, we have in our pipeline further improvements of the technologies aimed of improving the effectiveness and the ROI for our customers. Sincerely, I don't think that the handheld home use devices are affecting our market. But I will study more deeply this situation, Giovanni and maybe be back to you with a more, let's say, acknowledgeable answer when we meet again in some time. Bianca Fersini Mastelloni: Okay. We have one more question right now from François [indiscernible]. Andrea Cangioli: I have seen his question. Unknown Analyst: Sorry for the time to connect the microphone. One question about your competition, especially in aesthetic sector from South Korea or from Israel. How is the relative competition evolving? Andrea Cangioli: Yes. Israelian and Korean are the front line of our competition in the aesthetic market with a wealth of companies, both companies that are on the market from a long time, both companies that are now offering on the market new products. Of course, when you think about Israel, you think about Lumenis, which is the long term -- the longest -- the oldest company competing on the market as well as Syneron and as well as Sisram/Alma Laser. They are all competitors of us. We don't feel that we lost competitive advantage versus these competitors in the last years. Then there is InMode, which is the leader in terms of market cap, which is actually not directly competing against us because they sell RF technology with a high marketing content, with the use of testimonials, they are doing quite well but we don't feel a direct threat from them anymore. And then there is a new company, which was just launched by the former founder of both Lumenis and Syneron-Candela, Mr. Shimon Eckhouse. The company is called Softwave. It's quite small. And it's also competing in rejuvenation and skin tightening device. This is for what concern Israel. For what concerns Korea, the longest lived company is Lutronic, which is now merged with Cynosure. And we feel their competition very strongly, first, because we lost the customer, Cynosure due to the merger. And of course, they were purchasing a technology from us. When they merged with a company that has more or less the same technology, they, of course, are going to source this technology from Lutronic. Lutronic has been very strong on certain European markets. For instance, on the French market, they are the leaders. We are the runner up. And they are extremely -- I mean, they are extremely good in developing technology. So they are high-level competitors. So we cannot treat Lutronic as we can treat several other competitors coming from Far East that still deliver products which are well below par in terms of reliability, technical specification and overall product specification and quality. There is another pair, which is now flourishing in Korea. It's a company, Classys I. It's a listed company. You can see how with revenue, which is in the order of magnitude of $100 million on a yearly basis today, if I'm not wrong, they have a market cap, which is outstanding, over $2 billion. This is due to the rapid growth they are forecasting and to the very high margin. Basically, Classys is replicating, on a Korean basis, the business model of InMode or at least their ambition is to replicate it. They sell a very low-cost device as high prices and they're very successful in this moment. And again, looking at all this company, we feel more threatened by the competitors from Israel, which compete with the same -- apart from InMode with the same technological infrastructure that we do than from the companies competing from the Far East where the product level is improving but it's still behind what we have in Europe and what the Israeli and the best Korean company are able to deliver today. Bianca Fersini Mastelloni: Okay. We have no more question registered at this moment in our list. I would like to ask investors still connected if there are any further questions from their side. No more question. Okay. Then ladies and gentlemen, the conference is over. If you have any questions to investigate in the future, please do not hesitate to contact Enrico Romagnoli, who will be happy to answer your queries. Thank you to all of you for attending this conference and we hope to have all you again next time. Goodbye to everybody. Bye. Enrico Romagnoli: Bye. Bye-bye. Andrea Cangioli: Thank you very much. Bye-bye.
Operator: Greetings, and welcome to the Vera Bradley, Inc. Second Quarter Fiscal 2026 Earnings Conference Call. At this time, participants are in a listen-only mode. A question and answer session will follow the formal presentation. You may be placed in the question queue at any time by pressing star one on your telephone keypad. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Mark C. Dely, Chief Administrative Officer. Please go ahead, Mark. Mark C. Dely: Good morning, and welcome, everyone. We'd like to thank you for joining us for today's call. Some of the statements made during our prepared remarks and in response to your questions may constitute forward-looking statements made pursuant to and within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 as amended. Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from those that we expect. Please refer to today's press release and the company's most recent Form 10-Ks filed with the SEC for a discussion of known risks and uncertainties. Investors should not assume that the statements made during the call will remain operative at a later time. We undertake no obligation to update any information discussed on today's call. I will now turn it over to the call to Vera Bradley, Inc.'s Executive Chairman, Ian Martin Bickley. Ian? Ian Martin Bickley: Thank you for joining us today. It has been a busy two months since I took on the role as Executive Chairman. My team and I have hit the ground running to reinvigorate and reimagine Vera Bradley, Inc., an iconic brand with strong awareness and deep connections with consumers across generations. One thing that has become clear to me since stepping into this role is that our loyal customers love Vera Bradley. They truly want us to succeed. When we deliver the products and experiences they expect, they respond. We recognize there is much work ahead of us. But I want to be clear. We are implementing a comprehensive strategy to revitalize our market position by leveraging our brand's proven emotional connection with consumers. Our integrated approach spans strategic merchandising and product innovation, targeted marketing, and how we show up across shopping channels. All designed to reengage our loyal customer base while expanding our reach to new market segments. This disciplined focus on our core brand strengths, combined with data-driven consumer insights and seamless execution, will, over time, drive sustainable growth and restore our competitive advantage. To execute this strategy effectively, we're simultaneously transforming our operational foundation to improve focus, agility, and execution. We're streamlining decision-making processes, eliminating organizational complexity that has hindered our speed to market, and reallocating resources towards our highest impact initiatives. This operational discipline, combined with prudent cost management, will ensure we can invest meaningfully in the brand, innovation, and experiences our customers expect while delivering the financial performance our shareholders deserve. These structural improvements aren't just about efficiency. They're about building the agile, responsive organization needed to capitalize on Vera Bradley's iconic and distinctive brand positioning in the marketplace. On today's call, I will briefly discuss our second quarter performance, including several product and marketing wins that are giving us confidence we are moving the business in the right direction. From there, I will walk you through our key strategic initiatives informed by the work we have completed to date partnering with our recently established strategy and transformation committee. I will then ask Marty to provide a more detailed financial review of our second quarter performance, including an update on how Vera Bradley, Inc. is addressing current trade policies and the implications for our business. And we will wrap up with some time to answer any questions you might have. Before I begin, I want to take a moment to recognize and personally thank our entire organization for their exceptional commitment during this pivotal transformation. Our employees across all functions are not just executing this strategy. They are the embodiment of our brand values and the driving force behind our renewal. Their adaptability, creativity, and relentless focus on excellence will be the foundation of our sustained success. As we continue this journey together, I'm confident that our collective expertise and passion will deliver the results our customers, shareholders, and communities expect from Vera Bradley, Inc. I'd also like to provide a quick update on the nationwide search to find our next CEO, which I mentioned on our June call. This is a major focus for us, and we continue to meet with a number of promising candidates. We will keep you updated on our progress. Now our results. For the second quarter, we registered revenues of $70.9 million, a decline of approximately 25% to last year and roughly in line with our internal forecast. Notably, we saw sequential improvement versus the first quarter in our comparable store sales across our store fleet and on vb.com. And in each month during the second quarter. We are encouraged that this trend has continued and that our brand channels are leading the way. As I mentioned, back in June, we announced the formation of a strategy and transformation committee to assist with informing the company's strategic direction, identify future growth opportunities, and accelerate Vera Bradley, Inc.'s transformation. Through this cross-functional work, we have identified five key strategic initiatives that we are now implementing. Strategic initiative number one, sharpening our brand focus. We need to have a clear brand strategy and messaging that is consistent across all consumer touchpoints and that resonates with our loyal customers while engaging new audiences. This begins with product. Informed by consumer insights, and under new merchandising leadership, which we transitioned to in May, we are in the early stages of making meaningful adjustments to our product, design, and assortment. We are driving innovation back into our core DNA and what made Vera Bradley, Inc. successful. We were known for amazing occasion-based bags, for back to school, weekends, the beach, holiday, gift-giving, and more. Beginning in late June, we launched a back-to-school collection highlighted by product wins, including the return of compelling backpacks and lunch bag categories that we had not emphasized last year. This included the addition of a new extra-large backpack that became one of our best sellers across channels. As part of our fall and holiday assortments, we are bringing back iconic styles such as the Vera tote, along with exciting new product designs with great details. In addition, we are bringing back proven heritage-inspired prints from our archives such as Rachel Ditzy and Chambray, with our border iconography which have been a hit across all silhouettes during back to school. We are also expanding our range and increasing the depth of our investments in cotton, a material our customers love. Our assortments will be more balanced across fabrications, silhouettes, and prints. And we continue to have exciting IP offerings to surprise and delight consumers. Our Disney and Peanuts collections that launched during back to school were some of the best we have ever had. And our Gilmore Girls capsule, which launched just before Labor Day weekend, was incredibly well received, selling out in just five minutes. And we are super excited for the hero heritage reissue of the original 100 bag, a Vera Bradley, Inc. icon priced at under $100 just in time for the holidays. Available in heritage-inspired prints, seasonal patchwork, and pinnacle animations. The 100 bag will launch in October in our brand channels, supported by a compelling social media campaign featuring the iconic Radio City Rockettes, who are also celebrating their hundredth anniversary. On the marketing front, we have also completed some important work directly tied to our sharpening brand focus initiative. On July 12, we launched our "Don't Forget to Have Fun" back-to-school brand campaign. The social-first campaign leveraging a cast of carefully curated influencers, including Kate Steinberg, was well received with nostalgic and joyful tones, targeting brand consideration across a diverse range of consumers. Despite a significant reduction in our top-of-funnel marketing spend during this period, we drove meaningful increases in both recruitment and engagement on our Instagram and TikTok platforms, as well as new customer acquisition on vb.com. For reference, in the six weeks since launching this campaign, we gained more followers on Instagram than in the entire prior twelve-month period. While on TikTok, we gained more than double the number of followers than in the prior twelve-month period. We also saw a 23% increase in new customers on vb.com. Looking ahead, based on the success we are having, we will continue to lean into our social-first media strategy and the nostalgic and joyful tones that are clearly resonating with consumers. One remaining element of our sharpening brand focus initiative I'd like to mention today is our indirect business, including our wholesale strategy. The indirect segment has always played an important role in the brand position, growth, and profitability of the Vera Bradley, Inc. business, as it has allowed us to meet consumers in the venues where they choose to shop. In fact, Vera Bradley, Inc. began as a wholesale business, and many small specialty store partners throughout the country helped build recognition for the Vera Bradley, Inc. brand on a national scale. While the overall retailer landscape has changed dramatically over the years, we are confident that this will continue to be an important channel to engage with our consumers. We are taking a fresh look at our wholesale strategy with the goal of refining our approach to better match product to the consumers and the venues they choose to shop and ensure that it is aligned with our brand positioning efforts. As part of this, we will be continuing our partnership with major retailers such as Dillard's and Von Moore, and rebuilding the relationships with several of our important specialty accounts. While at the same time evolving new partnerships with important retailers like Anthropologie, that are resonating with a new generation of consumers that we believe will be attracted to Vera Bradley, Inc. Additionally, we have already secured some important new retail partnerships and collaborations for our upcoming fiscal year, which we are not yet ready to announce, but will enable us to reach new consumers in exciting ways. Licensing the Vera Bradley, Inc. brand for specific non-core categories that can expand reach and awareness is also something