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Operator: Greetings, ladies and gentlemen, and welcome to the SEALSQ First Half 2025 Financial Results Earnings Conference Call. As a reminder, this conference call contains forward-looking statements. Such statements involve certain known and unknown risks, uncertainties and other factors which could cause the actual results, financial condition, performance or achievements of SEALSQ to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. SEALSQ is providing this communication as of this date and does not undertake to update any forward-looking statements contained herein as a result of new information, future events or otherwise. These risks are also discussed in our filings made with the Securities and Exchange Commission. Please be advised that our first half 2025 earnings release was issued on Tuesday, September 9, 2025. Also, our Form 6-K for the 6-month period ended June 30, 2025, which was filed with the SEC on Tuesday, September 9, 2025, can be found by visiting the Investors section of the SEALSQ website at investor.sealsq.com. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to introduce Carlos Moreira, Founder and Chief Executive Officer of SEALSQ. Mr. Moreira, you may begin. Carlos Moreira: Thank you very much, Kevin. Good afternoon to those joining us from Europe and good morning to those joining us from the United States. I will begin today, the call by discussing our business milestone for the first half of 2025, then I will provide our growth initiatives and outlook for the second half of '25 and beyond and hand over to John to provide our financial performances of the year -- for the half year. So 2025 was a transformative year. It has been a pivotal year for SEALSQ as we accelerated our mission to deliver quantum-resistant semiconductor solutions and secure digital infrastructure for our rapidly evolving global market. The first half of the year confirmed the strength of our strategy, the resilience of our operations and the scale of opportunities ahead. As a fabless semiconductor innovator, SEALSQ designs market secure microcontrollers, both off the shelf and custom designed, integrated within a vertical trust service ecosystem featuring a post-quantum root of trust managed by public infrastructure services and secure chip personalization. Our solutions protect industries such as IoT, energy, automobile and smart homes, as well as sensitive applications in health care, government and defense. While the global embedded security chip market is projected to reach nearly $10 billion by 2028, suppliers offering certified secure products remain scarce. This creates a significant opportunity for SEALSQ, uniquely positioned to deliver both regulatory compliance and resilience against emerging threats such as quantum computers. Our strength market recognition, bolstered by the urgent need for secure microcontrollers to defend against post-quantum threat, has attracted a strong investors' confidence. Since November 2024, we have raised over $140 million in additional capital to accelerate our product road map, execute strategic investments and expand our growth pipeline. So in terms of the product and technology milestones, in the first half of '25, we achieved tangible progress on innovation and commercialization. The first one is with QUASAR Program, engineering sample of the QS7001, which is a post-quantum microcontroller delivered to initial partners in Q2 2025 for testing. Production samples and development kits are scheduled for Q3 '25, with initial revenue expected in 2026. It is important to mention here that we are one of the first companies in the world with that type of aggressive road map, and this can be transformed into a very important business opportunity and revenue generation in 2026. The QVault TPM, which is a pilot-customer sampling for QVault TPM V183. It is expected in Q4 '25, followed by V185 in Q1 '26. Initial revenues are projected for '26. The VaultIC408 secure microcontroller, which is an advance to FIPS 140-3 level 3 validation, has been confirmed by UL independent lab tests, which is NIST review ongoing now. The MS6003 Secure Element launched with FIDO2 passwordless authentication to meet demand in the fast-growing authentication market. Also INeS Box, which is deployed for factory IoT identification injection and in larger scale projects, ensuring compliance with Matter, which is the Homeland Certification for Home Appliances in the United States and the U.S. Cyber Trust Mark. Also the Quantum RootCA, very important development achieved during the first year, introduced by the OISTE Foundation as the first PQC integrated PKI system to safeguard IoT, financial and defense infrastructure against quantum encryption. Commercial achievement. So the commercial momentum mirror our technology progress. Revenue is on track to increase 59% to 82% in 2025 versus 2024, supported by a strong demand for PKI services, secure hardware and custom ASICs. Our TPM engagement more than doubled from 35 customers at the end of 2024 to 82 customers by mid-'25, validating the relevance of our road map. We also secured a multiyear supply agreement with global leaders such as the Hager Group, Dyson, MIWA and [ Delta Dore ]. Expanding collaboration with Landis+Gyr, which is one of the leading provider of smart meters in the world, including PKI deployment for 30 million utilities users in Asia and for the development for the U.S. market. Smart meters is one of the potential hardware that can be in real trouble if they are not post-quantum ready, and this company is taking the right step to make resilient at the product level with our technology. Advance on Card Reader business in Asia with new customers committing to several hundred thousand annual units, expanding our global footprint by opening a sales office in India and appointing distribution in Asia, Europe and Turkey. So now talking about the strategic investment and partnership. So 2025 has also marked a transformational phase in our growth strategy. The IC'ALPS acquisition, bringing 100 engineers to our staff force. In August 2025, we completed the acquisition of 100% of IC'ALPS, a French company located in Grenoble, which are ASIC design specialists, bringing, as I mentioned, 100 skilled engineers into the SEALSQ force. This has strengthened our common and custom post-quantum ASIC capability for medical, automobile and IoT industry, as this company has been provided this technology to leading health companies and automobile companies in Europe, all of them requiring new and specialized generation of chips. Quantix Edge Security facility, which executed a EUR 40 million investment in Murcia, Spain with EUR 20 million from the Spanish government, which is sitting now in $18 billion of investment in semiconductor in Spain, and we were one of the first projects authorized by them with a EUR 10 million investment from WISeKey and SEALSQ and EUR 10 million investment from partners localized in Spain like OdinS and TProtege. This facility, aligned with the EU Chips Act, will focus on post-quantum RISC-V chip design and secure semiconductor personalization, with revenue expected already in 2026. Quantum Investment Fund was launched initially launched at $20 million in late 2024, which has been expanded to $35 million in March '25. The first investment was ColibriTD, a French Quantum-as-a-Service company with whom we are codeveloping a quantum simulation approach to improve semiconductor wafer yields, potentially increased yield from 50% to 80% and reducing per chip cost by up to 50% in order to be more competitive in the market. This Quantum Investment Fund is now looking into other companies, as our vision is that both quantum technologies will merge very soon with quantum capability and quantum computer companies, creating major leaders in this sector. Therefore, the requirement of this aggressive road map and investment fund that has been created within the company. We also invested, as has been discussed in the last call, in space technologies. So we -- in cooperation with WISeSat, we have been deploying a constellation which is now sitting on 22 satellites. And SEALSQ has invested $10 million to expand our secure quantum-ready satellite constellation. So from the next launch of the satellites in November this year, we will have the capability of securing post-quantum connections from the space all the way down to objects on Earth in what is going to be one of the first ever secure post-quantum communication, connecting mobile phones with our satellite. With two launches completed already in '25, SEALSQ now has one of the largest constellations in Europe with 22 operational satellites, with plans to scale to 102 satellites by 2027. A strategic project with the Swiss Army has been signed, and we are in full deployment with their own requirements of the use of those satellites. Very strong year also in terms of research and development in order to maintain the leading edge. We continue to invest heavily in research and development, allocating $4.7 million in the first half of '25 as part of the $7.2 billion full year budget. This underscores our commitment to leadership in post-quantum innovation and the commercialization of next-generation chips. Also, on the financial strength with a robust cash reserve of $121 million as June 30, '25 and actually $150 million at September 9, '25. So the company is sitting now, $150 million that, combined with a strong balance sheet, positions SEALSQ to capitalize on growing demand for post-quantum resilient technology, potentially look into acquisitions and strategic investment in the post-quantum road map. We are all placed to drive commercialization to our new technologies while funding strategies, growth initiative becomes available. In August '25, SEALSQ unveiled Convergence, a forward-looking initiative integrating AI quantum technology and next-generation solution. The market is converging. All technologies are getting exponential, and they are creating synergies between themselves. And there is a huge market opportunity to develop business model around this convergence opportunity. Convergence unify PQC aligned with NIST standard tokenization advanced encryption, WISeSat 22 satellite constellation, decentralized physical infrastructure network, DePIN and machine-to-machine end-to-end communication. Its goal is to build a robust digital trust architecture for the group, protecting over 1.6 billion devices that is already in the market across health care, IoT, financial services, smart cities and space infrastructure. So the outlook for 2025 is also promising. Revenue is expecting to be in the range of $17.5 million to $20 million, representing already a growth of 59% to 82% year on. As you all know, the revenue on quantum computers is still small because the market is not yet ready, and people are now taking decision in investing in quantum technology. But one of the things coming first even in quantum is the post-quantum, and you need to build their own resilience at the enterprise level, government level, hospital level, airport level so you are ready when those quantums computer arrive in 3 to 5 years to be able to defend their attacks. This includes contribution from IC'ALPS following the August acquisition, the Quantix Edge Security project and renewed demand for traditional products. So 2023 -- sorry, 2026, the growth will be fueled by a full year of ICL's revenue, new personalization center project revenue, including Quantix Edge Security, and the launch -- and this is the most important part for the year -- visibility of our quantum-resistant TPM. Initial estimate reflects 50% to 100% revenue growth year-on-year, which is unseen in this sector for the moment. Pipeline, so we have a very strong pipeline. Our business pipeline stands at $170 million in opportunities for 2026 to 2028, reflecting a surge in demand for quantum-resistant security solution and sovereign semiconductor expertise. I will now turn the call to John O'Hara, our CFO, who will discuss in detail the financial results for the first half 2025 and our guidance for the second half of the year as a complement of my information provided so far. Please, John, go ahead. John O'Hara: Good morning, good afternoon, everybody. For the half 1 2025 revenue, our revenue of $4.8 million, which was consistent with the first half of 2024, was entirely in line with our expectations. It reflects the anticipated continued strategic transition period ahead of the launch of our new post-quantum technologies, and we expect the second half of the year to start to grow, as we'll come on to shortly. The gross profit was $1.6 million, and the gross profit margin increased by 15 percentage points from 19% last year to 34% this year. We do expect when the revenues return to a more steady state level and we grow further that, that will settle somewhere around the 45% to 50% margin on our legacy [indiscernible] chip products and with the [ rep ] margin from IC'ALPS is expected to be somewhat higher due to the nature of their revenue and their services. We had cash reserves of $121 million as at June 30, 2025, which was up from $19 million at the same point last year and up from $85 million at the end of 2024. Our current estimate is that this -- our cash burn, this gives us sufficient cash flow for a long time now on our cash burn rate. And we therefore believe we've got a strong war chest to also take advantage of any investment opportunities, any M&A activity that might come our way. We invested $4.7 million in research and development in the first half of the year, and we continue to have over $7 million allocated in the budget for this area for 2025, which is up from $5 million in the prior year. And that's before we take into account the research and development activities of IC'ALPS, which will also be consolidated in our second half results. As Carlos has already mentioned, for the full year 2025, we expect our revenue to be between $17.5 million and $20 million, representing between 59% and 82% growth year-on-year, which is, therefore, noting a return to growth in demand for our current semiconductor products as well as consolidating the revenue of IC'ALPS since acquisition. We also look forward for a strong 2026, as Carlos has also highlighted with some very early guidance, which will be supported by a new business pipeline of $170 million of identified opportunities for 2026 to 2028 across PQC, ASIC and sovereign semiconductor markets. With that, we have finalized the prepared remarks. And I will pass back to Carlos, so we can open up the call for Q&A. Thank you for your attention. Carlos Moreira: So thank you, John. Just as an end of the call remarks before we move into Q&A, just to mention that 2026 is going to be a very important year for the quantum industry and particularly post-quantum as the regulatory and technology landscape is moving in our favor with frameworks such as the European Union Cyber Resilience Act, the U.S. government Cyber Trust Mark and the UK PSTI Act mandating secure identities, encryption and life cycle management. So governments and strategic institutions worldwide have published road map requiring PQC adoption within the decade. So as I mentioned before, this industry is a emerging industry. We are in quantum, what we were on the web in the year 2000. Major players, and they have developed technologies and positions such as SEALSQ will become automatically high demanded companies as they bring a concrete solution for a concrete problem. Insurance companies are already announcing that they will increase their insurance premium if you are not yet PQC-compliant. Government regulations are putting regulations bringing companies and other government institutions to be PQC-compliant. And that will be reflected, obviously, on valuations of companies as the entry level to become a PQC-compliant and quantum company is still very high and requires hundreds of millions of dollars of investment. So with the strong financial resources, then we have the proven innovation and a strategic investment in place, SEALSQ enters the second half of 2025 with a very strong momentum and confidence. Our vision is clear: To lead the world in quantum resilience, cybersecurity and semiconductor innovation while we have a very proven quantum road map in place. So we thank our shareholders and employee partners and customers for their continued trust and support as we scale SEALSQ into the next phase of growth. So with that, we are finalizing the remarks. I would like to open now the call for Q&A. Thank you very much for your attention. Operator: [Operator Instructions] Our first question today is coming from Matthew Galinko from Maxim. Matthew Galinko: Firstly, just if we could clarify a little bit on the full year R&D budget. I think you mentioned it was around $7 million. And I think for the first half, reported $4.7 million, would seem that you're tracking ahead of that. So was there anything unusual in the first half spending that would not repeat in the second half? Just kind of ignoring the impact of the consolidation of the acquisition that we might expect? John O'Hara: Yes. Matt, hope you're well. So yes, so within the first half of the year, there was a bit of an expense of -- one-off expense for some stock-based compensation that falls under R&D. So that was the main... Matthew Galinko: Got it. Okay. And could you venture a guess for what kind of the annual R&D run rate, taking that out would be when you layer in the acquisition? [Technical Difficulty] Operator: Matthew, go ahead. Please go ahead. Carlos Moreira: Okay. So Matthew, sorry, we were disconnected. So did you got the answer from John? Matthew Galinko: I'm not sure if you got my second question or not? John O'Hara: No, I didn't. Carlos Moreira: No, no, we didn't. I'm sorry. John O'Hara: Did you get the answer to the first one on the research and development though, Matt, did you get that answer? Matthew Galinko: Yes. Yes. So I want to -- I appreciate the follow-up. So the -- I guess the question is what the run rate or if you could offer a run rate on the revenue -- on the R&D line, if you kind of back out that onetime stock-based comp piece under R&D in the first half and later on, the R&D consolidation in the second half, what would kind of the annual rate of R&D be? John O'Hara: So on the underlying business down in Provence, we would probably put that around about sort of $500,000, $550,000 per month. Matthew Galinko: Got it. Okay. All right. And then I also wanted to ask about the pipeline. I think you shared $170 million. As far as the prospective customers and perspective-type numbers in that pipeline, is that -- how do you build the pipeline estimate, I guess? Can you provide a little bit more of the process for how you include stuff in the pipeline? John O'Hara: Yes, sure. So essentially, my understanding is it's a relatively standard process where we go from certainly in the industry, I believe, where we go from kind of identifying an opportunity and evaluating that to the best of our ability, but then applying a relatively low success percentage to that. Because obviously, when we've just identified it, we haven't really gone very far, and then we go through the phase of identified, then qualified when we've kind of ratified the opportunity, and we've made at least first contact with the potential client. Then comes into design in, which is usually when we've signed up to provide them with a kind of a test kit and actually spec out and create a potential solution for a set of clients. And then design win at the end, which is the point where we believe that where we've been mandated to go ahead and produce the product and are in the final stage with that client. So obviously, by the time we get to design win, we apply a much heavier percentage because at that point, we're the only people in the game, so we generally expect at that point to get an order unless there is a technical limitation to the product or the client cancels their own internal project. So yes, so we put all that together, apply the weightings and then we tend to look 3 years into the future. So that $170 million will include revenues over '26, '27 and '28. What it does not include is the revenues for the clients that we've already won. So once we actually have received our first major purchase order of a significant volume and therefore, we've gone into production, we move that out the pipeline, and then we're kind of operating on a backlog where it's based on them sending and giving us orders. Carlos Moreira: Yes. Just to add on that, the sales cycle is long. On the hardware part, it's around 6 months. And the reason -- I mean, there's a lot of complexities to introduce those new generation chips into existing hardware that their electronics are now being designed to introduce the chip, and that requires engineering. So that means that you have to first understanding the problem, let's say, a smart meter or let's say, a connected car or a drone. So you have to understand the electronics, you have to redesign some of those components, so you insert the chip, then you have to check the connectivity, the chip in with electronics in order to create a post-quantum capability. So all that takes a long time, right? And normally, companies, the way they act on that is, as I mentioned in my presentation, post-quantum technology is emerging technology in terms of many customers don't realize the need of moving PQC yet. There are some that say quantum computers will be in 30 years, so why we should bother now. So this has been slowly, gradually, the education in the market has been improved by even companies that they have this type of thinking before. So that creates some kind of urgency in our clients. And now they are saying, okay, let's just start with 1 generation of products. So they don't immediately want to PQC-enable all their products. So they start with 1 type of products, they test and then they go to the next cycle of expansion internally in the company as you not only need to modify the security of the product, which is the hardware component, but also the software part. So that needs to be integrated into their back end, right? So that process as we move forward, will be more -- a more automated process. Actually, AI is helping a lot to create more efficiencies on that cycle so we can reduce the time and we can increase the numbers. So this is the present situation. That's why we believe that the revenue of these type of companies make now is not that important because what we are addressing is a much bigger problem in the future, which is when regulation arrives and regulations says, company, you need to have PQC enablement in your products, otherwise, you cannot sell them anymore because your products will not be authorized to enter into a specific territory. So there is the inflection point. We believe the big opportunity is for us. Operator: [Operator Instructions] We reached the end of our question-and-answer session. I'd like to turn the floor back to the call to Carlos for any further or closing comments. Carlos Moreira: So just to, again, to recap it too later on what we say, a huge opportunity ahead of us. 2026 is going to be a critical year, especially once this post-quantum chip will be available in the market. I know that some investors have been disappointed by the latest price of the share. I always say that '26 is the year where you -- everybody needs to be betting on and not '25. '25 was a transitional year. Despite that, we managed to end the first quarter -- the first semester of the year with a very strong position and very strong cash position, which is essential in this industry. And we are available for any further discussions, website, documentation is available. And our investment relation contacts in New York are available to set up one-to-one meetings. John and I, we're going to be doing a non-deal road show starting the third week of -- sorry, the second week of October. And it will culminate in New York in an event, the Quantum + AI event, where we are providing the keynotes, and where we're going to be bringing more results, and we will also be discussing, which we didn't discuss on this call, our U.S. strategy. As we have been informing in the past, SEALSQ is looking to personalize semiconductors in U.S. territory, and this is something that is top priority. We were looking into different locations such as Arizona and others. So we will be giving in a few weeks, a full update on that. And I'm sure everybody will be very satisfied to see the progress also in that area. So we'd like to thank our shareholders, employee partners and customers and all the participants on this call for their support as we scale SEALSQ into the next phase of growth. Thank you very much for your attention. Have a great day. Operator: Thank you. 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.
Operator: Ladies and gentlemen, welcome to the Synopsys Earnings Conference Call for the Third Quarter Fiscal Year 2025. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. If you would like to ask a question at that time, please press star 1 on your telephone keypad. If you should require assistance during the call, please press star 0, and an operator will assist you. Today's call will last one hour. As a reminder, today's call is being recorded. At this time, I would like to turn the conference over to Tushar Jain, Investor Relations. Please go ahead. Tushar Jain: Good afternoon, everyone. With us today are Sassine Ghazi, President and CEO of Synopsys, and Shelagh Glaser, CFO. Before we begin, I'd like to remind everyone that during the course of this conference call, Synopsys will discuss forecasts, targets, and other forward-looking statements regarding the company and its financial results. While these statements represent our best current judgment about future results and performance as of today, our actual results are subject to many risks and uncertainties that could cause actual results to differ materially from what we expect. In addition to any risks that we highlight during this call, important factors that may affect our future results are described in our most recent SEC reports and today's earnings press release. Pursuant to the close of the ANSYS acquisition on July 17, our results include roughly two weeks of ANSYS financials. As shown in today's financial statements, the vast majority of ANSYS revenue appears under the simulation and product group, with the remainder included under EDA. In addition, we will refer to certain non-GAAP financial measures during this discussion. Reconciliations to their most directly comparable GAAP financial measures, and supplemental financial information, can be found in the earnings press release financial supplement, and 8-K that we released earlier today. All of these items plus the most recent investor presentation, are available on our website at www.synopsys.com. In addition, the prepared remarks will be posted on our website at the conclusion of the call. With that, I'll turn the call over to Sassine Ghazi. Sassine Ghazi: Good afternoon. Q3 was a transformational milestone quarter for Synopsys. Against an unprecedented and challenging geopolitical environment, we closed the ANSYS acquisition, expanding our revenue, our customer base, and our long-term opportunity. We delivered third-quarter revenue of $1.74 billion and non-GAAP EPS of $3.39. Our results were primarily impacted by underperformance in the IP business as we had the expectation of deals that did not materialize, driven largely by the following three factors. One, new export restrictions disrupted design starts in China, compounding China weakness. Two, challenges at a major foundry customer are also having a sizable impact on the year. And finally, we made certain roadmaps and resource decisions that did not yield their intended results. We are actively pivoting our IP resources and roadmap towards the highest growth opportunities which I'll discuss in more detail. Looking ahead, we believe we have derisked our forecast knowing that transformation takes time and the external headwinds I cited will continue. We are taking a more cautious view of Q4 while still expecting to deliver a record revenue year. Let me provide more color on our Q3 execution and the actions we're taking to accelerate our strategy before Shelagh covers the financials in more detail. Zooming out, AI continues to drive unprecedented investment in infrastructure and R&D. Demand for high-performance computing and AI applications continues, while semiconductor demand in markets like industrial and automotive remains subdued. Despite the uncertainties and industry dynamics that we must navigate, I remain very optimistic about Synopsys' future. The increasing complexity, cost, and time-to-market pressure of designing and delivering AI-powered systems is a trend that persists across industries and underpins our opportunity. Now more than ever, we believe Synopsys will be a mission-critical partner in addressing these challenges. Adding ANSYS' gold standard simulation and analysis solutions to our portfolio dramatically expands our long-term growth opportunity. We are now not only the EDA leader, we are the global leader in engineering solutions from silicon to systems. This acquisition marks a significant milestone for not only Synopsys but also our customers and the industry. As products evolve into more sophisticated intelligent systems, their designs grow increasingly complex while development cycles continue to accelerate. The rise of physical AI underscores the importance of our combined expertise. R&D teams must not only optimize product design for performance and efficiency but also consider the real-world interactions of these products. That's why, for example, we're embedding NVIDIA Omniverse technology into our ANSYS simulation solutions making it easier to develop, train, test, and validate autonomous systems with greater speed and confidence. Not only can we deliver new innovation, with ANSYS now part of Synopsys, we have diversified our portfolio and our global customer base. Together, we will maximize the capabilities of engineering teams across industries, from semiconductor to automotive, industrial, aerospace, and beyond, enabling them all to rapidly innovate AI-powered products. Let's move on to business highlights. Design automation revenue inclusive of ANSYS products was up 23% year over year led by strength in hardware. As the complexity of designing silicon for AI workloads drives demand for Synopsys' powerful emulation and prototyping solutions. In Q3, we achieved multiple competitive wins with leading hyperscalers and shipped record Zebu Server 5 and HAPS 200 Xebu 200 units. EDA continues to demonstrate resiliency. Our Q3 results reinforce our leadership in next-generation chip design. Synopsys continues to win competitive bids for full-flow digital implementations, including a multiyear commitment with a leading AI customer. Synopsys' sign-off and extraction platforms also continue to set the industry standard with broader customer deployments and successful tape-outs on advanced designs. Synopsys' leading AI capabilities are a key differentiator. Today, roughly 20 customers are broadly piloting Synopsys.ai GenAI-powered capabilities. These capabilities pave the way for agent engineer technology. We believe the evolution of AI from helper to a doer will truly transform engineering workflows. Multi-die momentum also continued in Q3. We enabled multiple successful multi-die tape-outs for leading AI semi companies. Customers are enthusiastic about the promise of integrating our semiconductor timing and power sign-off capabilities with ANSYS' gold standard of thermal sign-off. And we expect to deliver our first fully integrated solution in the first half of next year. I'll turn now to simulation and analysis products which empower users to build and test products virtually. These solutions represent the largest portion of our ANSYS acquisition and performed in line with our expectations for the quarter. As is typically the case, the largest contributors were in the high-tech, aerospace, and automotive verticals. In Q3, we released ANSYS 2025 R2, providing customers access to groundbreaking advancements in AI-driven simulation, GPU acceleration, system-level modeling, and cloud computing. These newly released products extend Synopsys' AI leadership into simulation and analysis to help customers more efficiently develop and deliver their innovations. Turning to design IP, which was down 8% year over year due to the headwinds I previously mentioned. Again, we need to pivot our IP resources and roadmap to the highest growth opportunities. These changes are already underway. Let me give some context. Zooming out, evolving data center architectures, particularly those focused on AI, are accelerating the demand for faster data movement. This trend is driving strong demand for high-speed protocol IP and solutions that enable both scaling up and scaling out of large-scale systems. At the same time, the semiconductor and IT landscape is undergoing profound change. What was once a business rooted in individual licensing is rapidly evolving. The industry is increasingly requiring more sophisticated subsystems and chiplet-based solutions to combat complexity and accelerate time to market. In summary, our high-performance silicon-proven IP portfolio positions us as the leader in the fast-growing interface IP market. We support a broad spectrum of applications, including HPC, Edge AI, automotive, mobile, and consumer. By retargeting our resources and portfolio toward higher-value solutions, we are further strengthening our leadership in advanced interface and foundation IP. Before handing over to Shelagh, I want to address the company-wide steps we're taking to achieve greater scale and efficiency to accelerate our silicon-to-systems strategy and drive long-term growth. Synopsys' transformation, which began with the divestiture of the Software Integrity Group followed by our strategic acquisition of ANSYS, continues. Specifically, we are conducting a strategic portfolio review and will be taking actions to focus our investments and our execution on the highest growth opportunities. We look forward to delivering with ANSYS a differentiated design solutions roadmap and remain firmly committed to realizing the projected synergies of the merger. In addition, our enterprise-wide initiative to develop and deploy custom GenAI is boosting productivity. We will continue harnessing AI efficiencies to optimize our cost structure. Taken together, we expect to undertake related actions starting soon that will reduce our global headcount roughly 10% by the end of fiscal year 2026. A few closing thoughts. Synopsys is transforming. With ANSYS, we are now the leader in engineering solutions from silicon to systems. We've expanded our opportunity, broadened our portfolio, and increased the resiliency of our business. We remain focused on maintaining our leadership position while pioneering new solutions that will shape the next wave of innovation. Near term, we are deeply committed to prioritizing our IT execution and improving our efficiency to scale the business, accelerate our strategy, and capitalize on the highest growth opportunities. Thank you to our employees, customers, and partners for your continued commitment. Engineering is undergoing unprecedented transformation and Synopsys is seizing the opportunity to reengineer engineering. Now over to Shelagh. Shelagh Glaser: Thank you, Sassine. Q3 revenue came in at $1.74 billion, non-GAAP operating margin at 38.5%, and non-GAAP EPS at $3.39. Backlog came in at $10.1 billion including ANSYS, underscoring the resilience of our business. Our results were impacted by the underperformance in the IP business due to the headwinds Sassine outlined. Tailwinds from a strong quarter in our design automation segment and the close of the ANSYS acquisition partially offset these headwinds. In light of these headwinds and tailwinds, we are taking a conservative view on Q4 and updating our full-year 2025 targets for revenue, operating margin, EPS, and free cash flow. I'll now review our third-quarter results. All comparisons are year over year unless otherwise stated. We generated total revenue of $1.74 billion, up 14%, with strong growth in design automation. Regionally, we saw strength in Europe and North America, and despite sequential improvement in China, headwinds persist. Total GAAP costs and expenses were $1.57 billion and total non-GAAP costs and expenses were $1.07 billion, resulting in a non-GAAP operating margin of 38.5%. GAAP earnings per share were $1.50, and non-GAAP earnings per share were $3.39. Earnings included the impact of lower cash on our balance sheet and the additional $4.3 billion term loan used to fund a portion of the cash consideration and expenses associated with the ANSYS acquisition. Now onto our segments. Design automation segment revenue was $1.31 billion, up 23%, with strong performance from our hardware business. Design automation adjusted operating margin 44.5%. Design IP segment revenue was $428 million, down 8%. As mentioned before, our IP business faced several headwinds. In response, we are taking a more conservative view of Q4 and we are realigning our IP resources to the highest growth opportunities and improving our execution. Third-quarter Design IP adjusted operating margin was 20.1%, due to the lower than expected revenue and the investments we are making in the IP roadmap. Moving to cash. Free cash flow was approximately $632 million. We ended the quarter with cash and short-term investments of $2.6 billion and debt of $14.3 billion. Now to guidance, which has been updated to include ANSYS, as well as factoring the continuation of the headwinds previously discussed. For fiscal year 2025, the full-year targets are revenue of $7.03 to $7 billion, total GAAP costs and expenses between $6.08 and $6.1 billion, total non-GAAP costs and expenses between $4.43 and $4.44 billion, non-GAAP tax rate of 16%, GAAP earnings of $5.03 to $5.16 per share, non-GAAP earnings of $12.76 to $12.80 per share. Cash flow from operations of $1.13 billion and free cash flow of approximately $950 million, lower than prior expectations due to lower revenue and the interest impact of cash utilization and additional debt for the ANSYS acquisition. Now to targets for the fourth quarter. Revenue between $2.23 and $2.26 billion, total GAAP costs and expenses between $2.12 and $2.14 billion, total non-GAAP costs and expenses between $1.44 and $1.45 billion, GAAP earnings of negative 27¢ to negative 16¢ per share, and non-GAAP earnings of $2.76 to $2.80 per share. Our press release and financial supplement include additional targets in GAAP to non-GAAP reconciliations. With the ANSYS acquisition now closed, we remain confident in achieving the committed synergies of the merger. This is despite the delay in completing the follow-on divestitures of the Optical Solutions Group and PowerArtist business which is elongating the full integration of ANSYS as we work to obtain a final regulatory approval of the buyer. In conclusion, this was a milestone quarter for Synopsys. We are clear-eyed about the challenges we face and the actions we must take to align our portfolio to the highest growth opportunities, optimize our cost structure to drive greater scale and efficiency, which will include reducing our global headcount roughly 10% by 2026, and importantly, to extend our leadership position in engineering solutions from silicon to systems. Delivering a differentiated design solutions roadmap with ANSYS. The team is laser-focused on executing a strong finish to the year and delivering resilient, long-term growth for our shareholders. With that, I'll turn it over to the operator for questions. Thank you. Operator: Thank you. To ask a question, please press 1 on your telephone keypad. Please ensure you are not on mute when called upon. Before we begin the Q&A session, I would like to ask everyone to please limit yourself to one question and one brief follow-up to allow us to accommodate all participants. If you have additional questions, please reenter the queue, and we'll take as many as time permits. Again, it is star one to ask a question. Your first question comes from Ruben Roy of Stifel. Your line is open. Ruben Roy: Yes, hi. Thank you very much. Sassine, I'm wondering if you could maybe spend a few minutes just walking through the three challenges around the IT business. Just kind of thinking through export restrictions and design starts in China and then the foundry customer versus the roadmap and, you know, the impact of that. It seems like that's potentially a bigger issue that could be a headwind longer term. And maybe you could just kind of describe Q3 and kind of what the impacts were across each of those three issues. And then, you know, as you think about next year, and, you know, resource reallocation, etcetera, you know, will this require acceleration in things like M&A, or are you, you know, kind of positioned to address the needs of your customers with what you're working on for organically? And how soon can you turn this around on what sounds to be the most important part of those three headwinds? Thank you. Sassine Ghazi: Yeah. Thank you, Ruben, for the question. You're right. There are three factors that we mentioned that impact our IP performance for the year. The first one is the China BIS. Even though the restriction was only limited to six weeks, the impact from our customer behavior lasted definitely longer than the six weeks restriction. Customers were questioning whether or not they will invest in a multiyear commitment with Synopsys, how broad will they make that investment, they start an investment in a chip, can they finish it? Can they tape it out? So I don't want us to assume that the impact was limited to the restriction period, which was six weeks. The other factor, which is the foundry customer impact, where we have made a significant investment in building out our IP for that foundry customer with an expectation that there will be a return in '25 and that did not materialize for a number of reasons out of our control. They are market-driven reasons and customer-related reasons for that. So when we look at the impact for the quarter and as we derisk our Q4, those two primary reasons were what created the impact for the revenue during Q3 and as we're anticipating, Q4 and continuation of these factors. As for the last point, which is the roadmap and resource allocation, it's somewhat related to bullet number two. As we make investments and as the leader in IP, we have responsibility as part of the market position we have. We're not a boutique IP. We have the broadest IP portfolio and our customers expect us to serve various needs and requirements that they have. So some of the decisions we made were investing, for example, in edge AI opportunities for IP, that we put resources on delivering to these opportunities and it came at some roadmap cost. On which foundry to make that investment and for data center delay in some of our IP titles. That is something we know exactly what we need to do, and we're already underway to address them and to give you some color on what we are doing. Within Q3, we have merged two engineering teams. So we have our IP team that builds and delivers on what we call standalone IP. And the market is shifting towards subsystem and potentially in the future chiplet delivery, and we had a separate team that works on customization, which we call the system solution group. We merged these two groups together in order to accelerate our ability to deliver to the opportunities that they're in front of us. So it's all about scaling and we are addressing the scaling opportunities. And I have no doubt that we will see our ability to pivot these resources. And these are things you cannot visit within a ninety-day window. But as we look at the roadmap and the priority of the roadmap, we will commit and deliver to these items. Ruben Roy: Thank you for that detail, Sassine. If I could segue then into a question for Shelagh on the operating margin. With IP coming down, and ANSYS, you know, sort of coming into the model here. I've done my math correctly. It looks like, Shelagh, the operating margin is gonna net out to a little less than 36% for Q4. And just wondering if you can comment on kind of the decline in operating margins and maybe how you bridge to the longer-term target in the mid-40s? Shelagh Glaser: Yeah. Thanks for the question, Ruben. It's really the impact of the IP business and the downside on revenue of the IP business. As Sassine talked about, that's a very resource-intensive business. So as the revenue headwinds that we talked about are hitting the business, we're realigning the resources but we want to continue to invest in that roadmap for the long term. And so, that's really the impact. I would say it's a lesser impact. Obviously, ANSYS is fully integrated. ANSYS came with a higher operating margin, so the impact is really the IP. And our commitment to the long-term margin in the mid-forties is still intact. So our short-term headwinds that we're managing through are really short-term headwinds, but there's no change in our long-term commitment. Ruben Roy: Got it. Thank you, Shelagh. Sassine Ghazi: Thank you, Ruben. Operator: The next question comes from Lee Simpson of Morgan Stanley. Your line is open. Lee Simpson: Great. Thanks for squeezing me in. I mean, maybe I'll start again with the design IP. I mean, clearly, the weakness here has come as quite a surprise for everyone. We haven't seen this elsewhere. It does look maybe on simplistic mathematics that it's run about $120 million that you're weaker versus expectation anyway for design IP and I think you've called out the two elements, China and, of course, the foundry customer as primary here. So I'm just trying to understand how much of a heads up did you have on this weakness, this design IP slowdown, and maybe how much of this is permanent? I mean, does the China business come back, you think? Does the foundry business evolve into something else? And I'm really just trying to get a color on how permanent this might actually be. Thanks. Sassine Ghazi: Yeah. Thank you, Lee, for the question. I want to start with that we had an aggressive plan in IP for FY 2025 after an outsized performance the year prior where we grew that IP business by 24% and the year before that, by 17%. And there were some large agreements we were not able to get during this, I want to call it, hyper and intense period of our company's history. I know I communicated to some of you that during Q3, I was in China six times. In order to work on the transformative acquisition that we got to a positive outcome. Of course, it was the most important thing we had to do, and we got it done and we're very excited about it. In the process, there were signals that were missed in the forecast as to the magnitude of the factors I described, the two factors that you outlined. So I don't believe that these factors are just a Q3 impact. We will continue on derisking our forecast and anticipate that we will have a transitional and muted year in IP as we look ahead into FY '26. Now in December, we'll provide more color about the overall FY '26 components and we feel strongly about the other segments of the business. But as it relates to IP, and these two factors regarding China and the conditions in China, I don't believe this is a Q3 only challenge. As it relates to the foundry customer, it all depends on where do they go with the technology that we already developed the IP for. And what's the opportunity to sell that IP we developed it? Now is it permanent? It depends what you mean by permanent and at what level of the IP business. We have an incredible market position in IP. The demand actually is much higher than our capacity to deliver. One of the challenges that I described as roadmap, resource allocation, we have a massive team working on IP yet we cannot capture all the opportunities ahead. I mentioned some of the actions we took, there will be more, deeper look in terms of priority as well as our ability to scale by leveraging technology like AI. New methodology to be able for our team to deliver the IP faster, higher quality, etcetera. So the opportunity in IP is absolutely strong, but there will be a transitional period due to the factors I mentioned. Lee Simpson: Gotcha. And maybe just one further clarification on the roadmap and resourcing. I'm just trying to understand. Is there a specific area that we should be thinking about here? It sounds to my ears, and I could be wrong, obviously, that this is mainly foundational IP that you're realigning for. Because you did mention interface technology but didn't suggest that that was where you're realigning. That almost seemed like where you were doubling down. Have I got that the right way around? Sassine Ghazi: Let me add more color, Lee, because it's not quite. So today, if you look at the Synopsys portfolio for IP, we serve multiple markets. HPC, Edge AI, automotive, mobile, consumer, and we serve that portfolio for multiple foundries, not only one foundry. And as I mentioned to Ruben when he asked the question, we have and our customer has expectations. And we have the responsibility given that portfolio breadth that we have to serve the multiple foundries for those multiple markets. In both interface IP and foundation IP. There's more and more customization in particular for interface IP. And these customizations are moving from an off-the-shelf to a more subsystem delivery. Which is it takes longer, it takes more resources. And our ability to change the business model or the need to change the business model is an ongoing dialogue with our customers. Because as they're expecting us to do more work than just off-the-shelf IP, there's an opportunity for higher monetization. And that's what we're pivoting our resources, our methodology, our approach, from an architecture point of view to serve that market for the interface IP that I talked about. Lee Simpson: That's very clear. Thanks so much. Sassine Ghazi: Thank you, Lee. Operator: Your next question comes from Charles Shi with Needham and Company. Your line is open. Charles Shi: Yeah. Good afternoon. I do want to follow-up. The pivoting on the IP side of the business. It does sound like, other than the China and maybe the foundry customer challenges, Synopsys is really going through a transition in the IP business model. I think one thing really caught my attention in your prior remarks, Sassine, was about the higher level of customization, maybe more migration into subsystems. It seems like that it's something your IP, not necessarily a competitor, but another peer of your IP in the IP business is going through over the past couple of years. I wonder how should we rethink about the long-term IP operating profitability from that perspective because we do get the idea of why this is moving to that direction, but are you able to maintain or the same kind of IP long-term operating profitability targets going forward? Wonder if you can provide some strategic thoughts on that direction. Thanks. Sassine Ghazi: Yeah. Thank you, Charles. You know, the pivot from our customers in terms of expectation from off-the-shelf IP to customization is not new. But what is new is the magnitude in which the number of customers are expecting for us to deliver instead of discrete IP, to deliver a number of IP that we glue them together with some customization logic and test logic, etcetera, and validate and ensure that it hits the mark with the right quality. Each one of those engagements historically had two components. It had an NRE component and a use fee component. Given the demand for that customization, we need to ensure that we are capturing the right value for the impact we're delivering. Therefore, it's not something that we are, I want to say, happy to just say it's an NRE plus a use fee. There has to be another element in order for us to put priority for these opportunities and deliver too. And that's what discussions we're having with a number of these customers. And as you look ahead, if you fast forward two plus years from now, will we start delivering from a discrete IP to a subsystem to possibly chiplet? What level of chiplet? Is it a soft chiplet? Is it a hardened chiplet? Meaning, GDSII? Is it all the way down to a known good die with a partner? These are all questions and expectations our customers are asking us given we are the leader in that space. And we have a number of engagements with a few strategic partners, we are absolutely assessing as this market is pivoted and we're pivoting with it what is the business model to maintain the right profitability? In order to capture the opportunity and growth that we have? Charles Shi: Thanks, Sassine. Maybe I'll follow-up a short-term 10.1 billion backlog for the quarter exiting July. How much of that was ANSYS backlog and how much of that was legacy Synopsys backlog? Thanks. Shelagh Glaser: Hi, Charles. We're not gonna be breaking that out, but we have strength across the business. So we continue to see strength in our core business. We saw strength in ANSYS. And that gives us a lot of confidence in the long-term growth of the business. 