we will continue to pursue both from a strategic and commercial perspective. And already have several initiatives in the pipeline. Strategic initiative number two, developing a cohesive omnichannel strategy. Simply put, we are working to create more cohesion between the various platforms and channels where consumers engage with our brand. This is a comprehensive go-to-market assessment anchored on an omnichannel approach to the Vera Bradley, Inc. customer experience. In an effort to remove friction points that exist today. One straightforward example, we were running different promotions through our online outlet channel and outlet stores, creating both customer confusion and operational business inefficiencies. We now have our digital and store channels running the same promotions. Not only has this resulted in greater brand consistency, it has also resulted in improved margin rates as we have effectively reduced discount levels overall. There is more to come here, as we are just in the early stages of this work, but capitalizing on the obvious choices and low-hanging fruit where we can. Strategic initiative number three, Outlet 2.0, updating our outlet strategy. Our outlet channel is an important component of our omnichannel mix. It is where many consumers interact with us and where perceptions are formed. Today, it is primarily used for deep discounting and clearance. At the same time, the vast majority of our Vera Bradley, Inc. outlet stores are located in premium and luxury outlet malls where customers are increasingly looking for positive brand experiences in addition to value. With Outlet 2.0, we see an opportunity to shift the paradigm of our outlet stores by focusing on elevating the customer experience through improved assortments, including select full-price product, visual merchandising and display, and labor optimization. Outlet 2.0 will drive positive brand engagement by making it a more fun and joyful experience while bringing sharper focus to the Vera Bradley, Inc. value proposition in environments where we have a high number of footsteps and eyeballs on the brand. Outlet 2.0 can have a major positive impact on both our store productivity and profitability, while simultaneously accelerating our brand transformation. We are taking a test and learn approach to Outlet 2.0, in pilot in a handful of locations that we are planning to run during the holiday season. We are also adjusting our staffing models in select stores to better align with peak shopping periods, driving higher labor productivity and conversion rates. We will evaluate the results for potential rollout in 2026 after the holiday season and look forward to updating you on Outlet 2.0 progress on future calls. Strategic initiative number four, improving our operating model. We are taking a comprehensive look at our operating processes to evaluate how we can run our business more efficiently. We are looking at every aspect of our operating model, spanning product development and design, store allocation, store labor, promotional strategies, and more. This is a holistic examination of our operating model and go-to-market strategy. Importantly, we are changing how we are looking at the business and instituting a focus on fundamentals and key retail KPIs across channels. And how we can bring focus to the highest impact initiatives for the enterprise and improve execution. Our strategic focus is to direct decisions towards winning areas of the business as opposed to a democratic approach. Lastly, our fifth strategic initiative, reimagining how we work. We are reexamining our organizational structure and culture to improve the way we work to be more creative, collaborative, and efficient. While we recognize the need to continue to bring costs more in line with the current operating scale of the business, we must now redesign the organization and structure enhancing our talent and leadership to be more aligned with the key growth areas of the business. Strategy needs to lead our organizational and operational transformation as we take out the next layers of cost. In closing, while it is still very early, the current trends in our business give us some confidence that our improved focus and execution and the changes we have undertaken in our product pipeline, the tonality and reach of our marketing, and the ongoing work across our channels of distribution are moving Vera Bradley, Inc. in the right direction. We look forward to updating you on our progress. Now I will turn the call over to Marty to discuss the financials. Marty? Michael Schwindle: Thanks, Ian. Good morning, everyone, and thank you for joining us. I have a few brief comments to make about our performance for the quarter. For the sake of clarity, all of the numbers I am discussing today are non-GAAP and exclude the charges outlined in today's press release. Complete detail of items excluded from the non-GAAP numbers as well as a reconciliation of GAAP to non-GAAP can be found in that release. For 2026, our consolidated revenues totaled $70.9 million compared to $94 million in the prior year second quarter. Net loss from continuing operations for the second quarter totaled negative $500,000 or negative $0.02 per diluted share compared to net income from continuing operations of $2.6 million last year or $0.09 per diluted share. In terms of segment performance, Vera Bradley, Inc.'s direct segment revenues for the second quarter totaled $60.5 million, a 16.2% decrease from $72.2 million in the prior year. Comparable sales similarly declined 17.3% driven by conversion declines in our full-line outlet and e-commerce channels. Total revenues were also impacted by 10 new store openings and 13 store closures over the past twelve months. Vera Bradley, Inc. indirect segment revenues for the second quarter totaled $10.3 million, a 52.5% decrease from $21.8 million in the prior year quarter. The decrease was related primarily to a decline in key account orders as well as liquidation sales. Gross margin totaled $35.4 million or 49.9% of net revenue compared to $46.8 million or 49.8% of net revenues in the prior year. The slight increase in year-over-year margin rate resulted from lower liquidation sales, partially offset by incremental shipping costs driven by channel shifts from brick-and-mortar stores to online sites. SG&A expense totaled $36.3 million or 51.2% of net revenues compared to $43.6 million or 46.4% of net revenues a year ago. The $7.3 million decrease in expenses was primarily due to restructuring activities undertaken over the past year which resulted in lower compensation expense, primarily driven by reduced headcount, coupled with a reduction to advertising expense. Operating loss from continuing operations totaled negative $600,000 or 0.8% of net revenues, compared to operating income from continuing operations of $3.3 million or 3.5% of net revenues in the prior year. We remain focused on driving operational discipline to enhance execution and deliver improved sales, margins, and profitability. We are pleased with the early progress in this effort as demonstrated through sequential improvement in comps across three of our four direct channels, and sequential gross margin improvement. The team continues to review our processes and actions to identify opportunities for new approaches to how we work. Turning to the balance sheet. Cash and cash equivalents at the end of the quarter totaled $15.2 million. We had borrowings of $10 million against our $75 million ABL facility at quarter end. Second quarter inventory decreased 13.2% to $96.7 million compared to $111.4 million at the end of the second quarter last year. We recognize that inventory performance is a key opportunity for our business, and are focused on developing strategies to improve our turns over the next twelve to eighteen months. Immediate actions include aligning receipt plans more closely with sales expectations, and evaluating our SKU assortments to identify opportunities to reduce overall counts allowing for greater depth and high-performing colors and patterns. With regard to tariffs, we estimate a total annualized impact of $11 million. Our sourcing teams are working with our suppliers to mitigate the impacts, while also evaluating our go-to-market strategies to understand which levers to adjust. We expect over time the combination of these efforts to offset the dollar value of tariffs, but in the end, all actions will be driven by market dynamics. Given our transformation journey, and the dynamic consumer environment, we are currently not providing guidance. While this remains a challenging environment, we are identifying and implementing to enhance operational discipline. And these actions are already contributing to sequential improvements on a quarterly basis. We will continue to build on this progress, while accelerating our efforts to drive further improvement in our financial results. This concludes our prepared remarks. Now we will be happy to take your questions. Operator? Operator: Thank you. We'll now be conducting a question and answer session. If you'd like to be placed in the question queue, a confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing star 1. One moment, please, while we poll for questions. And once again, that's star 1 to be placed into the question queue. We reached the end of our question and answer session. And that does conclude today's teleconference and webcast. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.
Nicola Fiore: Good afternoon to everyone and welcome to EL.En.'s Half Year 2025 Financial Results Conference Call. Today's call will be recorded and there will be an opportunity for questions at the end of the call. With me on the call are Andrea Cangioli, EL.En.'s CEO; and Enrico Romagnoli, EL.En.'s Chief Financial Officer and Investor Relations Manager. Before we begin, please note that there are management remarks during the conference call regarding future expectations, plans, prospects and forward-looking statements. Certain statements in this call, including those addressing the company's beliefs, plans, objectives, estimates or expectations of possible future results or events are forward-looking statements. Forward-looking statements involve known or unknown risks, including general economic and business conditions in the industry in which we operate. These statements will be affected if our assumptions turn out to be inaccurate. Consequently, no forward-looking statement can be guaranteed and actual future results, performance or achievements may vary materially from those expressed or implied by such forward-looking statements. The company undertakes no obligation to update the contents or the forward-looking statements to reflect events or circumstances that may arise after the date hereof. [Operator Instructions] But at this time, I want to give the floor to Andrea Cangioli. Please go ahead, Andrea. Andrea Cangioli: Good morning. Thank you, Nicola and thank you, Bianca, for introducing this call. And thank you, everybody, who's attending, for being with us in this call following the release of our financial report as of June 30, 2025. Enrico Romagnoli will be on this call with me and I thank him for taking care of the details of our financial reporting that he will be sharing with you in a very short time. The numbers are out since last night. So you have seen that our performance in the 6 months was good in revenue generation. Revenues exceeded on a consolidated basis to EUR 285 million, up more than 5% compared to the same period in 2024, meeting our guidance and confirming the positive trend of the first quarter. The goal of overcoming 2024's result wasn't met at EBIT level. EBIT result was, in fact, quite strong, reaching EUR 34.6 million, meaning 12.1% EBIT margin but was lower than the EUR 37.2 million of the corresponding semester in 2024. While by slightly exceeding the initial expectation given the overall condition of the economic environment, the medical sector delivered an excellent performance. Revenue growth in the industrial sector was weaker than expected and its lower contribution to consolidated EBIT constitutes in full the delay of 2024-'25 consolidated EBIT versus last year. When I mention the overall economic conditions, I am referring to an overall climate of uncertainty in international relations stemming primarily from the failure of international diplomacy to bring to an end the wars in Ukraine and Palestine and from the trade war initiated by the U.S. administration that is reshaping the trade relation and also the political relation between the most powerful countries in the world, including Europe. While the wars are now in place from so long that notwithstanding the risk of further escalation, the markets are acting like they are accustomed to this status. The trade war for the time being is impacting on our business, making it more expensive to sell our products in the U.S., making it less profitable due to a weaker U.S. dollar and also inhibiting the reduction of interest rates in the U.S. due to the expected tariff-driven inflation. We disclosed before how interest rate and expectations about the change of interest rates impact on our capital goods market, where our customers predominantly fund their investments with debt and therefore, are helped in their investment decisions by lower interest rates. Of course, the conditions in our specific markets are affected by this general situation and are confirmed by the business trend of the financial results that are available concerning certain competitors of us. Below the EBIT line, all the entries -- I'm talking again of the consolidated financial results of the EL.En. Group and below the EBIT line, all the entries contributed to widening the gap between the results of 2024 and the result of 2025. Foreign exchange rate differences hit financial income for roughly EUR 3.5 million. The contribution of the Chinese activities on the verge of being divested and sold was a EUR 4 million loss in 2025, worse than the EUR 3.2 million loss contribution booked as of June 2024. And we finally had in 2024, a EUR 5 million extraordinary income booked as a remeasurement of our financial debt no longer due at the time, an entry which, of course, could not be replicated in 2025. So what the very bottom line is showing, a wide gap between the EUR 27.3 million income of 2024 and the EUR 17.9 million income of 2025 is not adequately depicting and reflecting our current performance. But rather than on this gap, which is mainly generated by uncontrollable events or by area of business, which are not part of the group anymore at the Chinese facilities, I want now to concentrate on the remarkable achievements that we met this year. First of all, revenue and EBIT increase in the medical sector. Both were up by more than 5% and this is the envelope results of a set of more specific achievement and successes. With the release of the Magneto urology laser system in late 2024, the leadership of Quanta System in the laser devices for urology application was confirmed and strengthened. Almost 900 urology system, including TFL lasers as well, I mean TFL or the fiber laser source-based systems, those not only including solid-state lasers like the Magneto, were delivered in the first 6 months of 2025, exceeding EUR 35 million in revenues. And as the installed base increases and also the manufacturing capabilities of our plant in Samarate are progressively moving upward, the revenue for the sale of sterile optical fibers, the consumable needed for each and every surgical procedure materially increased, exceeding EUR 20 million in the 6 months with close to 180,000 delivered fibers. As demand in our main aesthetic application segment, hair removal, is experiencing progressive softening throughout the last years, we concentrated our efforts on one side in improving the performance and effectiveness of our laser hair removal systems in order to fight the market slowdown. And on the other side, we concentrated in improving the performance and effectiveness of our systems and technology dedicated to anti-aging procedures and in providing them an adequate marketing support. I'm talking of technologies which improve the appearance of the skin, removing smaller wrinkles which stimulate collagen regeneration, providing shine and elasticity to the skin, which are tightening the skin, providing remedies to laxity, which are removing redness from the face and from the [indiscernible]. I am talking of RedTouch PRO and Onda PRO by DEKA, of Discovery Pico by Quanta and TORO by DEKA and of the CO2 laser product range, including Tetra PRO by DEKA and [indiscernible] laser by Quanta System. As I said -- as said, revenues stemming from these application domains sharply increased in 2025, offsetting the softer demand in other disciplines. Even if the overall performance in the industrial sector wasn't successful nor satisfying, especially due to a soft demand in the manufacturing markets in Italy, we can count several activities that in these 6 months set the foundations for a marked improvement of the ability to compete of our companies. The Chinese business, which was not contributing anymore to the performance of the group, has been sold and is not constituting a burden for management and financial resources anymore. The European subsidiaries network started up by LASIT in the market domain in the last 2 years is stabilizing and becoming an increasingly reliable source of revenue, also contributing to profit at least for the older subsidiaries. A similar pattern is now pursued by Cutlite Penta, which in rapid succession incorporated 3 subsidiaries in Poland, Germany and Spain, which for the moment are obviously weighing on expenses and on EBIT but we count on them being soon accretive in profit generation. Cutlite gained control of [ Nexam ], a small company based here around Florence, specializing in the manufacturing of automation systems that are strictly complementary to Cutlite's high-power laser sheet metal cutting systems. When jointly installed with the laser system, automation system by [ Nexam ] improve the overall performance and productivity of the laser system, providing to Cutlite a means of differentiation on its very competitive market through increased performance of the system and more extensive customization ability. Cutlite is pursuing competitive advantage on one side through the expansion of the offer, integrating it with automation systems and on the other side, through an increased level of service and of proximity to the end user through the organization of local sales and service facilities. Another point I would like to mention, if you look at our financial performance, one of the worst performance in terms of financial results in the 6 months was the industrial division of EL.En., the mother company of the group. But the development work performed both on the mid-power range CO2 laser sources for special manufacturing application and also in the performance of the scanning units based on our proprietary galvanometers are promising to be the grounds for a future rebound in revenues. Under this profile, I'd like to mention that the performance of our 1.5 kilowatt RF excited CO2 laser source are currently reaching such a level of stability that we are working and counting on the release of a 2-kilowatt laser source within a reasonable time span. Such achievement will extend the maximum power of our product range, meeting a threshold that could open up several interesting application markets. Another item I would like to touch on in my remarks is cash generation. The balance of the net financial position decreased by EUR 20 million in the period. I don't see in this contingent trend any particular problem as seasonality of the net working capital balance is always unfavorable for the group in the first 6 months. And as we paid out dividends for EUR 80 million and change and booked investment for EUR 50 million, out of which 6, I would describe as midterm liquidity investments. For sure, the net financial position is one of the historical strengths of the group. It's one of the components of the wealth of the group. The other components are much more intangible and sit in the capabilities of this organization to continually evolve and innovate its high-quality product range, confirming its recognized position among the world's leading players also through several solid commercial relationships built over the years. Thanks to the uniqueness and differentiation of its offering, the group is able to maintain a high customer perception of its value, which can be defined as an excellent market positioning. Despite the macroeconomic uncertainties of recent months, the offerings of our business units remained attractive to customers, thanks to effective product development, marketing support, training and the excellent technical assistance that accompanies aftersales service in all markets. One last thing before I hand the microphone to Enrico, a comment on the U.S. tariffs. The 50% tariff, which our products are called to pay when entering the U.S. constitutes today a cost increase in the chain that delivers our product to our end users in the U.S. The tariff-induced cost increase could either be absorbed in full by our distributors that could accept the minor reduction on margins that the cost increase would represent given the high resale margin that they often apply or could, if reverted to end users, be considered marginal price increase and do not affect demand maintaining the price in a range where demand is, let's say, inelastic to price or such cost reversal to end user could push prices in a range where demand could decrease due to elasticity to price. Those are all the theoretical possibilities. Both in our industrial and medical distribution, a key element for selling in the U.S. has always been the innovative content and quality perception of the product that allow us to sell it at premium prices and margins, which means keeping the market positioning of the product in an area in which the tariff costs do not materially affect margins and volumes for our distributors. And again, this directly ties our chances to effectively sell on the U.S. market to our innovation capabilities. It is difficult today to predict the midterm market adjustments that the new tariffs will cause. As of today, the reaction of our American customer has been positive and demand fluctuation has been limited and more related to specific acceptance of single products than to the extra tariff cost. Under this profile, we have to note that the implicit tariff that the weakening of the U.S. dollar is anyway levying on our sales to the U.S. will be more effective in the second half of 2025 when average foreign exchange rate will be steadily in excess of $1.50 for EUR 1 and the presence of the extra tariff cost on our distributors will make it difficult to neutralize as we have done in other circumstances, the ForEx penalization on our margins. Please, Enrico, go ahead with your comments on the financial report. Enrico Romagnoli: Thank you, Andrea and good morning to everybody. As for the year-end, the half yearly report has been prepared in accordance with IFRS accounting standards, excluding the consolidation line by line of Chinese activities, both in 2025 and in 2024 due to the ongoing negotiation for the sale of the division in accordance with IFRS 5. The majority stake of the Chinese companies was sold on July 15. In the first half of 2025, the EL.En. Group recorded consolidated revenues for EUR 285 million, up 5.1% compared to the EUR 271 million on June 2024. The medical sector up over 5%, while the industrial sector up over 3%. Gross margin was EUR 106 million (sic) [ EUR 126 million ], up 5% compared to the EUR 120 million on June 2024, with an impact on revenue of 44%, in line with the last year. It should be noted that in 2024, the group recorded proceeds for insurance and government reimbursement relating to the damages of the flood on November 2023 for an amount of EUR 1.9 million, 0.7% of the revenues. While in 2025, Asclepion accounted EUR 1.3 million as R&D grants, 0.4% on the revenue. Excluding both of these nonrecurring income and the impact on gross margin on sales, the gross margin would have improved by 0.4% in 2025, attributable to the improved sales mix. Operating expenses increased in value and in impact on sales, mainly in G&A, R&D and IT cost and sales and marketing activities. Staff cost increased -- the increase in staff cost is due to an increase in headcounts and in salaries. EBITDA was positive at EUR 42.2 million, down 2.7% compared to the EUR 43.3 million on June 2024. And EBITDA margin in 2025 was equal to 14.8% compared to the 16% of 2024. Depreciation, amortization and provision amounted to EUR 7 million (sic) [ EUR 7.5 million ] in 2025 compared to the EUR 6.1 million in 2024. The main reason of the increase was the reversal of the provision for risk and charges in 2024 for EUR 1.6 million due to some legal disputes that were resolved more favorably than expected. Net of this amount, the overall cost aggregate is in line with the previous year. EBIT for the 6 months was EUR 34.7 million, down 7% from the EUR 37.3 million in 2024. The margin on revenue was 12.1%, down compared to the 13.7% of last year. As already mentioned by Andrea, financial management recorded a loss of EUR 2.6 million. In details, the first 6 months, the interest income generated by liquidity was EUR 1.7 million, while the interest expenses on debt was EUR 0.9 million. Exchange rate differences had a strongly negative balance equal to EUR 2.5 million. But in addition, there is a onetime exchange rate loss recorded in Q1 for around EUR 1 million, following the release of the currency conversion reserve resulting from the sale of the majority in -- with us. In other income, last year was accounted the onetime income of EUR 5 million due to the remeasurement of the liabilities related to the earn-out to pay to former minority Chinese shareholders in case of IPO of Penta Laser Zhejiang. Income before taxes showed a positive balance of EUR 31.7 million, lower than the EUR 42.3 million on June 2024. In discontinued operation is summarized the net contribution to consolidated result of Chinese activities under disposal. The negative impact was EUR 4 million compared to EUR 3 million of last year. The main reason of the negative impact in 2025 is due to the devaluation of KBF equity investment in the first 6 months of 2025. The effective tax rate in 2025 increased to 32% from 27% of last year. And the main reason for this increase is due to the nontaxability of the EUR 5 million accounted in other income last year. Moving on the analysis of the balance sheet amounts, we can see an increase in total noncurrent assets and net working capital, while the net financial position decreased. The value of ratio net working capital on sales is close with the value of last year. In detail, cash flow for the period showed a reduction of approximately EUR 20.6 million in the group net financial position from EUR 110.6 million at the end of 2024 to EUR 90 million at the end of June 2025. This reduction was also due to dividends paid by the group, EUR 18.6 million, capital expenditure for EUR 10 million in fixed assets, EUR 6 million in mid-, long-term liquidity investment, EUR 2 million has been invested in own shares. And the seasonality [ expensive ] trend of the net working capital components resulted in a cash absorption of approximately EUR 20 million in the 6 months. Regarding sales analysis, in the medical sector, system sales showed strong growth in all major segments. In the aesthetics segment, plus 3%, the very favorable trend for anti-aging application continued. Among surgical application, plus 14%, urology system continued to record significant growth in sales as performance in physiotherapy, plus 7% was also very satisfactory, thanks to the significant incremental innovation in the range of products offered, a more widespread and effective coverage of international markets, together with relaunch of sales in Italy. Sales of consumable and aftersales services remained very satisfactory, driven by the sales of optical fiber for surgical application, which kept service revenue growth to 6% despite the low of service contract revenue from Japanese companies with us whose majority stake was sold in February 2025. In the industrial sector, the cutting segment, which no longer includes Chinese companies, maintained growth of over 6%, thanks to the excellent sales result of the Brazilian subsidiaries, plus EUR 6 million of revenue in the first 6 months and the inorganic contribution of [ Nexam ], EUR 1 million, a company dedicated to the manufacture of automation system for Cutlite Penta laser system, a majority stake of which was acquired in early 2025. LASIT also performed well in the market segment with the increased weight of its subsidiaries, while performance was more -- while performance was more challenging for all of us and the industrial area of EL.En., highlighted by the reduction in revenue from sources for industrial application, after sales service revenue remained stable. For what concerns the breakdown by area, revenue growth in Italy was entirely driven by the medical sector, while in the industrial sector, despite strong order intake, which bodes well for the rest of the year, overall revenue failed to match the already poor results seen in the first half of 2024. In European markets, growth benefited industrial company, which are gradually building the direct distribution network. LASIT has branches, some of which are almost fully operational in Poland, U.K., Germany, Spain and France from 2025. Also Cutlite has just launched branches in Spain, Germany and Poland. In the European market, the sales in medical sector increase of 13%. Revenue in the rest of the world declined slightly in both sector, penalizing the industrial sector by lower demand from American markets and in the medical sector by the challenging performance of the Middle Eastern market. Andrea, please go ahead on 2025 guidance. And you'll hear from Andrea. Andrea Cangioli: Here I am. Excuse me, I was talking with the microphone off. So I will close this section of prepared remarks with a few comments on the guidance. I would like to add just a small shade of color to the very clear statements we made in the press release, the goal of beating 2024's EBIT is harder to meet given