10.1 billion. Thank you. Operator: Thanks for the question, Charles. The next question comes from Joe Quatrochi with Wells Fargo. Your line is open. Joe Quatrochi: Yeah. Thanks for taking the questions. Maybe just to follow-up on that last kind of train of thought on the IP business. I mean, are we to think about, you know, you looking at different business models in terms of royalty, and things of that nature similar to some of your competitors? And I guess, you talk about just if your customers, I think you talked about them wanting to move very quickly on these subsystems and IP. I guess, can you talk about just time to market and the competition there? Sassine Ghazi: Yeah. Joe, the key is the IP business is scaling. And Synopsys, we've been fortunate. We've been in that business for 26 years and we do have the investment and the scale. But given the fragmentation, I want to call it, based on our customer needs and requirements that are becoming more customized. No matter how much scale you have, you need to put priority. And based on the priority, the right business model, in order to capture the right value for what we are delivering to those customers. And some of the discussions we're having with our customers is a combination that does include some sort of a royalty. We're in a fairly early phase in this discussion, and those are very much related to subsystem type of delivery to our customers. So I hope that clarifies it, Joe, what I mean by we need to look at something different than an NRE plus a use fee given that customization opportunity. Joe Quatrochi: Yeah. Appreciate the detail. And then as a follow-up, for Shelagh, how should we think about just on the go-forward basis? Like, what's the right level of cash balance that you need, you know, day to day as we think about just the debt pay down and the pace? Shelagh Glaser: Sure. So in terms of our day-to-day cash balance, we have a minimum that we hold just to ensure that, you know, we're properly able to invest in the business. We're well above that with the cash balance we have. This year, we'll make interest payments on the debt. And we anticipate being able to start to pay some of the principal next year on the term loans. Those two term loans are due in '27 in the '28 time frame. So well above our minimum to be able to manage the business. And the one other cash inflow that we'll have once it was in my prepared remarks, but once we complete the approval with SAMR of the buyer, of OSG and PowerArtist, we'll have that cash in. Both of those dispositions. Thank you. Operator: Thanks for the question. Your next question comes from Sitikantha Panigrahi with Mizuho. Your line is open. Sitikantha Panigrahi: Thank you. I want to switch to the ANSYS acquisition. So it's been now ANSYS one and a half more than one and a half months. With after the close. So what are the puts and takes in terms of, you know, what you expected at the beginning last year when you talked about versus after you having? What are the surprises that you have seen? And, specifically, I think you talked about the revenue synergy. You still reiterated, but going back to the ANSYS growth, if we look at S-4 filing there, they were talking about low to mid-teens over the next few years. So what are the potential drivers for that ANSYS to grow above that 10% market growth? Any color would be helpful. Sassine Ghazi: Yeah. Thank you, Sitikantha, for the question. As you can imagine, we are incredibly thrilled and enthusiastic about the opportunities ahead. And the market is speaking, actually, when you look at the moves that are happening in the market, to grab assets in order to bring in the solution that is required for physical AI to have a digital twin of a system. And in order to have it on time with high quality and low cost, you need simulation. You need virtualization of these systems. And in order to have it, with high quality, you need a sign-off product, multiple levels of physics in order to make it happen. Now the opportunity is not waiting for the physical AI when it takes place and it happens. There's an immediate opportunity, which is 3D IC. With 3D IC, there's a thermal need. There's a structure need. There's a fluid need. And ANSYS is bringing a great position into the Synopsys portfolio and integrating this technology during the semiconductor and chip design phase. So when you're building that multi-die system, you are confident that you're signing off with the right technology in order to achieve the right outcome. So from a surprises, there are no surprises actually except pleasant ones, given we know the team very well, a lot of enthusiasm, and energy and excitement from the teams. As Shelagh mentioned in her remarks, there's a final stage that we're trying to close with SAMR as soon as possible, which is the acquisition's scope has been, oh, sorry. The divestiture scope has been approved. But the buyer is in the process of approval. So we are taking some measures to keep the business and the integrity of the optical and power artist separate. But once that is behind us, the integration full force ahead to deliver on these solutions. Sitikantha Panigrahi: And, Shelagh, just a follow-up to that. ANSYS revenue, $78 million in Q3. But what's your assumption of ANSYS revenue embedded into the Q4 guidance? Is Q4 historically a strong quarter for ANSYS, but, again, you'll only include October. So is there any linearity in the quarter that we should consider? Any color will be helpful. Shelagh Glaser: Yeah. So in Q3, as you noted, the $78 million revenue disaggregation of S&A, and as we noted in the prepared remarks at the beginning, there's a small portion of ANSYS revenue that is also in our EDA. And for Q4, it's included in the full guide that we have ANSYS for all weeks of the quarter. And then in terms of ANSYS, they have conformed to our fiscal calendar, which as you note, their Q4 only one month of it falls into our fiscal calendar. So, obviously, some of that, some strength that you see in sort of the November time frame, that'll be in our Q1. And so we've aligned that fully. But I'm not gonna give a subsegment view as we don't guide below the total company. Thanks for the question. Sitikantha Panigrahi: Thank you. Operator: Your next question comes from Joe Vruwink with Baird. Your line is open. Joe Vruwink: Great. Thanks for taking my questions. EDA and IP as industries have fairly diversified opportunities, and that's true across customer accounts and end markets. But Synopsys has always been fairly unique that traditionally, you have one outsized account. It exposure, and some of the things you're saying seem to consider a need to diversify further. You made a remark, Sassine, earlier, about two years, you know, two years from now, we'll look back, and I think contract lengths being two to three years. Is that the appropriate time frame to fully enact the changes you're focused on and getting the business back on the track you believe is right? Sassine Ghazi: You're right. In terms of EDA and IP, we have a fairly diversified customer base simply because you cannot build a semiconductor chip without the need of EDA or IP. So while we have a fairly diversified customer base, Synopsys has been very successful with capturing the large percentage of wallet from leading large semiconductor companies. That has been our strength. With this one customer exposure that you're talking about, we have derisked part of that exposure in our FY '25. And there's a blend of contracts we have with that customer no different than any other customer, which is EDA, software, hardware, and IP. They have different time horizons, and it's very difficult at this stage to forecast what will happen and by when not knowing the situation of that customer one, two years from now. But that being said, we work very actively to expand our business at multiple levels of growth opportunities and that's where ANSYS will bring us a significant and positive opportunity to diversify the portfolio as well in terms of customer concentration as well as regional concentration. For example, the percentage of business in Europe versus China for ANSYS is very different than Synopsys Classic. So there's a big opportunity to diversify further with the ANSYS addition to the portfolio. Joe Vruwink: Okay. That's helpful. Thank you. Shelagh, maybe you'd answered this already, but I think it would be helpful just to get a baseline around what's changing in this guidance versus the guidance that was previously on the table. You know, how much is IP coming down, how much does ANSYS add, China is a factor. Just anything there that can help get us all on the right baseline going forward. Shelagh Glaser: Sure. So, as you know, the three headwinds that Sassine talked about in the IP, those are fully incorporated, and it's a balance between those three. What the impact was, and then as you noted, ANSYS has been added and it was a sub-period in Q3, so somewhat minimal. You saw the S&A, $78 million. And then ANSYS for Q4, again, I will remind you, the question that was asked previously. So I would say the biggest part of the ANSYS quarter is usually in the November time frame, and that'll be in our Q1. You know, the decline was really that update on the IP and then that's offset by the addition of ANSYS. Joe Vruwink: Okay. Thank you. Operator: Thanks for the question. Your next question comes from Harlan Sur with JPMorgan. Your line is open. Harlan Sur: Good afternoon. Thanks for taking my question. I assume that the Q3 foundry revenue weakness in IP was due to your largest customer as they pivot from their prior focus on 18A to now 14A foundry manufacturing technology? Is that the right assessment? And given the challenges of this customer, I mean, there's still question marks on their ability to be successful in Foundry. Is this Synopsys team still gonna support this customer on their future Foundry roadmaps? Sassine Ghazi: Harlan, as you know, I used the word earlier. There's an expectation. When you're the leader in IP, and you engage with a customer, we cannot tell that customer that we want to pick and choose what project or which foundry and for which application we want to engage. Because then they will not trust and the relationship with Synopsys. That has been our strength. As far as the whole 18A and the pivot to possibly a different technology, that's a customer choice. Whatever choice they make, we already have the IP available to the node that we have built it to. And part of the relationship with the foundry is we look ahead at timing, and the size of the opportunity, meaning the commitment to Synopsys and the post-delivery on that IP, what is the available market that we can sell it to? So that's really the situation that we have in general in IP. And specifically with some of our foundry customers. Harlan Sur: Thank you for that, Sassine. And then, Shelagh, looks like your total expense guidance for Q4 is coming in about $15 million higher, about three and a half percent higher than if I just combine your total expense structure and ANSYS' total expense structure prior to the close of the acquisition. So what's driving the higher expense outlook for Q4? And then more importantly, from the Q4 base, how do we how should we think about the potential cost synergies looking out over the next few quarters? In other words, how should we think about the fiscal 2026 Q4 exit run rate on total expenses? Shelagh Glaser: For the question, Harlan. On the first one, there's just some cost with, you know, really the initial quarter of bringing ANSYS on. And we want to make sure that it's a very successful integration. So I would say it's just part of ensuring that we've got a smooth integration going on. And then in terms of longer-term guidance, we'll talk about that in our Q4 earnings, what the expectations are for 2026. As we talked about in our prepared remarks, we are taking a comprehensive portfolio look and we're also driving greater scale and efficiency with a 10% overall headcount reduction that will drive through fiscal year 2026. And so that has the effect of actually accelerating our synergies that we had talked about when we announced the deal. So we'll talk more specifically though, Harlan, about sort of the direction of travel in '26. When we do Q4 earnings. Harlan Sur: Okay. Thank you. Operator: Your next question comes from Jay Vleeschhouwer with Griffin Securities. Jay Vleeschhouwer: Sassine, for you first, is the 10% targeted reduction of headcount something that you would have done irrespective of the current and anticipated unpleasantness in IP? And in other words, you would have done that anyway. It looks as though your organic headcount ex ANSYS was up 2,000 heads year over year, up over 600 sequentially. So perhaps you got a bit ahead of yourselves in terms of the organic expansion. And in the meantime, can you talk about the integration or consolidation that you've done of ANSYS already? Our understanding is that very soon after the close, you consolidated around the named accounts direct business. And perhaps you could also talk about your intentions on their very large indirect business. And then my follow-up for Shelagh. Sassine Ghazi: Jay, thanks for the question. As you can imagine, with an eighteen-month regulatory process, we were somewhat limited in terms of our ability to take actions on either portfolio or headcount adjustments. So the 10% headcount adjustment is something we would have done and we've been planning for it for a while and before even the acquisition was approved in preparation that we will be ready to act and carefully and thoughtfully of where to target that reduction. So that we have gone through internal strategic portfolio review. We're looking at the multiple layers of management processes, systems, the impact of AI that we have been deploying inside the company for about two years. So there are many opportunities actually to make sure we're putting the resources at the high impact, high return, and reducing where we can reduce, leveraging technology and the impact of it for further reduction or cost avoidance in the future. There's a very thoughtful process we've gone through for a number of months in preparation for action to be taken post-close. In terms of integration, as I mentioned a few questions ago, we have to make sure that we are very careful in our integration speed as we still are owning OSG, which is the optical business and PowerArtist. To make sure there's no contamination, there's no impact whatsoever in terms of the health of that business as we're handing it over to the buyer. So we are moving in some places where there's no impact. In other places, we're being very cautious and careful how fast do we go. Jay Vleeschhouwer: Okay. Shelagh, you made the interesting comment that you've already coordinated ANSYS' fiscal period with yours. And you noted the Q1 concentration. Following up on that, historically, ANSYS was indeed highly seasonal, particularly in their Q4, but not only in their Q4 because of 606 effects. So the question is, do you think that over time you could perhaps smooth out those seasonality and or 606 effects that they had so pronounced in their numbers? In other words, do you think you might change their lease and upfront model to more of your prevailing subscription model? Shelagh Glaser: Jay, that's certainly something we're looking at over time as we deploy new products and have new offerings for customers, how there might be more alignment with how we renew with customers, we give products to customers, and then we service them. So that's certainly something, but as you mentioned, that's a bit longer term because the renewal dates and the products that customers are buying are those have to be on the shelf right now. So as we move forward, there's an opportunity to do that. I do want to follow-up because you had a question for Sassine on the channel, I think. And so I want to make sure that we do address that. As a really important part of is about 25% of ANSYS. We're really thrilled to have such a robust channel, and we are ensuring that that's very smooth and that's very seamless, and those customers continue to get service. And then there's an opportunity, of course, because at Synopsys Classic, we did not have a channel. But now there's an opportunity for our products to be sold by those great partners. So there's no change whatsoever for the channel. They're just, you know, a wonderful asset, and we're ensuring that there's no disruption to the channel as we move forward. Jay Vleeschhouwer: Okay. Thank you. Kevin, I'll take one more question. Operator: Thank you. Our final question comes from Jason Celino with KeyBanc Capital Markets. Your line is open. Jason Celino: Hey. No. I appreciate you fitting me in. I'll just ask one. In the essence of time. I think, you know, you've mentioned multiple times that you've tried to derisk, you know, the Q4 guide to adjust for some of the headwinds you've been seeing. Without knowing how much ANSYS is contributing, it's hard to measure how conservative or derisked it is. So maybe I'll ask it a different way and say, you know, IP historically has been up sequentially for the past two years in Q4. Maybe it's regular seasonality or maybe it was something more specific. But, you know, given the headwinds you've seen directionally, you know, could we see the same trend again with seasonality in IP for the last couple of years? Sassine Ghazi: Jason, we do expect a transitional period and a muted year as we look ahead in IP. And that's due to the two factors we don't believe they will disappear in a short period of time. Now we have it balanced with a number of other opportunities to scale and deliver to the points I mentioned, like the subsystem opportunity, the serving the various markets, various foundries, etcetera, etcetera. But that's the expectation as we look ahead. Sassine Ghazi: Thank you all for joining our call. We look forward to talking you through the quarter. Sarah, could you please close us out? Operator: Thank you. This concludes today's conference. We thank you all for joining. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Korn Ferry First Quarter Fiscal Year 2026 Conference Call. As a reminder, this conference call is being recorded for replay purposes. We have also made available in the Investor Relations section of our website at kornferry.com a copy of the financial presentation that we will be reviewing with you today. Before I turn the call over to your host, Mr. Gary Burnison, let me first read a cautionary statement to investors. Certain statements made in the call today, such as those relating to future performance, plans and goals constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although the company believes the expectations reflected in such forward-looking statements are based on reasonable assumptions, investors are cautioned not to place undue reliance on such statements. Actual results in future periods may differ materially from those currently expected or desired because of a number of risks and uncertainties, which are beyond the company's control. Additional information concerning such risks and uncertainties can be found in the release relating to this presentation and in the periodic and other reports filed by the company with the SEC, including the company's annual report for fiscal year 2025 and in the company's soon to be filed quarterly report for the quarter ended July 31, 2025. Also, some of the comments today may reference non-GAAP financial measures such as constant currency amounts, EBITDA and adjusted EBITDA. Additional information concerning these measures, including reconciliations to the most directly comparable GAAP financial measures is contained in the financial presentation and earnings release relating to this call, both of which are posted in the Investor Relations section of the company's website at www.kornferry.com. With that, I'll turn the call over to Mr. Burnison. Please go ahead, Mr. Burnison. Gary Burnison: Okay. Thank you, Regina, and thanks to everybody for joining us. I'm really, really pleased with our performance in the quarter. The team is going to get into the results in a little bit. But when I look at the results, even over the past few quarters, with all the choppiness, the uncertainty around tariffs, the labor and economic environment, it's clear that our strategy is working. In fact, when you consider our diversification strategy and the current and future demographic trends alone, the opportunity is immense. And I think that's evidenced this quarter by the growth in all of our solutions. And today, we're driving performance with a far more sophisticated, holistic approach that delivers our expertise and robust IP through integrated solutions in every region of the world. In the quarter, we won a number of notable engagements. I'll highlight a couple, a top pharma company with over 20,000 employees where we're building a globally aligned leadership team, helping them foster a culture of innovation and streamline talent development across the regions. It's part of a multiyear engagement or a FTSE 100 retailer, we're now the exclusive assessment provider across all levels of the organization using our consulting-led assessments and our digital at-scale solutions with the ambition to deliver our capabilities from the shop floor to the boardroom. And finally, a top provider of HR management software, where we're going to deliver a subscription-based digital solution, a global leadership offering that includes content, instructor-led materials, micro learning and more and that complements the consulting engagement that includes leadership assessments and coaching. And these are just 3 examples of how we're integrating multiple solutions to create enduring client partnerships. We also continue to make measured capital investments that extend our offerings and solutions and expand our impact with clients. And a case in point is Talent Suite, which offers seamless integration of proprietary IP and data and talent applications into 1 digital SaaS platform, which enables our clients to make better hiring decisions, structure their organizations, assess, develop and reward their talent. In other words, Talent Suite enables clients to unlock human and organizational potential at scale. Our evolution towards large-scale, multi-solution client engagements is real. As we change the fundamental composition and scale of our business, and when I just look at the tail of the tape, today, we have loyal, repeatable clients of scale. Marquee & Diamond accounts generating almost 40% of our revenue, a 10-year revenue CAGR of 10%, driven by an expanding set of diversified solutions. We have strong top line synergies with 25% of revenue generated from cross-solution referrals. Clearly, this diversification is driving resilience and durability in our business and contributing to sustained shareholder value, and that's evidenced through our balanced capital allocation strategy, which includes 6 dividend increases in the last 5 years and a demonstrated track record of M&A and share repurchases. I'm optimistic, truly optimistic about the trajectory of this firm and more importantly, the impact we're making. We have a strong foundation with incredible brand permission that is fostering deep client relationships. We have relevant, diverse, scale and increasingly more integrated solutions that are even more closely aligned with the talent needs of our clients. And through our disciplined approach, I'm confident we are poised and well positioned for the future. With that, Regina, I'll now turn it over to Bob. Bob, it's all yours. Robert Rozek: Great. Thanks, Gary, and good morning, good afternoon, depending on where you're at. The global business environment over the last quarter remained extremely uncertain with many lingering economic challenges, keeping investment spending cautious. Unresolved tariff issues added to ongoing geopolitical tensions, readings on inflation cause uncertainties as to whether interest rates would remain higher for longer. . And despite the impact of these uncertainties on business sentiment, our clients continue to see the impact and value of our services and solutions. Our financial results for the first quarter of fiscal '26 remained strong providing further proof that our integrated business strategy, which is really diversified across industries, geographies and solutions is working. In fact, the current economic environment has created opportunity for Korn Ferry to really strengthen our client relationships and continue becoming a trusted global partner of choice, helping our clients solve complex talent in organizational performance challenges. And today, we're helping our clients resolve these challenges with both our skilled workforce and our proprietary data and IP, which is really a product of decades of behavioral science research. Additionally, we focus our efforts to sell larger, more integrated solutions via our [indiscernible] Korn Ferry go-to-market strategy. We're paving the way for stronger, more durable long-term growth. I'm also pleased to share that we remain on track for the market launch of our new Talent Suite platform that Gary referenced this November. Talent Suite will enable our consultants and clients to more easily derive and prioritize insights across our multiple Talent products using client data, our own proprietary data and select third-party data to help them make better and more insightful talent decisions. Now in addition to the detailed results found in our posted earnings presentation, I just want to go over a couple of company-wide solution-specific highlights for the first quarter. As Gary mentioned, the Marquee & Diamond accounts remained strong at almost 40% of our consolidated fee revenue. And that program delivered a little better than 7% fee revenue growth when you look at it year-over-year. Our cross-solution referrals also remained strong at 25% of our consolidated fee revenue. Executive Search fee revenue also remained strong, growing 8% in the quarter, and that's our fifth consecutive quarter of year-over-year growth in that solution area. Professional search and interim fee revenue was up 10% year-over-year with growth in both professional services perm placement, plus 5% and interim was up 14%. Our digital subscription and licensed new business grew 10% year-over-year in the first quarter and with 39% of total digital new business, and that's going to continue to add stability and predictability to our overall revenue base. And last, our average bill rates in Consulting and Interim both grew year-over-year, Consulting by 9% and Interim by 4%. Now turning to company overall results. Our consolidated fee revenue grew 5% year-over-year to $709 million, which is a second consecutive quarter of positive growth. Earnings and profitability also continued to grow. Adjusted EBITDA grew $9 million or 8% year-over-year to $120 million. Adjusted EBITDA margin grew 50 basis points year-over-year to 17% and our adjusted diluted earnings per share grew $0.13 or 11% year-over-year to $1.31. Total company new business, excluding RPO, grew 5% year-over-year led by strength in EMEA and APAC. Our RPO delivered $99 million of new business in the quarter, 46% of that came from new logos, 54% from renewals and the renewals included one large financial institution at $32 million. Estimated remaining fees under existing contracts also remained strong in the first quarter. Now as a reminder, this operating metric that we introduced last quarter is the quarter ending estimated fees under existing contracts to be recognized in future periods. At the end of the first quarter, this amounted to $1.67 billion, which was up 9% year-over-year. Of this amount, we expect approximately 58% or $972 million will be recognized as fees within the next year and 42% or $702 million to be recognized thereafter. Now turning to our regional results. Fee revenue in the Americas was down 2% year-over-year, with growth in Executive Search and RPO being offset by slightly lower demand in consulting, digital and professional search and interim. EMEA fee revenue was strong, growing 19% year-over-year, and we saw growth in all solutions. APAC fee revenue was also strong, growing 12% year-over-year also with growth in all solutions. And finally, our capital allocation in the first quarter remained balanced as we returned $36 million to shareholders through combined share repurchases and dividends, and we invested $22 million in capital expenditures focused on Talent Suite, our new technology platform as well as productivity tools and other product enhancements. Now turning to our outlook for the second quarter of fiscal '26. Assuming no further changes in worldwide geopolitical conditions, economic conditions, financial markets and foreign exchange rates, we expect fee revenue in the second quarter of fiscal '26 to range from $690 million to $710 million. Our adjusted EBITDA margin to range from approximately 17% to 17.5% and our consolidated adjusted diluted earnings per share to range from $1.23 to $1.33. Finally, we expect our GAAP diluted earnings per share in the second quarter to range from $1.10 to $1.16. Now I'd like to note that our GAAP diluted earnings per share includes approximately $10 million or $0.14 per share of accelerated depreciation, and that's related to our current product technology platform, which will be sunsetted as the Talent Suite is commercially launched at the beginning of the third quarter in November. We remain committed to controlling what we can control, leaning into identified growth opportunities and driving operational excellence. We will continue to promote a culture of innovation and remain focused on delivering outstanding client service. Korn Ferry is a global consulting firm that powers client performance. We're focused on improving our go-to-market efforts, engaging with our clients as one firm, we are Korn Ferry. We are well positioned for the next step in our growth, and I'm more confident and excited than I've ever been about what this company can become. With that, we would be glad to answer any questions you may have. Operator: [Operator Instructions] Our first question will come from the line of Trevor Romeo with William Blair. Trevor Romeo: Just maybe I had a couple on your digital business to start, the Talent Suite rollout coming up in November. As you're getting ready for that commercial launch, I guess, what are some of the key milestones you'll be tracking there? And how should we be thinking about maybe the time line for the benefits there to start flowing through the financials? Gary Burnison: Well, I think the benefits will take some time. I think it will be towards the end of calendar '26 realistically when we start to see the true benefits of it. Some of the milestones that we are working on include the partnerships that we have and further accelerating the go-to-market strategy around those partnerships. That's very important, particularly with the 3 or 4 large HCM players, that's certainly one thing we're working on. The second is enabling our colleagues and training our colleagues. We have a robust schedule in front of us to train all of our 1,800 frontline consultants on awareness and provocation, and selling of the Talent Suite. That's going to be happening over the next 6 months starting in October. And we also have a targeted strategy with milestones there around our Marquee and Diamond accounts. So it's really kind of a balanced approach here, a multipronged approach. Outside with partners, with our Marquee & Diamond accounts top down, bottom up with many of our clients, then there's an internal mobility strategy as well. Trevor Romeo: Thanks, Gary. Maybe just one quick follow-up on digital. The subscription and license piece of the segment going above, I think, 40% of segment revenue now. Could you maybe just remind us what is your kind of long-term aspirational target for how big those subscriptions could grow as a percentage of that segment? Gary Burnison: Well, we'd like to see it be north of, say, 60%, but that's certainly not in the next several months. But I just think there's this opportunity to impact a lot of people's lives and the destination of organizations through our IP, and we just have to figure out the best way to drive scale. And I think the best way to drive scale in that business is through our partnerships that we have. And we -- that's something that we're going to pursue very aggressively. Robert Rozek: Trevor, this is Bob. One thing I would add to that, as you think about Talent Suite, obviously, selling subscriptions and licenses is important for us. But it is -- also think about it as an enabler of the delivery of our other services solutions. So whether it's Talent acquisition, it's consulting, other areas in the organization are going to really benefit from having all of the assets, IP, data content, what we call foundational assets at the center of the organization, right? And they're going to be able to much easier -- gain much easier access and utilization of those. And then we have a reporting and analytics layer. And then when you layer on AI and Gen AI in terms of being able to access, slice and dice data much faster, easier, quicker you have to think about it more broadly than just selling subscriptions and licenses. Trevor Romeo: Great. And then maybe one more, if you don't mind. Maybe for you, Bob. Just on the guidance, I think typically, Q2 is a little bit of a stronger seasonal revenue quarter for you. So I guess the guidance may be a slight dip at the midpoint sequentially for revenue. Can we just maybe reconcile that. Should we read that as a little bit of conservatism or any reasons across the businesses that would make you think you wouldn't see a little bit of an uptick? Robert Rozek: I would say, Trevor, just given the uncertainties in the backdrop out there, we're probably on little bit on the conservative side. Operator: Our next question will come from the line of Tobey Sommer with Truist. Tobey Sommer: I wanted to ask what you're hearing from clients. You mentioned in your -- that uncertainty out in the economy prompted some conservatism in guidance, we see the BLS revision lower here this morning for job creation over the last year, maybe rates starting to come down here at the Fed sometime soon. What are customers telling you? Gary Burnison: Well, it depends where you are in the world. Look, everybody has got to play on the pitch. Everybody is dealing with the same economic and labor environment. I've spent the last several months with clients and colleagues in Europe in many different countries. And I think, broadly speaking, there's a great deal of optimism. And in the Americas, I think people are dealing with the lack of pricing power and the fact that costs have escalated 50% over the last 5.5 to 6 years. And look, I'm not surprised at all by the downward revision in those BLS numbers. I mean that's not shocking. There's been a labor recession for 2 years. And so companies are -- they're not doing massive downsizing, but they're letting natural attrition take its course and they're not replacing those hires. And then the other big thing not only in Europe, but in America and Asia is what does AI do long term in terms of how does an organization get work done. And with how many people. We've seen a really good rebound in Asia. And we've seen it in the numbers, both Europe and Asia really performed well. That was fairly broad-based in both regions. Life Sciences clients are -- that's a tougher deal as well as health care. We've seen a lot of great activity in industrial, which is 30% of the company. Private equity has been a source of significant strength because they have thousands of companies that are past their sell by date. And because of that, they're actually having to go in and think about how you really operate the company beyond just cutting costs and increasing EBITDA. So those would be the major themes that I've heard from clients directly. Tobey Sommer: Just sort of a specific question on consulting, if I could. With respect to your merger and divestiture kind of services in playbook. What are you seeing there? Because we've seen sort of an uptick in at least announced deals. And many of them seem to be sort of corporate breakups, I'm wondering if you're participating in that from a consulting perspective? Gary Burnison: There's actually -- there are a couple that we are participating. I can't talk about it, but there are a couple. But I think the bigger activity has actually been on the private equity side. And I think that's a direct result of firms hanging on to portfolio companies longer and the work that has to be done beyond 3, 4, 5 years. Tobey Sommer: Appreciate that. Last question for me is if we do see an appreciable uptick in demand or across the businesses and get a little bit faster revenue growth for the firm. Do you have some excess capacity now sort of in the businesses to be able to meet that? Or might you need to step on the gas with hiring and have sort of flat to down-ish margins for a quarter or 2 while you ramp things up? Gary Burnison: No. We're continually managing that talent. And I do think that there is capacity. And I think the big question what do you have to believe for this economic environment that we've seen now for a couple of years to actually turn. There's got to be some significant rate cuts. The Fed has been slow. It was never transitory several years ago. Anybody with any common sense could have said that. And that's what you have to see to get this thing going. Robert Rozek: Tobey, it's Bob. The other thing I would add to that, too, is we've set ourselves formally organized around AI, Gen AI and we're driving that into the organization. So from a capacity perspective, I would expect that to help us get through any groundswell that comes out of a more rapid rebound. Operator: Our next question comes from the line of George Tong with Goldman Sachs. Unknown Analyst: This is Sami on for George. Could you talk about how consulting new business performed in the quarter? What is your outlook for consulting for the remainder of the year? Any -- and the key drivers behind your expectations? Gary Burnison: Well, I think it's going to depend regionally too. I'm not looking -- I just don't think the economic environment particularly is going to change dramatically unless we see the Fed take action. And I think it's been a very, very difficult consulting market for 8 quarters now. And when you look at the overall firm results quarter on quarter-on-quarter and what I would characterize as the labor recession, it is incredibly, incredibly impressive. And so I would assume that in Europe and Asia, we're going to see continued momentum with our consulting solutions. And in the Americas, I think it's going to be a bit more challenging given the backdrop of what we're dealing with. And then the other move that we're making and this is not new. But many, many years ago, we said, look, we've got to get into bigger, larger scale and as Bob said, more integrated solutions, delivering impact to our clients. And so we purposely made an effort towards bigger, more transformational assignments. And it shows in the numbers. This isn't just rhetoric. When you look at the average look at rate per out as an example. That has gone from -- it's gone up 50% from $300 an hour, just a few years ago, to now almost $500 an hour, $470 an hour. When you look at the backlog, the backlog is actually increasing in consulting, 42% of that backlog is engagements over $1 million. And when you look at the new wins, those are also a good part of them, not the majority, but a good part are over $1 million. So what's happening is we're moving the entire organization towards more integrated solutions. The numbers reflect that. And with that then becomes a slower consumption by clients of the backlog. And so when we look at new business, it was your specific question in consulting, in the quarter, it was decent. I mean it was definitely on the plus side. But I tend to look at the firm as a whole and what we're doing there. And I just think you look quarter-on-quarter in the environment that's been very difficult and looking at the company's profitability, it's impressive. Unknown Analyst: Got it. And on digital, the number of consultants was down significantly this quarter. Could you talk about what drove the decision to reduce digital head count, especially given you have the launch of Talent Suite coming up? And is the head count now fully aligned with the current demand? Or could we see further rightsizing? Gary Burnison: Well, we are always managing the workforce, and so we've done it over the last 2 to 3 years, if you look at professional search and interim, for example, you'll find there that we've made significant changes in that workforce and reposition that workforce, and we've done the same thing in digital. So for us, it's -- again, it's around the firm. And it's not around these segments. It's around enabling the entire firm to be able to deliver the platform. And that platform is at its very, very foundation, how do you unlock human and organizational performance. How do you design an organization? How do you assess what type of leaders do you need? How do you develop and how do you pay them? That's what it's about. So it's not strictly around the 236 digital sellers that we have. It's around the entire firm. And the 1,800 frontline consultants that we have and their ability to deliver the entire firm. Unknown Analyst: That's helpful. Operator: Our next question comes from the line of Josh Chan with UBS. Joshua Chan: If I look at the -- if I look at the geography, the North American part of the business, most parts of the business is down somewhat, which jives with the macro, but Exec Search is still up in North America. So what's going on in Exec Search that's allowing that part of your business to really seemingly outperform the environment? Gary Burnison: Yes. It's a combination of [indiscernible]. It's the phenomenon where I've talked about this for a good 6 quarters, 7 quarters, it's peak 65, so there's the demographic shifts and trends that I referred to in my opening comment. So you've got that playing out. You've got the fact that many of the executives in the C-suite we're probably in the C-suite during COVID. And so you had a period of going from light to darkness to light and all the things in between around that time than the subsequent pent-up demand and great resignation. And so you've got people that are making the decision for themselves around work-life balance. Then you have boards looking at the C-suite and saying, is the leadership team that I need over the next 5 years what are their skills that will be needed and versus the past 5 years. So it's really those combination of factors that I believe are driving the Executive Search business. Joshua Chan: Great, Gary. And I think you guys also mentioned that in a choppy environment that could provide some opportunity for you to strengthen your position. I'm sure you'd love a stronger environment, but curious how you can still win business in a weaker environment and what kind of opportunities those might be? Gary Burnison: Yes. This is the best environment. I mean it's we're on most motivated. This is where good companies become great companies. It's only in these types of environments because people don't change unless there's a reason to change. And I think the environment gives us that reason to change. So I look at it and I -- it's not a question of just dealing with ambiguity, but it's embracing the ambiguity. And I love the environment and it does present opportunities for us, and it presents an opportunity even internally around how we think about ourselves and do we think about ourselves as business segments or do you think about yourself as Korn Ferry? And the truth is that we don't have the 5 businesses. We have 1 business, which is Korn Ferry. We have 5 solutions, but we have 1 business. And so the ability to change mindset in an environment like this, you have to take advantage of it. And that's what we're doing, and that's what we plan to do over the next several months is to continue to change mindset particularly around how we go to market. Robert Rozek: One of the things that I've talked about quite a bit with investors is when the world is somewhat [indiscernible] chaotic. It's actually, as Gary mentioned, a good thing for us. Think about Covid hit, everybody went home. Work got done differently, different work had to be get done and organizations turn to us to help figure that out. Right now, there's a lot of uncertainty out there, AI, Gen AIs out there. How do I change -- how does that impact my workforce? Does it change my job profiles? Do people have the right skills, to any different people. So when there's chaos out in the world and organizations are trying to figure their way through it, they turn to us to help them do that. So for -- as Gary indicated, it's actually a good thing for us. Joshua Chan: That's an interesting perspective. Operator: Our next question will come from the line of Mark Marcon with Baird. Mark Marcon: Gary in your discussion, you talked a lot about some of the bigger deals that you've been signing and you specifically noted one with a big HCM company. I'm wondering if you can elaborate in terms of what you're going to do for them? Gary Burnison: I'm not going to get into -- it's really a transformational program centered around leadership development. And so it's a big learning engagement where that particular client is not only licensing our IP around developing and transforming a workforce, but it also includes consulting with assessments in coaching. So it's really around kind of transforming a workforce in transforming not just skill set, but mindset, and it's using both our IP and consulting. Mark Marcon: That's really interesting. How big of a program could something like that be? Gary Burnison: These are typically multiyear and several million dollars. I'm not saying that this particular one is that, but that's generally what these look like. And part of it then is it gets consumed by the clients, not the digital piece, but the consulting wraparound on these leadership development programs, they have to consume it. They have to pull it down on the shelf. And that's why I can think of one that is huge. It was an 8-digit sale to a massive, massive organization. And we are now -- we've just completed year 3, and we've touched about 40% of that organization. And so the consumption of all of those services, not the IP, obviously, but the consumption of the services is really dependent on the client's speed, not on us. And that's one reason why you see the backlog, for example, in consulting increasing is because of that phenomenon moving to multiyear, multimillion dollar engagements. Mark Marcon: That's great. Gary, we have been in a labor recession. You guys have held up the best of arguably any of the major players that are out there that most investors look at. You've been getting more and more into professional search and interim. You've made a number of acquisitions there. I'm wondering as the environment remains relatively uncertain, what's your posture there? What have you learned from the acquisitions that you've made in terms of [indiscernible] what are the types of acquisitions, the best spaces where you guys actually fit? And how many more opportunities are there in terms of bolstering the areas where you really do fit? Gary Burnison: I think the pro search -- let me bifurcate that. The pro search market, as you said, is enormous. Today, most of that business that we have, most of that solution is in the U.S. What we've learned is the contingent part of that market opportunity does not work for us for the most part. So the learning there is we love the market. We want to go into it, but we also want to be eyes wide open. We don't want to be in contingent recruiting. It doesn't fit well with the brand in the Marquee and Diamond account strategy. And there is a -- still a big opportunity outside the U.S. we're underpenetrated there. And we have to be very cognizant both in pro search and interim as to what technology is going to do to a company's labor force over the next 5 or 10 years. So we have to be very, very targeted there and very smart. On the interim side, what we've learned is that it is, number one, why did we get into it? We got into it because we see a mega trend that's playing out that we continue things going to play out even with AI, with fractional workers. And so we think that megatrend is something that we should invest into. What we've learned there is that it is very synergistic with our brand. And similar to Pro Search, the opportunity is quite significant outside of the United States. And in fact, when you look at both pro search and interim, you would find that 70% or so of our solution today is in the United States. And there's an enormous market opportunity. I think you would see us on the acquisition side, more oriented towards interim than pro search because on the pro search side, there are a number of transactions we could do today. But will those transactions would come with a large pro search contingent piece, which we don't think is commensurate with our brand. Robert Rozek: Mark, just maybe a little bit more color. A couple of things for me that have been learning, Gary mentioned the synergistic in the ability to sell across the organization within the interim business itself, since we started down that path, we've created over 1,200 incremental opportunities by referring work across the system that never would have existed in those organizations had they stayed independent. And the other thing is I talk to people in the field that I find very interesting is a lot of our clients are asking us, you do my firm hiring now, why wouldn't you help us with the interim or temporary labor force as well. So I think there's -- the market is used as Gary indicated, and there's great demand amongst our client base. And it is extremely synergistic as you bring it into this organization. Mark Marcon: That's terrific. And then can I just ask about AI, twofold question. One is, clearly, there's been a labor recession for anybody who's been following the labor market for some time. And the question revolves around like even if we do see some [indiscernible] a little bit more actively. Gary, what do you think about the chance of uncertainty around AI kind of freezing certain employers. And in some cases, we are seeing some sections where labor demand is being reduced by AI. So I'm just wondering what you're seeing on the client front. . And then secondly, you mentioned you're injecting [indiscernible] processes. Wondering if you can be a little bit more specific in terms of specific areas that you're injecting to AI? How much are you spending there? And do you expect it to be an efficiency driver? And what's that impact going to be in terms of your own headcount? Gary Burnison: I'll let Bob -- Bob, you can address the second part. I guess I would -- none of us have a crystal ball. I would say when you look at the -- take the America, there's no question that lower birth rates over the last 30 years, are going to result in significantly less people coming into the labor force over the next many years. And so therefore, if a country wants to grow productivity like America has done at 2% a year, how does that supply and demand imbalance get corrected. Well, it gets corrected through technology. So I think there will be whether -- in whatever form that is, agentic AI, whatever it is, I think there will be a massive sucking sound, and it will be this huge pull that technology will have to bridge that -- less people into the American workforce. So I think that's undeniable. That's mathematics, that's data. And in this environment, that companies have been dealing with now for a couple of years, the reality people can talk about inflation at 2% or 2.5% to 3%, that is like such [[indiscernible] the fact is costs are up 40% to 50%, and that's a direct result of COVID. So in this environment, companies are having to look at ways to deliver impact to their customers more efficiently. And that has played out in the labor force over the last 8 quarters by letting -- for the most part, letting attrition take its course and not being so hell-bent on replacing those people that leave. There's no doubt that when you look at what you can do today with AI that any CEO would be absolutely looking at their organization and saying, what does this mean for my workforce strategy and it invariably has to mean, but I'm probably going to have less employees. I don't see how one would come to a different conclusion than that. And so for us, -- we are -- broadly, there's inside out and outside in inside out. We're doing the things that you would expect around our own workforce and how we mobilize that workforce with AI. And then there's the outside in with our delivery services and not only the consulting engagements, such as we have today around going into an organization and saying, are they AI ready, which we have many, many of those engagements, we're actually using, again, our IP to assess and benchmark company's AI readiness. But we're also using it relative to our assessment and coaching engagements. So Bob, maybe you could take the second part of Mark's question. Robert Rozek: Sure. So Mark, we're -- we actually are making investments into this area that are fairly substantial. Now we haven't gone out and hired a bunch of people. What we've done is we've taken approximately 40 individuals who had been within each of our solution areas, working on various aspects of AI, Gen AI and we've organized them under a central leader only, Brian Akerman. And Brian is driving the AI, Gen AI usage in the firm. We -- so we've taken those roughly 40 people centralize them. We now have rolled out licenses depending on your skill level or what your job role is and so on, the licenses may have -- some might be more -- have more efficacy than others. And we're going through right now and figuring out the impact that the AIG is going to have on our work. I guess where we are today, if you think about AI and Gen AI, it's -- to me, it's -- mantra is human plus AI. So it's really looking at those as efficiency tools. I think where it potentially gets more interesting is with the use of agents ultimately as they will be integrated into workflows work process, and so the impact of that is obviously something that we're going to -- we'll figure out, but that's down the road. I would say that as I look at our workforce scale, Gary mentioned a couple of times on the call, our backlog, right? So to me, it's not just about how do I look at AI and Gen AI as a way to get our head count down. But it's also a way is how do I take out some of the menial tasks that folks are doing today and I could take that freed-up capacity and use that to deliver the backlog that we have. So in my mind, it's sort of a combination of, yes, will it have an impact on our overall head count? Absolutely. But it's also going to give us the ability to free up capacity to provide and deliver services to our clients more -- on a more rapid basis. Operator: And it appears that there are no further questions, Mr. Burnison. Gary Burnison: Okay. Regina, thank you for hosting us, and we certainly appreciate you listening to our story. And we look forward to talking to you here over the next few days and over the next quarter. Thanks a lot. Operator: Ladies and gentlemen, this conference call will be available for replay for 1 week starting running through the day September 16, 2025; and at midnight. You may access the Echo replay service by dialing (800) 770-2030 and entering the access code 5927-661 followed by the pound key. Additionally, the replay will be available for playback at the company's website, www.kornferry.com in the Investor Relations section. This concludes our call today. Thank you for joining. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Second Quarter 2025 Hello Group, Inc. Earnings Conference Call. Please note, this conference is being recorded today. I would now like to hand the conference over to your first speaker today, Ms. Ashley Jing. Thank you. Please go ahead, ma'am. Ashley Jing: Thank you, operator. Good morning, and good evening, everyone. Thank you for joining us today for -- hello Group's Second Quarter 2025 Earnings Conference Call. The company's results were released earlier today and are available on the company's IR website. On the call today are Mr. Tang Yan, CEO of the company; Ms. Zhang Sichuan, COO of the company; and Ms. Peng Hui, CFO of the company. They will discuss the company's business operations and highlights as well as the financials and guidance. We will all be available to answer your questions during the Q&A session that follows. Before we begin, I would like to remind you that this call may contain forward-looking statements made under the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Such statements are based on management's current expectations and current market and operating conditions and relate to events that involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond the company's control, which may cause the company's actual results, performance or achievements to differ materially from those in the forward-looking statements. Further information regarding this and other risks, uncertainties and factors is included in the company's filings with the U.S. Securities and Exchange Commission. The company does not undertake any obligation to update any forward-looking statements as a result of new information, future events or otherwise, except as required under law. I will now pass the call over to our COO, Ms. Zhang Sichuan. Mr. Zhang? Sichuan Zhang: Thank you. Appreciate it. Hello, everyone. Thank you for joining our call. In Q2, both our domestic and overseas business continued to see positive trends again at the start of the year, achieving good results across various operational and financial metrics. Next, I will give you an update on execution of our strategic goals. Starting with the financial performance. For Q2 '25, total group revenue was RMB 2.62 billion, down 3% year-over-year. Domestic revenue reached RMB 2.18 billion, down 11% year-over-year, while overseas business was RMB 442 million, up 73% year-over-year. Adjusted operating income was RMB 448 million, down 6% from Q2 last year with a margin of 17%. Our key priorities for 2025 include the following: for Momo, the goal is to maintain the productivity of this cash cow business with the healthy social ecosystem. For Tantan, the goal is to maintain and improve its core dating experience and build an efficient business model that drives profitable growth. For the new endeavors, our goal is to continue deepening our presence in overseas markets, enriching our brand portfolio and building a long-term growth engine. In the first half of 2025, our domestic business gradually stabilized with both revenue and profit exceeding our initial expectations. For overseas business, we continue to drive rapid revenue growth with controllable costs and expenses. And now let me walk you through the details. First, on Momo app, all products and user acquisition efforts were focused around the goal of ensuring the productivity of the cash cow business. On the product side, the focus was to enhance user track experience to ensure long-term stability through our healthy social ecosystem. In Q2, we fully roll out in-house developed AI greeting feature, which have male users to generate personalized reading, driving the rates up by a high single-digit percentage. Using our use of AI to enhance icebreaking chat experience, we have also been testing an AI chat assistant feature, which provides content suggestion for male users during the ongoing conversations. This feature drives an increase in number of multiround conversation and rate of in-depth tracks, thereby improving retention and playing positive growth in stabilizing Momo's user base. On the user acquisition front, we further refined our approach based on ROI and reduced the budget of inefficient channels. We also optimized acquisition materials for high ARPPU users and drove sequential growth in ARPPU by enhancing the on-boarding experience for paying features among users from these channels. The reduction in unit acquisition costs combined with the ARPPU growth drove further improvement in ROI, which has already achieved a target greater than 100% in Q1. The overall user retention remained stable despite increased channel investments thanks to the improved user experience driven by product enhancements and algorithm optimization as well as the ability to accommodate channel users more effectively. In Q2, Momo app had 3.5 million paying users, a sequential decrease of 0.6 million due to our ongoing efforts to cut user acquisition investments with negative ROI. Since the ultra low paying users that we proactively abandon, make very limited contribution to the top line. The absence of this group has had a very minimal negative impact on revenue. Instead, their absence contribute to an improvement in profitability. We believe that the current user acquisition environment in China has fundamentally changed from the pre-pandemic experience and our user acquisition strategy to also evolve to achieve ongoing improvements in ROI. I believe that -- I'm confident that both Momo and Tantan still have room for continuous improvement in this area. Now on the productivity of the cash -- of Momo cash cow capital. In Q2, Momo value-added service revenue reached RMB 1.85 billion, down 11% year-over-year. The decline was mainly due to the soft spending sentiment among high-paying users, particularly in live streaming experience amid the weak macro environment. In light of this, we increased operational efforts in chat room experience, which is popular among mid cohort users. We adjusted common recommendation algorithm to enhance penetration rates and user scale of the audio and video-based experiences thereby stimulating consumption amongst mid cohort users. After the seasonal lows in Q2, reorganized non-bonus driven competition events in live streaming and increased the exposure rate of high-quality broadcasters to high-paying users in our algorithm. On the product side, we introduced new interactive gifts that further facilitate relationship building and paying conversion between users and broadcasters. With the joint efforts of our algorithm and product, we enhanced our traffic monetization efficiency, coupled with a seasonal recovery. VAS revenue increased 4% from last quarter. Turning to Tantan. In order to maintain profitability amid revenue pressure, we continue our strategy of reducing channel investments in Q2. A plan initiated at the start of the year with a target ROI of over 100%, we further scaled back budgets for underperforming channels. This decrease in channel traffic puts some pressure on the overall user scale. However, organic user growth show a positive trend since the beginning of the year and increased steadily over quarter-over-quarter, which potentially offset the decline in user numbers caused by the reduction in marketing expense. In June, Tantan's MAU reached 10.2 million, down 5% from last quarter. As of the end of Q2, Tantan had 740,000 paying users, a decrease of 80,000 from Q1. In addition to a decrease in MAU, another reason for the decline in paying users is the short-term pressure on the paying conversion caused by the improvement in user experience associated with the product upgrade. Following the full-scale rollout of the pilot projects, there was a slight quarter-over-quarter decrease in paying ratio. Turning to Tantan's financials. Revenue from the onshore business in Q2 was RMB 160 million, down 18% year-over-year and 4% quarter-over-quarter. The revenue decrease was due to a decline in the number of paying users, but ARPPU increased 18% year-over-year and 8% quarter-over-quarter, which particularly alleviated the pressure on revenue. At the product level, to explore dating experiences for Asian, we launched product upgrades from last year. Our key efforts included: first, strengthening view user application to enhance user authenticity and brand trust. Number two, we're focusing on the core dating experience by simplifying the UI layout to focus on key information, while downplaying noncore dating features such as fees and good track. The improvement in user experience has a certain negative impact on paying ratio and user retention. The upgraded version was fully rolled out in Q2. And currently, we are mitigated the negative impact of the new version on user metrics and amortization through continuous product fine-tuning. On user acquisition, our goal was to achieve 100% ROI including personnel costs and to eliminate budgets from the underperforming channels. The unit acquisition cost narrowed significantly and ARPPU will slightly compared to last quarter. In Q2, ROI remained stable at a level far exceeding 100%. The improvement in organic traffic and in the channel ROI has led to a significant year-over-year and quarter-over-quarter growth in Tantan's profitability. In terms of monetization, we mitigated the impact of the product upgrade on paying ratio by restructuring the membership package and refining the operations of core cities and user groups. The differentiated product design and pricing schemes has driven a continuous increase in ARPPU, recording a revenue decline that is significantly smaller than the decrease in the number of paying users. Lastly, on the overseas business. In Q2, overseas revenue reached RMB 442 million, up 17.3% year-over-year and 7% quarter-over-quarter. The overseas revenue accounted for 17% of the group revenue compared to 10% in the same period last year. In Q2, overseas revenue maintained its rapid growth momentum driven by the audio and video-based social product in the MENA region. Soulchill product optimization to the core chat room experience, boosted both the paying conversion ratio and the paying user accounts, thereby driving the crucial revenue growth from a high base. for Yahale and Amar, the local teams drove growth involves the number of paying users and ARPPU by continuously optimizing product features and strictly adhering to a paying user-oriented acquisition strategy. We initiated expected the overseas revenue would have grow even faster with more aggressive marketing expansion. We decided to be more prudent due to the following reasons. Number one, train -- Soulchill expansion to an affluent Gulf region, we felt the need for a better segmentation among different user groups. Therefore, we are currently trying to penetrate the market with a stand-alone app, which might take a bit more time. Number two, we noticed that the unit acquisition costs increased a bit too fast as we increased channel investment in two new apps. Therefore, we decided to move a bit slowly on the marketing expansion plans, focusing on improving ARPPU and optimizing acquisition costs, first. We will increase our channel investment again once ROI reaches a satisfactory level. We prefer such kind of prudent model that balance growth and bottom line because it prevents the from entering an awkward offer situation, where the rapid top line expansion is achieved through bottom line sacrifice. It's worth to mention that our overseas business is not limited to audio and video-based social product in the MENA market. Another key focus of our overseas business lies in the dating market across developed countries. Turning the overseas dating products led by our Singapore team already contributed a double-digit percentage of our total overseas revenue, primarily driven by Tantan International. After checking over last year, the Singapore team, we evaluated the brand positioning and product strategy for overseas Chinese and other Asian country users. Tantan International shifted from balancing entertainment and dating to focusing on the core dating experience. Based on this, we have initiated the product and branding. After 1 year's effort, Tantan International revenue has now stabilized. Moving forward, we will focus on dating and the growth opportunities in overseas Chinese communities and the Southeast Asia market. We plan to take Tantan International as a pilot product to our presence in our overseas stating field, providing users with some more dating brands that facilitate the discovery of romantic relationships and effectively establish connection from online to offline. This concludes my remarks. Now let me pass the call over to Cathy for the financial review. Cathy, please. Cathy Peng: Thank you, Sic. Hello, everyone. Thank you for joining our conference call today. Now let me take you through the financial review. Total revenue for the second quarter 2025 was RMB 2.62 billion, down 3% year-on-year, but up 4% quarter-over-quarter. Non-GAAP net loss was RMB 96.0 million compared to RMB 449.2 million from the same period of 2024. In the second quarter, we accrued an additional amount of withholding income tax of RMB 547.9 million, associated with profits generated by our -- in China for prior periods. I will elaborate on this accounting treatment later. This tax expense item is one-off in nature and did not reflect the normal business operations of the current and future periods. Excluding this special item, non-GAAP net income for the quarter would have been RMB 451.9 million, up 1% from Q2 last year and 12% from last quarter. Looking into the key revenue items for Q2. Total revenue from value added services for the second quarter of 2025 was RMB 2.58 billion, down 3% year-on-year, but up 4% quarter-on-quarter. On a user geography basis, PRC Mainland SaaS revenue was RMB 2.14 billion, down 11% year-on-year, but up 3% quarter-over-quarter. The year-over-year decrease was primarily due to soft consumer sentiment stemming from the macro factors, which put pressure on Momo business, and, to a lesser degree, a decline in compound paying users. The sequential increase was primarily driven by the recovery from Q1 seasonal weakness. VAS overseas revenue came in at RMB 440.7 million, up 73% year-over-year and 7% quarter-over-quarter. The year-over-year and sequential growth was mainly driven by the rapid expansion from multiple social entertainment and dating brands across our rich portfolio. Turning to cost and expenses. Non-GAAP cost of revenue for the second quarter of 2025 was RMB 1.60 billion compared to RMB 1.59 billion for the same period last year. Non-GAAP gross margin for the quarter was 38.8%, down 2 percentage points from the year ago period. The year-over-year decrease was due to three factors. Number one, an elevated payout ratio driven by structural revenue shifts towards overseas markets, which have a higher payout ratio, especially during fast expansion phases. Number two, workforce optimization leading to one-off severance payments. Number three, payment channel costs and structure -- infrastructure expenses accounted for a larger revenue proportion due to geographic mix tilting towards international operations, where fee structures are systematically higher compared to domestic business. Non-GAAP R&D expenses for the second quarter was RMB 172.0 million compared to RMB 179.7 million for the same period last year, representing a 4% decrease year-over-year. The decrease was attributed to personnel optimization. Non-GAAP R&D expenses remained stable at 7% of revenue, consistent with the figure from the previous year. We ended the quarter with 1,268 total employees compared to 1,364 from a year ago. The R&D personnel as a percentage of total employees for the group was 58% compared with 62% from Q2 last year. Non-GAAP sales and marketing expenses for the second quarter was RMB 239.7 million compared to RMB 360.6 million for the same period last year, both representing 13% of total revenue. The year-over-year decrease in sales and marketing expenses was attributable to the ongoing cost control strategy for the PRC Mainland businesses where both Momo and Tantan narrowed their marketing spend. This decrease was partially offset by the increase in channel investment for the overseas app. Non-GAAP G&A expenses was RMB 67.5 million for the second quarter compared to RMB 89.5 million for the same quarter last year, both representing 3% of total revenue. Non-GAAP operating income was RMB 447.7 million with a margin of 17.1% compared with RMB 476.5 million with a margin of 17.7% from the same period last year. Non-GAAP operating expenses as a percentage of total revenue was 22%, a decrease from 23% from Q2 2024. Now on income tax expenses. Total income tax expenses was RMB 638 million for the quarter. In Q2, the company accrued withholding income tax of RMB 578 million, of which RMB 547.9 million was a special item -- special nonrecurring item related to prior periods, namely that in the second quarter of 2025, we accrued an additional withholding tax of RMB 547.9 million, related to dividends paid or payable by our WOFE in Mainland China to its offshore parent company in Hong Kong. This accrual followed a notice received by our WOFE Momo Beijing from the Chinese tax authorities requiring it to withhold tax at the standard rate of 10% instead of the previously applied preferential rate of 5%. While the company continues to believe our initial assessment was reasonable, we note the authorities most recent interpretation and position and have complied accordingly. Among the total amount accrued, RMB 356.1 million was related to dividends paid by WOFE in 2024 and in the first half of 2025, and this amount has been paid in September 2025. The remaining RMB 191.8 million was the additional 5% withholding tax accrued for the undistributed retained earnings of Momo Beijing as of March 31, 2025. So from Q2 2025 onwards, we will accrue withholding tax rate at 10% and for profit generated by our Beijing WOFE. Without withholding tax, our estimated non-GAAP effective tax rate was around 11% in the second quarter. Now turning to balance sheet and cash flow items. As of June 30, 2025, Hello Group's cash, cash equivalents, short-term deposits, long-term deposits and restricted cash totaled RMB 12.39 billion compared to RMB 14.73 billion as of December 31, 2024. The decrease in cash reserves was largely attributable to the repayment of RMB 1.76 billion bank loan, including accrued interest in the first half of 2025. Additionally, in Q2, we paid an equivalent of RMB 346 -- we paid an equivalent of RMB 346 million cash dividend to our shareholders. Net cash provided by operating activities in the second quarter 2025 was RMB 250.1 million. Lastly, on business outlook. We estimated our third quarter revenue to come in the range from RMB 2.59 billion to RMB 2.69 billion, representing a decrease of 3.2% to an increase of 0.6% year-on-year. This is based on assumption that on a year-over-year basis, PRC Mainland business will decrease mid- to low teens, while overseas revenue is expected to grow in mid-60s. Please be mindful that this forecast represents the company's current and preliminary view on the market and operational conditions, which are subject to changes. That concluded the prepared portion of today's discussion. With that, let me turn the call back to Ashley to start Q&A. Ashley, please. Ashley Jing: Thank you. Just before we take the questions, for those who can speak Chinese, please ask your questions in Chinese first, followed by Enrich translation by yourself. Thank you. And operator, we're ready to take questions, please. Operator: [Operator Instructions] Your first question comes from Thomas Chong from Jefferies. Thomas Chong: [Foreign Language] We have seen Momo fundamentals in first half came in better than expectations set in early 2025. Can you talk about our second half outlook. On the other hand, we just talk about different AI tools like AI greetings and AI chat assistance. Can you also talk about what are our thoughts and strategy on AI application? Ashley Jing: [Interpreted] Let me translate this first. So Momo revenue achieved a sequential growth in the second quarter, primarily due to seasonal recovery. Additionally, with some the relatively stable consumer sentiment and regulatory environment, we took this opportunity to organize a number of nonbonus-oriented competition events. By offering the winners incentives such as training tours abroad or production of heat music videos, instead of simply cash rewards. We simulated broadcasters participation in this competition events at a relatively low cost. Whether this trend can be sustained in the second half of the year, largely depends on the overall consumer sentiment as well as the enthusiasm of agency and broadcasters. Regarding consumer sentiment. We currently do not see any significant deterioration, but are relatively fragile overall. On the other hand, due to some new tax regulations, agents and broadcasters may be affected in the second half of the year. Internally, we are adjusting our operational policies to address this issue. The main goal of our policy adjustment is to help the supply side enhance compliance while maintaining the normal and reasonable income and profit. This may put some pressure on the platform's revenue and gross margin, but our team will strive to mitigate this impact through improved product operations. Currently, Momo's overall revenue and profit in the second half of the year expected to be relatively controllable. Moreover, tax compliance across the entire industry is also a good thing for the long-term stability of the social entertainment platform. Okay. Let me translate this. So the second question is about application of AI in the social field. Since 2022, the group has done a lot of explorations and innovations in this area with significant strategic deployment and efforts. At the application level, it mainly involves several aspects. Firstly, we are integrating AI into existing social products to enhance user experience. And Chinese users generally struggle with icebreaking conversations, which posted a significant barrier to building new connections and maintaining ongoing interactions. This has been a key user of pain point we have sought to address through product operations. AI, however, can play a substantial supporting role in this area. Momo's previous product practice in AI-assisted icebreaking have observed a strong evidence of this. We believe AI has broad application potential in this area, such as offering chat advice and providing other similar systems functions. In addition to existing applications, we have recently launched a stand-alone AI character role play in chat in Japan. Users can choose their preferable IPs and storylines to be engaged in chat and role playing. This app is currently doing very well in Japanese market, and we have initiated preliminary monetization efforts. And beyond these application level exploration, we have also made significant efforts in underlying technology and infrastructure. Since there are no off-the-shelf AI vertical models tailored for the social sector available on the market, our group has set up a dedicated team for large model applications and continuously invested resources in this area. Based on Momo's we are conducting in-depth research and model training on how to leverage AI to better help users build and maintain new connections more efficiently. Our progress achieved in this area will significantly enhance the product and commercial value to Momo and Tantan and many of our new social products in the overseas markets. Thomas, I think that's the answer to your question. So operator, we're ready for the next question. Operator: Your next question comes from Leo Chiang from Deutsche Bank. Leo Chiang: [Foreign Language] Management mentioned in the prepared remarks that the company has taken measures to restructure the membership package and require the operations of core cities and user groups to mitigate the impact of the product upgrade on paying ratio. Can management elaborate more details of what measures you have taken? Sichuan Zhang: I will take this. So the recent Tantan product upgrade has led an increase in the number of users completing real person verification and profile pages now show more comprehensive information. User feedback shows that it feels like they can see more real people on Tantan. However, this improvement has resulted in users which has put some pressure on revenue to adjusted -- in Q2, we adopted a user classification approach, specifically with group user base on whether they have complete real personification, engagement level, paying history and factors such as appearance. For different user groups, we implemented tailor exposure strategy and monetization approaches. For example, for users with high paying potential, we moderately adjusted their matching rate and pay design to improve their paying conversion and ARPPU. Additionally, we divided domestic cities into several tiers based on user engagement level and regional consumption capacity. We developed suitable membership packages and pricing plans. Our goal is to maximize revenue, either by increasing the paying ratio to grow the number of paying users or by boosting ARPPU to drive revenue growth. In terms of UI design, we focus on core saving features by the previously quarter images and test information on the homepage. We now highlight the key information such as age, online status and systems. The revenue pressure caused by the product upgrade was fully evaluated in Q2. Recent product and algorithm adjustments gradually mitigated the negative impact of the upgrade on the revenue. So therefore, it's worth noting that the improved user experience has helped drive organic user growth and user retention. Previously, the vast majority of new users on Tantan were acquired to pay marketing channels. However, since the start of this year, the number of organic users have been steadily increasing. In Q2, the number of new organic users significantly bypassed acquired through channels. We believe the enhanced user experience provided by the product has established a solid foundation for recovering our user base and revenue following a reduction in channel investment. Ashley Jing: Yes, that's it for the answer. Operator: Your next question comes from Yicheng Yuan from UBS. Yicheng Yuan: [Foreign Language] So we've seen like overseas revenue grow over -- grew by over 17% year-over-year for two consecutive quarters. So could management please share your views on sustainability of the strong growth? And what are your expectations for overseas revenue in the second half? Sichuan Zhang: Thank you for the question. I will kick this to sum up the rapid growth of the overseas business in the first half of the year in one line that is pretty well across the board. For the social entertainment business, Soulchill has maintained steady growth momentum. The accelerated growth in the first half of the year is mainly driven by continuous breakthrough with Yahale and Amar. Despite the ongoing increase in channel investments, the ROI has constantly met target, allowing us to achieve revenue growth while improving profitability. This marks our most significant breakthrough since the start of the year. In fact, our social entertainment business could have grown even faster in Q2 and Q3. However, given the strict profit requirements set by the group, aiming for higher growth will sacrifice on profits, and we are conscious about the risky growth model at the moment. So in Q2 and Q3, we will focus on increasing ARPU and optimizing user acquisition costs. Although year-on-year growth may slow slightly, these three apps targeting MENA is still expecting to deliver very healthy and robust growth overall. So beyond social entertainment, our overseas dating business has also performed very well this year. This includes the stabilization of Tantan's overseas operation and other overseas dating products that managed by our Singapore team. We have also recently completed the acquisition of the -- although this scale is larger, isn't large compared to our overall overseas business. This brand has significant untapped potential in terms of user user possession in European markets and team capacity -- capabilities. We believe that this overseas dating brands will become key growth driver for our international revenue in the future. As for the revenue outlook, I will turn it over to Cathy. Cathy Peng: Okay. Sic has already given pretty clear and detailed answers about the growth dynamics of our overseas business. Let me try to translate into those comments into more quantifiable terms that model builders can work with. First of all, as you can see in Q1, Q2, we delivered over 70% overseas growth, which reflects strong momentum across both social and our -- some of our emerging brands. We -- as Sic mentioned, we could have moved a little bit faster in Q2 in terms of top line growth. However, we purposely slowed down a bit towards mid Q2, so we didn't have to sacrifice profit for faster top line and market expansion. It was really a decision out of strategic discipline and priority on growth with profit rather than growth at the expense of profit. And for that same reason, in Q3, we expect a temporary moderation maybe toward a year-over-year growth of around 60% as we deliberately pace marketing spend and focus on improving ROI through optimizing user acquisition costs and enhancing ARPU. That said, nonsocial emerging brands as a whole are continuing to accelerate at a triple-digit pace and will become an increasingly important growth driver as the year progresses. This is a good thing for the group because a lot of the new brands are subscription-based with higher margins. And these brands -- as these brands mature, we could see gradual improvement in our overall margin profile. By Q4 as ROI optimization take effect and with the contribution from some of the newer brands, we expect overseas growth to reaccelerate again. Hopefully, that answers your question. Back to Ashley to take more questions. Ashley Jing: Okay. So in the interest of time, maybe let's just take one last question before we wrap up for today's conference. Please, operator, if we have any. Operator: Your final question comes from Xueqing Zhang from CICC. Xueqing Zhang: [Foreign Language] The management just share the revenue outlook the second half of this year. And I would like to know if there will be any change in terms of profit margin. In particular, regarding the withholding tax issue that Cathy just mentioned in the prepared remarks. Can you will share more details. I believe investors are quite concerned about whether this is an issue specific to the company itself are effectively related to industry-wide process. Cathy Peng: Okay. On margins, it's hard to separate the discussion on margin from our overall top line outlook. So here is a recap on how to think about revenue outlook for 2025 at the group level, again, in a more quantifiable way. As mentioned earlier, we expect some pressure on Momo's value-added services in the second half, primarily due to recent tightened up in tax scrutiny affecting a lot of our performers and agencies. And of course, macro remains an uncertainty factor here as well. For these reasons, there could be some fluctuations in revenue and gross margins, particularly in Q3 and Q4. That said, we've been adjusting our revenue sharing policies to offset part of the impact. So the overall effect on top line should remain pretty manageable. On the other hand, content's performance, as you can see, has been a positive surprise after the restructuring at the beginning of the year where we substantially cut down personnel and marketing costs. Despite significantly reducing marketing spend, product improvements and monetization enhancements have kept revenue more resilient than expected. And the revenue is stabilizing as we move through the back half of the year. So it looks like we've achieved stabilizing revenue trend on top of significant cost savings for Tantan, which will give us pretty meaningful improvement in Tantan's profitability compared to last year. Now moving back to group level revenue outlook for 2025. We continue to see somewhere around the low teens year-over-year decline for domestic revenue, offset by strong growth in overseas where we anticipate a year-over-year growth around 70% taken for the whole year. Taken together, this implies that group top line in 2025 could either see a slight downtick from or remain flattish versus 2024. That's the current view of mine. Turning to margins. On the gross margin line, there are mixed forces that sometimes oppose one another. First, we are slightly raising payout ratios to support domestic agencies as well as performance as they adapt to the new tax environment, that could mean a 1 to 2 percentage point increase in overall payout on normal. Second, as the overseas revenue contribution becomes increasingly meaningful, mix shift across businesses could swing gross margin one way or another, making it difficult to pin down the group level margin expectations. For example, if the dating brands continue to outperform, margin will improve. However, if some of our newer entertainment brands grow faster, it could shift the margin profile the other way around. That said, I can give you guys my best estimate at this point. As a reference point, adjusted gross margin was 39% in 2024. Last quarter, we guided for -- if I remember correctly, somewhere around 36%, 37% for 2025. Given the recent developments in the live streaming and value-added services space in China, we now expect 2025 gross margin to land closer to the lower end of that range. So that's for gross margin. Below the gross margin line, R&D will trend lower in absolute dollar terms as we continue to optimize headcount. Sales and marketing will increase low teens percentage-wise, reflecting our investment to drive overseas growth, especially some of the newer applications that we are launching in the second half, especially in Q4. At the operating margin level, last quarter, we guided for -- from 13% to maybe 14% on an adjusted basis for 2025. Our current view is that we will probably land in the lower end of that range depending on where the top line ends. So overall, despite some near-term challenges faced by some of our agencies from tax scrutiny, our annual margin profile remains broadly stable and, I believe, aligned with prior guidance as we continue to exercise cost discipline and fund overseas expansions. So now the big question, moving below the operating profit line, it's probably worth elaborating a little bit more on the big special tax item for Q2. Basically, here is what happened. Recently, actually towards end of August, the tax authorities provided an interpretation that we believe represents a new position regarding the applicable withholding tax rate for dividends distributed by our WOFE to its Hong Kong parent company, Momo Hong Kong. The authorities have determined that the standard 10% rate should apply rather than the 5% preferential rate under the Mainland China and Hong Kong tax arrangement that we have applied in prior periods. Actually, from April 2025 to -- I'm sorry, from April 2024 to April 2025, our tax filings with 5% preferential dividend tax rate were subject to multiple routine reviews by the local tax bureau -- local tax authority, which raised no objections or concerns at the time. In addition, we believe the practice we previously followed was a common industry approach for companies in similar situations. That's why we were surprised by the subsequent reassessment of the authorities. While we continue to believe our initial assessment was reasonable, we note that the application of tax laws can involve very complex interpretation. As a reasonable corporate citizen, we have complied with the authority's latest guidance and have adjusted our accounting accordingly. As to the question about whether this is industry-wide or specific to Hello Group, from our recent dialogues with the third-party advisers who have been involved all along in this specific matter as well as the dialogues with the authorities, it is our belief and our understanding that the latest scrutiny that Hello Group experience is not unique to us alone. Our original approach was not unique either. Many companies with similar structures have followed the same practice. And if so, according to the authorities, there is a possibility that they could face similar scrutiny as well. That's what I can say at this point. So maybe back to Ashley to wrap up the call. Ashley Jing: Yes. I think times up. So let's call the day, and thank you for joining us today, and we will see you next quarter. Operator, we're ready to close. Thank you. Operator: Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]
Operator: Welcome to the Rubis 2025 Half Year Results presentation. [Operator Instructions] Now I will hand the conference over to the speakers to begin today's conference. Please go ahead. Clemence Mignot-Dupeyrot: Good evening, everyone. I'm Clemence Mignot-Dupeyrot, Head of Investor Relations. I am here today for Rubis's H1 2025 Results. I am with Clarisse Gobin-Swiecznik, Managing Partner; and Marc Jacquot, CFO. Clarisse will start the conference. Clarisse Gobin-Swiecznik: Ladies and gentlemen, good evening. To kick off this presentation of our H1 results, let me very quickly remind you what we do. Our business is about distributing energy while supporting mobility solutions. In Europe, we distribute and sell LPG, and we also produce and sell photovoltaic power. In Africa, we distribute and sell bitumen to road contractors in West Africa and fuel and LPG in East Africa. In the Caribbean, we distribute and sell fuel and LPG. Those products reached a wide range of customers, both individuals and professionals while the distribution is supported by a reliable and most of the time in-house logistics. For H1 2025, this diversified business model delivered a steady performance. In a global economic environment marked by uncertainty, our results for the first half of 2025 standout with growth in volumes and margins across all regions and product lines. Photosol continues to progress according to plan on track towards 2027 objectives. Our group EBITDA grew by 3% and the net income group share by 26%, driven by a stronger operational performance, better FX management and stable emerging currencies. Cash flow generation remains steady at EUR 276 million for H1, which is a key highlight of this publication. All of this gives us confidence in reaching our full year guidance, even in a less favorable USD-Euro exchange rate environment in H2. The following slide highlights our balanced growth across product lines and geographies. It showcases the strength of our commercial strategies, our agility, and seamless execution. Looking at our H1 performance by business line, you can see that in Retail & Marketing, all products delivered both volume and margin growths. LPG was driven by a very strong commercial momentum in Europe. In fuel distribution, the expected pricing formula adjustment in Kenya took the first step in March. The second step implemented in mid-July will show in our H2 performance. In bitumen distribution, demand in Nigeria is strongly picking up. The sharp decrease in unit margin visible here is purely a basis effect linked to the 2024 currency devaluation. We already mentioned it in Q1, Marc will elaborate further on this point. As for Support and Services, which covers supply to the distribution business, and the SARA refinery performance remains overall stable. Finally, the renewable business is expanding as planned with a sharp increase in both assets in operation and secured portfolio, in line with the remark we presented at last year's Photosol Day. In conclusion, this first half results are yet another demonstration of the group's ability to deliver consistent commercial and operating performance, cycle after cycle. And when you combine that resilience with discipline and proactive financial management, the outcome is clear, the strong and steady cash flow generation is fully in line with our historical standards. Marc Jacquot: Thank you, Clarisse. Good evening to all. Let's start with the big picture for the first half. Our EBITDA is up 3% year-on-year and flat on a comparable basis. As Clarisse already mentioned, this is driven by strong LPG performance in Europe, while in Africa, Kenya improved volumes and margins in the retail segment, and bitumen return to growth in Nigeria. Net income is up 26% to EUR 163 million, reflecting the absence of FX losses. CapEx related to the distribution business remains well under control, roughly stable at EUR 73 million while they are increasing in renewable to EUR 85 million, which is a concrete and positive sign that our growth projects are now materializing and are being steadily derisked. Nearly 85 megawatts were put in operation over H1 and 290 megawatts are now under construction. Corporate net debt is stable at 1.4x despite a negative trend in working capital over H1 which confirms our strong financial position. And finally, cash flow from operations remained strong at EUR 276 million for the first half year, supported by the good operating performance and the absence of FX losses. All in all, that's a solid performance. Now let's take a closer look at our activities. Retail & Marketing delivered a solid performance across the board with EBITDA increasing by 3% year-on-year. In Africa, we have three things to highlight. First, retail. Retail is contributing well and the impact of the new pricing formula in Kenya is expected to be fully visible in the second half. Second, aviation, which is more volatile, is facing higher pricing competition, leading us to reduce our volumes for the moment in Kenya. And the third one is bitumen. Bitumen margins increased less than volume and this is a basis effect from 2024 when naira devaluation impact affecting the financial results below the EBITDA was passed through to customers. Now let's look at the Caribbean. The Caribbean region was broadly stable, which is in line with our expectations. Guyana slowed down a bit with the election coming up in September, creating some kind of wait-and-see behavior among our B2B customers. In Haiti, the measures we have taken in our logistic management are starting to pay off, even if volumes remain a bit soft. Jamaica is normalizing with supply conditions slightly less favorable than last year. Now Europe. In Europe, the momentum is particularly good as a result of our challenger positioning combined with the excellence drive of our commercial teams and a colder winter this year. Looking at Support and Services, it remained stable, which is normal as this segment usually flexes with our Retail & Marketing activities. Now the renewable electricity production, what we can say is that the power EBITDA stands at EUR 22 million, which is up 38% year-on-year. In line with our road map, our development expenses have increased, reflecting the acceleration of the growth of this business, resulting in a consolidated EBITDA at EUR 10 million. In conclusion, this is a robust operating performance, attesting to the strength of our product and geographical diversification. Let's have a look at our financial results. Let me highlight just a few items here. The net income group share is up 26% or on a comparable basis, 18%. This is the result of lower expensive local debt levels and reduced FX exposure. When analyzing our income statement, let me remind you that the share of net income from associates in H1 2024 included Q1 results from Rubis Terminal. Interest costs are down, thanks to lower debt in Kenya and more favorable interest rates. As you know, last year, Rubis recorded significant FX losses, particularly in Kenya and Nigeria. In H1 this year, local currencies were more stable and the strategies we put in place to mitigate the FX risk have proven efficient, and we didn't incur any FX loss. As for taxes, nothing major to flag, the OECD global minimum tax is now fully integrated in our normal run. Overall, Rubis demonstrated agility and delivered solid financial results, fueling its cash flow momentum and supporting its balance sheet. Now a word on our financial debt. Total net debt stands at EUR 1.4 billion, with corporate debt at EUR 910 million, maintaining a healthy leverage of 1.4x at corporate level. Our liquidity level is high with more than EUR 180 million under RCF in addition to our EUR 530 million cash on balance sheet. The main variation of this debt this half came from the steady operational cash flow of EUR 390 million, which is up 11%, reflecting the good operating performance combined with the absence of FX losses. A negative impact from change in working capital of EUR 68 million after a very positive effect in H2 '24 as a consequence of lower trade payables. CapEx of EUR 164 million, which is higher than last year with the ramp-up of Photosol, hence, our usual June dividend that we paid to shareholders, but also to minority interest and general partners. Nonrecourse debt increased by EUR 63 million, in line with the renewable investments. All in all, our balance sheet remains solid with ample liquidity to support our future growth. Clarisse Gobin-Swiecznik: Thank you, Marc. Before we open the floor to Q&A, let me wrap up. So first, we saw Rubis commercial and operating performance. Second, our seamless execution and agility deliver reliable cash flows through the cycle. Finally, these H1 achievements make us confident, we are on track to reach our 2025 targets even in the less favorable euro-dollar context in H2. With a healthy balance sheet and a stable leverage ratio, we confirm we are aiming at EUR 710 million to EUR 760 million EBITDA within the framework of assumptions you have here on the slide. Thanks a lot for your attention. We are ready to take your questions. Operator: [Operator Instructions] Marc Jacquot: We have no audio questions for the moment. I propose you begin by the written questions on the webcast. Clemence Mignot-Dupeyrot: So we have 2 questions on the webcast from Auguste Deryckx of Kepler. Question number one is group EBITDA was stable on a comparable basis despite 5% volume growth, what are the key headwinds preventing stronger margin conversion? Marc Jacquot: What we can say on the margins, as I mentioned, the LPG margins were stable over the first half. And in the fuel distribution business, so the unit margin decreased by 1% in H1. And this decrease came exclusively from the Caribbean, especially from Jamaica. In Jamaica, the supply is not in Rubis' hands. And last year, we had very favorable condition for this supply. And this semester, actually, those conditions normalized, I would say. So that's the first explanation. Second one is on the bitumen, bitumen distribution business. So the volume growth in Nigeria resumed, as we explained. And H1 2024 was high due to the FX pass-through and the significant decrease in margin is explained by the basis effect after H1 2024 devaluation, after considering the guidance. Clemence Mignot-Dupeyrot: We have 2 questions considering on euro and USD FX. So question number one is -- but both questions have the same answer. Question number one is what level of FX rate and hyperinflation assumptions underpin the guidance, the EBITDA target of EUR 710 million to EUR 760 million. And what contingency levers do you have if the macro backdrop worsens. And another question from Emmanuel Matot is what is the total negative impact we can expect for 2025 on your EBITDA? Marc Jacquot: So regarding the guidance and the hyperinflation embedded in the guidance. We have the same level of hyperinflation in the guidance than in 2024, meaning a positive impact of EUR 25 million -- EUR 24 million on the EBITDA, EUR 22 million on the EBIT and minus EUR 10 million at a net income group share level, okay? So this is our assumption, and it will be -- and this is something that we will know only at the closing. So there is a lot of uncertainty in the hyperinflation. So we cannot commit on this number. In terms of impact of U.S. dollar, euro, the initial assumption we have was the euro-dollar level of the beginning of the year, meaning an exchange rate of $1.05 okay, for EUR 1. Now we are at $1.17 or $1.16 depending of the day. What we can say is that the good performance of the H1 will compensate the favorable impact related to the U.S. dollar impact. The margin we have in U.S. dollar is concerned, actually, I would say, 2/3 of our business, okay? So you can calculate what is the impact yourself on for H2. Operator: [Operator Instructions] Clemence Mignot-Dupeyrot: So we have another question online from [ Jean-Luc Romain ]. Could you please give us an idea of what the renewable EBITDA is before development costs? Marc Jacquot: So the renewable EBITDA before development cost is what we call the power EBITDA, the power EBITDA amounted to EUR 22 million in H1. Clemence Mignot-Dupeyrot: We have another question from [ Thomas Trotter ] saying about the aviation business. Are any of your markets showing activity in SAF, sustainable aviation fuel and is that a market Rubis might get into? Clarisse Gobin-Swiecznik: We are more or less agnostic to the type of fuel we distribute. We adapt to the demand of our customers. We would be able to distribute SAF and we do, in some places, especially in the Caribbean, but it's mainly a question of offer and demand, and there is not a lot of offer to date. We are, in any case, adapting ourselves to the demand from our customers. Clemence Mignot-Dupeyrot: Another question from Mr. [indiscernible] about Photosol portfolio evolution. It is not on the slide you have here in the presentation that is in the webcast, which you can find it on our website. Operator: [Operator Instructions] Clemence Mignot-Dupeyrot: We have another question from Emmanuel Matot at ODDO online, asking us if we have any impact of U.S. tariffs during the summer? Clarisse Gobin-Swiecznik: Rubis geographic and operational model makes it largely insulated from the direct effects of tariffs. We are not present in the U.S. nor in China, and we do not depend in any case of U.S.-based or China-based suppliers in our distribution business. On the indirect side, the products and services we offer are essential, particularly in the energy space. As such, demand tends to be relatively inelastic, meaning it remains quite stable even during periods of price volatility or economic slowdown. So I would say we have no effect of tariffs on our P&L or results. Clemence Mignot-Dupeyrot: Another question from [ Roger Degree ]. Can you update us on the CapEx plans and specific projects for the next year or 2 in the energy distribution business? Marc Jacquot: Roger. What we can say on the Photosol CapEx, this level, as you know, will increase in line with the ambitions communicated to the market at Photosol Day. So this is a EUR 1.1 billion CapEx in the 2024, 2027 back-end loaded. And for 2025 it should be in the range of EUR 150 million to EUR 160 million. Talking about Rubis Energy, so the distribution business, we should be in the normalized level in the -- I would say, EUR 185 million on the run rate. Clemence Mignot-Dupeyrot: Another question online. Can you give us an update on the shareholder structure? So the answer is public. The shareholding structure as of today is, the largest shareholder is Mr. Patrick Molis with more -- a bit more than 9%. Then you have the Bolloré Group through Plantations des Terres Rouges, a bit above 5%. You have Mr. Sämann 5% or so, Groupe Industriel Marcel Dassault a bit above 5%, and then the rest of the shareholding is structure an overall split between different shareholders. Operator: There are no more questions at this time. So I hand the conference back to the speakers for any closing remarks. Clemence Mignot-Dupeyrot: Thanks a lot for being here. We will be on the road on the days to come. So do not hesitate to reach out to us if you want to schedule a meeting or if you have questions, you know where to reach us. Thanks a lot, and have a nice evening.