the delay that we have after 6 months and considering certain unfavorable circumstances I described earlier in the call. But we can rely on the relevant backlog of orders and as usual, on our capabilities. Therefore, within the frame I outlined during my comments, we confirm the annual revenue growth target compared to 2024. And in the absence of external factors that could hinder further order intake in the coming months, which is needed in order to reach the yearly targets, in the 2025 financial year, EL.En. aims to improve its EBIT as well. With this, we are done with the prepared part of this presentation and ready for your questions. Bianca Fersini Mastelloni: Okay. We now open the Q&A session and we have 2 analysts in our list. I give the floor to Giovanni Selvetti from Berenberg. Giovanni Selvetti: The first one is on the medical division, which is growing nicely. If I look just at the sequential trends in the Q2, I can see a sharp increase in the surgical applications but a reduction year-over-year in aesthetics. And I was wondering what's driving that. And also, if I look at your comment on the press release of Asclepion, it seems like that this is the only company within the group that is not performing. And as far as I remember, this has been like problematic for the past 2, 3 years in terms of, firstly, sourcing materials, secondly, now sales. So I was wondering what's the story there. Then on the last comment you were saying on the guidance that given the order backlog that you see, you seem confident in reaching the guidance. Is this mostly medical or it's like an improvement in the industrial that you see that apparently is based on what you were saying at the beginning, the major reason for the difference in H1. It's a mix of both. So if you can give a bit of more color on the order backlog. And the third one is probably on staff cost. I could see that the incidence of the cost of personnel is going up quite significantly year-over-year. Here, the question is more -- so what's driving this? And Enrico said it's a mix of higher salaries and more staff. Is this more, let's say, related to the hiring of salespeople for new subsidiaries that, of course, are fixed cost now with 0 revenues attached? Or it's like any different dynamics that we should be aware of? Andrea Cangioli: Okay. Let me answer your question one by one. Yes, you are right. I mean it's on paper. The revenue for laser system dedicated to aesthetic application marked a small decline in the first 6 months. And as I highlighted also in my remarks, this is mainly due to the softening of demand in our main application segment, which is and still -- which was and still is hair removal. So if we look at the single performance of hair removal, hair removal is declining. We though offset for most of the decline in hair removal with the increase in these other applications. And we are pleased by this situation also because we can hope that there will be or there could be rebounds in the hair removal. We are working for that as well. But we are also acquiring a stronger -- a progressively stronger position in those other application other than hair removal where the market is growing and is expected to grow. So this is the general picture. For what concerned Asclepion, there are 2 circumstances, I believe that in this moment are impacting Asclepion's ability to effectively compete -- not compete, to effectively perform while competing on the medical aesthetic markets. The first is that we went through reorganization of our R&D capabilities, which is not easy in this moment in Germany because even though -- because we are in a fully -- full employment city like Vienna, where, I mean, we do not have the possibility to easily access to a certain level of employees or we do have the possibility of doing it by increasing the cost. And this also answered partially your question on the staff cost. If you look at the increase of staff cost in medical, this -- part of it is coming from Asclepion, where we had a sensible cost increase due to the need in order not to have people go -- we need to increase the average salary or the overall salary cost. And the second reason why Asclepion is struggling a little bit because within the companies of the group, it is the most -- the company that mostly relies on hair removal. It has products also for anti-aging and other application historically. But its main product, the [indiscernible] star, it's hair removal as a system. So it is strictly tied to the hair removal market. Of course, we are investing to differentiate. We have a new product for hair treatment, hair, not hair removal for hair treatment, the hair that stays on the head, which is very promising in the cosmetic field. But in the moment, we are a little bit struggling, fighting this not very positive moment in hair removal. Again -- and now I jump to question #3, which is the staff cost because you give me the -- I had the opportunity to jump on it when talking about Asclepion. Asclepion is one of the staff cost increase drivers. But I need to say that the staff cost increase, especially when compared to revenues was most evident in industrial, where we're hiring all those people with the subsidiaries, where we're hiring people also for R&D and where, as I said, revenue increased but we were expecting a sharp revenue increase. And therefore, we have a higher impact of the cost of staff on revenue. Of course, when you mention the reasons for the increased cost of staff, there are several causes. One is, let's say, the response to inflation that comes with contractual agreements to increase the salaries. Another comes on the need to keep attracting people by giving salaries higher than the average and so by giving benefits, bonuses and salary increases. And the third is actually the number of employees is growing in certain activities. Of course, we get a little bit more rigid to revenue fluctuation. But if we don't hire those people and if we don't increase the number of employees for a set of activities, which not necessarily are sitting in production capabilities but more also in support capability lies in the regulatory, the R&D, we won't be able to see revenues growing. So this is the answer for the question -- to the question for staff cost. Finally, back to your question #2, Giovanni, the backlog. Yes, we are pleased with the overall backlog, both in medical and in industrial. The backlog is stronger than in other phases, recent phases we experienced recently, both in the medical and then the industrial. Then you must know, we already -- we always told you that typically, only a very small part of our backlog of our order books is secured. Therefore, we have orders to deliver but -- and the customer need to confirm at the moment that we deliver their willingness to pay the delivery. And so the order books is a very good key indicator for the health of our market. But as I mentioned on the press release, as I mentioned also in my remarks, of course, we need this tension in demand. I mean, this positive tension in demand to be maintained over the period in order to have the confirmation that all the order backlog is converted into sales and is converted into sales within the end of the year in order to contribute to the revenues that would make the yearly revenues increase and by leverage effect would improve the EBIT with respect to the first 6 months and also with respect of the previous year. Giovanni Selvetti: Okay. May I have a follow-up on the hair removal and then I'll get back in the queue and then if there's enough time, ask a few questions after. On hair removal, is -- well, you said that partly it's Asclepion that is not performing, which is tilted to hair removal. Is it also due to Cynosure partly, because the sales going maybe to Cynosure are declining on the back of the new, I'd just say... Andrea Cangioli: Yes, I didn't want to mention it because it was like trying to find excuses and not finding excuses and saying what happens. You're right, Giovanni. Part of the decline in hair removal is due to the fact that Cynosure new property, new management is basically discontinuing the product line, Elite iQ because they will source similar product from their Korean partner, Lutronic. And you're right, part of the decline in hair removal is due to the missing Cynosure relation. But as this is relevant because it represents probably more than half of the decline in the 6 months of the revenues in hair removal and it doesn't cover in full the decline and therefore, the general trend is there anyway. Bianca Fersini Mastelloni: Next -- the next -- we have another question comes from Carlo Maritano. Carlo Maritano: Three questions from my side. The first one is again on the industrial sector. If I look at the geographical breakdown, I see that the main reason is Italy, as you previously mentioned. I was wondering if you -- what's the reason given that last year was already weak, is still Industry 5.0 that is struggling or if there is any other reason that you think are the reason of this weakness? The second one is on the medical business. If I look at the geographical breakdown, I see rest of the world in the second quarter it is a little bit weak. I was wondering if it is related to the consolidation of -- with us or if there are any geographical area that is struggling. And the third one, I know that laser sources are quite a small business for you, but I see that in this period, they are struggling. So I was wondering what's happening in this division and if you think that will improve going on. Andrea Cangioli: Thank you for this question that gives me the opportunity to treat with a little bit more detail, something which I didn't want to, let's say, be too long in my presentation. Yes, the industrial market, the market for manufacturing in Italy hasn't had a very strong rebound. We are seeing a positive buildup on the order books but we have been quite struggling, both in the cutting and also in the laser marking, in both situations. So we count now on a recovery because you're right, we are comparing to a weak year and being weak again and we really counted on a rebound. And this is -- when I say that we were expecting a stronger rebound, I'm mainly referring to the Italian market in the industrial. Second question is rest of the world in medical. What happened in the second quarter with us? I was trying to peak into the numbers and to see if with us -- of course, with us is part of the decline because we don't have with us revenues anymore. But well, I wouldn't say... Enrico Romagnoli: 2024 -- in 2024 the -- can you hear me? 2024 revenues by -- with us are EUR 5.6 million, while in 2025 are EUR 1.4 million because we consolidated only until February. So the difference is EUR 4 million, EUR 4.2 million. Andrea Cangioli: So yes, we had this difference, then we had Cynosure that Giovanni Selvetti mentioned. We just to be -- I mean, give you some more information, we had an excellent performance in Far East. I mean, in all the -- we had an excellent performance, weaker in the United States. And of course, Japan is missing with us, while Japan is building up nicely in the other medical applications after a low point in 2024. The third question was -- you had another question, Carlo. Enrico Romagnoli: Laser, laser sources. Andrea Cangioli: Laser sources. Yes, yes, yes. We experienced a very difficult transition phase because we have a large part of the lasers, which are dedicated to textile. You know that we sell laser sources for stone -- for the laser stone washing of denim. The whole market of clothing has been struggling, as you know, from the luxury brands to the more standard brands. And we are being hit by this kind of stagnation in the textile and clothing market. We had interesting cooperations in other 2 segments, one which we feel is still very valid, which is digital converting. So it's the packaging, the automation in the packaging industry. And we had a very important cooperation, which hopefully is down to a low point again with an Israelian company. It's a listed company, which quite unexpectedly filed for bankruptcy in the first quarter. So not only we lost the expected revenues but we also booked a loss, which is booked into accruals, the accruals line, so below EBITDA line for about EUR 450,000, I mean. So this is impacting heavily EL.En.'s division for laser sources. And the other segment in which we were counting to work is the electric motors manufacturing. But again, since our customers are based in Europe, mainly in Europe, also this market for what concerns European demand is quite struggling. And also some of our partners are not in the most -- in the best shape, our final partners because we are manufacturing, we are providing laser sources for manufacturers of hairpin stripping systems and for the manufacturing of electric motors, which provide devices for companies like Magneti Marelli. And you know that Magneti Marelli for instance, again, at least in the United States, filed for protection from creditors. I wanted to mention this department, this small business unit in my prepared remarks because notwithstanding the poor financial performance and revenue performance in the quarter, we are investing in R&D and we believe that the products could be the base for a rebound in revenues in the next quarters, maybe not in 2025, maybe later on. But I believe that even though certain of our customers are going through an unfavorable phase, we have a very interesting technology and this technology will again be accretive to our revenue and to our profitability. Bianca Fersini Mastelloni: We have one more question from Andrea Bonfa from Banca Akros. Andrea Bonfa: Very quickly on the duties issue, it wasn't mentioned, the fact that now Brazil is subject to a 50% duty. And for what I remember, Brazil was supposed to be one of the platform to export industrial laser in the U.S. If you can comment on that, if that is really an issue for you or if you can reroute that business from Italy. That's essentially my question for today. Andrea Cangioli: Thank you, Andrea. Our sales to Brazil go to industrial manufacturers in Brazil that mainly manufacture for Brazil. So in the past, for certain markets, the plastic cutting, our Brazilian customers were exporting their product, not the system, their product cut with a laser in the United States. But currently, the Brazilian market is, for us, a market which is, of course, affected by heavy duties but those are the duties for exporting in Brazil. There, we end. We do not use Brazil as a hub for exporting anywhere else. By the way, the performance of Brazil was exceptionally positive in this first 6 months of the year. I mean they had record revenues summing up close to EUR 10 million, which means given the weakness of the real, an absolute record in revenues in Brazilian real. And still, we are [ tonic ] on the market. And so we do not see, as of today, any negative effects driven by the U.S. tariffs on the Brazilian market. Andrea Bonfa: So -- and if I may, now the question is, how is the situation of exporting industrial laser to the U.S. considering that they haven't got any local production there, if I'm correct? Andrea Cangioli: I believe