Philip White: I'm Phil White. I'm Executive Chair of Mobico. Welcome to our 2025 half year results presentation. Now I'm not standing at the podium today. A few weeks ago, I had an operation on my knee. I've got a new knee. And the last thing I want to do is stand up there and fall over. That will make the wrong headlines. Okay. So you'll have to bear with me if I sit down. So sorry for this. So anyway, can I first introduce my colleagues sat next to me on my left is Brian Egan, who's just joined us as CFO. Brian's got a lot of experience in many difficult businesses in many difficult countries. So he's definitely the right guy for us at the moment. You'll find that he's a very softly spoken, polite, gentle Irishman from Dublin. But believe me, don't be fooled by that. It's nothing of the sort. Anybody who worked with him in the room will know he's as absolutely hard as [indiscernible], especially when you're negotiating fees with him. Okay? So don't be fooled. On my right is Paco Iglesias. Paco is our new -- not new, but in this year, our Group Chief Operating Officer. He's also been Chief Executive of ALSA for nearly 10 years. Now you only have to look at the results of ALSA for the last 10 years, which are absolutely stunning, and they continue to be so. So that's all down to Paco and his team. Welcome. All 3 of us are from 3 different countries. We've got an Irishman, a Yorkshireman, our own country, and we've got a Spaniard. But we've got one thing in common, although we speak differently. We've all joined the Board this year in 2025. So what you see before you today is a brand-new team. We set ourselves various commitments. The first thing I did was go around our shareholders and speak to them and introduce myself to try and understand their thoughts on why I've been appointed, why I'd come back. So I had to calm them down on that a bit. And when Brian came, we did a full roadshow of our lenders and our banking colleagues. And what we've said to them is that our style is perhaps different, not only from our predecessors, but probably from different countries. Going forward, we will be very open and very honest. We will communicate regularly. So hopefully, there won't be any unwelcome surprises. But most importantly, we will deliver what we have promised. Now this should be pretty easy for us because this is how we normally work. We're normal people. So we're going to be open and honest and probably we will be a bit too honest at times. I'm often criticized for that. We will talk a lot to our stakeholders and probably a bit too much and a bit too less, and we'll always try to overdeliver. But we are human. Sometimes we won't get it right. We can't get it right every time. We will make mistakes. So as it says on your pads in front of you, quite interesting headline, which I've just seen, what will inspire you today, and this is what we're here for. So we hope we inspire you. So let me start by telling you how the 3 of us are approaching our new roles. It really is back to the future. We've actually decided to start by going backwards. I know that sounds a bit crazy, but we are taking a small step back to achieve a bigger future. We've asked ourselves 2 simple questions. We think the strange questions are so easy. What are we? And what's our priorities? In our case, we don't have the luxury of starting with a clean sheet of paper. We've got to work with what we've got. So what are we? Now this is very simple. We're a major public transport group. We've been listed for years on the London Stock Exchange. We've got businesses in the U.K., the U.S.A. and Spain and some other business in some other countries. That's a pretty obvious answer to that question. But being listed on the LSE does give us responsibilities and obligations, and we are fully aware of what our responsibilities are. The second question, what are our priorities needs a little bit more explanation. So what I'm going to do is take you briefly through the group and all our divisions. And we're going to be absolutely open and honest with you on this. So if you look at group first, despite having some great businesses, we're not performing as well as we would like to. We have a track record of overpromising and underperforming, and we're overleveraged and unloved by our shareholders. They've told me that, absolutely. Despite this, there are some things that haven't changed since my first spell at National Express when I was a bossier. We still have a great team of loyal people who are committed to looking after their customers and the communities in which they work. And as before, we also have a diverse portfolio of businesses, a bit different from the old days, but we've got deep expertise across many geographies and many different modes of transport. We think that we've got many opportunities for significant value creation for our investors and our people, although we have to be a lot more disciplined in our execution. But please remember, we are a new team, and we don't have all the answers just yet. So let's take a look at our various divisions. Firstly, Coach. This is where it all started in the '70s with National Express coaches created under National Bus Company. And we still have a national network of coach services in the U.K., mainly run by third parties under our branding. I think that model is well known to you all. But we are now creating a pan-European coach powerhouse. U.K. Coach will join ALSA from January next year. This will unlock our ability to compete, win and grow and deliver more efficiencies and synergies. The National Express brand is highly respected in the U.K., is highly recognized and it will remain as it is. We have today announced that Javier Martinez Prieto has been appointed as MD of U.K. Coach. As you know, we're facing many competitive challenges to our network, particularly in pricing. We are fighting back by continuing to invest in the digital customer service interface, more dynamic pricing and upgrading customer service in all our coach stations. This will give our passengers a much better experience of traveling with us. Although at the moment, we are maintaining our passenger numbers, which is great news, we are experiencing reduction in our yields. So we have to respond by being more efficient and more cost effective. If you look at U.K. Bus, as you know, in my time, U.K. Bus was formerly the jewel in the National Express Group Crown. It's a leading operator in the West Midlands market, but has struggled a lot since COVID. We now have a funding agreement with Transport for the West Midlands, which covers fares and service levels. Thanks to Kevin Gale and his new team, we have now much improved relationships with our West Midlands stakeholders, which is crucial to us given what is coming around the corner. So what's coming around the corner? The answer is the mayor of the West Midlands, as you know, has decided to introduce bus franchising in the region, and this will happen between 2027 and 2030. This marks the end of the deregulated and commercial bus network introduced in 1986. Our focus now is on preparing for franchising, leveraging our long history in the area, but also looking for opportunities in the other major conventions. As we did when deregulation was introduced in the '80s, we will embrace the change and do our best to help our local authority partners achieve a seamless transition to the new regulated era. Over to the States. WeDriveU operate shuttle transit services across the U.S.A. It has nearly 100 contracts, the majority -- the vast majority, in fact, of which are profitable. But unfortunately, 2 are loss-making, and that's affected the group's results today. One of the loss-makers is in Charleston and this will terminate at the end of the year, the contract, and we will not be renewing it. The other loss maker is our Washington contract, and this has operational issues. We have an action plan in place to fix the problems, which have been caused by a difficult mobilization at the start of the contract and significant driver management issues. As you know, WeDriveU separated from its sister business, School Bus, when School Bus was sold earlier in the year, and it is now run as a separate stand-alone business. There is a strong pipeline of growth opportunities, both in shuttle and in transit with 4 new contracts already secured for the second half of this year, which is good news. Our focus going forward will be securing more asset-light contracts, which are cheaper to operate and carry far less risk. Moving on to German Rail. We're the second largest operator in North Rhine-Westphalia and one of the top 5 rail operators in Germany. We have 3 contracts, 1 profitable and 2 loss-making. I've got the balance quite right there. These have been very difficult contracts for us, particularly in driver recruitment and issues arising from poor rail infrastructure. We are now making progress in reducing the driver shortage gap, which has vastly improved network performance. And we are looking forward to more work by Deutsche Bahn on the network to fix the problems we have that have plagued the system for quite some time now. We have a new management team in Germany and the U.K. who have engaged a lot more closely with our local stakeholders, again, crucially important. I can say today that discussions with our German local authority colleagues on our contracts are progressing very well. We are aiming to press ahead with supplementary agreements, which hopefully will be finalized in the coming months. I'm told from a reliable source that we've made more progress in the last 4 months than the last 4 years. Hopefully, it will soon be sorted. Moving on to ALSA. In preparing for my script for today, I Googled to try and find what the original name of ALSA was and here it is, but I can't pronounce it. So Paco, what is it? Francisco Iglesias: ALSA is Automóviles Luarca Sociedad Anónima. I think Phil has made up a new name. That's much better. Philip White: But when I go [indiscernible] called ALSA, a life-saving acquisition. And it truly is. And we much prefer ALSA to the big name, don't we? But we like a life-saving acquisition because that makes me feel good as well. So ALSA truly has been a life-saving acquisition. It is a new jewel in the Mobico crown. It's the largest bus and coach operator in Mainland Spain and has expanded into the Canaries, the Balearics, and also Morocco, Portugal, Switzerland and Middle East. It has also been very brave and very successful in diversifying into other transport-related businesses, such as health transport, which basically is ambulances. There is also a strong pipeline of growth opportunity in both new contracts and potential acquisitions. For instance, ALSA are currently bidding with a local partner for a significant 10-year asset-light contract in Saudi Arabia. This contract is valued at over EUR 500 million and is part of a EUR 75 billion global investment there to create the world's largest entertainment destination. So if we get that, that will be really good news. But ALSA continues to be our dominant business within the group. Underlying profit growth compared to last year is again in double figures at around 10%. We will be maximizing ALSA's operational experience to drive improved performance across the whole group. So looking ahead, there are 3 things we need to do. Firstly, we've got to simplify our business. Secondly, we've got to strengthen our balance sheet. And thirdly, we've got to succeed by delivering on our premises. We've got to stop letting people down. So we're streamlining our management structure. We're attacking overheads. We're removing duplication and integrating businesses where this makes sense to do so. Sounds simple, and it is. We will strengthen our balance sheet by generating more cash, improving liquidity and reducing debt, which is far too big. We are already reviewing our CapEx and acquisition plans to get better value from our investments. Succeed. What does succeed mean? Well, I always feel the biggest motivator for people who work for us and work with us is not money. It's a success of a business. If we have a successful business, we have happy people who provide quality service for all our customers. If our people feel good about our business, they'll stay with us, fight for us and hopefully feel even happier. And this is what I focused on in the first few months. I'm trying to get a buzz back in the business, a good feeling. But to achieve success, we've got to deliver what we've promised, and we haven't done this for quite a while, which is not good. So we've got to make our customers happy. We've got to hit our targets. We've got to generate cash to fund more investment in the business. We've got to be smarter. We can't settle for sake and invest anymore. And we've got to achieve the right value for our investors, earn back their trust, and we want to make them love us again. So just a brief explanation of the results before I hand over to my colleague on my left. Here is a summary slide of our H1 results. You've already seen these in the [ RNS ] this morning. The good news, particularly in public transport, is the top line is still growing, up 7% in the group compared to last year. But the bottom line is not so good. We're not converting our revenue and our cash into profits. So we've got to manage our costs better. Let's face it, this should be a lot easier job from us compared to managing our revenue. Hitting the costs, controlling the cost, reducing their costs is a lot easier than making your customers and your stakeholders pay for you. So ALSA has delivered another strong performance this year. But unfortunately, it's not been replicated elsewhere in the group. Our U.K., WeDriveU and German Rail businesses have made little or no financial contribution to the half year bottom line. This is incredibly sad and it can't continue. As a result of this, EBIT is GBP 9 million down on last year, and we've also had to make a further impairment charge on the sale of School Bus. This means we have wasted even more money on that investment. I'll be as bold to say that. We've got to invest our monies a lot better than we have done in the past. So it's a first half where we could have done much better. As I've said this morning, we are taking immediate action to address all these underlying issues, and we expect to deliver full year results, Gerald, in line with our previously stated guidance. I will now hand over to Brian to give you some interesting stuff. Brian Egan: Okay. Thank you very much, Phil, and good morning, everyone, and thank you very much for coming today. First of all, I would like to begin by highlighting the direction we are taking in terms of the financials. And the good news is that our revenue continues to grow year-on-year. However, we are now focused on reducing and controlling costs in order to improve profitability. Second, we need to manage our balance sheet, and this means, in particular, tighter control over CapEx and working capital. This will increase our cash generation so we can reduce our debt to acceptable levels. As Phil said, we need to simplify and strengthen the business. H1 group revenue increased by GBP 86 million, reaching GBP 1.3 billion. This is a 7% increase, mainly reflects the strong growth in ALSA, where passenger figures grew across all businesses, including 11.5% in Spain. And in WeDriveU, we also saw strong revenue growth of over 13%, driven by new contracts in corporate, university shuttle space and paratransit operations. U.K. revenue was flat in H1 when you take into account the exit of NXTS contracts. It is important to note that the Coach sector in the U.K. remains extremely competitive. Adjusting operating profit for the group is GBP 59.9 million, an GBP 8.7 million decrease versus last year. This reduction was the result of lower profitability in WeDriveU caused by operational challenges in Washington-based paratransit contract. Of particular note, GBP 82 million profit was generated by ALSA. The rest of the group reduced the profit by GBP 22 million. This is being addressed. The business simply cannot afford the central and divisional overheads at this level and steps to reduce them significantly have already been taken. I would like to confirm that our full year profit guidance remains at GBP 180 million to GBP 195 million. Free cash flow of GBP 57.8 million is GBP 38.5 million down from the prior year as a result of an increase in working capital, mainly because of delayed collections in ALSA. This is expected to reverse in H2. Return on capital employed was 11.6% versus 8.1% in half year '24. However, this is primarily due to the impairment of School Bus leading to a lower asset base. Whilst net debt and covenant gearing have increased since the year-end, this is before the benefit of the GBP 273 million School Bus deleveraging proceeds. Taking these proceeds into account, gearing would have been 2.7 rather than 3. Statutory profit from continuing operations is GBP 35 million, a GBP 23 million improvement on the prior year. Revenue has grown across all of our business, except for U.K. Coach, and this is the result of the exit of the loss-making private coach operations, which reduced revenue by GBP 12.5 million. In terms of operating profit, only 2 divisions made a profit, ALSA and WeDriveU. However, the profit from WeDriveU is GBP 13 million lower than last year due to operational challenges in the WMATA contract. It is clear that there is a strong top line growth, but we need much better control over our costs. And as I mentioned before, central and divisional overheads are being reduced at present. I will now discuss our divisions in their local currencies. ALSA's continued strong performance saw revenue increase of over 13%. Adjusted operating profit was in line with the last year with a 0.9% increase in adjusted operating profit. There was particularly good momentum in regional urban and long-distance markets in Spain, where revenue grew by over 10% and operating profit grew 8%. The extended Young Summer initiative has driven strong long-haul performance, which is 20% up on prior years. ALSA continues to diversify business in Spain. For example, the health transport business, where revenue more than doubled since the same period last year from GBP 18 million to GBP 39 million. It's also important to note that of the GBP 97 million profit generated by ALSA, GBP 9.3 million came from outside Spain. Underlying profit margin is in line with Half 1 one-off settlements in regional and urban businesses in the prior year taking into account. The underlying profit growth was 11%. ALSA had a successful half year in terms of contract retention and bids for new contracts, including Andalucia, [indiscernible] and the contract in Saudi Arabia that Phil mentioned earlier on. Whilst WeDriveU has seen revenue grow by 16%, the operating profit of $3.4 million is disappointing. This is as a result of operational challenges with the WMATA contract. Although it took some time, WMATA operational targets are now being met. However, costs grew in doing so, and these are now being rightsized. Looking forward, streamlined business processes, automated systems and tight cost control will drive margin improvement in WeDriveU. Strong contract momentum continued in half 1, and these contract wins alone will increase annual operating profit by over $2 million. Moving on to the U.K. performance. During H1, we saw increased competition in the Coach sector and the announcement by TfWM of their intention to franchise the regional bus market. Overall, revenue declined by GBP 12.5 million. However, this was due to our exiting of the loss-making NXTS and NEAT Coach businesses. Otherwise, revenue is flat. Growth continued in Ireland with strong -- with revenues up GBP 2.7 million due to strong demand. The reduction of GBP 1.5 million in operating losses to GBP 9.1 million in the Coach business is materially driven by the exit of the loss-making contracts that I've already mentioned. Total U.K. Coach operating margin improved by 0.6% as a result of the restructuring and changes to seasonal timetables to optimize the network utilization. U.K. Bus reported an operating loss reduced by GBP 2.5 million to negative GBP 0.5 million. So it's virtually breakeven. However, this was supported by funding increases from GBP 23.7 million to GBP 26.2 million from TfWM. To optimize business operations, a 2% network reduction commenced in May with a 1% already in effect and the remainder expected by September. This will improve operating profit by approximately GBP 1.4 million. In addition, an agreed price increase of 8.6%, which was effective from the 16th of June. This is expected to generate almost GBP 8 million in operating profit for the full year '25. Finally, turning to German Rail. Our Rail business in Germany performed in line with expectations, delivering a H1 turnover of EUR 143 million, up 1.9% and delivering an operating profit of EUR 0.6 million. The RRX1 and RRX 2/3 contracts are both onerous contracts with losses of GBP 26.5 million. That's cash losses of GBP 26.5 million, being offset by a utilization of the onerous contract provision, which has now reduced from -- to GBP 158 million at the 30th of June. Our investment in driver training is paying off with an increase of 22 drivers year-to-date, up to 333 drivers in total. The increased level of infrastructure works and network disruption continued to result in penalties under the contract. However, as Phil has already stated, the discussions with the German PTAs are progressing constructively and are expected to conclude in the coming months. Now looking at our cash -- focusing on our cash. Our operating free cash flow generation is lower by GBP 38.5 million versus last year. This is driven by increased working capital outflow in the period. The outflow is as a result of the timing of cash collections in ALSA and is expected to reverse before the year-end. Growth capital expenditure of GBP 61.5 million has increased by GBP 33.4 million, GBP 50.8 million of this CapEx related to School Bus. Acquisitions cash outflow of GBP 14.9 million related to deferred consideration on the CanaryBus acquisition that ALSA completed last year. In terms of net debt, the cash outflow of GBP 44.1 million consists of GBP 26.5 million OCP utilization, which I mentioned previously on the German Rail contracts, GBP 17.6 million related to restructuring, the majority of which is -- the vast majority, in fact, of which relates to the School Bus disposal. Adjusting items are explained in more detail in the appendix. GBP 21.3 million of coupon payments on the hybrid instrument were made in the period, in line with prior periods. And net funds outflow for the period of GBP 90 million resulted in adjusted net debt of GBP 1.3 billion at the end of the period. At 30th of June, covenant gearing was 3x. And again, as I mentioned before, this does not reflect the benefit of School Bus net proceeds for the covenant deleveraging of GBP 273 million. This would have reduced gearing to GBP 2.7 billion. But obviously, the cash came in, in July and missed the year-end. We expect full year '25 covenant gearing to be approximately 2.5x, and that's at the 31st of December. Finally, debt maturity. At the 30th of June '25, the group had utilized GBP 1.2 billion of committed facilities with an average maturity of 5 years. And we had cash and undrawn facilities of GBP 700 million in total. And of course, we received the School Bus deleveraging proceeds in July. 75% of our debt is fixed with most of the floating portion due to revert to fixed by the end of the year. With the proceeds from School Bus sale, we have sufficient liquidity to meet the earliest debt maturities, which are May 2027. In addition, the majority of the core RCF facility has been extended to 2029. Finally, in relation to the hybrid bond's call window, which expires in February '26, the group will decide whether to roll the bond prior to this date. So I'd now like to hand you back to Phil. Philip White: So let me just summarize and conclude the presentation by telling you what we want to do with the business going forward. Please remember, we are a new team. We've got a new approach. We've got a very different style, and we've got a very simple strategy. So our first objective is to get the group right by fixing the underperforming businesses. This is an absolute must. Secondly, we want to continue to invest in our strong businesses to ensure they continue to grow and develop. This is also very important. We have to continue to feed and support our growing businesses. Thirdly, we want to -- we need to be leaner and smarter. We want to be more efficient and improve our EBITDA. We have to do this to strengthen our balance sheet. Fourthly, we're going to continue to generate positive cash flows to reduce our debt levels so they are more manageable and more affordable. Fifthly, to care for our customers, give them a great experience on their journeys, so they come back and they stay with us. And most importantly of all, to make our people feel proud again. Happy people means happy customers. Thank you. So over to you guys now, it's your turn. Q&As, and Paco has been very quiet this morning. So he's going to answer all the difficult questions. Paco. Gerald? Nice easy one to get going. Gerald Khoo: Gerald Khoo from Panmure Liberum. I will start with three. Firstly, can you elaborate on the problem contract in Washington? You talked about inherited problems. How much of that was foreseen? How much of it was foreseeable? How do you go about fixing the operations and therefore, the profitability? Secondly, in U.K. Coach, what changes with -- shall we say the effective merger operationally with ALSA? What's going to be run differently? And how much can change given the fact that 80% of the operations are actually outsourced? And finally, in U.K. Bus, what share do you think you have of the West Midlands bus market? And what opportunities might there be to extract capital or assets once franchising has run its course? Philip White: Okay. WeDriveU first. I'll answer it generally and perhaps Brian or Eric can come in. But Eric will correct me if I'm wrong. This was a contract in Washington. We did have a contract there already, but this opportunity gave us to secure a much, much bigger operation. We were given a very short time scale, I think, a month to mobilize it. And probably we -- hindsight is a wonderful thing on these sort of things, but we could push back on that and give them more time. And also, I think when you talk about an inheritance, there were also driver retentions and recruitment problems, Gerald, before we start -- before we got there. And these turned out to be much bigger than we thought. So it was -- first of all, the issue was understanding the financial information when we first arrived and understanding what it was telling us. And secondly, we had to tackle the driver recruitment issue very quickly because we weren't hitting our required service levels, which were incurring penalties on us, quite expensive penalties. We fixed that by recruiting more drivers. Like in Germany, we've bridged the gap. Probably to be on the safe side, we've recruited more drivers than we need. So instead of incurring the penalties, we're incurring extra operational costs. So what we've got to try and achieve, and it's really what our main purpose in life is to get the number of drivers in line with the number of buses we've got to get out every morning. So it's not rocket science. It's just getting down to the detail, managing the driver, getting them on the buses and hitting the service and making our customer happy, which is not at the moment, right? So it's probably a longer job than we thought. As far as ALSA is concerned and the transfer of ALSA to Coach, the coach market has changed. As you know, we've got people who want more of our business than we like them to have, but that's life. There's different rules applying to disruptors coming in and how you can act to incumbents already there and how you can respond. And the balance of power under competition law is with the disruptor, not the incumbent, and you might think that's fair. How long the cream off our existing routes is another matter. They don't operate a network. These disruptors, they cream off the best routes and take our best revenue away. So we've got big issues to face. The market has changed. It won't go back. And we've got to respond by being meaner and leaner, and we can't afford the overhead costs that go with the current business. So this is why it's going to be part of ALSA to form a big pan-European coaching business. That will bring new eyes into the business. The coach operation has been operated for a long time. We bring people in who can look at things differently, probably be a bit harder than our current management and me, I'm too soft. So we need somebody else coming in there, looking at the new model, using all the systems and best practices from ALSA and really looking at the business as an acquisition. That's what we want them to do. I think what I'd like to do, if at all possible, is to become the new disruptor. We can't do that ourselves. It's impossible. And secondly, on U.K. Bus market share, it's big, Gerald. I don't want to quote a number, but it's pretty big, right? And there's a lot of interest. The key to success of bus reregulation is having the vehicles and the depots. You can see that in Manchester. And I've got a long queue, [indiscernible] operators ring me every day to buy our buses and to buy our depots. So there's a lot of interest, but I think there's better ways of doing this in the future. I think, as I said before, we didn't like deregulation, but we embraced it. We don't like reregulation now because it don't suit us. Deregulation didn't, but we'll embrace reregulation, and we're working with the local authorities in the West Midlands. And we want to begin to think again to lovers, not to think we're just after the money because we don't. Jack Cummings: Jack Cummings at Berenberg. Also three questions, please. Firstly, just two on the guidance. The profit guidance is obviously quite half 2 weighted. So could we just get a little bit more color in terms of the building blocks, which can get you to that half 2 profit number to hit the guidance? Then secondly, on the guidance. So obviously, there's a GBP 15 million range. What needs to happen? Or what are the kind of pinch points here that could get you to the top end versus the bottom end of that guidance? And then the final question is just on the CapEx. So what goes into the decision-making process between that growth CapEx and the CapEx that's kind of to decide for small M&A versus potential cash conversion given the leverage? Philip White: They are three easy ones, so I'll hand it over to Brian. Brian Egan: So just looking at H1 versus H2, I mean, traditionally, 1/3 of the profit is H1, 2/3 is H2, and that's mainly driven by the fact that particularly July and August are really big months for the business. And in fact, December is also a big month. So it really is very much in line with -- if you go back over the last 2 or 3 years. In terms of delivering at the higher end of the range, I look towards Eric here. I mean some of the critical factors, particularly WeDriveU is a big one. So if WeDriveU can manage to get the cost issue under control earlier, it's going to help us towards the higher end. If it's going to be later, then we're going to be towards the lower end. That's probably the biggest one, if I'm honest about it. The third one was -- so we are looking at CapEx. It's a bit hard at this time of moment. CapEx, we have a budget that we've agreed for CapEx over the next couple of years. The priority, obviously, is retention CapEx, and then there's a balance left. And then it depends upon a level of flexibility around that depending on the opportunity. But one of the problems at the moment is that we are quite constrained because of our debt position. But the priority number one is retention, retention CapEx. Then there is an amount left over and then we look at the returns depending on whether it's a contract bid and there are a couple of good opportunities, in fact, that we're looking at present -- that ALSA is looking at the moment. But that will depend on the return of both of those. Alexander Paterson: It's Alex Paterson from Peel Hunt. As if I'm greedy, can I ask four questions, please? But they're all very simple ones. Philip White: That's fine. No condition. Alexander Paterson: First question is, just before the North American School Bus deal closed, you were talking about leverage being fairly flat year-on-year. You're now saying 2.5x. Can you just say what's driven that improvement, please? Secondly, in the U.K. Bus, can you say what sort of proportion of your fleet is owned, because I know you've got some of it through Zenobe, and I'm not quite sure what those proportions are now. And thirdly, on Germany, can you say has the group given any guarantees over the German Rail losses? And then lastly, just on Germany, as it stands. So if nothing changed, what would your expectation of cash losses be in the next couple of years? If you can get a better deal is when you described it as equitable in the statement, does that mean no more outflows? Or what kind of change on that? Philip White: Brian? Brian Egan: Okay. So they weren't so easy. Okay. So let me just -- I mean, first of all, cash losses for Germany. So you'll see for the first half of this year '26. So we have actually impairment at the start of the year of GBP 170 million. So that is the expected cash loss from those contracts. So clearly, the discussions we're having at present, we are optimistic that I mean they are going quite well. So anything that will hopefully end up because discussions end up in a positive note, we will hopefully be able to reverse some or maybe even all of that GBP 170 million depending on how they get on. So that is cash. Kevin Gale: I think they're quite front-end loaded. Brian Egan: They are, correct. That's correct. So this year, it's almost GBP 50 million. Yes. In terms of the improved leverage as a result of School Bus, this year, we have the benefit of half year's profit from School Bus and that half year disappears last year. So we get a double benefit in this particular year because we -- the half year benefit of the School Bus profit. Next year, that half year disappears. So in fact, we have a negative impact with School Bus taken out next year. So it sort of -- it goes -- it improves and then it sort of goes back a little bit then we look at next year, unless, of course, we take actions to address that, which we're looking at, at the moment. There is a guarantee [indiscernible] the details, there is a guarantee in relation to Germany. And in terms of the percent of fleet owned by us. Philip White: Kevin, have you got that number? Kevin Gale: Circa 2/3, 1/3, So 2/3... Philip White: Any other questions, guys? Ruairi Cullinane: It's Ruairi Cullinane from RBC. The first question is it doesn't seem like you're looking for a CEO, which I think was a top priority in the spring. So what drove the change there? Secondly, could you touch on options to delever? Would that be noncore disposals? What could be on the cards given the potential upward pressure to leverage in full year '26 as School Bus EBITDA drops off? And then finally, I think there was a fare increase in U.K. Bus last summer, but there wasn't sort of much sign of it annualizing in H1. So could you just explain that? And should we expect the fare increase this summer to annualized as a sort of typical fare increase? Philip White: Okay. As sort of Executive Chairman, which means both jobs, I think I'm best answer to the first question. And at the moment, I think the Board are happy with the new team. We've got a lot of projects in hand at the moment. I'd like to work with Paco and Brian into the near future to make sure all those projects are achieved in a good way. So I don't think at the moment, the Board are rushing to find a new CEO, and they're quite happy to stick with the team that's here. And hopefully, we'll deliver the results that we are set to deliver. Delevarage. I suppose the easy answer is when you're in a position like that, when we're earning the EBITDA we've got at the moment, and we've got the level of debt we've got at the moment, nothing is off the table. And I think we've got to be hard. There might be disposals, there might be more disposals. And we've already said we're going to look at efficiencies. We're looking at integrating the businesses together. We're going to duplicate in -- we're going to cut out the duplication. But you have to remember between 60% and 70% of our costs are labor costs. So when we're talking about being more efficient, cutting costs, we're really talking about people. But the important thing is if we do that, we've got to be honest with them, and we've got to do it in a kind and caring way. But as I said, we're looking at everything at the moment. Brian Egan: So I think in general, we haven't -- we put a detailed plan together, but there are two approaches. First of all is to reduce the debt itself. We have to look at how we do that. And the second is create capacity to manage more debt by improving our EBITDA. So there are the two things we're looking at. First of all, create more capacity with the higher EBITDA and second then to tackle the debt. And the fare increase... Philip White: On the fare increase...When do we implement it, Kevin? Kevin Gale: The end of June. Philip White: Oh, it is end of June, so fairly early. Brian Egan: For this year, it's... Philip White: It's 8.6%. So it's a big one. So it's going to be interesting to see what -- how the customers react to it. Brian Egan: The expectation is a GBP 7.5 million impact. Philip White: Yes. And I think Kevin will agree with me. It's -- we spent too many years with -- you get a funding agreement with it, but you don't get it for nothing. So to get that funding agreement, which is [indiscernible] at the moment. They control our service levels and our fares. But it's the first increase we've had in many years, Kevin? Kevin Gale: Substantial increase in 5 years. Philip White: So it's a big one. So it's going to be interesting to see whether we land it. Kaitlyn Shao: Kait Shao from Bank of America. Also three from me. First, I think, Brian, you mentioned for WeDriveU, you're expecting a [ GBP 2 million ] improvement. Can I just confirm it's a [ GBP 2 million ] kind of on top of first half performance, basically full year impact coming through in the second half? And then second, on ALSA margin. You mentioned some one-off items for the first half. Can you elaborate a little bit on what those items are? And just thinking ahead for second half, how should we think about margin? It's going to be kind of similar around 12%, that kind of level? and then number three, on the hybrid, I appreciate a decision is coming in the next [ year ]. Brian Egan: Profit value of contracts won in the first half of the year. So that's the annual profit increase expected to begin [ ranging ] from those contracts. In terms of the margin, if you compare like-for-like, you will see the margin -- the profit margin is slightly down in the first half of last year. A provision was released, so the expectation was we would have to repay some grants. We didn't have to repay the grants, therefore, we released [ GBP 8 million ] provision. So it basically slightly inflated the last year's results compared to this year. So if you back that out, you will see that overall there is an 11% growth in profit in ALSA. The final one, on the hybrid. We will take a view on that [indiscernible] with the current thinking is that we will [indiscernible]. We'll make a decision closer to the date. Gerald Khoo: Gerald Khoo from Panmure Liberum again. German Rail, can you sort of outline the sort of scope of talks? You talked about how -- well, there was a discussion about how the onerous contract provisions are front-end loaded. What's the trade-off between time and value? And if talks were to drag on, is there a lost opportunity to recover? Or is it not possible to recover past losses, so to speak? Brian Egan: No. So the discussions -- I mean, there are two broad buckets. The first is compensation for the past is what we are seeking. Whether we'll be successful or not, we don't know at this time. But there are two buckets. One is to do with the compensation for the past. So for example, we've incurred a lot of penalties, which really relate to the poor infrastructure. And then the second bit is in terms of profitability going forward. So it's -- they're the 2 areas. And then depending on how we come out, we have two different buckets. So the answer is yes, we absolutely are looking for compensation for some of the past costs, absolutely. Ruairi Cullinane: Ruauri Cullinane, RBC again. Just on -- is there any growth angle to incorporating U.K. Coach within ALSA? Obviously, there's mention of making a pan-European powerhouse? Or is it mostly about best practice? Brian Egan: So the integration sort of -- do we see a growth opportunity... Francisco Iglesias: Well, okay. First, sorry for my English, sorry for English. I'm a very simple person. So I think that the success is to do the things simple. That's the reason why I believe in this project, I believe in this team. This strategy is very simple. And the plan for this merger between U.K. Coach and ALSA is right there -- is to get the things simple. And what do I mean by that? For me, we need to focus on the metrics, on the basics. What does it mean? For example, occupancy, what's the ratio of occupancy that can we improve that? For sure, I think. For example, customers, can we improve the scoring of the -- from our customer, what do they need? Are we delivering the best for them? I think we can do that. For example, the cost, can we remove duplicates between people in ALSA and people in U.K., for sure. For sure, U.K. does things better than ALSA and ALSA does other things better than U.K. Can we get the best of that? So my expectation is to focus on these three things: operation, the occupancy level, cost efficiency, customer, how to deliver better and cost that is very related with technology. We have different technologies in U.K. and ALSA. We are not going to get just ALSA. But I think we have to make a better decision in the next tools, for example, for planning, for pricing, for whatever you can consider that is important in a transport business. So this is my idea. And I'll work with Kevin and the team and the new people that are going to join the project. And I think we are not going to make up the wheel again. It's just to make very simple things. And I think we have had success in the past, why not in the future? This is -- let's see in the next months, but I'm optimistic. Philip White: Okay. Thanks, Paco. Anymore? Okay. Then guys, just before we finish, I'd just like to thank a few people, if you don't mind me saying so. So thanks for everybody in the room today, and thanks for all the people who have dialed in to listen and see the presentation. I would also like to thank our fantastic advisers who make us think differently and help us to really explain our strategy to everybody, our shareholders and our lenders. Thank you to all the people at the center and in our divisions who work so hard, we deliver what they're doing. They've worked incredibly hard over the last few weeks and getting the results in order and the presentation so we can explain the results to guys like you and people on the phone. But I'd also say a special thank you for 2 people. First of all, thank you for the RMT for being so caring again, looking after all your customers in London. You do a great job of there. And thank you to a writer in the Sunday Times called Rod Liddle. I don't know whether you saw it over the weekend, but it was comparing various accents in the north of England and now nice Jordi and Cleveland accents were lovely to hear. But you described the Yorkshire accent "as a pantamine agglomeration of belched arrogance, right? So thank you for listening to my belched arrogance this morning. I really appreciate it. Now going forward, we're going to update you later in the year. This will include the strategic update on ALSA and we'll do that quite a comprehensive presentation on that to you. And secondly, we'll bring you up to date on the progress we're making in efforts to improve our efficiency and to increase our EBITDA, things that have formed such a huge part of the presentation this morning. So great to see you all. Have a safe journey back to work or back to home, avoid the tube, give a big kiss to RMT and we'll see you soon. Thank you.