that what I said in relation to the U.S. tariffs in my remarks can be applied to the distribution of industrial laser system as well. By the way, we are in a very important week because this year, the FABTECH is being held in Chicago and is currently being held. So this is the week for the presentation of our products, especially for Cutlite Penta, which has a very large spend this year. And so big investment, Andrea and we're hoping a big return. What I can say is that currently, our offer is so diversified. I confirm there are no U.S. manufacturers that are able to offer on the U.S. market anything close to what we are offering. In certain specific segment, luckily, there are no competitors worldwide. We can have the kind of offer that we are offering in certain specific and smaller segment. Therefore, on the tariffs, what applies is the following. Since our distributors are applying interesting markups, they are able to handle the cost increase without affecting volumes and with only marginally affecting their margin and without -- not asking us to further reduce our margin given the fact that we are reducing our margin by 10% and more due to the weakening of the U.S. dollar itself. Anyway, before the FABTECH was starting, our view and our order backlog on the -- for the United States for the sheet metal cutting was positive. And so we could -- we were optimistic about then, I mean, next week, I'm waiting for the people to come back from this very important trade fair and to understand if the perception of our market positioning, which is very positive in the United States, is still confirmed with a high level of differentiation. Again, what I was saying in my earlier remarks, as long as we can provide a differentiated product and needs to be differentiated with a high perceived value in comparison with U.S. manufacturers or with other worldwide competitors as long as we maintain this perception of value, the 15% tariff which on laser cutting system could be a little bit higher since there is a little bit of steel in, a little bit, there's a lot of steel included in the laser systems. Anyway, the 50% tariffs does not change completely the value chain of the distribution in the United States and we can continue to be optimists in seeing the United States as an interesting market for selling our products. Andrea Bonfa: And finally, if I may, last question. I mean, your working capital level at the end of last year was quite important. I mean you are coming from years where the procurement or raw material was complicated to say the least. Are you planning to structurally lower this working capital or the stock? Or what are your thoughts on this? Andrea Cangioli: We sell in general, products which have relatively high margins and we can never run the risk of not being able to deliver because we don't have available materials to manufacture high-margin products. For these reasons, we have to plan ahead. Typically, the planning cycle has its peak working capital expansion in Q2 -- at the end of Q2 and Q3 because we then close the number for the end of the year, which corresponds also with the highest demand quarter. So we plan to improve our programming capabilities. We are investing in resources, in people, in softwares but basically, it's not easy to reduce the structural impact of working capital. So when I say that overall, the working capital increased by EUR 20 million in this first 6 months and I don't consider this a big issue is because I believe that it will be lowering in the next months and it will maintain more or less the same levels. Then if we will be able to trim 1 or 2 or 3 percentage points in the impact of net working capital on sales, this we will need to see. We are putting down policies in order to try to reduce but we do not want to run the risk to run out of parts because we try to control inventory because it's really -- it wouldn't be worth. This we know from history. Then I concur the level of net working capital is quite high. But good thing to know is that most of the things we have in stock will not lose value over time because they don't have any intrinsic obsolescence. They have obsolescence also, excuse me, only with innovation and we try to control innovation cycles in order not to leave in inventory older versions as we innovate the versions of our products. Bianca Fersini Mastelloni: Next question comes from Emmanuel de Figueiredo from LBV Asset Management. Emmanuel de Figueiredo: I have just 2 questions. The first one is on the medical, on the tariffs in the U.S. Can you just explain a little bit what your competitors are doing in terms of pricing? Are they absorbing the tariff and hitting their margins? Or are they increasing price? What is your view on that? And what are you doing? And then secondly, again, on the medical, what is your best, let's say, best-performing product this year in the medical? You said that hair removal is weak but what is your best performing product. Andrea Cangioli: Thank you for the question. Good to see you. I don't really know in detail. I haven't seen movements on prices in the U.S. market. So I can assume that everybody is trying to absorb the tariffs somewhere in the chain. I mean, I don't know if it's at the origin. I don't know if it's at distribution level. But we are not seeing, as of today, abrupt price changes, even though the United States is affected by inflation. So year-over-year, there is an inflation in prices. So this gives room to somehow absorb -- not absorb, revert part of the tariffs to the end user without creating a big difference in the approach compared to our other competitors. And about the successful products in the medical, of course, the magneto and the urology lasers are very successful. In aesthetic, we have 3 very successful products. One is Onda PRO. Onda, you remember very well, I'm sure our technology, which is based on microwaves, Onda in Italian means wave and it was originally a body contouring device. Onda PRO, this evolution launched last year adds a third handpiece, which is used for the face. And therefore, the system becomes also a skin rejuvenation device, having the ability to treat the skin of the face in order to tighten it. So it's a anti-aging device for tightening. The second very successful device is the RedTouch, which is a innovation, which introduces a laser emitting in the red for rejuvenation on the face and on the [indiscernible]. And I leave the third, the most successful of our technologies, I touched this earlier -- in earlier conferences is the CO2 laser. The CO2 laser, which is the first technology, the oldest technology that EL.En. has offered on the market and the technology that we master. And we improved its effectiveness starting from the technology base. Who visited our company knows that our facility has 2 kind of technology for CO2 laser source, the glass technology, DC excited, the metal technologies, RF excited. The RF excited technology has come to such flexibility in the modulation of the beam, which allows extremely dedicated curing on the skin and is the winning technology on the U.S. market, by the way, particularly on the U.S. market for the rejuvenation application. So Onda PRO, RedTouch and Tetra Pro are the game winners in this moment and are the units which -- with increased sales in the U.S. and in Far East are offsetting -- at least partially offsetting the decline in other disciplines. Bianca Fersini Mastelloni: And now we have Giovanni Selvetti with another question for you, Andrea. Giovanni Selvetti: I promise this is the final one. No, it was more of a curiosity on hair removal because I see that there's been quite a decent growth of, let's just say, self-made hair removal devices, laser devices as long -- at least here in the U.K., you see that a lot. So I was wondering if this is partially in a way, eating the market on your side because if people can do this thing alone without going to, like let's just say, a specific place, well, the demand just flows one way to the other, right? So I was wondering if this is something you see or if it's something that you believe it's a real concern going on? Andrea Cangioli: Again, I don't want to be blamed as superficial. But the home, the devices that remove hair or claim to remove hair for household use are not able to remove hair by themself for a simple physical reason that they do not deliver enough energy to effectively remove the hair. They could be used for a maintenance after they use a professional use. And so in these terms, they could limit the number of visits that you make at a professional site. But generally speaking, I don't think they are effective enough to -- for the technologies available today to eat up market shares to our professional market. I see more a competition coming from lower-cost manufacturers, which improved their performance, which is eating up the low-level competition and forcing us to compete in a share of the market, which is still large, which is the high end but which is smaller than the whole market. We need to continuously differentiate and improve the performances in order to stay on this market effectively. The performances in term of both financial ROI and therefore, effectiveness of laser systems for hair removal improved dramatically in the last years. And our sales, we have in our pipeline further improvements of the technologies aimed of improving the effectiveness and the ROI for our customers. Sincerely, I don't think that the handheld home use devices are affecting our market. But I will study more deeply this situation, Giovanni and maybe be back to you with a more, let's say, acknowledgeable answer when we meet again in some time. Bianca Fersini Mastelloni: Okay. We have one more question right now from François [indiscernible]. Andrea Cangioli: I have seen his question. Unknown Analyst: Sorry for the time to connect the microphone. One question about your competition, especially in aesthetic sector from South Korea or from Israel. How is the relative competition evolving? Andrea Cangioli: Yes. Israelian and Korean are the front line of our competition in the aesthetic market with a wealth of companies, both companies that are on the market from a long time, both companies that are now offering on the market new products. Of course, when you think about Israel, you think about Lumenis, which is the long term -- the longest -- the oldest company competing on the market as well as Syneron and as well as Sisram/Alma Laser. They are all competitors of us. We don't feel that we lost competitive advantage versus these competitors in the last years. Then there is InMode, which is the leader in terms of market cap, which is actually not directly competing against us because they sell RF technology with a high marketing content, with the use of testimonials, they are doing quite well but we don't feel a direct threat from them anymore. And then there is a new company, which was just launched by the former founder of both Lumenis and Syneron-Candela, Mr. Shimon Eckhouse. The company is called Softwave. It's quite small. And it's also competing in rejuvenation and skin tightening device. This is for what concern Israel. For what concerns Korea, the longest lived company is Lutronic, which is now merged with Cynosure. And we feel their competition very strongly, first, because we lost the customer, Cynosure due to the merger. And of course, they were purchasing a technology from us. When they merged with a company that has more or less the same technology, they, of course, are going to source this technology from Lutronic. Lutronic has been very strong on certain European markets. For instance, on the French market, they are the leaders. We are the runner up. And they are extremely -- I mean, they are extremely good in developing technology. So they are high-level competitors. So we cannot treat Lutronic as we can treat several other competitors coming from Far East that still deliver products which are well below par in terms of reliability, technical specification and overall product specification and quality. There is another pair, which is now flourishing in Korea. It's a company, Classys I. It's a listed company. You can see how with revenue, which is in the order of magnitude of $100 million on a yearly basis today, if I'm not wrong, they have a market cap, which is outstanding, over $2 billion. This is due to the rapid growth they are forecasting and to the very high margin. Basically, Classys is replicating, on a Korean basis, the business model of InMode or at least their ambition is to replicate it. They sell a very low-cost device as high prices and they're very successful in this moment. And again, looking at all this company, we feel more threatened by the competitors from Israel, which compete with the same -- apart from InMode with the same technological infrastructure that we do than from the companies competing from the Far East where the product level is improving but it's still behind what we have in Europe and what the Israeli and the best Korean company are able to deliver today. Bianca Fersini Mastelloni: Okay. We have no more question registered at this moment in our list. I would like to ask investors still connected if there are any further questions from their side. No more question. Okay. Then ladies and gentlemen, the conference is over. If you have any questions to investigate in the future, please do not hesitate to contact Enrico Romagnoli, who will be happy to answer your queries. Thank you to all of you for attending this conference and we hope to have all you again next time. Goodbye to everybody. Bye. Enrico Romagnoli: Bye. Bye-bye. Andrea Cangioli: Thank you very much. Bye-bye.