Operator: Good day, ladies and gentlemen, and welcome to accesso's Interim Results 2025. [Operator Instructions] I would like to remind all participants that this call is being recorded. I will now hand over to Steve Brown, CEO, to start the presentation. Steven Brown: Thank you, and good afternoon, everyone. Thank you for joining us. We are pleased to present our half year results, interim results to you today, and of course, take lots of questions at the end. So without delay, let's get started. Obviously, I'm here Steve Brown, Chief Executive Officer and joined by Matt Boyle, our Chief Financial Officer. And as usual, we have a short agenda today. We are going to give you a quick summary, a quick highlights of the year and on the numbers, talk about our progress in terms of our strategy. Matt will review the numbers and then we'll chat at the end in terms of our outlook and our questions. So moving on to Page 5, just quick numbers. We'll breeze through this quickly because Matt is going to spend a lot more time on this in a few minutes. Our revenue was just under $68 million, cash EBITDA at $5.1 million and we ended the period with over $25 million in net cash. Our ticketing and distribution business was up 2.5%. That was propelled by strength in our distribution business. Guest experience was down 21%. That's related to a hardware purchase that we had in the prior year as well as the softness that we saw across the early summer months of June due to the extreme heat, which reduced the visitor volumes, which then means are shorter queues, so we obviously sold less for chilled queuing. And then our professional services business, although on a small base, was up 5% as we continue to support our customers with their specific needs for implementation and extensions that they may need to our software through our RPS team. Once again, diversification is coming into play in our business. I talked a lot about that in the past and the importance of diversifying across our business with products, markets and geographies. And this is a great example where -- while we saw some softness in the summer, our transactional revenue was down about 4%, primarily driven by the June weather. We had extreme heat here in the U.S., and it was even too hot to go to a water park. We saw a very soft attendance across the theme park operators in North America as well as other venues around the world just due to some weather impacts. We'll talk more about that in a minute, but I'm happy to say we seem to be over that hump and June was a bit of an exception. Geographic and revenue diversification. We're seeing that come into play here. We had an uptick with implementation and change request services as we continue to meet our customers' needs with their specific request applicable to their business. Our maintenance support business was up about 15% and we have revenue now coming in from the new business we brought in across Saudi Arabia with Qiddiya as well as Skyline in Australia, New Zealand. And so you can see the overall picture is helping kind of offset the weakness we saw in the summer from transactional revenue coming in other areas of our business as we continue to grow. I want to spend more time on the next section, which is our strategic process -- progress. And you'll remember at the beginning of the year, you would have seen these same 4 bullet points. And we laid out a strategy at the start of the year. To really do 4 things: to accelerate the pace of our wins, increase our basket size from our customers, continue investing in new technology and also think carefully about how we leverage our capital and our cash in particular. And I'm really happy to report kind of where we are on each of those 4 points. So in terms of new wins, if you look at on a revenue basis, so we think about a win -- I know we report the counts, 28 venues, 38 venues, 39 venues, but really what matters is how much revenue is coming from those wins because obviously, all wins are not treated equal. And if you look at a revenue basis and we track that based upon how much is the client worth on a 12-month basis. Whether they sign in February or November, on our end, we're looking at what are they going to be worth on an annual recurring basis. And if I look at what we've signed at the end of the half, our revenue basis was nearly double the prior year, almost 90%. So we've almost doubled the amount of revenue -- new revenue that we booked, and our sales pipeline has doubled. I just looked at it on Friday. And last year at this time, our pipeline here today in September was about $12 million. And right now, it's at about $24 million. So we've increased our pipeline, and we've really increased our win rate and the size of the wins that we're bringing in; a very important success for us as we think about increasing our growth rate going forward, and the actions we've taken to get there. I'll talk more about that on the next slide. We're also seeing continued traction with Freedom. You see the number of wins we've received. We went from 11 venues to, I believe, 38 or 39 venues now this year. And we have a very strong pipeline. Again, I just reviewed that. We have 48 current customers that we are working in the Freedom pipeline. Obviously, all those will not sign, but it just shows you the strength of that particular product. We also signed our first theme park for Freedom. It's a theme park opening here in the United States in 2026. That's alongside Passport. And so overall, we're really working to increase that basket size and bringing Freedom in alongside Paradox or alongside Passport allows us to increase our check average with each customer. We're investing in new technology. Third point, our composable commerce project. We had our first pilot this summer, the initial phase sort of Version 1.0 of composable commerce kind of road tested it. And that's going to become a very important element for us as we think about the next generation of e-commerce and also expanding that strength beyond just Passport and leveraging our e-commerce prowess across Paradox, across Horizon, across the whole product set. And that's really what composable commerce is going to allow us to do. We're continuing to roll out Paradox. We're seeing success with converting series for our customers, and also they're going to get the benefit of composable commerce as they move over to Paradox. Of course, I have to use the word AI. It would be -- not be a results presentation without the use of the word AI somewhere. But importantly, we're thinking carefully about AI. And I think you probably have all seen AI for AI sake being listed in presentations. And perhaps we've been a little quiet about it in the past because we've been thinking carefully about how it should work in our business and not just chasing technology for technology's sake. And we have a couple of really cool things that are in flight in terms of product enhancements. I'll talk about that in a moment. And also the use of AI to drive efficiency, efficiency in our programming, efficiency in our operational support, efficiency in our commercial process. For example, answering our RFPs that have thousands of questions sometimes and leveraging AI to help us speed that up. And fourth, our use of capital, we had an acquisition earlier in the year of 1RISK, which is a digital waiver product that's very important to us, and we continue our buyback. And again, Matt will share more on those details. And Matt is also working on a structured capital allocation framework so that we have a model to follow when we think about how we leverage our cash and the sort of decision tree process to follow around how we and the Board all think about the use of our capital. Talking a bit more about the commercial strategy. This has been a very big focus for us, and you will have noticed that perhaps in our statement today. But as a business inside of our group, we have spent a lot of time and a lot of energy thinking about our commercial strategy, and how we propel our growth rate. So thinking about our go-to-market and how we approach that, how do we increase our pipeline, how do we increase our win rate? How do we improve our deal size. And there are a number of things we've been taking action on to get there. First of all, we've enhanced the sales enablement. And people say, what are the heck of sales enablement. That is all the work we do behind the scenes. So you have a sales director out in the field. But there are a lot of resources behind them supporting them with demos, proposals, presentations, all the things that they need to be successful. And one of the things we've done is allocate more resources into that area, so that our sales directors can be more polished and more prepared and also move more quickly with their sales presentations and their responses to customers. We've increased our win rate, a lot of focus around getting that customer across the finish line. Getting to 90% isn't good enough. We've got to get them across the finish line. We had 36 product wins in the first half of the year, which is an increase of 11% year-on-year from a percentage basis, that's a pretty big jump in our win rate. Our new offerings are doing well. As I mentioned, Freedom had 20 wins in the half. We now have 39 in total, and as I mentioned, 48 in our go-forward pipeline. We've also seen higher transaction values. So when a customer signs, what are they worth on an annual basis? Are they worth $00,000, $00,000. What is that value of each individual win. And we've seen that increase by about 82%. So pushing double in terms of the value of our wins, meaning we're winning bigger customers and also that they're taking more products when they sign with us. And importantly, last but not least, we named a new commercial leader to our Group. He actually started yesterday. We're really pleased to welcome Mike Evenson to the group. He brings a tremendous amount of experience and it's really just going to be a great fit for our group. It was a long search, a very careful search. It took us, obviously, until now. But I wanted to make sure we really found the right leader that was a fit for us culturally that would understand our customers, understand our markets and importantly, had a sense of our technology and his background with audience view of nearly 15 years, which is a SaaS-based ticketing platform, sets him up for great success with us as we move forward. So we're really pleased to have him on board. In terms of the other bullet point, innovation and investing in our technology and leveraging AI and Passport, a few highlights. We've done a lot more than this, but a few highlights for the page. In Passport, we released our commerce API. So allowing customers to develop their own front-end e-commerce or purchasing applications if they have use cases, where maybe they want to create some smaller widget to sell tickets or they want to build their own e-commerce. We've now released a full commerce API allowing them to do that. We've had 1 customer pilot that. But again, it keeps us competitive because other suppliers often have the API. It's not always used. But importantly, it's important to have that flexibility for customers because sometimes they have these unusual use cases, and they want to create something themselves and allowing them that opportunity is very important from a competitive perspective. We've enhanced our checkout flow, conversion rate is super important in Passport e-commerce, and we've also finished the rollout of V6, which is our latest update to Passport. We finalized that across our customer base. We had to wait for seasonality. We can't roll things out, for example, during the middle of the ski season. So we finished those up as soon as the clients were in a position to do those updates. In Paradox, we did a very important integration with a company called Inntopia, which is really very popular to ski industry for packaging the overall bundle, hotels ad tickets, for example, and having that integration with Inntopia aligns us with the market leader in that space across the ski industry. We did a lot of enhancements on snow school, which is where you book your lessons, making that product even easier to use and more feature-rich for our customers, particularly the ones moving from Siriusware over to Paradox to make sure they have a really great upgrade on those features. And we continue to migrate and prepare for the broader migration Siriusware customers over to the SaaS product that is offered by Paradox. Accesso Freedom. The product itself is very, very feature rich, and it's interesting when we do demos, and we've done many, many, many demos this year. We rarely have a comment on functionality. It's more questions about implementation or their particular use cases. And so a lot of our work we're doing in Freedom is really about go-to-market and things we might need to make sure we can hit our full addressable market. One of them, for example, is Quebec has a new compliance for tax requirement. And it is just actually waiting to effect in July. But in order to sell in Quebec, we needed to be integrated with the government and their tax compliance system, which is actually quite complicated. So we finish that, which will allow us to sell primarily across our ski customers in Quebec, which there are many of those for Paradox. We also have added room charge functionality, which will allow us to go more into resorts. Think about ski resorts that need room charge back to their hotels, think about venues in Las Vegas that might need room charge capability, and that was a really important development item for us. We've also expanded our integration features that we offer between our products. So some of the detailed functionality between, say, Freedom and Paradox or Freedom and Passport, we continue to progress those to make sure that we have everything customers are looking for. Composable commerce, I already mentioned it will bring market-leading e-commerce to Paradox. Think about the Passport level of e-commerce, our crown jewel, Think about that now being available on Paradox. That will happen in 2026, and we'll upgrade password e-commerce, again, starting in '26 and across 2027 into the new composable commerce model. And that importantly gives us the pathway to begin offering e-commerce across successful Horizon customers where today, they have to develop their own using the Horizon API, and we don't have that transactional revenue opportunity. Composable commerce in this new model will allow us to place that alongside Horizon, which is a really important strategy for us. AI, as I mentioned, we're enabling the model context protocols, basically making our system compatible to use all the tools of AI. And we've done those releases across Passport and Freedom, to make sure that we can leverage those tools that are out there for commerce, to sort of skipping the technical gibberish. Really cool thing, we'll be debuting this at IAAPA in November is we have a voice-enabled chatbot. It's a prototype, but I would say it's basically market ready, allowing you to voice order tickets, voice order food and retail. Again, keeping ourselves on the front edge of how other products are evolving and importantly, showing our edge towards innovation in the market. This is something that it seems like it's not a lot of people doing it yet, but our view is this will get adopted very rapidly, and we need to be ready and have those capabilities available for our customers. So you can say, "Build a London Eye ticket for tomorrow at 10:00 a.m. " And the chatbot can do that for you and then run it across your Apple Pay, for example. And last but not least, we've done the Passport language model integration, and that allows us, if you think about Passport in all the different regions we serve and how many translations we have to do for languages, leveraging the AI model that's available for language translation will help us tremendously in terms of efficiency and being able to support those broad range of languages that we do today. I think Passport supports over 30 languages. And I believe about 15 of those are versions of English, believe it or not. And so having this model will really help us in our deployment and our development process. Matt will talk more about this, but it was the fourth pillar in our strategy for the year in terms of how do we use our capital in the business. Two things, really 3 things here. One is the acquisition strategy. In the half, we did make 1 acquisition, which was of 1RISK, which is a liability waiver application. And if you think about a ski resort, every customer signs a waiver, a risk waiver. If you think about a trampoline park, if you think about rock climbing, you think about any kind of venture experience, you sign a waiver. And in the ski industry, this is absolutely central to their business. And we realized that essentially, we were integrated with 1RISK across all of our customers, and we were relying on a third party for that product. So it made a lot of sense for us to bring that in-house. We can now enhance our integration and offer a more robust product to the marketplace. It also gives us a competitive differentiation because now we have the market-leading waiver application as part of our product set, exclusive to our integrations. And this has really been very well received across the ski industry in particular. And we're looking to leverage this across Horizon with some of our implementations in Saudi Arabia. We already leveraged it across Passport and of course, across Paradox. Our buyback continues. As you all are aware that operated through H1, it continues today. We are about halfway through the target of that buyback that we started earlier in the year. That target was about GBP 8 million, and we're about halfway there. I think if you look at where we are today, we've passed the halfway point. And last but not least, and Matt can talk more about this, we are developing that structured capital allocation framework, just to give us more of a road map on how we think about the use of our cash going forward. And thinking ahead as we continue to build our cash about how we would leverage that to maximize shareholder value. So those are the highlights. I think what's important is we laid out 4 key strategies at the beginning of the year. And our team has done a great job of really focusing on those 4 items and making sure that we not just meet them, but we've exceeded those deliverables. And despite the headwinds we saw from some trading volume in June, overall, we are on track with all those particular objectives. Our pipeline is incredibly strong. Our win rate is increasing. And I wish I could control the weather, but other than the extreme heat that really knit us a little bit in June. I'm extremely confident about where we are. And as you look past June, it was like a turning point. We got past July 4, and the volume just turned back more to what we would expect. In terms of overall numbers, we basically made up in July what we lost in June due to the heat. And now what we've seen is things are more on track with our expectations. And so we did have that little bit of a wobble, but overall, it seems like we're back on course with our expectations. We have a few months to go, obviously, the important Halloween season. So it's too early to call the exact result. But it's important not to let that heat from June weigh too heavily on your minds because we got past that point and really things are back to normal by all accounts. And the other thing I would add just in commentary about the market is the operators realized or have realized, obviously, the softness they saw in June was heat-related. So you can't overreact to that, right, because you would run a bunch of discounts that were unnecessary because once the heat is gone, you might not need them, but they have really fine-tuned their promotional strategy. And if I look at the reports across July, across August, we're seeing very strong volumes from the operators as they have now adapted to the current consumer environment, and they're pushing to deliver their attendance numbers, not just through discounting, but through packaging, through marketing, through promotions, through their PR, all those different elements seem to be firing on all cylinders. And without the headwind of the heat, the weather against them, they seem to be actually doing much better than they had done earlier in the year, and the volume numbers have looked really good for us since the end of June. So with that editorial, I'll turn it over to Matt, and he'll walk us through the numbers. And then we'll have plenty of time, obviously, for questions. Matthew Boyle: Thank you, Steve. So hitting the key financial highlights. Steve -- Steve went through them earlier, but on a more detailed basis. You see our revenue was down 1.9% of the headline. There are actually a few adjusting items to think about in there. We exited a B2C business back in early 2024. We also sold a Brazilian subsidiary back in January '25 of this year as well as the fact that we had this large hardware sale of $1.8 million back in H1 2024 that wasn't repeated. So on a constant currency basis, if you exclude the hardware, we're actually 1.2% ahead of where we were this time last year in the prior period, which was strong given the circumstances and certainly the volume headwinds that we had in the June period, Steve went through. We had an improved gross margin. So you see there the jump from 76.2% to 78.3%. Again, I think that majority -- the overriding reason for that is because of this hardware sale. So the hardware sale for us is a low-margin line in comparison to our SaaS and services and SaaS, in particular, is very high margin for us. And so you see that jump there of a couple of percentage points. And cash EBITDA was down to $5.1 million, which I'll cover the reasons as to why on a later slide, but predominantly the increase in our underlying admin expenses. And our net cash was up to $25.4 million, and that's quite a big jump from where we were in June 2024, again, there's a detailed slide on the cash flow later on that highlights the strong free cash flow that our business has and the uses that we make of it. Proceeding to the next slide, I've just got a split and those of you who have seen this slide before will be familiar with it. You see on the right-hand side is our split of revenue mix effectively. And you can really see the impact of the things that we're talking about there, where our transactional volumes, so the great percentage mix piece is down from 74% to 72% of the total, that's the volume headwinds as well as the other piece, so the [ luminous green ] being down from 6% to 3%, which is the hardware drop and they are being offset by the other repeatable and the nonrepeatable piece taking more of a share of our overall mix, which I'll come on to a little bit later shortly. And again, so those who have seen this presentation before, you'll be familiar with this slide. So we break down our revenue into the various different types that we have, transactional repeatable, nonrepeatable or other. And you can see there that the transactional revenue as a headline was down 3.8% on the prior period, but there's really 2 stories in there. The virtual queuing and the ticketing, both down as a result of the softness that we saw predominantly in June, but really there from April onwards, but not as pervasive and that's offset somewhat by the increase in distribution revenue. So the distribution channels that we operate act as a key strategic enabler for a lot of our venues to navigate the promotional discounts that they're offering in quite a rapid basis and respond to changing demand and changing conditions, which is positive asset and just another string to our bow. And then working your way down the table, you'll see that the total repeatable revenue is 2.5% down, but that's down lower than the transactional volume because of the increase in the maintenance and support and the recurring licensing revenue. They are predominantly accesso Horizon driven, but the increases certainly are at this point as a number of our larger implementations start to go live. And Steve mentioned a few of the brand names there, but we have a number of projects in progress out both this year, next year and thereafter, such as in the Middle East. And you'll see there a 15% and 25%, a 25.6% increase, respectively, on the maintenance and support and recurring license fees. And then you get to our onetime nonrepeatable revenue. And we've broken this down into a bit more granular detail this year to give it slightly more color than we have done in previous years. And you'll see that there's a new line implementation change of there is some billable services which is really the onetime work that we're doing for a lot of our customers, whether it's the implementation, the initial implementation of the product, or whether it's a change request for feature enhancements or road map acceleration or whatever it might be; again, another string to our bow, so to speak, that we're there to be able to respond to a customer's demands and really highlights the fact that customers are willing to invest in our products as well, which is great. And highlights mission-critical place in a customer's ecosystem. And then lastly, at the bottom of the table there, you've got the hardware revenue dropping 85.6%, and that's the hardware decrease, the accesso Prism, the sale of $1.8 million that wasn't repeated in the current period, and that they are all of the revenue by type. Taking you through our full income statement down to the profit before tax, the revenue piece we've covered and the gross profit we've covered, the jump there being predominantly in the mix and moving away from our hardware sale in the prior period. Really to talk about is the admin expenses, administrative expenses. So on a reported basis, they're 0.6% up on where they were in the prior period. Really, we look at expenses on an underlying basis, so stripping out that depreciation and amortization piece. And on that basis, they were up 4% on where they were in the prior year, up to $48.5 million. And included within those underlying expenses, we had an FX cost headwind. So we had about $1 million of cost resulting from revaluations of non-USD assets and other foreign exchange losses in the year, whereas in the prior year, that comparative figure was $0.8 -- $0.4 million, so a $0.6 million increase there. On a constant currency basis, our underlying admin expenses were about 2.4% up on where they were in the prior year. And that's really reflective of broader wage and staffing inflation that we've seen on a relatively consistent headcount. You'll see in our head count there has dropped from 682 at the end of December '24 through to 675 at the end of June, and that's inclusive of hiring 7 heads from the 1RISK acquisition that we made. So really managing that head count robust state, but there are some aspects, whether it's health insurance, whether it's broader wage inflation that we continue to manage as tightly as we can, but experience the level of cost increase. The other piece to highlight on here is the net finance both income and expense numbers here. So in the current period, we actually had net finance income of $0.5 million. which is reflective of the fact, again, of a $0.9 million positive revaluation of our USD loan, so creating an FX gain in our net finance income. And then that in comparison -- in conjunction with the fact that we've just had lower drawings for the period. So we were about just shy of $19 million with our average drawings through the early part of 2024 and we're around about $10 million drawn through the early part of this year. So the lower drawings, lower interest expense, and you can see the interest expense dropping there and as well as the finance income resulting in a -- quite a marked increase in profit before tax, the $1.8 million versus $0.3 million we had in the prior period. Taking you through from cash EBITDA. So again, cash EBITDA have been our principal operating metrics for the past 5 years or so. And this is showing the movement from operating profits through to that cash EBITDA metric. And you can see in the top layer, operating profits up to $1.3 million versus $1.2 million in the prior period versus cash EBITDA being down on a prior period. And really, that's reflective of the fact that we've got movement in the reconciling items there between the two and mostly driven not only through the amortization lines. So 2 amortization lines in there, really, it's the amortization on acquired intangibles. So we last made an acquisition 2 years ago at this point. So we've got the runoff there as we get further away from making from those original acquisitions, the amortization charge decreases through to the runoff effect. So we're down 14.6% there. And the other piece is the R&D capitalization/amortization that's been in this business for the past 5 years, you'll see there the amortization on R&D is $1.6 million versus the capitalized cost of $1.6 million or $1.54 million at the moment, almost equal to each other. And that hasn't been that way for quite some time. You see in the prior period, it was $2.3 million versus $1.2 million. We're getting to a point now where they almost equal each other and that -- those large amounts of capitalization that were done in the period to pre-2020 prior to Steve and I's time are now starting to run off completely and we don't have an impact of that in our P&L, which is growing. And then lastly, the cash flow side, to the key points to highlight here, which should peak interest. You can see there, and we spoke about this again in previous presentations, the working capital movements that we have. We have some pretty large swings, particularly when our cutoff periods are June and also at December at the year-end where we have seasonal peak trading. And then you add in the fact that the business -- 1 part of our business, the distribution business collects gross cash flow. So quite a lot of the time is collecting the gross ticket price that is flowing through our balance sheet, whether it's an accounts receivable and out through the other side of an accounts payable. The movements are there around the cutoff period of June and particularly impact our working capital. So you see the swing there from a $40 million outflow in the prior year to a relatively fat $477,000 income in the current year, which is really just a snapshot. We generate free cash flow throughout. But if you're taking a snapshot in time, that's what it ends up looking like. It reverses relatively quick thereafter. If you look back at December, you'll have seen a similar story and the inflow comes in the preceding on the subsequent 6 months as it did this year. The net cash, actually, the number that we've got at the bottom there, $25.4 million this year and $18.2 million at the end of the prior period does include the impact of that pass-through cash. So there's about $5 million of cash related to Ingresso in the current period, the distribution business and again, $2.8 million roughly against the $18.2 million that was in the -- at the end of June 2024. The other 2 key items to highlight here really, and they feed into the capital allocation piece that Steve was mentioning earlier. Firstly, to talk through is the purchase of intellectual property is the 1RISK acquisition with a little bit of the balance of cost on our improved corporate website that will go live later this year. And then the final one there is the $5 million on the purchase of own shares for cancellation. So -- at the end of June, we were at $5 million, which is roughly of $10.5 million in total, which is GBP 8 million. At the end -- so as of Friday last week, we were at GBP 6.6 million, so roughly $9 million of the $10.5 million, so about 2/3, just over 2/3 of the way through, which is a total of 1.4 million shares being purchased and canceled. So around about 3.5% of our shares in issue at the time we started this program. So really positive and we will have a continued impact on our earnings per share number and forms a key part of our capital allocation strategy. And just to talk a bit more about that briefly before we -- and we don't have a slide yet on it, but we will do in future presentations, is really going to outline, what is our decision tree analysis, how are we thinking at Board level of how we spend our free cash flow. I mean you can see there we've jumped from $18.3 million at the end of June '24 to $25.4 million at the end of a year later, and that's despite spending on intellectual property and despite spending $5 million on shares. So a marked increase in cash and generating free cash flow. So how are we making best use of that? And previously, this year, we've obviously been making use of share buybacks. But really, we're going to outline our thought process. So how do we work through that? Is it mergers and acquisitions? Is it distribution? Is it buybacks? But putting a bit more color to the decisions that we're making, I think, would be worthwhile and providing the level of framework that we haven't otherwise done before, which is something we'll look to do in the future. That's largely it on cash flow. And then on to summary and outlook, and that is unchanged. So we gave this guidance in April post results. We revised it slightly to say we'll be at the lower end of the revenue expectation when we came out with our trading update in July, but our margin guidance remains unchanged at approximately 15%. Steven Brown: Thank you, Matt. So now with the formal part of the page turning done, we will open up the rest of the time for questions. And I'm sure there are plenty of those for us. Operator: [Operator Instructions] Our first question is from Tintin Stormont from Deutsche Numis. Tintin Stormont: Can you hear me guys? Steven Brown: Yes. Matthew Boyle: Yes. Tintin Stormont: I'll do 3 in case it doesn't come back to me anytime soon. First, on the new wins. How should we think of the time to revenue from these wins. So when you win the deal and then obviously the time to implement, is there any bottleneck that we should be sort of kind of aware of any risk of bottleneck there? Do you have -- have you got the resources to be able to get them all live when the client wanted to, et cetera, et cetera, especially given the greater success you're seeing. And then secondly, in terms of the much improved win rates, could you maybe just delve a bit deeper into where the improvements are? Is it in deal discovery origination? Is it slicker, more targeted pitching conversion? Are there any changes in the competitive landscape that we should also be thinking about? And then lastly, in terms of Mike's arrival, what would you say is the top of this agenda, if you could speak on his behalf. Steven Brown: All right. Well, as the Interim Chief Commercial Officer for the majority of us here, I'm more than happy to answer those 3 questions. In terms of implementation, we're in great shape. We -- one of the things we've been disciplined about is even when the win rate dropped is maintaining our resources because those are highly trained individuals that know our products very, very well. And cycling those positions is not something you really want to do. So we have a strong bench for implementation. And of course, our operations team can spot them as needed for some of the work. So we don't really expect any issue with the implementation, and we're careful with how we schedule those. The majority of time when we have a delay on implementation, to be honest, it's the client often underestimates the complexity that they're about to embark on, and they have not allocated enough resources on their end. And so that really ends up being more of the equation in terms of their responsiveness just because they have day jobs, too, and now they're implementing a new system. And so that becomes more of the time line issue, and we try to help them as much as possible to work around those things. Where are the improvements? I think one of the important improvements was just reorganizing the team a bit. And we had drifted where we had too many of our salespeople trying to sell everything. And to be a really good expert and to talk your game, you need to know the product. And knowing a little bit about a lot of products is not as efficient as knowing a few products really well. And so I think that's helped. They're not as scattered as they were. I also think we had some confusion around how do we sell Horizon, how do we sell Passport. We've tightened that up. I think a lot of it has been our response time to customers. I really worked with the team on that. If a client asks 3 follow-up questions, you get 3 follow-up answers same day and making sure that the organization is supporting them on answering those questions because they don't really know the answers all the time. They need a technical answer. They need a product answer. They may need a financial reporting question answered and making sure the [indiscernible]37:52 team all rallies behind them to get those back as soon as possible. And I would say one more item is showing up more in person. It's something that as you try to manage cost, which you can see we're doing quite aggressively, you tend to be a little careful about traveling. And I've encouraged them to be less careful, to be honest, because I'll give you a great example of the theme park that we won, which was a really good win for us here in the U.S. And the team went -- this is early on in the year. The team went, 2 of them, sales engineer, sales director in person. It was a half a day demo, took customized meeting materials, reflective of the clients' brand, did all that and really just did a fantastic job. The main competitor dialed in for a 4-hour demo on Zoom. And so you can imagine how we fared in that and how we could respond to the questions when you're eye to eye. And so I think just getting them realigned around our approach has made a big difference. And it's not just the ones we're selling to, but our pipeline has increased substantially. And I think a lot of that is all the same things. How fast do you respond to a lead, how much time are you dedicated to outbound outreach, how are you handling trade shows? And we've just kind of rethought all those different parts to make sure we're generating those leads and getting their attention. And I know we talk about the website, and it seems relatively straightforward. But with our product set and having acquired 1RISK, having acquired Paradox, having acquired -- having Horizon now in the mix, and we have Freedom, we really needed to step back and rethink our whole go-to-market proposition in terms of how we communicate and so it wasn't about an outdated website. It was about rethinking how we now deal with this expanded product set in a much more straightforward manner. And so it's been a lot of mapping, a lot of creative, but probably 20% creative and 80% mapping and logic of how do you communicate better. And we've already started using that in our communication, but the website is really going to be an important tool for us. And so we've done all this so far without the website and without the traction from what we've been building in the last 8 or 9 months. So I feel very good about where we're going and what Mike is walking into now is in a really great place. I think if there's one priority for him, and it's to be very hands-on, we're selling big-ticket items here. And those sales directors, as skilled as they are, they still need support. And me being able to dial in and call the client, me being able to help them nudge their proposal just a little bit, being hands-on is his #1 priority. It's just helping them with that experience that he brings, that I've been bringing and helping them just round out their presentation, round out their responsiveness, another set of eyes on how we're presenting things. Editing proposals to not have the word fee show up 15 times on 1 page, things like that, that just psychologically play into our presentation. That really him being hands-on is absolutely a #1 sort of operational, I think, priority for him. And beyond that, I would say, helping us build out our global framework a lot more. We have a sales team of 3 handling all of international. And we're sufficiently handling the demand we have, but we need to create more demand. So how do we do that? How do we do that with international marketing? How do we do that with our trade shows? Our domestic or our U.S., Canada lead generation and sales team is really quite refined as our international team is, we just need more of it. And so how do we scale that team? How do we get our product and our message into these markets a bit deeper so we can increase our penetration outside of the U.S., outside of the U.K. So that will be his main priorities. Operator: Our next question is from Katie Cousins from Shore Capital. Katie Cousins: Sorry, can you hear me? Steven Brown: Yes, Katie. Matthew Boyle: Yes. Katie Cousins: Just 2 from me, please. Going back to the pipeline. Just interested in a few more details around that. And if it's skewed to a certain geography or service that you provide? And also, is it conversations with existing clients of expansion? Or are these completely new sites or customers? And then a bit more -- second question is a bit on 1RISK, and how that fits into the current offer? And are you offering that as an additional revenue to customers? And any development spend needed on that product? Steven Brown: So the pipeline is really across all areas. As I mentioned, Freedom has a pretty good pipeline. And our pipeline is weighted. And so when we look at our pipeline, we size the opportunities and we apply a weight. So if they just called us up, right, hey, how are you? They're probably weighted at 0 in our pipeline. If they've done a demo and they showed some interest, they might be at 10% or 15% weighting in our pipeline. If they're in the negotiation phase, they may be at 50% or 60%. So it's a weighted pipeline. And that allows us to have a more disciplined view of around what the real opportunity is. And it's across all products. And there are some larger ones in there that may be Horizon because those check averages are larger. There's a lot of volume around Horizon. There's quite a bit in Paradox because we're seeing the demand of the Siriusware customers looking to move to Paradox and how we're working those leads. But the majority of it -- the vast majority is new venues, new customers. We're installing or we just are contracting with a new museum in Nashville for a very popular singer. There are things we're working on in Dubai that are quite interesting. So there's a whole range of things in there and the vast majority of it, because our sales team, yes, they sell additional products like Freedom, but a lot of those are add-ons that our operation team is handling. Our sales team is really focused on new customers as their priority or in the case of Siriusware getting those customers moved over to Paradox onto the SaaS model over to Passport, that does follow our sales team. But I would say, by and large, it's new customers, and I can certainly quantify that and give you a follow-up answer. But by and large, Matt, would you agree with me on that? Matthew Boyle: Yes. No, yes. definitely. It's new venues really rather than new products and event at existing? Steven Brown: And in terms of 1RISK, it's a really healthy product. They were a small business, 7 employees. That's not a very big company, right? But they've done a lot with a small team. And they had 150-plus venues they were serving. We're going to roll those into our operational flow and operational process. It will become embedded as part of our support model. Right now, we're still in that sort of transition phase of making sure the customers are being supported with what they had already signed up for. But if they're buying Paradox, for example, when they're on the transaction-based SaaS model, 1RISK will be included as a feature of Paradox. If they're still using Siriusware, they would pay for it under their contract. And if there are customers out in the market that want to use it on a stand-alone basis, not integrated with any ticketing system, just a stand-alone waiver system, those would also be available. But the only integration to an e-commerce platform, for example, or a point-of-sale platform will be an accesso product. And so we bring -- we brought the market-leading waiver, which is a must-have into our product set. And the other customers that were using the product are now looking at a second tier or third tier product because they don't have that integration available anymore. So it was very strategic for us. And it wasn't a large acquisition. It was more of a buying a product feature. It's a huge differentiator to have that integrated in our system. And because the integration is for us now, we can do a lot more with it. When it's a third-party application, they're having to please everyone. And so the integration has kind of become the lowest common denominator. And now that it's ours, we can really take that to the next level and make it much smoother. We're already doing that, make it much more integrated, much more intuitive because we now can control essentially that product road map. And so our product will be even more superior to what it was previously and another leg up, so to speak, on the competition, particularly in the ski market. Operator: Our next question is from Jon Byrne from Berenberg. Jonathan Byrne: Jon Byrne here. Three questions for me, if you don't mind. So firstly, as the Middle East rollout progresses, can you maybe give us a steer on what the potential contribution from that geography could look like and what you expect the revenue sort of ramp-up profile to look like over the next few years? And then secondly, on virtual queuing, can you give us any more color on the revised commercial agreements you cited in the statement? Is that for lower price terms and sort of likely to impact going forward? And then finally, on margins, you mentioned AI efficiencies. Is there any other areas that you're focused on from an operational efficiency standpoint? And what do you see sort of potential benefits from that program being? Steven Brown: Yes. The Middle East rollout, the main one we're focusing on now is Qiddiya for the opening of the theme park and the water park here in the next few months. We're doing everything on our end to stay on track. Again, we're subject to the construction time lines that they're dealing with there. But overall, things seems to be progressing well. They are highly focused on opening the theme park this year as they've committed to. And by all accounts, they seem to be, from our view, on track with that. We can't control it, but they seem to be on track with it. And once that is fully rolled out, there's always enhancements and follow-ups, things they think of later they didn't think of on the front end. That will be enhancement-type work that we'll be delivering, I'm sure. And then it turns into a maintenance and support model. Importantly, on those -- on that and another engagement, if you think about VGS when we bought it, now Horizon, they did not offer the opportunity to help the customer run the software. They basically sold them the software, help them install it and then the client was left to run all the server environment, which is actually quite complex for that scale. In those Middle East engagements, we've now -- we're going to be signing them or have signed them. I'm not sure today -- this time of day if it's signed or not, but we're going to be running those for them under our professional services team as site reliability, managing their environment for them. So we've extended our opportunity there for them beyond just the license and maintenance into actually operating the software for them and managing their servers, their security environments and all of that, which is an additional check average for us, a check item for us. And it will add hundreds of thousands of dollars of margin to that deal. And we have that process running and proposing and contracting across a number of customers. They don't really want to run these things, to be honest. And the fact that now is the broader accesso team, we can offer that to the rising customer base -- it's been very well received that we can bring that expertise and allow them to run their business instead of sort of running servers. And I think we'll continue to see opportunity coming from that. The Middle East overall, there are -- there's still another project there, which is 7 also by QIC. It's in its construction phases. We can't control the timeline there. That will continue to evolve. And there are a number of other leads we're working on in the Middle East that I honestly, unfortunately, can't comment on. It's interesting that area is becoming very competitive. And the details, even the systems they are choosing are important. And more than I've seen, honestly, previously, the NDAs that are being required are actually quite steep. And so you'll find us using our words carefully when we talk about Middle East and the opportunities there just because the sensitivity in that particular market seems to be a bit enhanced from what we dealt with in other areas, just to maintain, I think, their competitive advantage or whatever they're concerned about. But we have a number of opportunities we're working on there. Some of them are quite large. I think Disney World large, very large. Some of them are smaller, water parks, resorts, different things like that. But I think now that we've planted the flag with Qiddiya, we've certainly gotten the market's attention. The VGS team already had its attention. I think now even more that we have these broader capabilities, we're going to continue seeing that growing. I think it will become a very important market for us. Particularly for Horizon, it's just so compatible with the languages and currencies that it seems to be appealing. That said, there are some projects that Passport is a better fit for, that are being considered. So I can't comment on the number, but it is going to, I think, become a significant area for us over the next 3, 4, 5 years. In terms of the virtual queuing that we mentioned in the trading update, again, there's some commercial sensitivity there. But as we indicated, the client has -- was leveraging 2 products, and they have informed us that they don't plan to enter a new contract after this one expires on the queuing side. But on the other hand, we've extended our e-commerce agreement and with revised commercial terms that, to some extent, some material extent, offset the impact from the other agreement not being -- the new agreement not being executed. And so it was really balancing a bit. Some of that was bringing the e-commerce rates to market level, honestly. Some of these legacy contracts that have been around for a very long time, have a market rate adjustment that is appropriate. It was honestly more so about that. And coincidentally, it allowed us to kind of offset some of that -- some of the impact from the other agreement. And last but not least, in terms of efficiencies, one of the things that Lee, who is our Chief Operating Officer, is working on with the team is organizational, I hate to say, realignment or maybe it's more of alignment. And especially as we again, almost like the website, we have all these different products now. And the last 2 or 3 years, we've added several. And just thinking how we bring those to life for customers operationally when a customer may have -- they may have Paradox alongside Freedom. They may be even using Lo-Q, they might be using Ingresso. And how do we service them, so they're not calling 4 different departments. And in doing that, can we be more efficient with our resources, both in terms of service model, better service for the clients, but also in terms of the number of people that it takes to deliver that. And can we just become more efficient as a business if we realign and think about how to realign some of those processes. So -- and not to just say it as a token point, but actually, AI is an important part of that because how can we leverage some of the tooling to increase our efficiency around how we handle routine service tickets, how we handle questions that come in, the questions that come in about how to set up product, can we give them user guides that are automated, prompted around how to use the system, things to reduce the workload coming into our team that today is manual. And so it's beyond just let's use AI to build something cool. It's also how do we give these tools and maybe these realigned -- how do we give these teams and the realigned teams further tooling that has continued to become available to help them move more rapidly, which as we continue adding more customers, which we're doing, obviously, quite rapidly, maintaining our headcount, keeping our cost as tight as possible, hopefully reducing our cost. But how do we do that with some organizational realignment as we continue to add. And that's really -- there's a sprinkle of AI in that, but it's really about the overall structure and how we realign and how can we gain some efficiency there. Operator: Our next question is from Oliver Tipping from Peel Hunt. Oliver Tipping: Just a couple of quick ones from me. The first is probably for Matt. Just looking at the sort of cash EBITDA metric that you guys have used for the last few years. Are you thinking about changing that back to a sort of more standard operating profit metric versus the cash? Because obviously, now the CapEx and the D&A are much more closely aligned than they have been in the past, which I think was the original reason why you sort of switched to a cash EBITDA. And then just secondly, on the Freedom opportunity, how does the e-commerce market compare to sort of original food and beverage market in terms of opportunity for you guys. I imagine it's more applicable to a much larger number of your clients? Or do they all seem to all have both e-commerce and F&B? Matthew Boyle: Yes. Thanks, Oliver. So I'll cover the first piece that you mentioned really on our cash EBITDA metric. As you point out, certainly was our principal operating metric for the last 5 years, given the difficulties we had with capitalization in years gone by. I think we will move to -- not as a cutoff completely, but we will move to something that is closer to pure operating profit adjusted EBITDA number that certainly both presenting that on those numbers and on a per share basis will become something we do quite routinely; one, because we don't have that impact of capitalization anymore, but also because of the capital allocation decisions that we're making are making marked improvements in our shareholder returns, and they're illustrated by the earnings per share that we're generating. You can see in the numbers today, our statutory operating profit, basic earnings per share is up compared to the prior period. And our adjusted earnings is relatively flat, which reflects that offset of amortization or the decrease in amortization. So yes, I think we will transition towards a metric that is closer to adjusted earnings and per share earnings over the next few months and years. Steven Brown: And the question for Freedom. One of the key differentiators, I would say, probably top 1 or 2 points is venues that have multiple locations and how you administer that. It's very complicated when you have hundreds of employees running different restaurants, maybe they're working in the retail stores as well and how you manage the product setup, the employee setup, all the controls. And we have a client -- we have a lead right now. We're working a proposal where we're up against a stand-alone point-of-sale provider. And they would install -- say the place has 12 restaurants. They would basically install 12 different systems in there, and the client would have 12 different sets of products, 12 different sets of employees. In Freedom, you can run all that as one universe with 12 locations as part of that universe, and very, very elegantly. That is a major differentiator and something that is really not found in many products on the market. And when you're trying to streamline your operation, manage efficiently, manage your inventory of your products, manage your staff, it is absolutely a key differentiator in how all that works. And it's not just we're covering the bases with features, which a lot of the stand-alone point-of-sale providers are really good, but the depth of this product because of its history. If you can run the food system at Walt Disney World, which we're still doing today with the legacy product, the legacy version, the functionality that is in that system is extraordinary. And so when you're doing a demo, it's not a top line demo. They're asking very complex questions that we can answer on the fly. And so we are very differentiated in the market. And I think that is -- as customers are discovering the quality that's there in a full SaaS model, I think it's really propelling our win rate and the interest in the product. And every customer has food. I mean there are -- everybody has food. The only exception is maybe some of them outsource it to, say, a Sodexo or a Host Marriott or HMS. Some of them, not many, but a few do, but all of them have food and retail. In fact, we just got our first win with one of those names I just mentioned that is the outsourced provider at a rather large venue operator here in the United States. That third party actually is signing with us for Freedom. And you can imagine Sodexo, HMS, all those different companies, how many locations they have. And so you start to make an impression with these. I think the opportunity is beyond just our typical theme park ski resorts and in any of those venues they might serve as they see the product and appreciate its capabilities. And it's not an old product with these functions and some of the products we're competing with are quite old. It is fresh, fresh architecture, fresh API, fresh user experience, mobile ordering, kiosk ordering, all built in. The legacy products that are out there, even if they're SaaS, you've got to go find a partner to build your kiosk, find a partner to build your mobile ordering. They don't have it like we do, where you can handle multiple venues on your mobile ordering, handle their season pass discounts, handle their season pass entitlements, do all the things you do in the venue. It's different than selling a point of sale to a restaurant that's on the street corner. It's a different ball game. And we are highly differentiated in that space. There are only 2 or 3 other products that could come close to what we're offering. And it is ubiquitous to use that word across our customer base. Some of the clients only have a couple of terminals. They're not the most interesting ones, but it's easy to deploy. We can handle those. Most of them have 12, 15, 20, 30. One we're dealing with right now has 100 terminals across a relatively large opportunity. So we're going to see that as a very important cross-sell for us. When I look at the one win we've mentioned a couple of times for the theme park here in the U.S., when we look at the revenue from ticketing and the revenue from the food and retail, they're equivalent. Our revenue is equivalent. So we've doubled the check size on that particular customer. Typically, in a venue, if they sell whatever it is, $100 million in tickets, they typically sell about $100 million in food and retail, roughly speaking. So essentially, it gives us the opportunity under the same SaaS model, percentage of revenue model to double the check average. And there's a little bit more competitive pricing on the food and retail side than there is maybe on ticketing, but we're still getting, on average, well above 1% of revenue on all of these deals. So it's going to be a really good long-term play for us. Operator: And our final question is from Richard Jeans from Hardman & Co. Richard Jeans: Thanks for the presentation. Excellent presentation. You recently launched the accessoPay 3.0. Perhaps you could give some color on the long-term digital payments strategy. That's my first question. I got -- I think I've got 3 questions. The second one is on Brazil, the disposal of -- does that have any implications for showcase more broadly? And thirdly, on -- just wondering what your -- do you see any growth opportunities in virtual queuing and Ingresso, could you give a bit of color about where the growth potentials is in virtual queuing in Ingresso? Steven Brown: Yes, let's go backwards. So virtual queuing in Ingresso, absolutely. It's really important that we continue to think virtual queuing is very relevant for us. It is a very relevant product. We have a lot of customers using it, customers that love the product. And we continue to see an opportunity there with -- we're currently working on an operator right now to extend their -- to extend into other venues within large operator. So there are -- there's still plenty of demand for the product. It continues to really have no competition other than someone doing a manual risk band system that is not tech forward and does not offer the same revenue opportunities or features that we offer. And although we don't have the main IP anymore, the sort of general one, we have a lot of individual IP. In fact, we just had one granted in this period, another patent granted. We've got these sort of Easter eggs of patents that even though you can handle -- maybe handle the basic system yourself with wristband or some basic technology, you start getting into the use cases that are unique, you start running into our patents. And so I think we've still fenced ourselves relatively well from delivering the same level of product that we have. You can certainly do -- make a do-it-yourself product and get buy, but not with the same level of customer support features and revenue-enhancing features that we offer. So I think there's still opportunity there. Ingresso as well. Ingresso, as you will see, did well in the half of the year. And when operators are slightly challenged on volume as they were perhaps in June, they look to these channels where they can get quick promotional value. They haven't got to build a TV commercial or build social media ads, they can go to channels like Groupon, for example, and immediately push out to millions of customers, these promotional officers with a click of a button. And that's what Ingresso gives them as the outlet for that kind of distribution. And so you kind of see the inverse effect. When things are really great and booming, even in the Westin theater business, those operators will give us very few seats because they can sell them at full price. They don't need promotions. They don't want to pay a commission. When things are running normal, it's kind of a balanced model. When things get a little tight, we may suffer a little bit on this at the Passport side, but we get the volume now on the Ingresso side. So Ingresso will continue to grow. I think our priority there, as I just reviewed with the team this last week is, it's all about efficiency and margin. And we don't want to have a -- we don't want to take a $20-plus million business with the margin it has today to be a $40 million business with that margin. I want a $20 million, $25 million, $30 million business with a good margin. And so the priority there is really around the types of customers we bring in, the types of opportunities we pursue. And importantly, how we're helping our broader customers with Paradox or Passport or ShoWare, Horizon, how we're helping them with their distribution as a strategic advantage to our competitors. So Ingresso will continue to be really important for us, and we'll continue looking for ways to make it as efficient as possible from a margin and profitability perspective. Going backwards, I think, Matt, the second question was for you. Matthew Boyle: That was on the Brazil disposal, I think, Richard. And so we -- it's an increasingly difficult market to operate for us, and it was exclusively operating accesso ShoWare for us. So we took the decision to exit that market. It was relatively small amounts of revenue, so EUR 0.6 million on an annual basis, EUR 0.3 million in the comparative period for the figures shown. It doesn't preclude us operating any of the other products in the space, but ShoWare, we don't operate in that region because of the difficulties we faced in operating. A relatively simple decision and sell to former management. Steven Brown: And what was the first question again, Richard, I'm sorry? Richard Jeans: How you recently... Steven Brown: One of my favorite things to talk about because we haven't unfolded this a lot in our presentations. But if you look at the competitive set that are out there, some of the newer companies that are coming along, particularly on e-commerce, they're largely going into the payment space. And some of them are honestly not making money on the product, making all their money on payments. And so we've been taking a hard look at how we approach payments and how we bring that to market for our customers, because when you think about the aggregate volume that we're producing, we can get really good deals from payment processors, probably better deals than our customers can get on their own as an individual going to their local bank for merchant processing. And so we have been evaluating -- it's a very competitive landscape. It can be -- the payments can be a little confusing or a lot confusing. And what you see is not always what you get. So we've done a lot of work this last year of evaluating all the different providers that we could work with, talking to their customers, really understanding their tech set. We have a lot of experience with all of them, but evaluating what business model will work for us to bring the payments opportunity into our offering and how we would bring that to market. So someone signing up for Freedom, for example, can have the option to add the payments. And I think in most cases, we will be more competitive than whatever they're currently paying. And it could end up adding 30, 40, 50, maybe more basis points to our pricing model. That's what we're seeing competitively from others out there, and that's what we see from the providers we talk to in terms of what that margin is. And importantly, it gives the customer a better rate at the same time. We end up on the service side. Those become our customers. So we're the first-line support. We're handling all of that. But we're already doing most of that for our customers anyway. And so can we bring that full circle, give them that full offering? It allows us to, I think, be pricing competitive on our product and on payments. And if you're looking at some of the benchmarks out there, and we've looked at plenty of them, some of them perhaps acquisition opportunities, some of them publicly traded that have information out there, you'll see the payments commissions or payment margin to be pretty significant in their P&Ls. And on our end, it's not something that we have really built in structurally to our process. And we're looking to change that and to evolve that into something that's more meaningful in our business. And I think that there's several million dollars of opportunity there as it can take hold over time. Obviously, bringing new customers in, getting them on our platform, our payments platform, going back across our customer base and working to convert them over with better rates, we can bring more margin in, again, back to the basket size conversation. But until we have all the -- I's dotted and T's crossed, I don't want to lay out exactly what we're thinking, but we're very close on having a commercial arrangement sorted on that front and being able to offer this to our customers in the very near term. Operator: Thank you. There are no further questions. I will now hand back to the accesso team for closing remarks. Steven Brown: Well, thank you, everyone, for joining us. Hopefully, we answered the majority of your questions. If you think of things that are still burning questions, feel free to reach out to us. We'll be more than happy to answer. As I say, this is always the best part of the presentation is really getting at what you're interested in. So thanks again, and we will speak to you all again in a few months.
Operator: Good afternoon, ladies and gentlemen. And welcome to the Rubrik Second Quarter Fiscal Year 2026 Results Conference Call. At this time, all lines are in a listen-only mode. If at any time during this call, you require immediate assistance, please press 0 for the operator. This call is being recorded on Tuesday, September 9, 2025. I would now like to turn the conference over to Melissa Franchi, Vice President, Head of Investor Relations. Please go ahead. Hello, everyone. Welcome to Rubrik's Second Quarter Fiscal Year 2026 Financial Results Conference Call. Melissa Franchi: On the call with me today are Bipul Sinha, CEO, Chairman, and Co-founder of Rubrik, and Kiran Chaudhry, Chief Financial Officer. Our earnings press release was issued today after the market closed and may be downloaded from the Investor Relations page at www.ir.rubrik.com. Also on this page, you'll be able to find a slide deck with financial highlights that, along with our press release, includes a reconciliation of GAAP to non-GAAP financial results. These measures should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. During this call, we will make forward-looking statements including statements regarding our financial outlook for the third quarter and full fiscal year 2026. Our expectations regarding market trends, our market position, opportunities, including with respect to generative AI, growth strategy, product initiatives, and expectations regarding those initiatives, and our go-to-market motion. These statements are only predictions that are based on what we believe today and actual results may differ materially. These forward-looking statements are subject to risks, and other factors that could affect our performance and financial results which we discuss in detail in our filings with the SEC. Rubrik assumes no obligation to update any forward-looking statements we may make on today's call. With that, I'll hand the call over to Bipul. Bipul Sinha: Thank you, Melissa. I want to start by thanking everyone for joining us today. We are pleased with our second quarter results that once again exceeded all guided metrics across top line and profitability. Here are five key numbers. First, subscription ARR surpassed $1.25 billion, growing 36% year over year. Net new subscription ARR reached $71 million in the second quarter. Second, our subscription revenue was $297 million, growing 55% year over year. Third, our subscription NRR remained strong once again, above 120%. Fourth, customers with $100,000 or more in subscription ARR crossed 2,500, growing 27% year over year. Finally, on profitability, we once again made material improvement in subscription ARR contribution margin, up about 1,800 basis points year over year. On cash generation, we are very happy to report we generated over $57 million in free cash flow this quarter. This combination of top line growth and cash flow margin at our scale is rare. We remain confident about the opportunity ahead, and thus, we are raising our outlook for the year. Let me first give you some context on where we are focused. Rubrik is evolving into the security and AI company. In the last several quarters, it is clear to us that as we continue to focus on and win the past cyber resilience market, we also have a tremendous opportunity in the enterprise AI acceleration. Let's start with cyber resilience. And the broader context of the market opportunity. From our inception, Rubrik was designed to help customers achieve the fastest cyber recovery time. To deliver this, we uniquely combine data security posture management, identity resilience, and cyber recovery natively on our Rubrik Security Cloud or RFC platform to achieve complete cyber resilience. And at the center of our differentiated architecture is the Rubrik preemptive recovery engine. In Q2 alone, I had over 125 meetings with customers and prospects worldwide. What was abundantly clear is that IT and security leaders now have an assumed breach mindset. Simply meaning they are certain that cyber attacks are inevitable despite significant investments they have made in cyber prevention and detection. At the same time, these enterprises are also looking to replatform and modernize their infrastructure in preparation for the imminent enterprise AI transformation. As companies shift deeper into cloud engine AI, customers continue to turn to us, Rubrik, for complete cyber resilience. Delivering uniform and consistent data security policy control as well as rapid accurate recovery from cyber attacks. Concurrently, our Predibase acquisition I'll discuss later in my remarks, also allows us to deliver enterprise AI acceleration. The bottom line is this. We have tremendous opportunities ahead of us. First, we continue to lead the vast cyber resilience market. And second, at the same time, we continue to build a new future for enterprise AI. Now I'll detail some of the wins across our initiatives at varying scale. For our cyber resilient data protection business, we continue to add solutions across new applications and workloads. Leveraging the same underlying preemptive recovery engine to deliver risk and remediation capabilities. This unique architecture consistently enables us to outperform both legacy and new gen backup vendors. Let me highlight this with two illustrative customer events from the quarter. A major North American oil and gas company selected Rubrik after its legacy backup provider was unable to support a fast recovery following a disruptive cyber attack. Rubrik was selected because of our superior recovery time relative to both legacy as well as new gen alternatives. Our comprehensive yet radically simple platform cyber recovery across all workloads including the cloud, was another key reason for the legacy backup replacement. In another example, a Fortune 50 pharma leader turned to Rubrik to protect its critical applications displacing its twenty-year-old legacy backup vendor as well as native cloud backup solutions. We also outcompeted new gen backup vendors for this opportunity. Rubrik was selected due to not only our ability to deliver greater cyber resiliency, in the face of escalating cyber risk, but also more efficient cloud storage cost. Let me now talk about innovations in cloud protection that are delivered from RSC which is a single unique platform across center, cloud, SaaS, and identity workloads. We continue to expand our purpose-built cloud data protection solution to more applications services, and databases in the public cloud. This quarter, we expanded our cyber protection of AWS RDS database. And added comprehensive protection for Amazon DynamoDB strengthening Rubrik's leadership in cyber resilience for cloud databases. We'll continue to build upon our code to cloud cyber resilience platform which offers protection from the first line of code full stack of applications in production across the major hyperscalers. Let me highlight a few customer wins cloud and SaaS protection. First, a global Fortune 500 transportation organization increased their investment in Rubrik this quarter, adding M365 protection. Protection for Azure workloads, code-based recovery for GitHub, and Azure DevOps as well as Jira protection. This expansion bolsters the company's cyber resilience. And reduces recovery times across its critical cloud applications. Another example is with the Fortune 500 logistics and supply chain company that also expanded its partnership with Rubrik, by fortifying its mission-critical data state in Azure and M365 applications. After adding Rubrik to safeguard its data center applications in the past. Furthermore, the customer added identity recovery, reducing recovery time of directory and Entra ID, from several weeks to mere hours. Rubik's cyber resilience platform now avoids an estimated $65 million losses per day for this customer in case of downtime due to cyber attacks. Now let's turn to our opportunity in identity resilience. In just a couple of quarters of general availability, we have seen notable momentum for Rubik identity recovery solution with now over 200 customers. Rubik is addressing a critical need for enterprises by enabling the rapid recovery of their identity services following cyber attack, or operational failure so that they can return to business as usual. We are the only vendor in the market that delivers rapid recovery of both active directory and intra ID in a hybrid cloud manner the backbone of identity solution worldwide. Let me give you two specific customer wins in identity. This quarter, a leading UK financial services company strengthened its partnership with Rubrik by adopting Rubrik Identity Recovery, prompted by a recent cyber attack on a major UK retailer the company evaluated vulnerabilities within its own active directory environment. They recognize that these weaknesses could lead to significant post-attack disruption resulting in substantial market cap declines and potentially affecting millions of pensioners. By consolidating data and identity protection with Rubrik, this company now considers Rubrik one of its top three strategic IT vendors. In another example, a Fortune 500 financial institution in The US turned to Rubrik after an audit uncovered that its active directory recovery would take upwards of seven days with millions of dollars at risk each day. By adding rubric identity recovery, they reduced recovery times to under two hours preventing potentially significant business disruption and satisfying board mandate. We continue to invest in our identity solutions. We deepen our innovation with the general availability of Rubik identity resilience. Like I mentioned in the last quarter's earnings call, we are bringing together Rubrik's identity and DSPM solutions. Our latest Rubik identity resilience solution brings together data security and identity intelligence for the first time. Similar to how we monitor and sustain data, Rubric Identity Resilience continuously monitors and protects human and nonhuman identities. Tracking misconfiguration, as well as high risk and malicious changes in the active directory and intra ID. It also ties identity-based information like privilege access to rubrics, DSPM sensitive data context and activity. To strengthen risk posture and accelerate cyber recovery. Next, let's talk about our innovation in the Gen AI space. As I noted during our IPO, Rubik by design perpetually lives on the frontier of innovation. And our long-term success depends upon our ability to continuously create and commercialize pioneering products. As part of this, we continue to build a portfolio of innovation at different stages and at different levels of risk. This approach allows us to stack multiple f curves to maintain maximal momentum. While preparing for what's next. Along these lines, I will talk about our longer-term initiatives for GenAI. While GenAI can unlock significant new efficiencies for every organization, there are significant barriers like accuracy, cost, and security which hinders its adoption beyond proof of concept. We are addressing these challenges while leveraging our unique ability to extract, manage, and business data. Rubrik's data platform not only delivers robust cyber recoveries, but also provides clean, secure data with the necessary permission and policy enforcement to power generative AI applications. This ensures only the right person has access to the sensitive data. Our recent acquisition of Predibase furthers this vision. Just as Rubrik is working to simplify data access for GenAI, Readybase works to solve performance and cost issues around deploying GenAI models for proprietary AI applications. The Predebase platform allows enterprises to fine-tune GenAI model and run an optimized inference stack for faster accurate results at lower cost. We believe the combination of Rubrik and Predibase is incredibly powerful in accelerating GenAI from proof of concept to full production and value realization. We welcome the pretty based team to Rubrik. Where they have hit the ground running and continue to innovate and define new frontiers in enterprise agentic AI. We recently announced agent rewind, built on our Rubrik's secure data platform underpinned by ReadyBasis AI technology. We have spent years helping our customers recover from cyber attacks and operational error. With Agent Rewind, we can now help customers undo the mistakes of AI agents without full system rollback. Which is crucial for a scalable and secure AI adoption. We are still in the early stages of optimizing product market fit for our AI solutions. Including agent rewind. We plan to add more capabilities and investments to enable confident enterprise AI transformation and agentic work adoption. This is our multiyear initiative to scale rubrics AI solutions. In closing, I would like to share my gratitude. First, thank you to all my fellow Rubik continues to win the cyber resilience market. Because of Rubikanth's collective focus and disciplined execution. We continue to break new grounds for enterprise AI acceleration. And you know what? It's still early days for all the opportunities ahead of us. Also, a big thank you to all our customers and partners. Your trust inspires us to continue to lead and define future of cybersecurity and enterprise AI. And lastly, of course, thank you to you, our shareholders, your continued support and trust. With that, I'm pleased to pass it over to our Chief Financial Officer, Kiran Chaudhry. Kiran Chaudhry: Thank you, Bipul. Good afternoon, everyone, and thank you for joining us today. We had a strong Q2, which was highlighted by solid growth at scale and continued improvement in profitability. We continue to benefit from our leadership in the growing market for cyber resilience, and we are pleased to raise our outlook for the year. Let me start by briefly recapping our second quarter fiscal 2026 financial results and key operating metrics and then I'll provide guidance for the third quarter and full year fiscal 2026. All comparisons, unless otherwise noted, are on a year-over-year basis. We are very pleased to have ended Q2 with subscription ARR of over $1.25 billion, growing 36%. We added $71 million in net new subscription ARR. We continue to drive adoption of our Rubrik Security Cloud which resulted in $1.1 billion of Cloud ARR up 57%. Our differentiated land and expand model benefits from multiple avenues to gain new customers and grow our footprint after the initial contract. Expansion occurs through increased data existing applications, securing more applications or identities, or adding more security functionality. As a result, we continue to see a strong subscription net retention rate which remained over 120% in the second quarter. All vectors of expansion are healthy contributors to our NRR. Highlighting the meaningful runway we have to more deeply penetrate our customer base. Adoption of additional security functionality contributed approximately 35% of our subscription net retention rate in the quarter. We ended the second quarter with 2,505 customers with subscription ARR of $100,000 or more up 27%. These larger customers now contribute 85% of our subscription ARR up from 82% in the year-ago period as we become an increasingly strategic partner to our enterprise customers. For our second quarter, subscription revenue was $297 million up 55%. Total revenue was $310 million, up 51%. Revenue in Q2 benefited from our strong ARR growth and tailwinds from our cloud transformation journey. We also saw a higher nonrecurring revenue which was accounted for as material rights related to a crowd transformation. This contributed approximately seven percentage points to the revenue growth this quarter. Which was a few percentage points above our expectation. Adjusting for the benefit from material rights in Q2, total revenue grew approximately 44%. Turning to a geographic mix of revenue. Revenue from The Americas grew 53% to $225 million. Revenues from outside The Americas grew 46% to $85 million. Before turning to gross margins, expenses, and profitability, I would like to note that I'll be discussing non-GAAP results going forward. Our non-GAAP gross margin was 82% in the second quarter compared to 77% in the year-ago period. Our gross margin benefited from the revenue outperformance including higher nonrecurring revenue, reduced hosting costs from new cloud contracts, including a one-time hosting cost credit, and the improved efficiency of our customer support organization. We anticipate total gross margin to remain within our long-term target of 75% to 80% in fiscal 2026. As a reminder, we look at subscription ARR contribution margin as a key measure of operating leverage. We believe the improvement in our subscription ARR contribution margin demonstrates our ability to drive operating leverage and profitability at scale. Subscription ARR contribution margin was positive 9% the last twelve months ended July 31 compared to negative 8% in the year-ago period. An improvement of approximately 1,800 basis points. When normalizing for the $23 million, in employer payroll taxes associated with the IPO in the prior period, the improvement was approximately 1,500 basis points. The improvement in subscription ARR contribution margin was driven by higher sales the benefits of scale, and improving efficiencies and management of costs across the business. Free cash flow is positive $57.5 million compared to negative $32 million in 2025. This increase was driven by higher sales including timing of renewals, improved operating leverage, and optimizing our capital structure. Turning to our balance sheet, we ended the second quarter in a strong cash position with $1.5 billion in cash, cash equivalents, restricted cash, and marketable securities and $1.1 billion in convertible debt. Let me now provide some context for our outlook for fiscal 2026. We remain confident about our outlook given the strength of the fiber resilience market and demand for our differentiated offerings. We believe these drivers alongside our strong and consistent execution will deliver strong subscription ARR growth ahead. In terms of operating investments, we continue to invest in R&D to drive innovation in the large and growing markets we operate in across data, security, and AI. We'll also continue to make investments in go-to-market where we see the most compelling ROI across select regions and verticals and to find product market fit and scale our new innovations. Let me discuss our current outlook on quarterly seasonality. After a strong first and second quarter, we anticipate Q3 will contribute approximately 21 to 22% of full-year net new subscription ARR. In addition, subscription ARR contribution margin has some seasonality due to the timing of net new subscription ARR and operating expenses each quarter. Based on our current net new ARR linearity and investment plans, we continue to anticipate the subscription contribution margins will be the seasonally lowest in Q3 before moving higher in Q4. In terms of revenue, we now expect material rights related to our cloud transformation to contribute approximately six percentage points to revenue growth for the full year. Up from our prior expectation of a few percentage points. As a reminder, the revenue related to material rights is nonrecurring, and we expect minimal revenue contribution from material rights in fiscal 2027. Please see additional modeling points for fiscal 2026 in our investor presentation which can be found on our investor relations website. Now turning to our guidance for the third quarter, and full year fiscal 2026. In Q3, we expect revenue of $319 million to $321 million, up 35-36%, which includes a few percentage points higher benefit from material rights than previously expected. We expect non-GAAP subscription ARR contribution margins of approximately 6.5%. We expect non-GAAP earnings per share of negative $0.18 to negative $0.16 based on approximately 200 million weighted average shares outstanding. For the full year fiscal 2026, we expect subscription ARR in the range of $1.408 billion to $1.416 billion reflecting a year-over-year growth rate of 29% to 30%. We expect total revenue for the full year fiscal 2026 in the range of $1.227 billion to $1.237 billion reflecting a year-over-year growth rate of 38% to 40%. Or 32% to 34% without the benefit from material rights in fiscal year 2026. We expect non-GAAP subscription ARR contribution margins of approximately 7%. We expect non-GAAP earnings per share of negative $0.50 to negative $0.44 based on approximately 197 million weighted average shares outstanding for the full year. We expect free cash flow of $145 million to $155 million. Finally, we are pleased with our execution in the first half of the year as we continue to deliver cyber resilience to organizations around the world. With that, we'd like to open up the call for any questions. Thank you. Ladies and gentlemen, we will now begin the question and answer session. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed with the number two. If you are using a speakerphone, please lift the handset before pressing any keys. In the interest of time, please limit yourselves to only one question. Your first question comes from the line of Saket Kalia from Barclays. Your line is now open. Saket Kalia: Okay. Great. Hey, guys. Thanks for taking my question here and another nice job this quarter. Absolutely. You know, guys, the number that really jumped out to me the most of all was the free cash flow margin at 19% in the quarter. I think that's now four consecutive quarters of positive free cash flow. Bipul, maybe the question is, what's changed strategically in driving that type of profitability? And, Kiran, is there anything that we should think about in the second half on free cash flow as we fine-tune our models? Bipul Sinha: Thanks, Saket. As I've said before, I'm a capitalist. And I love profitability and cash flow. But, look, we are in a very large and an expanding market of cyber resilience. And as customers are looking to transform their businesses into AI enterprises, they are doing multiple transformations around cloud, around infrastructure, and cyber resiliency is the number one topic for them because if your data doesn't have integrity or availability, none of the AI will be useful. Or helpful. So we are helping do that cyber resilience transformation for our customers. Giving them like, AI-based ransomware detection, fast recovery, capabilities like that. And that's what is helping us win in this large market. And as we are scaling our business, the efficiencies are kicking in. I would love to have Kiran add some more from a finance perspective. Kiran Chaudhry: Sure, Bipul. And hi, Saket. I'll just give you a little bit more context both for the cash flow in the quarter and assumptions on the guide. So super pleased with the $58 million we generated in free cash flow this quarter. As you said, 19%. It was 3,500 basis points improvement year over year. And then from 700 basis points from last quarter Q1. A few reasons for that. Starting off with stronger ARR performance, than anticipated, and then the margin improvement as well, 9% sub AR margin. That was a key driver for the cash flow. In addition to that, you'd have seen we made some capital structure optimization in the quarter. We settled our private company debt, which has a higher interest coupon with a 0% convertible. So we had more cash on the balance sheet and less interest expense, which we sometimes pay out in cash. So that helped as well. And then on the duration front, we saw favorable duration this quarter. As you know, we increasingly sell cloud-native products, which tend to have a shorter contract length as well as shorter payment terms, and we didn't see that compression duration this quarter. And the last thing I'll say is that there's probably more timing related, but we saw more early renewals. Related to the usual trend and some of which was multiyear as well. This was in the context mostly of customers co-terming renewals with active expansion. So all of that really drove the cash flow outperformance to 19% margin this quarter. I look at the guide, we are happy to raise the guidance for the year. We previously had guided around 6% margin and we're guiding to 12%. And that's a thousand basis point or 10 percentage points improvement year over year. Some of the trends continue. Obviously, it's based on our ARR guide as well as the higher investments we are making in the second half from an OpEx perspective. Obviously, the capital structure portion will continue. But specifically in the duration, we are not assuming the compression continues. We are modeling in a little bit more compression. Would say low to mid-single digits through the rest of the year, and that is all the assumptions. We have made in the guidance. Saket Kalia: Super helpful, guys. Thank you. Melissa Franchi: Thank you, Saket. Operator: Your next question comes from the line of Andrew Nowinski from Wells Fargo. Your line is now open. Andrew Nowinski: Good afternoon. I just wanted to say, I think the net new ARR in Q2 is really impressive. Considering you went through a sales comp change, moving to annual sales comp plans this year. And so I know the change really didn't have an impact on your year-over-year growth in Q2, but I was wondering if you could just talk about whether you saw any impact from that and whether you're expecting higher seasonality in Q4 because of that change? Thank you. Bipul Sinha: Let me give you some qualitative perspective on it, and I'll let Kiran provide some more details. Look. We have been running our business on a per-year net ARR basis. And it jumps this quarter, that quarter, depending upon the deal timing and deal closure. But we run our business on a full-year new ARR. We used to do a quota compensation for the sales team on a half-yearly basis. So starting this fiscal year, fiscal year 2026, we decided to align how we run the business with how we compensate our sales team. And that change in the first half so far has not brought out any material impact to how we see our business or their achievement. Obviously, we have the rest of the year in front of us and we'll know more about the impact by the end of this year. But so far, it has gone well. Kiran? Kiran Chaudhry: I'll just add a few more thoughts here. So there are, of course, some shifts in seasonality. But it's only the first half. So we can give you a full update on our first year with this sales compliant change at the end of the year. But so far, it's been smooth and there's been no disruption. But from a modeling perspective, since we don't have a Q2 accelerator as we had in the previous half-year plans, Q2 and Q3 will look somewhat similar. That is reflecting our guidance, but Q4 will be seasonally strong. And this is reflected both in our subscription ARR guidance as well as the margins and free cash flow. Andrew Nowinski: Thank you very much. Melissa Franchi: Thank you, Andy. Operator: Your next question comes from the line of John DiFucci from Guggenheim. Howard Ma: Great. Thank you. This is Howard Ma on for John. I guess either for Bipul or Kiran, can you help us better understand how you're levered to data growth? So for instance, there's an aspect to your pricing model that's based on volume tiers. Which you could argue is directly tied to data growth. And then there's a user-based element especially with securing SaaS apps, So what is the mix today, and is there an opportunity for a purely consumption-driven component that gets bigger over time? Bipul Sinha: So Rubrik's products are a combination of data volume, and data security features and capability that we attach to it. And the combination of the two is the pricing for our different editions like enterprise edition, foundation edition, So we don't separate the two. And we help our customers identify all of the critical data and deliver all our security capabilities on those critical data. And as their data grows, as their applications or number of users grow, as they adopt more workload for Rubrik, we grow. So we have multiple growth vectors in Rubrik. One vector is organic data growth within a workload and applications that we are already securing. The new workloads that are coming to Rubrik, or existing applications, which are moving to Rubrik. And then the third piece is attaching the data security products. For products such as M365, which is tied to the number of users, We have a licensing model that aligns to that SaaS program. So we'll make it easy for our customers to adopt Rubrik and for them to understand the pricing model and expense based on how they pay for their core platform. Howard Ma: Does it answer your question? Bipul Sinha: Yes. That does. Thank you so much. Melissa Franchi: Thank you, Howard. Operator: Your next question comes from the line of Eric Heath from KeyBanc. Your line is now open. Eric Heath: Hey, guys. Thanks for taking the question and congrats on the results again. Kiran, I want to ask a few different questions on the model if I could. Could you just help us understand maybe what drove some of that early renewal activity given some of the sales comp structure changes to make it more year-end? I would have thought the opposite would have happened given the comp structure change. And if you could just speak to what's driving the decline in non-cloud ARR quarter over quarter is a little bit bigger than normal one. And lastly, if I could, if I could push it. But on the material rights, just what's driving that higher material rights activity that you're not necessarily expecting or you weren't expecting? Thanks. Kiran Chaudhry: Sure. I'll take them in order. So from a renewal perspective, we always see some early renewals every quarter. I mean, some of this is timing. Right? We have some on-time renewals, which is the majority. And some early and some late. But the renewals which occurred this time were more related to our expansion deals, which were in process with the same customers. And, typically, customers' core term the renewal activity with the expansion itself. So that was really the driver of the early renewals. And I also pointed out that some of those renewals are multiyear in nature. So that obviously impacted cash flow because of the higher billings. And just to add one more point, that is not related to the comp structure changes because that is tied to expansions, which is occurring along with renewals. So I wouldn't relate those two activities. And the second question, the non-cloud ARR, most of our since we're about 85% cloud right now, most of the cloud ARR is net new in the sense either coming from new customers or expansion with current customers. But there's still a small element of migrations which are happening from the non-cloud part. So you still see that declining a little bit. And at some point, we're getting towards the, I would say, point where it optimizes to a more steady rate it's a few points more than 80%, after which you'll see the non-cloud ARR grow as well. And then on the last point on the material rights, just to give some context, these are related to some qualified customers who had gotten some credits at the time we start our cloud transformation and those credits are beginning to expire. In some cases, where the qualification is possible, the customers use the credits to purchase some newer expanded products. In other cases, they expire. So the accountant treatment is slightly different. When those credits are used to purchase something versus when it expires. So that drives variability as well, and there's some timing element to that. Too, which we saw outperformance this quarter. Eric Heath: Thanks, Kiran. I threw a lot at you, but appreciate that. Thank you. Melissa Franchi: Thank you. Yep. Thank you, Eric. Operator: Your next question comes from the line of Kash Rangan from Goldman Sachs. Your line is now open. Matt Martino: Hey, guys. This is Matt Martino on for Kash. Thanks for taking my question. Bipul, Rubrik's brought to market a slew of new innovations across identity AI and data security. As you expand from a core product to a multiproduct platform, how do you see your go-to-market and sales motion evolving to effectively sell this broader, more complex vision to the C-suite? Thanks. Bipul Sinha: So multiproduct sales for some time now. Because we started with our core data protection business for data center as well as cloud, then we added M365. Then we added like, Salesforce, then we added now identity recovery, identity resilience, We are now building solutions for AI. So we have a kind of, like, a pipeline of three stages. So the stage number one is what we call RubrikX. That actually is the incubation phase of new products and go-to-market. And then the next phase is PLS, which is our product line sales team. That takes the early majority of product to scale it to be ready for the core sales team, and then we've transferred it to the core sales team. That's how we kind of scale our multiproduct go-to-market strategy. Obviously, we are doing all our product in a single platform. Rubrik Security Cloud. So that when our customers adopt more of Rubik's solution, our platforms get smarter and smarter and deliver more value. For example, if our customers have M365, as well as on-premises data center solutions. If there is a threat actor on both sides, we will be smart. We'll be giving our customers a smarter information about the complete picture of their data security and cyber resilience. As opposed to dumping logs and having them analyzed separately. So that's the platform strategy that we have taken from day one. And that's how we are building a multiproduct portfolio, but driving the value from a single platform. Matt Martino: Very helpful. Thank you, Bipul. Operator: Your next question comes from the line of Gregg Moskowitz from Mizuho. Your line is now open. Gregg Moskowitz: Great. Thank you for taking the question, and very nice quarter, guys. I wanted to ask about the DSPM. First of all, how it did in Q2? But more broadly, because it remains a hot area within cybersecurity, But, you know, these days, almost all the larger vendors have some sort of offering. Clearly, a significant majority of enterprises have yet to implement DSPM, When I think about Rubrik, I know you have a differentiated position here, but is there a point at which you think we'll see an inflection in DSPM market adoption? How do you think this will all evolve? Bipul Sinha: We have a belief that cyber resilience requires both resilience and identity resilience. And combining DSPM, is the data portion with identity information is needed to provide complete cyber resilience. Because when a privilege gets escalated for a user, inside your active directory, you may want to understand what new sensitive data is now being exposed to this customer and what is the blast radius for the customer credential get compromised. So bringing the identity intelligence and data security intelligence in a single platform is differentiated. We have this new unique vision in this market, and we believe that the future is going to be a holistic view for the customers from data identity and cyber recovery to be able to drive complete cyber resilience. And that's what we are driving for. Gregg Moskowitz: Okay. That's helpful. Thank you. Melissa Franchi: Thanks, Gregg. Operator: Your next question comes from the line of Todd Coupland from CIBC. Todd Coupland: Great. Good evening, everyone. You Bipul, you gave a number of examples on competitive wins this quarter. Could you just talk about the environment and your major sources of share and update us on your deal win rate? Thanks a lot. Bipul Sinha: As far as we are concerned, there is no change in the competitive environment for us. We still win the vast, vast, vast majority of deals against all competition legacy as well as new gen vendors. And it is due to our unique platform Rubrik Security Cloud, it is underpinned by a preemptive recovery engine that pre-calculates a clean data state even before the cyber attack happens. So that our customers are ready to recover as soon as they have a successful cyber attack. As a result, many of our customers are not in the news even when they are confronted with significant cyber attacks and they are not disrupted. And that's what is differentiated about Rubrik. And, again, we are equal opportunity replacers. For both legacy solutions as well as new gen solutions because they lack cyber resilience. Capabilities in a way of preemptive recovery engine. Just to give you an example, a European multinational industrial company replaced the legacy backup vendor with Rubrik's cyber resilience platform because a third-party audit found that they were not ready to recover upon a cyber attack, and they needed to upgrade their resilience posture. And they chose Rubrik for fast recovery for a simplified software platform for cyber resilience. So that's what we see in the marketplace. Again, our win rate comes from a very differentiated platform that we envision and built in the last ten years. Todd Coupland: Great. Thanks for the color. Operator: As a reminder, if you wish to ask a question, please press 1. Your next question comes from the line of Junaid Shah Siddiqui from Truist. Your line is now open. Junaid Shah Siddiqui: Great. Thanks for taking my question. Bipul, as the MCP protocol adoption gains traction across the cybersecurity ecosystem, do you view it as a strategic growth lever that could expand Rubrik's role from, you know, data protection into a broader security orchestration platform? Bipul Sinha: The way we see Rubrik is not in the prevention and detection business. We are in the cyber resilience business. Because we have a fundamental belief you can't prevent the unpreventable. And the world requires cyber resiliency and cyber recovery capabilities, and that's what we are focused on. Having said that, if you take a step back, Rubik is really a secure data lake. And we use that data lake data to recover applications. And recover your system. And this data is governed and secured and classified. And with Anapurna platform, we built vectorized search to deliver embeddings directly into GenAI applications. And now Predibase which is the fine-tuning and serving platform, And now we are building AgenTeq Rewind that combines our core cyber resilience plus the AI platform technology to really deliver capabilities around undoing the action bad actions of agents. So we are looking at AI in a holistic way. But we are not just focused on securing the AI. What we are focused on security, which is the cyber resilience business, as well as AI operations business, which is about agent fine-tuning, serving, agent rewind plus plus. So that's why we are defining ourselves Rubrik is the security and AI company. Junaid Shah Siddiqui: Thank you. Melissa Franchi: Thank you. Yeah. Operator: Your next question comes from the line of James Fish from Piper Sandler. Your line is now open. James Fish: Hey, guys. Sorry for any background noise here. Just wanna go back to the DSPM side. Any way to think about the updated penetration here? What you're seeing competitively just within this part of the market? And then additionally, what are you guys assuming you're thinking about for Fed here heading into, you know, the big Fed? And understanding it's been a small part historically, you know, what do you actually see for maybe some disruption there? Thanks, guys. Bipul Sinha: Sorry. Did you say Fed? Fed. Okay. As I said, we see the opportunity in the data security market around combining data and identity together. Because I don't believe just the data classification itself is a long-term sustainable business or a platform. So our vision is that how do we combine identity and data together to give a full picture of not just the posture of the data and identity, access to the data, but at runtime understanding what is really happening to the data and should anything bad happen. How do we do data recovery or identity remediation? And it's all data is the underpinning technology or the platform across all three. And that's the vision that we are driving. In terms of the again, this is still in the investment phase for us. And we are continuing to kind of build the cyber resilience transformation for our fed customers. It is high priority for fed organization given the nation-state actor and the fed that they face. It is we continue to invest in the growth and develop the Fed market for ourselves. We recently received Fed RAMP Moderate, For example, this quarter, a Fed agency had a challenge of deployment of a new gen vendor that they had bought a couple of years ago. So they are replacing that new gen vendor with Rubrik to protect their mission-critical databases. Which is required for their cyber resilience. And they picked Rubrik for our ability to deliver faster recovery times on the data. So fed again, we continue to win in the fed. It's still a developing market for us. Continue to invest. And we believe that Fed will continue to be a significant opportunity for us given how important cyber resilience and cyber recovery is for this market. James Fish: Thank you, James. Operator: Your last question comes from the line of Shrenik Kothari from Baird. Your line is now open. Zach Schneider: Great. Hey, guys. This is Zach Schneider on for Shrenik. Thanks for taking our question. So I believe nearly half of new deals are landing in the enterprise tier with foundation still key entry point for budget-constrained customers, and please correct me if that number is wrong, But could you just walk us through how deal sizes, renewal patterns are subsequent expansions differ across the tiers? Especially over multiyear contracts? Thanks. Kiran Chaudhry: Hi, Shrenik. So this is Kiran. I'll take your question. So on the first part, it's generally the trend has been similar. Close to half of our lands are coming from the enterprise edition. And then a mix of both the business and foundation with foundation being the larger of those two. And the enterprise the expansion path can vary. As you know, we are a multiproduct company. So customers start with one of these editions and maybe a couple of one or two of these workloads, and then they can expand by either expanding to a higher tier edition if they start with foundation or business, or if they already start with enterprise, they could expand to other workloads as well. And start with Microsoft 365, go to a native cloud workload or an Oracle workload, or database workload. So the expansion paths are not limited just because you started in a higher edition because you can always add more workloads as well. Zach Schneider: Great. Thanks a lot. Melissa Franchi: Thank you. Operator: This concludes our Q&A session. I would now like to turn the call over to Bipul Sinha for closing remarks. Bipul Sinha: Thank you. Thank you, everyone, for joining us today. We remain very excited about the cyber resilience opportunity as we build the future of AI transformation in terms of the enterprise AI acceleration. Much appreciate your support and trust. Again, very early days for Rubrik. We are in the first decade of our multi-multi-decade story. Thank you so much for your time. Talk to you three months from today. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Welcome to the Rubis 2025 Half Year Results presentation. [Operator Instructions] Now I will hand the conference over to the speakers to begin today's conference. Please go ahead. Clemence Mignot-Dupeyrot: Good evening, everyone. I'm Clemence Mignot-Dupeyrot, Head of Investor Relations. I am here today for Rubis's H1 2025 Results. I am with Clarisse Gobin-Swiecznik, Managing Partner; and Marc Jacquot, CFO. Clarisse will start the conference. Clarisse Gobin-Swiecznik: Ladies and gentlemen, good evening. To kick off this presentation of our H1 results, let me very quickly remind you what we do. Our business is about distributing energy while supporting mobility solutions. In Europe, we distribute and sell LPG, and we also produce and sell photovoltaic power. In Africa, we distribute and sell bitumen to road contractors in West Africa and fuel and LPG in East Africa. In the Caribbean, we distribute and sell fuel and LPG. Those products reached a wide range of customers, both individuals and professionals while the distribution is supported by a reliable and most of the time in-house logistics. For H1 2025, this diversified business model delivered a steady performance. In a global economic environment marked by uncertainty, our results for the first half of 2025 standout with growth in volumes and margins across all regions and product lines. Photosol continues to progress according to plan on track towards 2027 objectives. Our group EBITDA grew by 3% and the net income group share by 26%, driven by a stronger operational performance, better FX management and stable emerging currencies. Cash flow generation remains steady at EUR 276 million for H1, which is a key highlight of this publication. All of this gives us confidence in reaching our full year guidance, even in a less favorable USD-Euro exchange rate environment in H2. The following slide highlights our balanced growth across product lines and geographies. It showcases the strength of our commercial strategies, our agility, and seamless execution. Looking at our H1 performance by business line, you can see that in Retail & Marketing, all products delivered both volume and margin growths. LPG was driven by a very strong commercial momentum in Europe. In fuel distribution, the expected pricing formula adjustment in Kenya took the first step in March. The second step implemented in mid-July will show in our H2 performance. In bitumen distribution, demand in Nigeria is strongly picking up. The sharp decrease in unit margin visible here is purely a basis effect linked to the 2024 currency devaluation. We already mentioned it in Q1, Marc will elaborate further on this point. As for Support and Services, which covers supply to the distribution business, and the SARA refinery performance remains overall stable. Finally, the renewable business is expanding as planned with a sharp increase in both assets in operation and secured portfolio, in line with the remark we presented at last year's Photosol Day. In conclusion, this first half results are yet another demonstration of the group's ability to deliver consistent commercial and operating performance, cycle after cycle. And when you combine that resilience with discipline and proactive financial management, the outcome is clear, the strong and steady cash flow generation is fully in line with our historical standards. Marc Jacquot: Thank you, Clarisse. Good evening to all. Let's start with the big picture for the first half. Our EBITDA is up 3% year-on-year and flat on a comparable basis. As Clarisse already mentioned, this is driven by strong LPG performance in Europe, while in Africa, Kenya improved volumes and margins in the retail segment, and bitumen return to growth in Nigeria. Net income is up 26% to EUR 163 million, reflecting the absence of FX losses. CapEx related to the distribution business remains well under control, roughly stable at EUR 73 million while they are increasing in renewable to EUR 85 million, which is a concrete and positive sign that our growth projects are now materializing and are being steadily derisked. Nearly 85 megawatts were put in operation over H1 and 290 megawatts are now under construction. Corporate net debt is stable at 1.4x despite a negative trend in working capital over H1 which confirms our strong financial position. And finally, cash flow from operations remained strong at EUR 276 million for the first half year, supported by the good operating performance and the absence of FX losses. All in all, that's a solid performance. Now let's take a closer look at our activities. Retail & Marketing delivered a solid performance across the board with EBITDA increasing by 3% year-on-year. In Africa, we have three things to highlight. First, retail. Retail is contributing well and the impact of the new pricing formula in Kenya is expected to be fully visible in the second half. Second, aviation, which is more volatile, is facing higher pricing competition, leading us to reduce our volumes for the moment in Kenya. And the third one is bitumen. Bitumen margins increased less than volume and this is a basis effect from 2024 when naira devaluation impact affecting the financial results below the EBITDA was passed through to customers. Now let's look at the Caribbean. The Caribbean region was broadly stable, which is in line with our expectations. Guyana slowed down a bit with the election coming up in September, creating some kind of wait-and-see behavior among our B2B customers. In Haiti, the measures we have taken in our logistic management are starting to pay off, even if volumes remain a bit soft. Jamaica is normalizing with supply conditions slightly less favorable than last year. Now Europe. In Europe, the momentum is particularly good as a result of our challenger positioning combined with the excellence drive of our commercial teams and a colder winter this year. Looking at Support and Services, it remained stable, which is normal as this segment usually flexes with our Retail & Marketing activities. Now the renewable electricity production, what we can say is that the power EBITDA stands at EUR 22 million, which is up 38% year-on-year. In line with our road map, our development expenses have increased, reflecting the acceleration of the growth of this business, resulting in a consolidated EBITDA at EUR 10 million. In conclusion, this is a robust operating performance, attesting to the strength of our product and geographical diversification. Let's have a look at our financial results. Let me highlight just a few items here. The net income group share is up 26% or on a comparable basis, 18%. This is the result of lower expensive local debt levels and reduced FX exposure. When analyzing our income statement, let me remind you that the share of net income from associates in H1 2024 included Q1 results from Rubis Terminal. Interest costs are down, thanks to lower debt in Kenya and more favorable interest rates. As you know, last year, Rubis recorded significant FX losses, particularly in Kenya and Nigeria. In H1 this year, local currencies were more stable and the strategies we put in place to mitigate the FX risk have proven efficient, and we didn't incur any FX loss. As for taxes, nothing major to flag, the OECD global minimum tax is now fully integrated in our normal run. Overall, Rubis demonstrated agility and delivered solid financial results, fueling its cash flow momentum and supporting its balance sheet. Now a word on our financial debt. Total net debt stands at EUR 1.4 billion, with corporate debt at EUR 910 million, maintaining a healthy leverage of 1.4x at corporate level. Our liquidity level is high with more than EUR 180 million under RCF in addition to our EUR 530 million cash on balance sheet. The main variation of this debt this half came from the steady operational cash flow of EUR 390 million, which is up 11%, reflecting the good operating performance combined with the absence of FX losses. A negative impact from change in working capital of EUR 68 million after a very positive effect in H2 '24 as a consequence of lower trade payables. CapEx of EUR 164 million, which is higher than last year with the ramp-up of Photosol, hence, our usual June dividend that we paid to shareholders, but also to minority interest and general partners. Nonrecourse debt increased by EUR 63 million, in line with the renewable investments. All in all, our balance sheet remains solid with ample liquidity to support our future growth. Clarisse Gobin-Swiecznik: Thank you, Marc. Before we open the floor to Q&A, let me wrap up. So first, we saw Rubis commercial and operating performance. Second, our seamless execution and agility deliver reliable cash flows through the cycle. Finally, these H1 achievements make us confident, we are on track to reach our 2025 targets even in the less favorable euro-dollar context in H2. With a healthy balance sheet and a stable leverage ratio, we confirm we are aiming at EUR 710 million to EUR 760 million EBITDA within the framework of assumptions you have here on the slide. Thanks a lot for your attention. We are ready to take your questions. Operator: [Operator Instructions] Marc Jacquot: We have no audio questions for the moment. I propose you begin by the written questions on the webcast. Clemence Mignot-Dupeyrot: So we have 2 questions on the webcast from Auguste Deryckx of Kepler. Question number one is group EBITDA was stable on a comparable basis despite 5% volume growth, what are the key headwinds preventing stronger margin conversion? Marc Jacquot: What we can say on the margins, as I mentioned, the LPG margins were stable over the first half. And in the fuel distribution business, so the unit margin decreased by 1% in H1. And this decrease came exclusively from the Caribbean, especially from Jamaica. In Jamaica, the supply is not in Rubis' hands. And last year, we had very favorable condition for this supply. And this semester, actually, those conditions normalized, I would say. So that's the first explanation. Second one is on the bitumen, bitumen distribution business. So the volume growth in Nigeria resumed, as we explained. And H1 2024 was high due to the FX pass-through and the significant decrease in margin is explained by the basis effect after H1 2024 devaluation, after considering the guidance. Clemence Mignot-Dupeyrot: We have 2 questions considering on euro and USD FX. So question number one is -- but both questions have the same answer. Question number one is what level of FX rate and hyperinflation assumptions underpin the guidance, the EBITDA target of EUR 710 million to EUR 760 million. And what contingency levers do you have if the macro backdrop worsens. And another question from Emmanuel Matot is what is the total negative impact we can expect for 2025 on your EBITDA? Marc Jacquot: So regarding the guidance and the hyperinflation embedded in the guidance. We have the same level of hyperinflation in the guidance than in 2024, meaning a positive impact of EUR 25 million -- EUR 24 million on the EBITDA, EUR 22 million on the EBIT and minus EUR 10 million at a net income group share level, okay? So this is our assumption, and it will be -- and this is something that we will know only at the closing. So there is a lot of uncertainty in the hyperinflation. So we cannot commit on this number. In terms of impact of U.S. dollar, euro, the initial assumption we have was the euro-dollar level of the beginning of the year, meaning an exchange rate of $1.05 okay, for EUR 1. Now we are at $1.17 or $1.16 depending of the day. What we can say is that the good performance of the H1 will compensate the favorable impact related to the U.S. dollar impact. The margin we have in U.S. dollar is concerned, actually, I would say, 2/3 of our business, okay? So you can calculate what is the impact yourself on for H2. Operator: [Operator Instructions] Clemence Mignot-Dupeyrot: So we have another question online from [ Jean-Luc Romain ]. Could you please give us an idea of what the renewable EBITDA is before development costs? Marc Jacquot: So the renewable EBITDA before development cost is what we call the power EBITDA, the power EBITDA amounted to EUR 22 million in H1. Clemence Mignot-Dupeyrot: We have another question from [ Thomas Trotter ] saying about the aviation business. Are any of your markets showing activity in SAF, sustainable aviation fuel and is that a market Rubis might get into? Clarisse Gobin-Swiecznik: We are more or less agnostic to the type of fuel we distribute. We adapt to the demand of our customers. We would be able to distribute SAF and we do, in some places, especially in the Caribbean, but it's mainly a question of offer and demand, and there is not a lot of offer to date. We are, in any case, adapting ourselves to the demand from our customers. Clemence Mignot-Dupeyrot: Another question from Mr. [indiscernible] about Photosol portfolio evolution. It is not on the slide you have here in the presentation that is in the webcast, which you can find it on our website. Operator: [Operator Instructions] Clemence Mignot-Dupeyrot: We have another question from Emmanuel Matot at ODDO online, asking us if we have any impact of U.S. tariffs during the summer? Clarisse Gobin-Swiecznik: Rubis geographic and operational model makes it largely insulated from the direct effects of tariffs. We are not present in the U.S. nor in China, and we do not depend in any case of U.S.-based or China-based suppliers in our distribution business. On the indirect side, the products and services we offer are essential, particularly in the energy space. As such, demand tends to be relatively inelastic, meaning it remains quite stable even during periods of price volatility or economic slowdown. So I would say we have no effect of tariffs on our P&L or results. Clemence Mignot-Dupeyrot: Another question from [ Roger Degree ]. Can you update us on the CapEx plans and specific projects for the next year or 2 in the energy distribution business? Marc Jacquot: Roger. What we can say on the Photosol CapEx, this level, as you know, will increase in line with the ambitions communicated to the market at Photosol Day. So this is a EUR 1.1 billion CapEx in the 2024, 2027 back-end loaded. And for 2025 it should be in the range of EUR 150 million to EUR 160 million. Talking about Rubis Energy, so the distribution business, we should be in the normalized level in the -- I would say, EUR 185 million on the run rate. Clemence Mignot-Dupeyrot: Another question online. Can you give us an update on the shareholder structure? So the answer is public. The shareholding structure as of today is, the largest shareholder is Mr. Patrick Molis with more -- a bit more than 9%. Then you have the Bolloré Group through Plantations des Terres Rouges, a bit above 5%. You have Mr. Sämann 5% or so, Groupe Industriel Marcel Dassault a bit above 5%, and then the rest of the shareholding is structure an overall split between different shareholders. Operator: There are no more questions at this time. So I hand the conference back to the speakers for any closing remarks. Clemence Mignot-Dupeyrot: Thanks a lot for being here. We will be on the road on the days to come. So do not hesitate to reach out to us if you want to schedule a meeting or if you have questions, you know where to reach us. Thanks a lot, and have a nice evening.
Operator: Hello, everyone, and thank you for joining the ANGLE 2025 Interim Results Call. My name is Claire, and I will be coordinating your call today. [Operator Instructions] I will now hand over to Andrew Newland, CEO. Please begin. Andrew David Newland: Good morning, everybody, and welcome to ANGLE's interims webcast for 2025. It's been a very strong half year in terms of major progress in commercialization on multiple fronts. However, there has been strong revenue pressure from adverse market conditions. So it's a balanced 6-month period. As you know, ANGLE has developed a breakthrough product for cancer diagnostics, which can be used to help patients get better outcomes by making sure that they have more appropriate treatment and also reduce health care costs. We're getting closer to its deployment widely for patients. We've had 3 major achievements during the half year, which are in relation to large pharma contracts, DNA dual analysis and cluster buster drugs. So I will tell you about those now. First and very importantly, our large pharma strategy, which we've developed as a way of accessing development funds to progress clinical trials in support of Parsortix has progressed well. The idea here is that pharma can fund for their own drug development purposes, individual clinical trials and that they can actually lead eventually to a companion diagnostic based on the Parsortix system and wide adoption. So as you know, we've had 3 pharma projects -- large pharma projects that we've been working on. And all 3 of those successfully completed during the period. The first one, the Eisai HER2 breast cancer trial was very important as it demonstrated in a 200-patient cohort Phase II trial that 2 tubes of blood taken at the same time and processed by Parsortix gave very consistent results in terms of the number of cancer cells present, the circulating tumor cell clusters present and critically, the expression or absence of expression of HER2 protein. But -- and this is the key point, the 2 time points were different. So very often, we saw that the patient's condition had changed. And this was to be expected because the first blood draw was taken prior to the patient being given the HER2 antibody-drug conjugate drug and the second time point was afterwards. So we saw significant changes in some, but not all of those patients. We're currently awaiting access to the clinical data to demonstrate whether or not the changes we saw directly correlated with the patient response or otherwise to the drug. But that's obviously what we would anticipate. So this trial has successfully confirmed that our HER2 assay, so our test for analyzing the HER2 protein on the cancer cells is very useful for the HER2 drug clinical trials, but also is likely to be relevant for selection of the drug for individual patients. So that was a big step for us. Secondly, the 2 AstraZeneca contracts, which were slightly different in nature because we were funded to develop assays for AstraZeneca. The first one was in DNA Damage Response, which is applicable for multiple cancers and the second one in Androgen Receptor, which again is a protein, but in this case, for prostate cancer. Both of those assay development projects were successfully completed. And we're now waiting actually to hear from AstraZeneca and indeed from Eisai and BlissBio, the owner of the ADC in HER2, about next-stage projects. So we've got next-stage projects under discussion with those companies. The second major achievement was the development of the DNA dual analysis, Illumina, end-to-end NGS assay, and I'll talk about that in more detail later, but it was a major achievement during the half year. And the third one, which I'll also discuss later, was the publication in Nature Medicine, a top-level peer-reviewed journal of the first inpatient trials for cluster buster drugs developed using Parsortix and fundamentally dependent on Parsortix. Post the half year-end, so since the 30th of June, momentum has continued, and we were absolutely delighted last month to announce our first large med tech collaboration. So why would a med tech company want to collaborate with ANGLE? Well, the answer is that we can offer them access to circulating tumor cells, so intact cancer cells from blood. And if they can move their test across to that analyte, then they can do repeat testing. And I'll talk more about that, but we're delighted to have secured that collaboration deal with Myriad Genetics, which offers the potential for large-scale commercialization of the Parsortix system. And as I said, I'll explain that. We built out the pipeline of opportunities with multiple large med tech and large pharma companies. So there are other companies coming down that track. One of the very interesting developments is the development that we've now managed to engage with the NHS in very serious discussions, and that has come since the NHS' announcement on the 30th of May that they were launching something called blood test-first in lung cancer, where lung cancer patients will have a blood test processed. And that is current -- to identify whether the specific treatments they can be given. The advantage of that blood test versus the tissue is that the results from the blood test can be found quicker, so the patient gets treatment quicker. And also a number of patients, probably about 20% don't actually have a successful biopsy. So they have no sample to guide their treatment. But what the NHS is interested in is the DNA dual analysis solution that ANGLE uniquely provides. So I'll give more information on that a little bit later. And then finally, internally, we've been working extremely hard, and we're making very good progress on accrediting -- getting an accreditation for our clinical lab. We're targeting completion of that by the end of the year. And that would then open up the possibility for ANGLE to start offering tests directly for patient management, which clearly would be a major step forward for the business. In terms of the half year results, in terms of the finances, we have unfortunately been subjected to the challenging market conditions. Market volatility and tariff concerns have actually slowed decision-making regrettably at many large corporates that we're in touch with. So they're pausing or delaying some of their decisions. And that comes on top of a lack of capital for the smaller companies that we'd like to work with. So in both cases, there's been a delay in conversion of pipeline opportunities that we've been developing. The consequence of that is that the pharma revenue is regrettably down on the prior year half year period, and the product revenue is flat. We believe that this is a temporary situation, which will resolve itself over time. But at the moment, it's unclear when that will happen. We've been managing our costs very carefully with tight cost control, and we've reduced our operating expenditure by 12% compared to the previous period. And overall, that has slowed down to the comprehensive loss being reduced by 7%. Clearly -- and the cash and R&D tax credits position stands at GBP 6.6 million with the cash runway unchanged into Q1 2026. But clearly, access to additional funding is a key focus for the business for H2. And that funding can come from a variety of different sources. In terms of some more granularity on key developments, our integrated NGS workflow with the Illumina platform is a major step forward for ANGLE. It's a unique offer actually, that ANGLE offers the ability to assess both the DNA from circulating tumor DNA, the dead, which come fragments from dead and dying cancer cells which is the standard approach from the plasma as well as the circulating tumor cells, which we can obtain from the waste product of the ctDNA analysis. So the ctDNA providers, what they do is they extract the plasma liquid and they throw away the blood cellular component. What we've developed is the methodology for resuspending that in a saline, running it through the Parsortix system and recovering the circulating tumor cells, and they can then be analyzed with the exact same approach of sequencing as the ctDNA. So then you have 2 analytes from the same tumor blood, which have been sequenced in the same way. As I said, we're the only company that can offer that solution. Now what we've done in the half year is we have developed an Illumina end-to-end solution. So by that, I mean, we start with the Parsortix, but then we use an Illumina pan-cancer gene panel and the Illumina next-generation sequencing. And that has some really significant advantages. Firstly, Illumina has got worldwide distribution of its products, which means that there is a customer base with their products that can now implement Parsortix. We don't have to supply a separate cancer panel external to Illumina. And secondly, of course, this increases the revenue potential for Illumina and has got them quite interested in working with us on joint sales. Now this form of analysis, as you can see from the image here, identifies twice as many mutations, so actionable DNA variants than ctDNA alone. And it is therefore the case that we believe that very, very important information about how the cancer is progressing is missed by circulating tumor DNA. It's also missed by tissue biopsy because the tissue biopsy is a onetime point. And what happens is the cancer progresses and changes and you can't repeat the tissue biopsy. And that is what has stimulated the interest from the NHS. And they're now considering the idea of testing on a large-scale basis, whether they can, in fact, get additional actionable information from the circulating tumor cells, which would improve the outcome for patients and importantly, reduce the cost of operation. So this whole area of getting the Illumina end-to-end DNA dual analysis to work was a major achievement in the half year. The second major achievement was this first medtech partnership. So this, we think, is the first of many such medtech partnerships. It's driven by the idea that companies who offer tissue-based tests. Now in the case of Myriad Genetics, they do that via large-scale clinical laboratories where they offer tests. These companies basically can only do one time point for the patient. They can only do their test when they've got the tissue available. Now the same approach applies also to medtech companies who sell products. Their products can only be used at a single time point where there is tissue. And this is a crucial limitation on cancer care today, which is that it's all based off -- apart from some ctDNA, which has its own limitations. It's all based off tissue where there's only one time point available. And yet everybody knows that cancer progresses and changes. So with Myriad, the idea here is that they are working with ANGLE to see if they can port one of their cancer tests onto a CTC platform. So that would then enable them to have, as I mentioned, multiple repeat tests for a patient, so that generates repeat revenue for them. And secondly, it opens up the opportunity to provide tests for patients who don't have tissue and quite a lot of patients have a failed tissue biopsy or alternatively, the biopsy tissue is not accessible. So that's 2 major benefits for them. The third potential benefit is actually looking at patients before the tissue diagnosis. So if you have a test, you can do a blood test without any major impact on the patient. So you can do it very early when, in fact, you might not choose to do a tissue biopsy because of the invasive nature of that. So Myriad has made a commitment to expanding its offering across the cancer care continuum. And we see Myriad as an excellent major partner for commercialization. They have, as I mentioned, a very large-scale clinical laboratory establishment, and they're a major player. They have around $800 million in revenue as it stands at the moment. And they're an outstanding partner for us to work with for commercialization because they have already got all the market channels in place. We expect to see other medtech partnerships coming through in due course. Now the reason I've highlighted this area of targeting metastasis is because the Parsortix system has unearthed some amazing information. The fact that there are large-scale circulating tumor cell clusters present in patient blood and that these circulating tumor cell clusters are absolutely incredibly important in terms of the metastasis of the patient. In fact, the Aceto Lab in Switzerland has demonstrated using Parsortix in a mouse model that the cancer is 100x more likely to spread. The metastatic potential is 100x greater where there are circulating tumor cells in a cluster than when the same number of circulating tumor cells are separate rather than attached to one another. And these large-scale circulating tumor cell clusters have never been seen before the advent of Parsortix. Now we previously reported the publications by this group over the last 4 or 5 years in nature. But what they've done is they've stepped forward, and we announced in January a publication again in Nature Medicine, where they have used the Parsortix system with breast cancer patients to identify patients with circulating tumor cell clusters. And then they have given them a heart-related drug called digoxin and showed again using Parsortix, the ability to separate these circulating tumor cell clusters into individual cells. That same process in a mouse reduced the spread and pretty much stopped the cancer progression in the mice compared to identical mice that didn't have the heart-related drug. So there was now a spin-out company that's been set up in Switzerland with the idea of developing a new class of drugs to stop the spread of cancer. And this can only be possible if the Parsortix system is used to identify whether the patient has circulating tumor cell clusters and ensure that the right patients get the drug and then monitored with routine blood test to see whether they need to have the drug again. We expect that there will be major clinical trials using Parsortix in order to progress this further. So a very exciting development for cancer management of the future, and it's entirely enabled by the Parsortix system. So our system has a lot of evidence behind it, and that continues to build. So now we have 46 independent cancer centers in 15 different countries, who have published between them 115 peer-reviewed journal publications on Parsortix across 23 different solid tumor cancers. And all of these publications are positive. So we are now into the phase of commercialization. As I mentioned earlier, we have had some adverse market conditions, which have temporarily slowed the decision-making process at some of the largest companies. However, we have a very major pipeline that we have developed, and we expect to see a whole series of developments coming through in the relative near term. So we're getting started on the Myriad Genetics collaboration, porting their tissue test to CTCs, and we expect to see that expanding over time. We have discussions going with several large pharma companies in relation to multiple projects, and that's being progressed further at an upcoming conference, the World CDx Conference in Boston on the 21st of September, where we have many meetings with pharma to progress these discussions. We also have engagement with multiple med tech companies who will be at that conference, including some who have declared themselves wanting to do joint sales with ANGLE of CTCs -- potential CTC solutions marrying their downstream technology and offering that to pharma, which is a welcome addition to our sales approach. The partnership for DNA dual analysis. So this evidence is now beginning to get out there, and we have several molecular companies, both NGS and other molecular downstream analysis companies looking to partner with us to take that further forward. So we expect to see progress in relation to that. We also have some companies interested in partnering with ANGLE in relation to protein analysis. So this is looking at the proteins such as the HER2 and the Androgen Receptor that I mentioned earlier on in the presentation. There's many different ways that you can analyze these proteins, but you have to have intact cancer cells to do it, and we provide that solution, which isn't otherwise available. The methods can involve immunofluorescence, immunohistochemistry and FISH, to name a few. So there are several companies wanting to partner with us on that. We're hopeful that we'll be able to agree a suitable clinical study with the NHS soon, which would be then to evaluate the benefits that can come from analyzing and circulating tumor cells, first for lung cancer, but then for other cancers. And obviously, the target there would be to generate the clinical evidence which will be sufficient for the NHS to seek to adopt solution from ANGLE as a routine solution. And obviously, we're a U.K. company. We're close to the Royal Marsden, who's heavily involved in this, and we have a number of benefits that we can offer them over and above their current solutions, which are based from the U.S. ctDNA companies. And we -- the NHS is the largest medical market in the world in terms of a single customer, and we believe that adoption by NHS would drive -- further drive worldwide interest in our technology. And as I mentioned, we're working on our own clinical laboratory accreditation. That's going very well, and we expect to see that complete by the end of the year. So in summary, we have a breakthrough technology, and it is capable of transforming cancer patients' outcomes, both diagnosis and treatment as well as reducing costs for health care providers. We believe it provides the best sample for analysis, and particularly that is now being proven for next-generation sequencing, which is the major area of focus for all the health care providers. And it's interesting that NGS is getting a lot of attention. The cost of NGS sequencing is dropping and the sensitivity is increasing. The adoption of artificial intelligence is increasing. And again, that enables patents to be seen that might be missed otherwise and the cost of AI is dropping. So what you actually end up with is a limiting factor is access to the best sample. And we believe that intact living cancer cells taken at a real-time point from the patient blood provides the best possible sample. In terms of downstream analysis, we have got a unique DNA molecular analysis of intact cancer cells married also with the ctDNA, and that gives the ability to look at clonal evolution. And looking at clonal evolution and how the cancer is changing is the driver to get ahead of the spread of disease. And that's why the new drugs to block cancer progression based on Parsortix are a major development. And that's also why the NHS is now expressing strong interest in what ANGLE is doing. So thank you very much for listening. We'll now move to Q&A, and Ian Griffiths, our CFO, will join me for that. Operator: [Operator Instructions] We have our first question from Adam McCarter from Cavendish. Adam McCarter: I've just got a few. So yes, just you talked during the presentation about the challenging environment sort of experienced during H1. Just wanted to know if you've started to see any encouraging signs of these headwinds begin to subside at all in the second half of the year? So second question then just on the NHS. Just how do we sort of think about those NHS clinical studies that Parsortix could be incorporated into the opportunity and the materiality there? And then the final question is obviously good to see sort of more of those high-impact journal publications for Parsortix, particularly the Nature Med one. Are these types of publications helping sort of in your BD efforts and helping progress those conversations with pharma and the medtech? Andrew David Newland: Thank you very much, Adam. The first comment -- question was about encouraging signs. Well, certainly, the Myriad Genetics signing up to go ahead with us was a very encouraging sign. That was a conversation that had been going on for quite some time. And they've taken the decision that despite the conditions, they want to start investing in this. I listened recently to the Chief Executive's presentation of their own results, and they specifically referred to extending their offer into the continuing cancer care continuum. So I thought that was a very promising sign. That said, there are multiple others, which I would have liked to have dropped by now. So let's hope to see -- we'll see some more of them coming through in a similar way. In terms of the NHS side of things, what that's generally speaking about is the fact that they are adopting the blood test-first in lung cancer patients for 15,000 patients per year. And interestingly enough, they literally do throw away the blood cells. And that's quite a compelling argument. You're throwing away the best part of the sample with Parsortix, we can analyze that. So I guess we'll start off with a pilot study first and then if they like it, we can expand. But the good thing is they don't even have to take an additional tube of blood to address this. And in terms of the -- Ian, you can add to this if you wish to. But in terms of the publication side, absolutely, we use these peer-reviewed publications to drive business development. We have a medical writing team that packages that information, and it forms a lot of the interaction that we have with prospective collaborators and customers. Ian Griffiths: Yes. And I'd probably add to the encouraging sign a couple of things. So one is increasing sort of awareness of the need to incorporate multi-omics into oncology and multi-omics, just for clarity, it means not just DNA, but adding in RNA and protein information. And if you look at Illumina, in particular, the way they're developing their next-generation sequencing is they can already do RNA and the sensitivity and cost points are improving that all the time. But they're also introducing a new protein solution as well. So obviously, we've got the perfect sample to fit with the Illumina equipment. And then the other thing is in discussions. So obviously, we produced data earlier in the year on the dual analysis. And that's generating a lot of interest because I think people are quite surprised how much additional DNA information we're finding with CTC-DNA, not just what the ctDNA produces alone. So there's quite a lot of interest around that complementary nature, but the fact that there's a lot of additional data. Operator: Our next question comes from Edward Sham from Singer Capital Markets. Edward Sham: Congratulations on all the operational progress despite the tough sector headwinds. I've got a few questions. But if I could just first start with your kind of your large pharma contracts because you've obviously completed in the first half, the 3 contracts with Eisai and AstraZeneca. I was just wondering how much visibility do you have in converting those into further contracts? And just can you give me a sense of the wider pipeline? Are you seeing strong traction across pharma? Or is it more medtech? Andrew David Newland: So in terms of the visibility on the new contracts, regrettably, we don't control the timing of these large pharma, and they will tell us when they're ready to do whatever it is that they want to do. So that's a bit of a challenge. But we are seeing increased wider interest from large pharma, and we have a very strong roster of meetings at World CDx. And this includes pharma that we've been dealing with for some time. We have been called on by several large pharma to provide them with -- essentially, they call it an RFI, a statement of what we can analyze from CTCs and how that works and how much we would charge them for that. So we do know that there are multiple players at these large pharma who are actively considering adoption of our solutions. What we don't know is when they might decide to jump in and also when those studies would start. So that's it really. I mean basically, there is mounting evidence and mounting interest, but we've got to get it converted. Edward Sham: No, that's really helpful. And then maybe just on the Myriad Genetics collaboration. Can you just outline the key milestones and importantly, how the economics would work if that was to be commercialized at scale? And just kind of give me an idea would that -- would ANGLE's revenues primarily be through services? Or is that also driving part sorting sales and consumables as well? Andrew David Newland: So we gave an announcement in relation to the work with Myriad. It was a bit lighter on details, and that's because they don't want to disclose some of those bits of detail. But I can talk in principles. So initially, we are being paid to provide some direct services to assess our sample going into their test. Some of that work has already been done. Now we're looking at various different modifications, which may improve the outcomes. So that's paid for service work. Assuming that progresses, what I would anticipate is there will be more paid for service work in terms of clinical trials to actually assess how well the CTC test does against the tissue biopsy test. And then beyond that, an implementation would involve us selling them a whole lot of Parsortix machines and setting up -- they would have to set up a Parsortix laboratory. So we'd have quite a lot of product sales. And every single sample, of course, would then need a Parsortix cassette as a consumable. And we currently charge $300 a cassette for that purpose. So that's on the specific tests we're working on at the moment. But they have a whole series of tests. And if the first one is looking good, there's absolutely no reason why they wouldn't do all their tests in a similar way. So we'd expect to see them getting -- wanting to get closer and closer to ANGLE. And then what I just described in terms of the sort of revenue flows being multiplied out by multiple different tests. Edward Sham: That sounds like a really great opportunity. And then just maybe just one last question on costs and runway. So you've highlighted your cash runway goes into Q1 '26. But I was just wondering beyond that, you've mentioned the alternative sources of funding. I was just thinking what can you do now? So realistically, can you take further cost out of the business and kind of what do you think your cash burn is going to look like through to kind of the end of the year? Andrew David Newland: Ian, do you want to cover that one? Ian Griffiths: Yes. Obviously, we are -- and you've seen that from the half year, we are continuing to try and manage our costs tightly. So certain spend has been sort of paused, certain costs have been cut back. But the nature of us being a regulated industry and having to have the sort of capability and capacity to deliver on the projects, deliver on the milestones means there's a certain level of underlying spend. So we're focused very heavily on the sort of that milestone delivery, and that can in itself be sort of one of the potential sources of funds. As we highlighted in the interims, there's a variety of sources of funding that are available to us. It's not just the revenues, but there's also commercial milestones, licensing, other income from collaborations with industry partners as well as sort of debt and equity funding, which is what we've historically done with the company. So we flagged, we will need to raise additional funding through one or a combination of such sources. We know there's challenges on the AIM market and biotech sector, which are well documented. And so our focus is very much is generate the milestones, generate the contracts that show that we're making that commercial progress to secure that support. Operator: [Operator Instructions] We currently have no further audio questions. We'll now move on to our text questions. Our first question is from Franc Gregory from Trinity Delta. She asks, following up on Adam's question, what can you tell us about the state of discussions with large pharma and large medtech companies? Andrew David Newland: So Franc, thanks for the question. So I think I gave a fair amount of information on that. We're talking to large pharma. There's multiple large pharma involved and across a variety of different drug categories. Just to recap, the protein analysis, which is what we've done so far for pharma, such as HER2 Androgen Receptor and the DNA Damage Response proteins, those are all things that have to be done by looking at cells and looking for expression. So they cannot go elsewhere for that. And there is, therefore, quite a lot of interest and particularly from antibody-drug conjugate companies because the antibody-drug conjugate attaches to the cancer cell via the protein. And if that protein is not there, then it won't work. And as an example, AstraZeneca's drug in HER2 is a HER2 antibody-drug conjugate. It is prescribed currently based off tissue biopsy. So if the patient is HER2 positive or HER2 low, then they'll be given that drug but as a second or third-line therapy, and that can be 3, 5 or even more years after the tissue biopsy. So there's published independent data that shows that up to 40% of the HER2 status would have changed in that time frame. This is mirrored across all the different proteins, and that's why the pharma are interested in that. The second interest for the pharma is in relation to the DNA dual analysis. And our pitch there is that the circulating -- so some of the pharma are adopting circulating tumor DNA analysis in their clinical trials. And our pitch to them is you're missing out on information, which might be critical in your clinical trial by not analyzing the circulating tumor cells in the blood cellular component. And that is beginning to gain traction as well. It's obviously a new area because we've only just developed it, but that is the subject of a lot of the conversations in the World CDx. So hopefully, that's a little bit more information on the pharma relationships. In terms of the med tech, we've got several big med tech product providers who offer molecular or protein-based testing solutions, which are sold worldwide, but they don't have access to a repeat sample. And those people are beginning to talk to us about implementing a CTC solution, which could be sold to their customers. And also, there's quite a lot of interest in working for -- jointly to get sales from pharma. And that would help us a lot because credibility of a very big company that they already do companion diagnostics with in tissue, wanting to work with ANGLE would obviously be a credible offering to the pharma. Operator: We have a follow-up question from Franc. How long and complex is the selling cycle into these partnership discussions? Andrew David Newland: Sorry, I missed that. Could you repeat the question? Operator: How long and complex is the selling cycle into these partnership discussions? Andrew David Newland: That's very variable. So what's happened is that the selling cycle has been longer than anticipated for the reasons that I said that these pharma are delaying commitments to various different things. But generally speaking, you're looking at a 6-month engagement before you can actually get into a sale because you're providing information to the pharma on the specific data from -- it was an earlier question, but data from the publications, for example. And then we sometimes do some pilot work ourselves. And so we have to submit a lot of data to be considered before they then decide to go forward. Operator: Our next question comes from Nigel Birks from Cavendish. [ BSL ] highlighted the unique potential of Parsortix in cluster cells a while back. What is new now? And how might this be commercialized? Andrew David Newland: So that's a great question. Thank you very much, Nigel. So what is new is that they have actually used the Parsortix system with breast cancer patients to identify circulating tumor cell clusters. And then they have dosed these patients with the heart drug, digoxin, and they've showed that the circulating tumor cell clusters separate into individual cells. So this is a completely new way of trying to approach cancer therapy is to reduce the competence of the circulating tumor cells to actually grow somewhere else and cause the secondary cancer. The reason that's significant is because well over 90% of patients who die from the metastatic spread to secondary cancer sites. Now that is caused by the circulating tumor cells in clusters landing somewhere else and growing. And there's -- so -- and they've demonstrated in a mouse model that if this heart drug is given, then the circulating tumor cell clusters disaggregate in the mouse and the mouse does not then succumb pretty much at all to the cancer. So it doesn't spread and kill the mouse. So the hope is that, that will translate to cancer patients. Now normally, there would be quite a big risk associated with a transfer of a mouse model across to a human model because there are a variety of differences, which mean that it might not be successful. So this first step shown that they have been successful in disaggregating the circulating tumor cell clusters is incredibly important. But the second element is that there was work done in the mid-1980s and 1985, the first large-scale study was done looking at breast cancer patients and trying to work out differences between the ones who had a successful outcome and the ones who didn't. And what they found was that actually a good factor for a better outcome was relating to having a comorbidity of a heart condition. So can you believe that? So if you've got cancer, you'd be better off if you have a heart condition, you're more likely to survive your cancer than if you don't have a heart condition, which is patently absurd. So the only -- and nobody understood that in the '80s and late '80s when this was investigated in detail. But they then -- and they sort of gave up on it. But now, of course, when we now know that heart drugs disaggregate circulating tumor cell clusters, there's the possibility that, that's the reason why we're seeing the progress in the mouse model. So the spin-out company is now working on some other drug targets very similar to digoxin, but with greater potency for CTC cluster disaggregation and basically less side effects. So that's super exciting because it could likely lead to a lot of work with Parsortix on clinical trials, which we can obviously enable and make money out of. And then as and when it potentially comes to market, the Parsortix is an absolutely crucial element. It would have to be used with every patient on multiple time points. Operator: We currently have no further questions. So I will now hand back to Andrew for closing remarks. Andrew David Newland: Well, I'd like to thank everybody for their support. It's obviously very disappointing that we didn't deliver higher revenue lines. We're hopeful that this will change, and it will change as we get our large pharma and our large med tech collaborations moving forward. And as I mentioned, our clinical lab will open up the potential for us to actually start providing tests for patients. And there is a very, very strong demand from the medical world and patients for this approach. And the fact that the NHS has started engaging with ANGLE is, I believe, a very strong positive. So thank you very much for your support. Have a good day, everybody.