Operator: Good morning. This is the Chorus Call conference operator. Welcome, and thank you for joining the Full Year 2026 Consolidated 3 Months Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Jacopo Laschetti, Stakeholder and Corporate Sustainability Manager of SeSa. Please go ahead, sir. Jacopo Laschetti: Good morning, and thank you for joining the SeSa Group presentation. Representing the group today are Alessandro Fabbroni, Group CEO; Caterina Gori, Investor Relations and Corporate Finance and M&A Manager; and myself, Stakeholder Relations and Head of Sustainability. Earlier today, the Board of Directors approved the consolidated financial results for the first quarter of fiscal year 2026 ended July 13, 2025 (sic) [ July 31, 2025 ]. The corporate presentation is available on the SeSa website and will serve as a reference throughout today's conference call. Alessandro will begin by providing an overview of our key business developments and achievements. Alessandro Fabbroni: Good morning, and thank you all for joining today's call. In the first quarter of the new fiscal year, SeSa returned to growth, confirming the achievability of the guidance of the new industrial plan. Overall, first quarter 2026 shows a solid recovery in consolidated revenues and EBITDA, along with a significant improvement in net profitability, supported by a substantial reduction in financial expenses and the improvement of the net financial position compared to April 30, '25, with a clear and progressive reversal of the main trends of revenues and profitability. In the first quarter, on a consolidated basis, the group recorded revenues for EUR 846 million, up 8%, and EBITDA of EUR 61 million, up 7.2% year-on-year, and an adjusted net profit for EUR 29.8 million, up 6.4% year-on-year, with an adjusted group net profit equal to EUR 27.9 million, up by 4.5% year-on-year. The trend in [ human ] people shows 6,593 employees as of July 2025, with a moderate growth up 0.9% compared to April 30, '25, in line with our target of growing operating efficiency of the new industrial plan. On organic basis, revenues increased by 2.2% year-on-year, EBITDA by 4% year-on-year and adjusted group net profit by 2.3% year-on-year compared with the pro forma figures as of July '24, restated to include the quarterly results of Greensun, company acquired last November '24. Consolidated revenues by sector show a positive trend compared with fourth quarter '25. ICT VAS, with revenues for EUR 497 million, down 2.7%, entirely organic, showing progressive recovery from the 8.2% decline in fourth quarter '25, with return to growth expected from second quarter 2026, following the double-digit increase in the July and August 2025 backlog. Digital Green VAS, with revenues for EUR 111 million, up 24.7% year-on-year, driven by 20% organic growth and strong business demand, supported by rising energy needs related to digitalization and the high adoption. Software and System Integration sector with revenues for EUR 220 million, up 2.8% year-on-year despite a slower demand in some key Made in Italy districts and the re-engineering activities in some business units. And finally, Business Services sector, with revenues for EUR 37 million, up by 3.0% year-on-year, which continues to grow entirely organically, supported by the increasing focus on digital platforms and vertical applications, and the expected acceleration in upcoming quarters, thanks to new agreements with some major Italian banks. Consolidated EBITDA increased by 7.2% year-on-year, reaching EUR 61 million, up 4% versus the pro forma figures, and driven by the 20% growth of Green VAS and Business Services sector, while the ICT VAS and Software System Integration sector remained broadly stable year-on-year. ICT VAS achieved an EBITDA of EUR 22.2 million, down 0.9% year-on-year, with an EBITDA margin equals to 4.5% as of July '25, up from 4.4% as of July '24. Digital Green VAS reported an EBITDA of EUR 6.2 million, up 18% year-on-year, with an EBITDA margin of 5.6% as of July '25, slightly down from 5.9% as of July '24. Software and System Integration sector achieved an EBITDA of EUR 23.5 million, down 2.7% year-on-year, with an EBITDA margin equals to 10.7% as of July '25 compared to 10.8% in the full year '25. This reflects the re-engineering operations in some business units, with EBITDA margin expected to stabilize in full year '26, the same level of the full year '25. Business Services reported an EBITDA equals to EUR 7.3 million, up by 25% year-on-year, with an EBITDA margin of 20%, driven by the progressive focus of revenues on proprietary digital platforms and vertical applications developed over the past 2 years. Adjusted consolidated EBIT was equal to EUR 47.3 million, up 4.2% year-on-year after depreciation and amortization of tangible and intangible assets equals to EUR 12.7 million, up 15% year-on-year and provisions for around EUR 0.7 million. As expected, in the new industrial plan, net financial position show a significant reduction equals to 12% compared to first quarter '25 and equals to 36% compared to fourth quarter '25, driven by lower interest rates and efficiency measures in group financial management. The first quarter adjusted consolidated net profit was equal to EUR 29.8 million, up 6.4% year-on-year, reflecting stronger operating profitability and a reduction in financial expenses. The adjusted group consolidated net profit reached EUR 28 million, up 4.5% year-on-year and up by 2.3% versus the pro forma figures as of July '24. Finally, consolidated report in that financial position as of July 2025 equals to a net debt for EUR 65 million shows a significant improvement compared to EUR 75 million as of April 30, '25, thanks to operating cash flow in the quarter and lower investment compared to the previous year, with CapEx and M&A equal to approximately EUR 11.5 million in first quarter '26 alone. Now I'll give the floor to Caterina to present our new strategy in terms of M&A and the main resolution of the last shareholders' meeting held on August 27, 2025. Caterina Gori: After years of significant M&A investments, our new FY 2026, 2027 industrial plan marks a strategic shift, focusing on group simplification and organic growth. We will leverage the capabilities and business model we have built over the years to drive sustainable growth, supported by dedicated CapEx in AI and automation to enhance efficiency, scalability and market penetration. As a result, annual M&A investments are projected to decline to around EUR 30 million, guided by a selective value-driven strategy, while CapEx is expected to remain at approximately EUR 50 million per year. In the first quarter of FY '26, we further strengthened our international presence through only 2 strategic acquisitions, with total investments of approximately EUR 7 million. Visicon GmbH in Germany, an SAP consulting specialist, with EUR 5.3 million in revenues; and [ Delta Informaciones], Spain, an AI-driven player in digital identity with EUR 2 million in revenues. Both companies delivered EBITDA margin above 10%. These acquisitions confirm our strategy, a selective approach to high-value M&A in Europe, combined with strong investments in digital transformation areas such as AI, automation and digital platform. As outlined in 2026-2027 industrial plan, we are focused on generating strong cash flow and delivering solid returns to our shareholders, as demonstrated by our last shareholder meeting on August 27, 2025, where we approved a dividend of EUR 1 per share in line with the previous year, a significant increase in the share buyback program from EUR 10 million in FY '25 to EUR 25 million for the coming year, almost 3x the previous amount to further enhance the shareholder value by increasing the payout ratio from 30% of the last year to 40% of the current year. We have already started the program the day following its approval, underlining our commitment to create sustainable value for our shareholders. Then the cancellation of treasury shares up to a maximum of 2% of SeSa share capital over the next 18 months. As of August 27, 2025, approximately 1% of shares had already been canceled. I now invite Jacopo to present our ECG (sic) [ ESG ] results for the first quarter of FY '26. Jacopo Laschetti: Good morning, and thank you, Caterina. In terms of sustainability path, in light of the new CSRD regulations and the new ESG standards, we confirm our strong commitment to value generation for our stakeholders, and we continue to invest in sustainability and environmental protection, supporting intensively our customers to be responsible on the management of natural resources. By the way, our Digital Green sector contributes significantly to reduce overall CO2 emissions, thanks to our leadership position, which allows to improve the sustainability profile and performance of our partners. In line with our ESG growth path, our sustainability plan for 2026 and 2027 defines priorities, targets and specific actions to integrate sustainability in our business model, contributing to the creation of long-term value for stakeholders. On this point, our last results were characterized by a significant improvement in ESG performance and the achievement of some relevant sustainable development goals set. We reinforced our group purpose that confirm our corporate values and goals of long-term sustainable value creation for the benefit of all stakeholders. Digital innovation, long-term value creation, sustainability and digitalization continues to be the core pillars of our strategy, defining the group's purpose. We also continue to extend our main group certification, confirming all of our ESG ratings. In terms of HR management, we are facing a consolidation phase with an increasing focus on work and collaboration efficiency and the progressive integration of digital enablers in our organization and the way we work. After big improvement of our human capital over the last 4 years, in the first quarter of the new fiscal year, we increased the headcount by 0.9% only, in line with our strategic industrial plan. We continue to work to further improve our loyalty rate, reinforcing at the same time our education, hiring and welfare programs with wider and specific measure to support parenting, diversity, well-being and work-life balancing, thanks to dedicated programs in favor of diversity and inclusion. Now I give the floor again to Alessandro for the final conclusions. Alessandro Fabbroni: Thank you, Caterina and Jacopo. I will now share the final remarks and conclude our session. Three months ago, we presented our new industrial plan, aiming at group's transformation by focusing on organic growth of our core businesses, organization streamlined, growing operating efficiency and market penetration by reinforcing our role as a leading digital integrator and partner of customers' digital transformation. In the first quarter of '26, we worked strongly to deliver the main strategic targets of the industrial plan, driving organic growth across the group sectors, streamlining legal entities and adopting AI and digital enablers to boost operating efficiency. In particular, in the first quarter of FY '26, we achieved a 25% growth in profitability of Business Services sector, driven by the expanding market penetration of our proprietary digital platforms and vertical applications developed over the past 2 years, a double-digit organic growth in both revenues and EBITDA for the Digital Green VAS sector, fueled by strong business demand and rising energy needs driven by digitalization and AI adoption, recovery in ICT VAS trend compared to fourth quarter '25 with a double-digit backlog growth in the month of July and August '25, supporting an expected return to a year-on-year growth from the second quarter '26. And we also achieved a significant reduction in the net financial expenses, down 36% compared to fourth quarter '25, and down by 12% compared to first quarter '25, reflecting the ongoing recovery trend, supported by lower market interest rates and the efficiency measures implemented during FY '25. Thanks to our strategy, we strengthened our position as a leading digital integrator with a strong focus on cybersecurity, AI, automation, vertical application and digital platforms. And at the same time, our Business Services sector continued to grow in the financial services industry, driven by rising demand for specialized vertical platforms and applications. In the light of our first quarter 2026 strategic achievements and the disciplined way we have been executing the new industrial plan, today we confirm our commitment to deliver all growth targets that we have outlined last July for the new FY '26. This means a 5% to 7.5% growth in revenues, a 5% to 10% increase in EBITDA, and about 10% improvement in net consolidated profit, confirming that we are on track to achieve the main value generation targets for our shareholders. Considering the positive trend of our net financial position improving by around EUR 10 million compared to April 30, '25, we are delivering the planned 40% payout ratio compared to the 30% of the previous year by executing the new EUR 25 million buyback program approved by our last shareholders' meeting. Now we will continue to execute the new industrial plan with strong discipline, focusing on organic growth, operating efficiency, the adoption of digital enablers and inspired by a corporate vision oriented towards sustainable growth and digital innovation. Thank you very much for your kind attention. Now we open the Q&A session. Operator: [Operator Instructions] The first question is from Andrea Randone, Intermonte. Andrea Randone: My question is about the outlook you provided for the business segments. We can see that Digital Green is performing slightly ahead or I can say, ahead of initial expectations, while maybe Software and System Integration is a bit softer. So my questions are, what is the visibility you have on the most recent months? And if you can provide some indication on the full year profitability you are expecting compared to what we have seen in the first quarter? And any further comment on this -- the expected evolution of the business segment is welcome. Alessandro Fabbroni: Andrea, thank you for the questions. So first of all, the trend of business segment is characterized by growing focus on proprietary digital platform. So that means, as a result, growing level of EBITDA margin that we achieved record 19.9% of revenues. So we grew by 3% in terms of revenue. We expect to accelerate the trend of revenues, considering also several main contracts that we won during the first quarter that we will account starting from the second quarter. So our guidance continues to be a double-digit growth in terms of revenues and in particular, in terms of profitability. In the Digital Green, we capitalized the great effort we did in the last quarter. So the merger between PM Service and Greensun created a leading player in Italian market. We increased our market share in the business segment. There is a great demand of energy for renewable sources, considering the low prices that stabilized. So the trend of prices were stable in the quarter. So the lower level that we achieved over the past 1.5 years made very competitive the green energy solution, and there's a great demand from corporate organization in that direction. So the trend of the market is a trend of high single-digit growth, and we plan to be able to perform to continue to grow double digit, thanks to our competitive advantages and our market share we achieved in the Italian market. The situation of the Software and System Integration in the quarter characterized by a recovery of EBITDA marginality in comparison to the fourth quarter because we performed with a 10.7% compared to 10.2%. We expect to stabilize this level around 10.8%, 11%. And so to start increase also in terms of EBITDA quarter-by-quarter. So our feeling is that the first quarter of that fiscal year was the most difficult to face because we are in the beginning of the industrial plan, but the actions that we perform, we will disclose most of their effect in the upcoming quarters. So that is the reason that we confirm the consolidated guidance for the whole group with a visibility level that increased a lot compared to 3 months ago. Operator: [Operator Instructions] The next question is from Gabriele Berti, Intesa Sanpaolo. Gabriele Berti: First question on CapEx, considering you mentioned a shift in the CapEx mix used from M&A and internal development, where do you see CapEx in this fiscal year? And how much will be dedicated to internal development? And if you could also provide some color on which kind of projects are you developing? And then second question, if you could elaborate on the driver behind the acceleration in the backlog for the VAS segment? Alessandro Fabbroni: Gabriele, thank you for the question. Yes, in terms of CapEx, including M&A investment, we have around EUR 11.5 million in the first quarter, of which EUR 7 million M&A. So that means we are more or less on track because our full year indication is an indication of EUR 75 million, EUR 80 million, of which EUR 30 million, EUR 35 million dedicated to selected M&A. So the internal development refer mainly the so-called digital enablers adoption. It means AI automation and also the development of digital platforms and vertical application for penetrating the market and also for our organization. In terms of trend of ICT VAS, first of all, we closed the quarter with an upturn in comparison to the trend of the fourth quarter. So we declined 2.5% compared to a decline of 8%. But in particular, we closed the quarter with very, very positive trend in the backlog. The backlog increased by over than 10% in July, over than 10% in August with a good start in September. And so considering also the trend we had in the previous year, now we expect to recover a positive increase in revenues starting from the second quarter. I remember that our indication for the full year is to grow low single digit in terms of revenues and EBITDA and double-digit in terms of profitability. And in fact, in the first quarter, we increased in terms of net profitability in this sector by around 17%. So that means we are on track not only in terms of trend of revenues and EBITDA, but in particular also in terms of profitability and net income. Operator: The next question is from Guy Breeden, Quilter Cheviot. Mr. Breeden, your line is open. Maybe your line is on mute? Unfortunately, we cannot hear you. Could you please open up your line? Maybe you are muted? [Operator Instructions] The next question is from [ Paolo Cipriani ], a private investor. Unknown Shareholder: Alessandro, can you hear me well? Alessandro Fabbroni: Yes, very well, yes. Unknown Shareholder: Yes. I have a question regarding the financial expenses that are improving and should be expected to improve further. Could you just maybe help me to understand whether a bit more just to say something a bit more on what they are related to. I mean just are they, for example, related to the acquisition of the previous small companies acquired in the previous years, I mean, related to the working capital management of these companies? And maybe just say something about the full effect of cost optimization initiatives that seems to improve these financial charges? Alessandro Fabbroni: Thank you for the question. So first of all, we are capitalizing 2 main factors. The first one is the lower level of interest rates. I remember that in any case, we will benefit in a progressive way because several financial costs are accounted for in advance for 3, 6 months. And so we will benefit moving forward. The second one is obviously the improvement that we are achieving in working capital management and also in several other measures that we are introducing starting from 1 year. So the lower number of legal entities, the adoption of cash flow and obviously planning and, generally speaking, the identification of planning and several targets for any group's legal entity. So the start of the fiscal year was positive because of the comparison with the previous year in terms of first quarter 2025 was a comparison with an improvement by 12%. But if we compare the first quarter '26 with the fourth quarter '25, we improved by 35%. So that is the reason we expect to accelerate in our progressive improvement quarter-by-quarter. Operator: [Operator Instructions] Gentlemen, Mr. Laschetti, there are no more questions registered at this time. I turn the conference back to you for any closing remarks. Jacopo Laschetti: Thank you very much. As usual, we stay available for any additional information, and thank you very much for your participation. Operator: Ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect your telephones.
Matthew Moulding: Good morning, everyone, and thank you for joining us for THG's half year results presentation. As I said in the statement this morning, trading momentum continues to build positively with the strategic changes implemented last year across both THG Beauty and THG Nutrition now bearing results. H1 was a performance of 2 halves. We entered the year following a period of focused execution, implementing significant strategic initiatives and model changes across the group, including the completion of the demerger of our Tech and Robotics division, Ingenuity. In THG Beauty, we disposed of some of our smaller operations, commenced the cycle of investment in our portfolio of own brands and took the decision to prioritize retail trading in the U.K. and the U.S. In THG Nutrition, the Myprotein global rebrand was a major talking point last year, and it's been important to gauge sentiment from existing D2C customers, new consumers and our developing network of retail and license partners. It's clear the positive reaction to the new positioning of Myprotein is starting to speak for itself with accelerating sales growth and a rapid rollout across offline retail. In a dynamic consumer environment, our results demonstrate the resilience of our digital-first model. And as we move through Q3, I'm pleased to say the group is delivering positive growth across both our businesses. Three key achievements from H1 stand out. First is the successful return to growth for our THG Nutrition division, which delivered 3% revenue growth, driven by a return to growth in new customers as well as significant expansion of our off-line retail offering across Europe, the U.S. and Asia. Secondly, in THG Beauty, we delivered a resilient trading performance despite a slower start to the year. While strategic changes impacted the headline number in the second quarter, we saw our U.K. Beauty retail business grow at its fastest rate since Q1 2024, proving the strength of our market-leading platforms and active database quality. And finally, we've strengthened and de-geared our balance sheet by extending facilities to December 2029 and reducing gross debt by GBP 374 million. Alongside the refinance, following an unsolicited approach in half 2 2024, the group sold Claremont Ingredients, a small manufacturing business within THG Nutrition. The proceeds have been received, which accelerates our plans to move the group towards a net cash position. Claremont is the U.K.'s leading independent flavor manufacturing lab for sports nutrition and was acquired in late 2020 for GBP 52 million to accelerate Myprotein's product development and global licensing ambitions. The disposal for over GBP 100 million marks a significant return on that investment with Myprotein supply chain protected through a long-term supply contract, ensuring we continue to benefit from Claremont's capabilities while also gaining access to the broader international expertise of the Nactarome Group. These actions, combined with remaining focused on cost-saving initiatives have laid a strong foundation for the second half of the year and beyond. Okay. So let's turn to the headline financial performance for half 1. Group revenue was GBP 783 million, which was 2.6% down on the prior year, reflecting the significant strategic actions we've taken, particularly within THG Beauty. The majority of Beauty's H1 revenue decline can be attributed directly to the planned discontinuation of certain operations and disposals as well as the effect of withdrawing from certain sales activity in Europe and Asia. Encouragingly, Beauty is back in growth in Q3 as expected, reflecting the benefits made from last year's model changes. THG Nutrition's return to growth in both Q1 and Q2 reflected the positive response to the global rebrand, helping to drive new customer growth as well as a rapid rollout of our offline model. As previously announced, group adjusted EBITDA for the period was GBP 24 million at an EBITDA margin of around 3.1%. Despite strong sales growth, continued high input costs in Nutrition weighed on margin performance for the business during H1. Myprotein has a much shorter supply chain than peers, and so sharp movements in commodities are felt sooner. The wider market has now caught up, allowing Myprotein's vertically integrated D2C model to return to strength with both sales and margins now returning to growth. Beauty Retail, the largest part of our Beauty division, performed well in Half 1, especially in Q2, supported by a strong and resilient U.K. beauty market. In our Beauty Own Brands division, the timing of large orders into major customers has fallen later this year, which impacted profitability of our Perricone MD brand during Half 1. An improved order pipeline is in place across our key beauty brands for H2, including for Perricone. Turning to our balance sheet and cash flow. Our financial health remains robust with cash and available facilities of around GBP 270 million at Half 1, which is prior to the Claremont disposal proceeds and prior to our seasonally strong cash generative period for the year. We maintained strong capital discipline with capital expenditure materially reduced, helped by the demerger of Ingenuity. Looking at our businesses in more detail. THG Beauty revenue stood at GBP 480 million with U.K. performance a real highlight, gaining market share in the second quarter. This is reflected in our brand health metrics with prompted awareness for Lookfantastic reaching its highest level in Q2 this year. We've launched over 70 major new brands on site and refined our product listings to keep our proposition fresh. The underlying health of our Beauty customer base is strong, and our loyalty programs continue to grow, now reaching well over 3 million members. These customers purchase more frequently and have a higher spend per account. Revenue from returning customers has increased, reflecting the success of these loyalty programs. Average order values and conversion rates via our apps continue to grow as well, and there remains a significant opportunity to enhance app functionality to deliver an even more personalized experience for our customers. In THG Nutrition, we returned to growth, delivering revenue of GBP 304 million for the half. D2C new customer growth returned in the first half, reflecting a shift in marketing investment to open funnel campaigns to build brand equity following the rebrand. Our offline retail expansion across all key geographies, including the rollout of Myprotein products in U.S. Walmart stores also supported both revenue growth and brand awareness. Product innovation remains a core strength where we've successfully launched over 200 products across 4 very different categories. These launches use multi-touch campaigns that help expand our category-leading ranges and meet changing consumer preferences. Our nutrition customer metrics tell a positive story. Myprotein is clearly the U.K.'s most preferred sports nutrition brand, leading the category in brand consideration. Our offline performance has been exceptional with more customers purchasing the Myprotein brand than ever as our offline channels rapidly expand. We now sell over 750 different product lines across 5 distinct categories through the offline retail channel, and our products are already available in over 34,000 doors globally. Now let's look ahead. The second half of the year has started well, and we are now entering the key trading weeks of the second half with THG Beauty back in growth, helped by strengthening home market demand. The launch of our advent calendars has been the strongest in our history, and we expect gross profit margins to remain at our medium-term target levels, supported by improving performance from our own brands. To prioritize long-term market share gains and customer loyalty, Myprotein will limit price increases, underpinning further acceleration of its installed base in global offline retail as well as supporting D2C new customer growth. We are confident in this strategy to protect long-term market share and loyalty. Our guidance for the full year 2025 remains unchanged, while our performance and strategic actions give us confidence in our medium-term targets. So in summary, THG has delivered a resilient first half performance, underpinned by a pleasing Q2 performance. Both businesses are now back in growth as we enter the key trading period of the year, and we've opted to deleverage the balance sheet with cash from a strategic high-return disposal. Thank you again for joining us this morning, and we will now open the floor for questions. Operator: [Operator Instructions] First, we have Patrick Folan from Barclays. Patrick Folan: Just a couple for me. How should we think about the Nutrition margin going forward as you find the balance between margin improvement and top line growth while whey prices hang in the balance? Then secondly, looks like we're in a time period where protein is the most invogue category in the consumer world. Can you maybe share with us any expectations you have on your Walmart launch? And if there's anything else you are excited about within your portfolio, especially considering the second half top line guide for Nutrition? And if I can squeeze one more in. Can you update us on the U.K. VAT situation regarding protein powders? Matthew Moulding: Okay. Look, so 3 questions there. The guys will prompt me on what they were, Patrick. But the first one was around the margins. How should we look at that given whey pricing remains elevated at record highs. I mean, look, stability is always a good thing for our business model. So what's the problem for us is when you get sharp movements. Obviously, sharp movements down in pricing are attractive because we will see the benefit of that quicker than anybody else and sharp movements up, we'll see the adverse impacts of that quicker than anybody else. And that's all driven by our supply chain. We're a vertically integrated D2C business with a short supply chain. So on average, we're probably carrying no more than -- when we get the raw materials into our warehouse, that's probably starting to be in the customers' hands within 9 weeks, whereas for offline channels, you can imagine that's probably more like 9 months. And so there's a much greater delay in raw materials feed into our supply chain so much sooner than everybody else. Now we are in a sustained period now of where pricing is stuck where it has really at these kind of record levels, and we are comping that with the prior year now as well at the same time. So that stability means that all of our peers have got that in their supply chain. And so as a result, our business model starts to operate well. And as a result, we're seeing our online D2C margins grow quite considerably year-on-year. And I wouldn't -- I can't disclose, I guess, the specifics of it, but it's hundreds of basis points better and nothing's changed in particular in the supply chain. But pricing is going up in the market as the peers are pushing their prices up, having to deal with this. Now so we're in a very strong position with that. As then you will see that why pricing starts to fall at some point, then if it's a very gradual fall, great, it doesn't matter. We're all in a level playing field. If it's a fast fall, then we'll see the benefit very quickly in terms of that. And so what I would say is we've then looked at the off-line retail opportunity, and we have been pricing to go into the offline retail opportunity at a very competitive rate. So if you were to go into any of the off-line channels, you will see that you've got Myprotein as the highest quality product on the market, priced at an incredibly cost efficient for the consumer. And as a result, we're leading the category quite typically. When we go into offline retail with a retailer, Myprotein will typically lead that category from the off, especially in the U.K., I mean, almost certainly in the U.K., that would be the case. As you then talk about, I think you mentioned Walmart, you look at places like Walmart. Obviously, U.S. is a very, very big market, and Myprotein doesn't have the same position in the U.S. as it does in the U.K., where we're clearly the #1 in the U.K. That said, the sales that have gone through Walmart so far, we've been very pleased with, and I believe everyone is very pleased with. And we have got that disruptive model at the same time that goes into it. We will continue to be disruptive. I think we announced that with the Claremont deal. We want to get that installed base across the world way beyond the 34,000 doors that we're currently. I think we're at about 45,000 by the end of the year. We've pre-released in the past that we know about. Obviously, we're targeting 100,000, and that would give us an incredible position from a standing start only a couple of years ago. So we are investing some of that D2C margin growth to a degree in the offline channel, where we're running that broadly at a breakeven for now tight position, which is a very sensible place to be as we then get category leading in all those retailers, we naturally can then push our pricing up and do push our pricing up, and we'll be doing that accordingly, which then further enhances your margins, especially into 2026. So that was the margin question, Patrick. I'll let you come back in a second to see if there's any further questions on that. The other 2 questions you had, one was on the VAT position. As we understand, well, we do understand that HMRC have been refused their right of appeal against the decision. And as a result, they've now got, I don't know, another week or so left, 2 weeks left maybe to come back and see whether they're going to try and fight this in the highest courts or not. I think we pre-released that there's a GBP 30 million contingent asset for us there. If that was to come to pass, that's actually looking more like GBP 45 million. We've obviously put our claim in accordingly and protected our position and that then continues to grow going forward. We still continue to charge VAT on the products as a matter of prudence. And even though the HMRC has lost the case because it's a position we've now been operating in for a period of time and just think that's the right thing to do. So look, let's see, but it's quite an interesting position with, at the moment, a GBP 45 million potential asset to come back into the business there. And then -- the Walmart launch Yes, the Walmart launch. So -- and we're doing -- across the U.S., we're making some really good progress there. I'm super pleased with what the team are delivering on the offline retail across the U.S. and the U.K. I think you asked are there any other interesting partnerships to come. We've -- in the detail of what we've released today, you will see a couple of licensing deals, which are quite exciting. We can't name them specifically, but you'll see that the success of the Muller has been really good. The Iceland deal is great. These are millions of products a month going into consumers' hands with serious retail value attached to them at the same time. We're now moving into the ready-to-go lunch market with a major player in the -- for the U.K., which will hopefully expand into Europe pretty quick as well, which would see us have millions of more products in consumers' hand in high protein lunchtime provisions. And then the other thing is one of the largest confectionery groups in the world, we've done a deal where we're licensing those brands in from Myprotein products, and they should be in consumers' hands, hopefully, the first of them in time for Black Friday and Cyber Week as well. But the licensing side of the business is a fantastic pipeline of licensing in and licensing out. Operator: Our next question now comes from Andrew Wade from Jefferies. Andrew Wade: A couple from me. The first one, you mentioned Beauty orders impacted by focus on active customer mix. Could you give us a little bit more detail on that? Is that reflecting sort of territory pullback? Or is that another factor as well? That's the first one. Shall I fire all of or do you want to answer? Matthew Moulding: Fire all off, Andrew. The guys are writing notes in case I forget. Andrew Wade: Nice one. So that was the first one. Second one, you talked a little bit about the investment cycle in your own brands. Could you talk about what the catalyst has been for that and sort of what impact you're expecting from that sort of period of investment? And then the last one on Claremont. Clearly, a valuable asset that you've monetized from within the group, but many haven't been thinking about. Could there be other opportunities like that within the THG table? Matthew Moulding: All right. So there was the Beauty life cycle, any other Claimants in the group? And the first one again... Unknown Executive: First one was Beauty and the... Matthew Moulding: Active customers. Yes. So look, so on the Beauty side of things, it's -- as you say, really, it's really around pullback in certain territories where we're not seeing immediate levels of profitability. I think we flagged it a while back. Our focus -- we've got real strength in the U.K. and U.S. and we've got a fantastic distribution across Europe, but it comes from Poland. And so what we've done is we focused on making sure that those customers that can deliver the requisite level of return for us on day one in key territories is where we've put our energies and focus. And so that's been the key factor there. The second question around Catalyst for the own brand. Yes. So look, the truth is as any brand owner would know, maybe not everyone talks about it, but you go through cycles with brands. You've just seen it with Myprotein, where we've had a hell of a year last year with Myprotein, and we're now reaping the rewards of that. And so quite often, the catalyst with any brand is as much as looking forward and thinking, well, do we need to tweak the path of it or something like that. We're always doing that. Beauty brands are a little bit slower, I've got to say, than nutrition. So you don't ever need to do dramatic big moves ordinarily with the Beauty brand. It's around tweaking, changing direction a little bit, et cetera. What we're really talking about here with the Beauty brands is more about the timing of some of the big customer orders. So some of the strategic things we might do is put less focus into certain channels and new focuses into other channels. But there are -- the real factors that have been affecting the brands or Perricone in particular, has been around some large orders that were in the first half of last year and fall into the second half of this year, principally. Net-net, actually, there's a bit less volume order going through it with some of those customers as there's been some volatility with some of those customer channels. But that's the principal reason for it. But we are always tweaking our brands and Beauty is just less of a requirement for major overhaul than more of your fast-moving consumer brands like Myprotein. The final point, I think, was, Andrew, around what have you got in your group that we're not thinking about, but it was an unsolicited approach that came to us in second half of last year for Claremont. We've got lots of assets in the group similar. We spent hundreds of millions through the years building additions to our business model. So even in Nutrition, we have a bar manufacturer that manufactures for some of the biggest brands in the world as well as for ourselves. We paid GBP 55 million, I think, for that 5, 6 years ago. We have a drinks manufacturing business where we similarly drinks for ourselves and other people, et cetera. In Beauty, we have the U.K. manufacturing business. We have the U.S. manufacturing business. Those businesses combined, we've probably spent the best part of GBP 250 million on getting those in position. What we've done with all of these assets, and there's others as well, but we've done with all of those assets is they're just part of the concept of how do we make the mothership a better, stronger business and the mothership would be in Nutrition, Myprotein, in Beauty, it would be Cult Beauty, Lookfantastic in particular, being the biggest in derm store in America. And everything else we do around that is at that point in time, we're just trying to make those businesses stronger and have more competitive advantage. Naturally, if at some point, we sit there and think there's a reason or a value or an unsolicited approach that needs serious consideration, then we'll do that. But long-winded way of saying, Andrew, we've got plenty of these things in the business, and we could do one of those, just a small one of those, win the VAT and you're probably pretty much at net cash, right? So without too much change to your business model, people wouldn't even notice a change in our business model, but that's how we've built the group. Operator: [Operator Instructions] And next, we move to a question from John Stevenson from Peel Hunt. John Stevenson: Again, 3 questions again. On Retail Media, obviously been around for a while, and you look to formalize your approach to the creation of THG Beauty Media. Can you talk a little bit about how that's going to accelerate the benefits of Beauty and sort of what you're doing there? On apparel, obviously, showing really strong growth through the first half. Can you give a bit more detail behind that sort of rate development and future plans? And then finally, on Nutrition, looking at progress in convenience in particular, if you get to the ready-to-eat ready-to-drink. You talked about, I guess, some of that with the licensing deals. Again, can you sort of rate your progress into convenience and how much that's going to change over the next 12 months? Matthew Moulding: All right. Look, the ones I remember, I'll start with straight away, if that's all right. The -- in terms of athleisure wear, clothing under the Myprotein, I mean, look, it's been a journey. I don't mind admitting because when you're -- there's no other sports nutrition brand in the world that's moved into serious athleisure wear. And I think what we've proven is that we've gone from doing spring vest that you buy that the average weight lifter would buy with a bag of protein now to a serious proposition of very high-quality leisure wear, gym wear, et cetera. And a point at the minute, it's triple-digit growth in there. And that's principally driven by females as well, right? So you're also bringing a lot of female customers into the ecosystem that maybe 5, 6 years ago was a bigger challenge to do. And that's been particularly pleasing. Look, I think the model itself, we have a big customer base on Myprotein globally. We have a great influencer roster of all different types of people as well. And then we have this full range from bars, snacks, all these other product categories by -- it almost just all helps itself in the flywheel because if you're somebody that wants to make a living out of being in health and wellness and being an influencer, that actually, if you work with Myprotein, you're not just pushing one product every day. You've got this whole plethora of your lifestyle in which you can push, which includes really top quality clothing at the same time. And then add to that, things like Hyrox, where we've become the global partner there, which has gone particularly well. And all of our athletes are competing in there. It's really just started to gain some real traction this year. The rebrands played a big part as well. Women don't necessarily want to walk around with big logos and things like that. And you've got -- we've now got the Micon product quality is outstanding. So I just think it's a whole long list of factors that are coming together as ever with these things, right? What we've got to do then is keep the momentum going on top of that? It's no good just growing by 100% one year and then being flat the next year or down a bit to go forward a bit, so on and so forth. So there's a lot of focus in the background on that. The other -- Retail Media and Beauty. Yes. Retail Media and Beauty. Look, it's something Amazon has led the world on this hasn't it? They're a fantastic media business with ads there. We're a big data business ourselves. And so as a result, we've seen incredible success from rolling that out through the years. And we just know there's much more for us to be able to do working with the brands in this regard, and we can show people fantastic returns by saying spend the money here on the marketing, and this is the return you get the other side. So we're just following through that consistently. One of the exciting areas actually in the years to come, we'll be able to put that into Myprotein where obviously, we've launched this brand hub where lots and lots of health and wellness brands now operate on there, and that should expand quite significantly. It's only launched in the U.K. currently. But as we expand that globally, we'll also want to put the Retail Media through there and be able to show those brands, listen, if you invest here, this is the return you're going to get. So it's just been a consistent deliver for us year after year since we launched it a few years ago, and we're just getting stronger and better at it. So that's the simple kind of mechanic that we've got there. The... Unknown Executive: This progression into convenience, nutrition. Matthew Moulding: How would you rate it? Look, I think it's been pretty outstanding in the U.K. I think we can do better in Europe. And the U.S., we're in the offline model, but we're not doing much in the way of licensing across the U.S. and the move in that regard. So I think from the U.K. perspective, we've nailed it. Still lots and lots more to go reflected in the announcement we've mentioned today around the lunchtime, but we've got the rest of the world to really get on with here. And Europe is somewhere where we're making progress, but there's -- we're scratching the surface really there. Operator: That concludes today's Q&A session. So I'd like to hand the call back over to you, Matt, for any additional or closing remarks. Matthew Moulding: All right. Well, I think everyone will be fed up with my voice, but thank you very much. And I'd like to thank the staff in particular. It's been a brutal sort of 12, 18 months of hard work and dedication, but I think they can see the rewards from that now. So thank you.