Holly Schoenfeldt: Good morning, everyone, and thank you for joining us today for our webcast announcing U.S. Global Investors Results for Fiscal Year 2025. As you can see on Slide #2, the presenters for today's program are Frank Holmes, U.S. Global Investors CEO and Chief Investment Officer; Lisa Callicotte, Chief Financial Officer; and myself, Holly Schoenfeldt, Director of Marketing. Moving on to Slide #3. During this webcast, we may make forward-looking statements about our relative business outlook. Any forward-looking statements and all other statements made during this webcast that don't pertain to historical facts are subject to risks and uncertainties that may materially affect actual results. Please refer to our press release and corresponding Form 10-K filing for more detail on the factors that could cause actual results to differ materially from any described today in forward-looking statements. Any such statements are made as of today, and U.S. Global Investors accepts no obligation to update them in the future. Moving on to the next slide. As always, we appreciate our loyal shareholders. So if you like one of our signature USGI hats that are featured on this slide, just send us an e-mail at info@usfunds.com with your mailing address and we'd be happy to send them your way. Okay, on the next slide, I want to briefly review the company U.S. Global Investors is an innovative investment manager with vast experience in global markets and specialized sectors. We use a quantamental strategy to create thematic smart beta 2.0 products. The company was originally founded as an investment club, becoming a registered investment adviser in 1968 and has a long-standing history of global investing and launching first-of-their-kind investment products, including the first no-load gold fund. And finally, we are experts in thematic investing, in particular, in gold and precious metals, natural resources, airlines and luxury goods, all using a quantimental approach that includes both macro and micro factors. At this point, I do want to hand things over to our CEO and CIO, Frank Holmes, who will provide a deeper macro overview of this visual and in the whole fiscal year. Frank, over to you. Frank Holmes: Thank you, Holly. Thank you very much for the introduction, and really smart beta 2.0 is very key as a dynamic investment process that we adhere to. And also from a macro point of view and our thematic ETFs, we try to cross what are the key drivers on global themes, where big government spending is going, and we right in all our perspectives that we believe that government policies are precursor to change. So we monitor and track both monetary and fiscal policies, and we comment regularly, every week in investor alert and if you're not a subscriber, I highly recommended because it gives you a good recap of these various asset classes. As you're looking at right now the DNA volatility and life is all about managing expectations. And when it comes to the stocks, volatility is very important to try to understand grasp. So when we look at the S&P and gold and grow, they all basically, it can go up or down 70% of the time, 1%, not a bit. If it's all 3% that's material. And when we look over 10 days, is 3% to 4%, so if it goes up 10% over 10 days, that means it has a change in momentum. It falls more than 4% over 10 days, usually that's a by. And I'm going to comment about how we continue to buy in those down days, especially when we get these big drought any volatility in spoke volatility in the marketplace. But here, you can see that the DNA volatility of grow is now left, which is really important to me than the Dow Jones U.S. asset managers index used to be greater -- and it used to be much more like the volatility with GOAU is or the airlines index of 3% daily, and now it's down to 1%. And it was important for you to recognize that our revenue comes from assets that are in JETS and GOAU. And they're very important because they drive the overall revenue line. So our DNA volatility has been becoming much calmer than the volatility underlying assets. Next, please. I want to thank the shareholders, all the retail and then the institutional. These are the top 3, either Capital Management, Vanguard and Perritt. Perritt is known for a long period of time, there's expert specialists in micro caps and also have a cultural affinity towards golds and asset class, which I'll comment later on in this macro overview before we turn it over to Lisa Callicotte, to give you the financial updates. Next, please. I owned approximately 90% of the company and 99% of the voting control, which has been compliance with SEC rules, et cetera. We do have independent directors and independent boards that we have to go through the normal process in managing the affairs of the company. And we have experts in the fund business and legal and accounting and venture capital -- so I'm happy to see that the independent directors have a breadth and depth of knowledge of capital markets, which I believe is important. Thank you. Next, please. So strategy and tactic. So create thematic products that are sustainable, using our smart beta 2.0. It requires rigorous back testing for thousands of hours. Our mission is to make people feel financially happy and secure that their wealth is consistently growing. And they relate to these themes that we're providing for public and what I said we backtested it and employs on these products also in addition to myself. But as a company, we strategically buy back the stock using an algorithm on flat and down days. And we managed to preserve past and future growth and opportunities of market corrections, M&A activity to acquire fund assets on a regular basis, we look at opportunities. Grow our subscriber base and followers. We believe that that's very important for the crossover from people that follow us, read our research. They know our culture, they know our values, and it's much easier for them feeling the trust factor to come into our thematic funds. So we want to really have educated and informed investors and increase our closure to the bitcoin ecosystem. We've regularly deploying capital into the Bitcoin ecosystem, especially, when since the Genius Act has been approved, and that has been changing overall capital markets acceptance. And we think that scarcity is important for gold as much as and more so even for Bitcoin, which is capped at 21 million coins, and the adoption process seems to be growing slowly outside America, but pretty quite rapidly in America. Next, please. GROW performs a [indiscernible] cap over the past 5 years, but it's just marginal. What's positive for the shareholders is that small cap stocks has started turning up. And what this visual is trying to show you, the last time we had this epic surge to $12 of share for GROW. A lot of that was a huge growth we had in just ETF and HIVE. HIVE had this exponential move because Ethereum had moved in Bitcoin, but really, we were the dominant player in Ethereum, and we were making almost $1 million a day at that time. Ethereum is no longer a crypto asset to mine and HIVE is now just going through a new growth cycle with Bitcoin mining, especially the expansion in Paraguay and our HPT strategy in Canada -- so that has been part of our exposure is through HIVE. Next, please. They're really important is if you know that 80% of the world's cargo is carried by ship -- so the CETF is connected to emerging markets. So I want to try to explain to people that it's so important like arteries and veins of the world, that is the connectivity between emerging markets, exporting commodities to developing markets, buying the finished product coming out of China or Thailand, all this shipment is taking place on cargo ships. And one of the things we had shut down is our Eastern European fund after Putin invaded Ukraine, it really changed the whole dynamic to New York. And the whole concern about China building up their military and becoming more and more difficult, what they've done, but what we've noticed is that to have a pulse global activity and trade, it really all comes from cargo. And so we created a product. And in daily, you can see cargo provide goods and for energy shifting what the rates are. And what's interesting to me is that they all fell on April 2 earlier this year when Trump came up with his global tariff war, but really start to rebound and cargo shipping actually it is making more money than we were a year ago. And for investors, cargo shipping, the yield on this was about something like an 18% dividend payouts. So these shipping companies are leveraged, but they offer big payments. And I'm happy to share with you with all the negative news last year, the shipping companies did payout big dividends. And this year, their shipping rates are higher, even with this backdrop of all those negative news. Next, please. So this is another visual to highlight that despite tariffs, total imports in the first half of 2025 forecast to be nearly 4% higher than the previous year. Next please. Now gold, gold is in the region all-time high in 2025, but gold talks are ripping up, they're showing up in growth stocks in IBD's growth momentum, both for this huge increase in revenue per share and cash flow per there. But the ETF space, I'm happy to share with you is that we've not experienced the redemptions, but there's been a lot of redemption next place has taken place and when we take a look at the other ETFs. So the biggest is GDX, the experience with $3 billion of redemptions other ETF as the gold stocks have been making all-time highs because the gold is making an all-time high and profit margins have been expanded. So from when we look at our product OAU, it's really how well in fund flows relative to the other big gold ETF. Gold equity ETFs, but what's important here is to show that gold is performing well. And a big part of that is China's push with the BRICS Nations, Brazil and Russia and other one [ road ] one belt countries being anti the U.S., anti particular U.S. dollar in particular, when Obama went after sanctions and complicated U.S. dollar assets and then Biden did it again. There's this big push to de-dollarize. So what you've seen is China and other countries, having less dollars of foreign currency and increasing it into gold. And it's more and more central banks buying gold. So it just tends be prudent for many reasons, central banks have a different theme than retail and family offices or smart investments like Galileo, they believe that when you have such a big interest payment on $37 trillion deficit that goal becomes an important asset class. But what I want to share with the listeners -- it's not just the dollar. It's also the G20 countries are just extensive money printing, and that has really triggered an interest in bitcoin. And with the new administration and with the Genius Act just being recently passed, it enters in that the scarcity of Bitcoin capped 21 million coins, and the scarcity of gold, but there's no mathematical perfect cap on it is showing you that money printing excessive, they're going into alternative asset classes. And gold and silver and gold stocks and Bitcoin and Bitcoin mining stocks are like HIVE was the Bitcoin mining stock but holds Bitcoin. These are alternative asset classes are capturing more appeal, especially when the large hedge fund, the world it keeps articulating why you want to have gold as an asset class. So we think we're in a good position. Next, please. Market disconnect. This is a visual to show you the GDX, which is market-based, market cap-based ETF unlike GOAU, which is more focused on revenue and cash flow and free cash flow and royalty model. There's been nothing, but redemptions as the gold prices have gone up. I believe that is turned now, which is good. The positive fund flows a bit of an offset, but it's really been really weird market, since last year that you would experience Gold taking off profit margin of gold stocks and gold stocks going up 40% to 80% to 100%, various names that there would be net redemptions. What was acclaimed to me was that there's been a lot of hedge funds that were short gold stocks. And along the GDX as gold has been rising, we've been unwinding their hedge position. So I don't know, if that's true, but it really is a conundrum I've seen before. But I think us behind us I really do. I think U.S. Global is well positioned with GOAU and these other thematic products, please next. Record-breaking quarters for royalty companies. Franco-Nevada reported record revenue for the quarter, up 42% year-over-year. Wheaton also had generated record revenue and operating cash flow Triple flags, which came out about 5 years ago, basically posted operating cash flow and increased their dividend. So I think that, that model is continuing to grow, but the gold stock that have higher expenses and then as gold trades higher, all of a sudden, their cash flow and exploding, they've had better stock performance. And when we look at stock by Gold Fields, it's been on a tier. But as a value gold stock picker, it's not the best for a value, but as high leverage, they call it, high operating costs, when both starts to take off as it has been these companies have the biggest percentage change in gross profit margin. And a lot of more speculative funds and hedge funds go into those names. Next, please. So the growing global reach U.S. Global ETFs now, in particular, JETS and GOAU are listed on the Mexican Stock Exchange, I went down to Mexico made a presentation to family offices of about 150 investors. And we're seeing that also listed in Bogota and Peru and Chile that these the Colombian securities that we're getting more trading and more volume that is taking place in these particular products. It was interesting that in Peru, there was lots of more interest in SCA, the sea cargo shipping ETF. Next, please. Well, there's another factor. There's an intersection with military spending and AI and data centers and NVIDIA chips that's really important for investors we're on a super cycle here for AI. There is no doubt about it, but there's also a fast-end big spend into data centers and sourcing energy. In fact, the biggest spend in America right now for infrastructure is in [ between ] Oplin, Texas, whereas the $500 billion spend to build the biggest high-performance computing data center at this. And what's interesting is that 70% of that demand is for Open Chat GPT. And an Open Chat is a phenomena. Unlike I hear these people say, oh, it's a bubble like tech bubble like 1999, and it's just not true. That tech bubble was eyeballs. This tech bubble, if it's a bubble is because of cash flow and revenue Open Chat has gone from basically nothing to $1 billion a month in revenue. And continues to grow, along with the other big language model companies like perplexity, Groq, which is Elon Musk investment and through a special purpose fund, we have a small investment in the sort of growth in that Groq that's in the U.S. global portfolio investments. And the only way to get that was to go through a special purpose. And it's illiquid, but it's growing, and it's just important to recognize that we believe that U.S. Global, we were in a super cycle. And a super cycle is really important for us that the military spend because of what's happened in the Ukraine and how the Ukraine have a pushback with creating asymmetry with drones for using GPU chips, but these inexpensive drones basically been able to deter and push back against Russia. And President Trump, no mentioning of words of telling the NATO members of Europe and Canada got better [ antipasto ] spending more money or they're going to pull NATO. And it's been a sea change. The amount of money and what's happening in Europe is very profound, they're going to emulate America and create an industrial complex that parts will be made through all these different countries in Europe and basically being assembled in Germany, tax special weaponry cannons, missile launchers, et cetera, et cetera, and so Germany is committed to up to 5% of their GDP. But that's a big number. You're talking, and that's going to be, when I do my other calculation is up to over $300 billion. And you take a look at a Sweden, all of a sudden there are 2%, who's the strongest center has been Poland. So next place. So there is a big spend of the NATO members, and this is looking back, basically, but these numbers are just going to grow and the consumer is concerned. Well, a lot of this money is going to go into a satellite that's going to go into needed to use of NVIDIA chips to power these new drones or autonomous weaponry, autonomous submarines, autonomous vehicles, dogs that are autonomous that can go into high conflict zones. It goes on and on with your imagination, but the spend is huge, but what you realize is that it has to go into data center, so that it has to go into -- because if you don't have high performance computing data centers, then the drones don't work and the satellites. So all this stuff is all hyperlinked to each other. Next, please. We used to think it was just metal, iron and steel, now it's a very different world. But this was NATO members projected defense spending and the numbers are quite substantial. The last number like for Canada is actually over $150 billion. And it's up faster than what this was printed out. Just to give you an idea of what's taking place. Countries like Poland became big spenders because not only from refugees come from Ukraine, but from Belarus and they had to build a wall to protect illegals or the spies coming into sabotage illegal complexes within Poland. So Poland is very sensitive of Russian spies coming into the country. So you're seeing them put up a big spend. And what's interesting is that Greece is a big percentage of GDP because they had no idea how to protect their borders when they had the Syrian crisis, and they were going from Turkey over to Greece and how do they manage all of this was a game changer for them. So the U.S. is projected to spend $1.5 trillion. But what's the difference between what we're spending in China? China might spend 8% on soldiers and health care, et cetera, most of us going into armaments, whereas 50% of NATO and U.S. is on soldiers and the cost for health care and continuous care for these soldiers we are actually underspending relative to what China is spending. Next, please. The AI market is exploding. And will continue to spend 28% CAGR. And next please. So it's important to understand these big changes. And that's 1 reason why we created our war with ETF. But as AI to rebuild the military, so it has a lot of cybersecurity-related investments. Next, please. But what's really alarming is that ETFs have grown to be more in numbers than overall listed public companies and talk to a retired former SEC senior lawyer is alarming and that the SEC has to go and promote new IPOs, new companies coming public, the formation of capital because if that's not growing faster than M&A work, then all of the sudden mutual funds became bigger than stock shares outstanding. And what you do see is that there are lots of mergers and there's not of private equity coming in buying companies. So therefore, eventually starts impacting liquidity. The new administration is very pro turning up IPOs and creating capital for more public companies, which is positive. The ETF is really fasting what's happening there is the thematic ETFs are capturing more imagination. And not just an index that's really based on something by these index providers, but active ETFs have flourished, and that's something that we are really happy about and positioned to capture the growth. Next, please. So U.S. ETF assets are approaching $11 trillion. Next, please. Now what's the time for small caps to run? Michael Gade is well known in Piper Sandler, likes to say, a small caps, the unquestionable winner in August. But we saw that we rose, but really nothing greater than the rose of 2000 small caped index. It's related to what's the growth in assets. And I showed you earlier that when we had JETS go from $40 million to $4 billion in assets and HIVE go from $0.50 to $10 or some number like a big number. Those big moves on our balance sheet, in particular, the growth in JETS that there is lots of sophisticated investors that trade our stock around the number of creates and fund flows. So they're looking at the total number of assets we have every month. And if they start to expand, then they want to be long. If they start to fall, then they want to be out. I was told by 1 small group that they do biweekly what the overall asset picture is because it drives revenue. That's not how we function. We're long-term investors. And we believe that we have great products. We have real conviction on the quality of the products we offer. And so they've been rigorously back tested before we put them in the marketplace. JETS has validated this concept of what we went out to create that was to be the New York Stock Exchange Global Airline Index. And even after fees has done that. And when we look at the airline industry, it is almost 9% of global GDP. So can you get 1 product that's capturing 9% of their global GDP? Well can you capture -- another product captures 80% of all global trade at sea. I think these are really unique products. And I hope we have in England, it's called Trip. So it's basically JETS with additional hotels and cargo and not cargo ships but cruise liners because cruise liners are having incredible growth in revenue that people are still spending incredible cruise amounts of money to go on cruises and same thing with airline tickets, the prices have not gone down. When I get analyst say, it's really interesting to share with you, Wall Street comes out and says, well the airlines are going to grow up 3%, but GDP Airport grew at 15%. So how can the airport grow of traffic, 15%, but the airlines are only grow 3%. And so there's a disconnect that there's always a negative narrative that's been going on for 2 years now that the airlines are going to fall apart, but they continue to defy and they're using AI to have pricing power and how they move their Jets along, if they're going to cancel roots, it's done very quickly. So it's important for you to recognize the investors that AI is a significant component for how airlines are managing supply, which then gives them pricing power. Next, please. Bull markets have lasted 5x longer than Bear markers on average. So I watch this. I see this and I listened to and I read a Twitter and LinkedIn and this is just potentially to look for the next crisis. So people can pat themselves they call the crisis. But if it happens by the dip and hold on for life that's basically what this suggesting because of trade payer. Next, please. Warren Buffett highlights the value proposition of buying back one's own stock at a value accretive prices. And it benefits all shareholders. It's very much a democratic process democracy, democratizing capital markets is not just for the biggest holders. And so he will retire at the end of 2025 at the age of 95 with $340 billion cash to invest. So I think it's interesting in what he's done, but he was a big proponent of buying back stock. So let me give you a quick recap. Next, please. So positive news, buyback authorizations have increased 19% year-to-date. So that has been another part about executives and boards making a decision to buy back their stock. Next, please. While we buy back stock because we believe the stock has undergone and therefore, buy back shares as we're long-term investors. And this is part of the company's 2-pillar strategy to enhance shareholder value by paying dividends as well as buying back stock per year. Next, please. So for share repurchase program for the end of June 30, the company repurchased a total as 801,000 Class A shares using cash of $1.9 million, of which a lot of these proceeds came from being paid back on our debenture from HIVE. Next, please. Those repurchases, as you can see, showing you that has steadily increased. Next, please. The dividends, the company pays a monthly dividend. That's a 3.66% yield, it was more attractive than any money fund. Next, please. Shareholder yield. This is the algorithm dividends plus buybacks plus debt reduction divided by market cap is the overall shareholder yield. And next, please says that U.S. Global, and the 5-year treasury is 3.79%. Most dividend paid stocks are based on the 3.79%, the 10-year is 4.24%, odds favor rates dropped this month. So what does that mean? Well, that's one other factor that people look at to move stocks around. But the shareholder yield is 9%, so we believe that GROW is an attractive buy. Next, please. We look to compare our souls to WisdomTree which is 100% ETFs at Invesco, 40% of their assets to our QQQ and give an idea for relative multiples and what the rotations are for investors. Next, please. So I look for at 2025, the company has a steady cash flow despite volatile and challenging macro environments at the apathy for JETS is disappointing and for gold, we believe that this turns on when a turn is very rapid, it just happens so quickly. And so we -- our assets are down from a year ago. So we ended up losing money, but we still keep deploying and building our plan because we believe that it just happens so quickly, fund flows and directional change. And so we believe that we'll continue to buy back stock on flat and down days and pay monthly dividends. And we have a strong business to do so. Next, please. Smart beta investing is our quantamental fundamental investment strategy because it combines cutting-edge technology with robust data analysis to help optimize returns and manage risk effectively for our shareholders. It's a quant approach. It's back tested thousands of hours before we go and launch a product just like medical product is supposed to be tested over and over before unleased to the public, and we have the same sort of discipline. Next, please. GROW's investment is slowly drilling down to 8% comfortable debenture of $1.5 million. And as the money comes in, we're redeploying back into the crypto ecosystem. Next Please. So it's -- we have $1.4 billion in assets. We have [ $1.5 million ] in annual operating revenue. the real important number is to get through $1.9 billion. We've seen this happen in a month. So as I said to investors that we've seen the redemptions slow down, we've seen the apathy slowdown -- and we think that with our thematic asset classes that we remain very bullish and committed to a long-term secular Bull market. Next, please. Average assets under management. As you can see that shift, that's really just the talent time of apathy not having bad products, but having good quality product out there. Sentiment, we can't control. We can still control, having a good product. Next, please. Quarterly earnings per share were definitely impacted marked by the tariff war for the quarter. It's improved this quarter ended June and hopefully, it improves this next quarter. Historically, in the fourth quarter, airlines have a huge run -- and usually, September is usually a good buying, and they have a big run along with Bull stocks, so we remain very positive going into the year-end. Next, please. Now I'm going to turn over to hard working, our CFO, Lisa Callicotte, to give you a granular detailed analysis. I know I've been long-winded to talk about a macro theme of where we are and she'll give you a bottom-up analysis of financial analysis. Thank you, everyone, for being loyal shareholders. Lisa? Lisa Callicotte: Thank you, Frank. Good morning. First, I'll start with our Slide 43 that has the financial highlights for our 2025 fiscal year. Average assets under management were $1.4 billion for the year ending June 30, 2025. The Operating revenues were $8.5 million, and we had a net loss of $334,000 or $0.03 per share. Slide 44 notes our breakout of earnings. So we have operational earnings that consist of our advisory services and then we have other earnings, which mainly consists of realized and unrealized gains and losses on our investment holdings. But both of these are dependent and will fluctuate based on stock market forces. The next slides talk about more of our detail of our operations for the fiscal year ending June 30, 2025. Our operating revenues were $8.5 million for the year, which was a decrease of $2.5 million or 23% from the $11 million in the prior year. The decrease is primarily due to a decrease in assets under management, especially in our JETS ETF. Operating expenses for the current quarter were $11.4 million, relatively flat compared to the prior year. On the next slide, we see our operating loss for the year ending June 30, 2025, is $3 million. And we had other income for June 30, 2025, of $2.7 million compared to $2.4 million in the prior year. This was an increase of approximately $329,000, mainly due to higher investment income in the current year. In the current year, we had lower realized and unrealized losses versus the prior year. Net loss after taxes for the year was $334,000 or a loss of $0.03 per share, which is an unfavorable change of $1.7 million compared to the net income of $1.3 million or $0.09 per share for fiscal year 2024. If we move on to the balance sheet on Slide 47 and 48. We see that we have a strong balance sheet and has high levels of cash and securities. And then if we go to Slide 49, that notes our total liabilities, and these are consistent with prior year. The next slide is a detail of our stockholders' equity. At June 30, 2025, the company had a net working capital of $37.2 million and a current ratio of 20.9:1. With that, I'd like to turn it over to Holly, so she can discuss marketing and distribution initiatives. Holly Schoenfeldt: Thank you, Lisa. All right. This first slide in my section showcases our ongoing dedication to delivering original timely market insights to our YouTube and TikTok channels, Video content remains one of the most powerful tools for educating and engaging both new and existing shareholders. If you haven't already, we'll strongly encourage you to explore our YouTube channel. All right. On the next slide, I'd like to spotlight several recent interviews featuring Frank Holmes from the past quarter, including appearances on the Seeking Alpha podcast premarket Prep, FOX Business television and other major platforms. Earned Media remains a cornerstone of our marketing strategy, giving us the opportunity to share timely insights and thought leadership across a range of thematic sectors. We regularly amplify these appearances on our special media channels JETx and LinkedIn, and we featured them throughout our website content too. All right, on the next slide. Our war ETF launched about 9 months ago, and we continue our outreach and marketing efforts for this unique product and we actually just published a white paper this week on defense spending and the ETF itself, and that can be found on u.Sglobaletfs.com or to e-mail us at info@usfunds.com, I will send you that link. All right. On the next slide, I also want to quickly announce a few webcast we have in September, both of which you will be able to access a replay for. One is September 10, where we will be teaming up with the HIVE ETF team out of Europe to discuss our UCITS Travel ETF, ticker symbol TRIP or TRIP. Secondly, on September 25. Frank Collins will do a virtual webcast highlighting clear trade in the market right now and specifically, why not going to be a good time to look at exposure to defense and gold. All right. On the next slide, we always like to recap the most read Frank Talk blog post during the most recent quarter. So as you can see here, the top being focused on defense and [indiscernible] along with the attractiveness of gold. So again, that perfectly aligns with our webcast on September 25, we hope you'll tune in. And we hope you'll keep reading the Frank Talk Blog. Thank you. All right. Finally, on my last slide, I do encourage all of you to follow U.S. Global Investors on social media. We're on Twitter or X LinkedIn, YouTube, Instagram and Facebook. So wherever you prefer to get your news, be sure to check us out. This was your up-to-date with what's going on not only with growth but our funds and, of course, the broader market insight. All right. As a reminder to our audience, if you have any questions today, please feel free to e-mail those to us at info@usfunds.com, and we will gladly follow-up with you and get anything clarified that you may need more information on. Thank you so much for tuning in today. That concludes our webcast summarizing fiscal year 2025.
Operator: Hello, everyone, and thank you for joining the ANGLE 2025 Interim Results Call. My name is Claire, and I will be coordinating your call today. [Operator Instructions] I will now hand over to Andrew Newland, CEO. Please begin. Andrew David Newland: Good morning, everybody, and welcome to ANGLE's interims webcast for 2025. It's been a very strong half year in terms of major progress in commercialization on multiple fronts. However, there has been strong revenue pressure from adverse market conditions. So it's a balanced 6-month period. As you know, ANGLE has developed a breakthrough product for cancer diagnostics, which can be used to help patients get better outcomes by making sure that they have more appropriate treatment and also reduce health care costs. We're getting closer to its deployment widely for patients. We've had 3 major achievements during the half year, which are in relation to large pharma contracts, DNA dual analysis and cluster buster drugs. So I will tell you about those now. First and very importantly, our large pharma strategy, which we've developed as a way of accessing development funds to progress clinical trials in support of Parsortix has progressed well. The idea here is that pharma can fund for their own drug development purposes, individual clinical trials and that they can actually lead eventually to a companion diagnostic based on the Parsortix system and wide adoption. So as you know, we've had 3 pharma projects -- large pharma projects that we've been working on. And all 3 of those successfully completed during the period. The first one, the Eisai HER2 breast cancer trial was very important as it demonstrated in a 200-patient cohort Phase II trial that 2 tubes of blood taken at the same time and processed by Parsortix gave very consistent results in terms of the number of cancer cells present, the circulating tumor cell clusters present and critically, the expression or absence of expression of HER2 protein. But -- and this is the key point, the 2 time points were different. So very often, we saw that the patient's condition had changed. And this was to be expected because the first blood draw was taken prior to the patient being given the HER2 antibody-drug conjugate drug and the second time point was afterwards. So we saw significant changes in some, but not all of those patients. We're currently awaiting access to the clinical data to demonstrate whether or not the changes we saw directly correlated with the patient response or otherwise to the drug. But that's obviously what we would anticipate. So this trial has successfully confirmed that our HER2 assay, so our test for analyzing the HER2 protein on the cancer cells is very useful for the HER2 drug clinical trials, but also is likely to be relevant for selection of the drug for individual patients. So that was a big step for us. Secondly, the 2 AstraZeneca contracts, which were slightly different in nature because we were funded to develop assays for AstraZeneca. The first one was in DNA Damage Response, which is applicable for multiple cancers and the second one in Androgen Receptor, which again is a protein, but in this case, for prostate cancer. Both of those assay development projects were successfully completed. And we're now waiting actually to hear from AstraZeneca and indeed from Eisai and BlissBio, the owner of the ADC in HER2, about next-stage projects. So we've got next-stage projects under discussion with those companies. The second major achievement was the development of the DNA dual analysis, Illumina, end-to-end NGS assay, and I'll talk about that in more detail later, but it was a major achievement during the half year. And the third one, which I'll also discuss later, was the publication in Nature Medicine, a top-level peer-reviewed journal of the first inpatient trials for cluster buster drugs developed using Parsortix and fundamentally dependent on Parsortix. Post the half year-end, so since the 30th of June, momentum has continued, and we were absolutely delighted last month to announce our first large med tech collaboration. So why would a med tech company want to collaborate with ANGLE? Well, the answer is that we can offer them access to circulating tumor cells, so intact cancer cells from blood. And if they can move their test across to that analyte, then they can do repeat testing. And I'll talk more about that, but we're delighted to have secured that collaboration deal with Myriad Genetics, which offers the potential for large-scale commercialization of the Parsortix system. And as I said, I'll explain that. We built out the pipeline of opportunities with multiple large med tech and large pharma companies. So there are other companies coming down that track. One of the very interesting developments is the development that we've now managed to engage with the NHS in very serious discussions, and that has come since the NHS' announcement on the 30th of May that they were launching something called blood test-first in lung cancer, where lung cancer patients will have a blood test processed. And that is current -- to identify whether the specific treatments they can be given. The advantage of that blood test versus the tissue is that the results from the blood test can be found quicker, so the patient gets treatment quicker. And also a number of patients, probably about 20% don't actually have a successful biopsy. So they have no sample to guide their treatment. But what the NHS is interested in is the DNA dual analysis solution that ANGLE uniquely provides. So I'll give more information on that a little bit later. And then finally, internally, we've been working extremely hard, and we're making very good progress on accrediting -- getting an accreditation for our clinical lab. We're targeting completion of that by the end of the year. And that would then open up the possibility for ANGLE to start offering tests directly for patient management, which clearly would be a major step forward for the business. In terms of the half year results, in terms of the finances, we have unfortunately been subjected to the challenging market conditions. Market volatility and tariff concerns have actually slowed decision-making regrettably at many large corporates that we're in touch with. So they're pausing or delaying some of their decisions. And that comes on top of a lack of capital for the smaller companies that we'd like to work with. So in both cases, there's been a delay in conversion of pipeline opportunities that we've been developing. The consequence of that is that the pharma revenue is regrettably down on the prior year half year period, and the product revenue is flat. We believe that this is a temporary situation, which will resolve itself over time. But at the moment, it's unclear when that will happen. We've been managing our costs very carefully with tight cost control, and we've reduced our operating expenditure by 12% compared to the previous period. And overall, that has slowed down to the comprehensive loss being reduced by 7%. Clearly -- and the cash and R&D tax credits position stands at GBP 6.6 million with the cash runway unchanged into Q1 2026. But clearly, access to additional funding is a key focus for the business for H2. And that funding can come from a variety of different sources. In terms of some more granularity on key developments, our integrated NGS workflow with the Illumina platform is a major step forward for ANGLE. It's a unique offer actually, that ANGLE offers the ability to assess both the DNA from circulating tumor DNA, the dead, which come fragments from dead and dying cancer cells which is the standard approach from the plasma as well as the circulating tumor cells, which we can obtain from the waste product of the ctDNA analysis. So the ctDNA providers, what they do is they extract the plasma liquid and they throw away the blood cellular component. What we've developed is the methodology for resuspending that in a saline, running it through the Parsortix system and recovering the circulating tumor cells, and they can then be analyzed with the exact same approach of sequencing as the ctDNA. So then you have 2 analytes from the same tumor blood, which have been sequenced in the same way. As I said, we're the only company that can offer that solution. Now what we've done in the half year is we have developed an Illumina end-to-end solution. So by that, I mean, we start with the Parsortix, but then we use an Illumina pan-cancer gene panel and the Illumina next-generation sequencing. And that has some really significant advantages. Firstly, Illumina has got worldwide distribution of its products, which means that there is a customer base with their products that can now implement Parsortix. We don't have to supply a separate cancer panel external to Illumina. And secondly, of course, this increases the revenue potential for Illumina and has got them quite interested in working with us on joint sales. Now this form of analysis, as you can see from the image here, identifies twice as many mutations, so actionable DNA variants than ctDNA alone. And it is therefore the case that we believe that very, very important information about how the cancer is progressing is missed by circulating tumor DNA. It's also missed by tissue biopsy because the tissue biopsy is a onetime point. And what happens is the cancer progresses and changes and you can't repeat the tissue biopsy. And that is what has stimulated the interest from the NHS. And they're now considering the idea of testing on a large-scale basis, whether they can, in fact, get additional actionable information from the circulating tumor cells, which would improve the outcome for patients and importantly, reduce the cost of operation. So this whole area of getting the Illumina end-to-end DNA dual analysis to work was a major achievement in the half year. The second major achievement was this first medtech partnership. So this, we think, is the first of many such medtech partnerships. It's driven by the idea that companies who offer tissue-based tests. Now in the case of Myriad Genetics, they do that via large-scale clinical laboratories where they offer tests. These companies basically can only do one time point for the patient. They can only do their test when they've got the tissue available. Now the same approach applies also to medtech companies who sell products. Their products can only be used at a single time point where there is tissue. And this is a crucial limitation on cancer care today, which is that it's all based off -- apart from some ctDNA, which has its own limitations. It's all based off tissue where there's only one time point available. And yet everybody knows that cancer progresses and changes. So with Myriad, the idea here is that they are working with ANGLE to see if they can port one of their cancer tests onto a CTC platform. So that would then enable them to have, as I mentioned, multiple repeat tests for a patient, so that generates repeat revenue for them. And secondly, it opens up the opportunity to provide tests for patients who don't have tissue and quite a lot of patients have a failed tissue biopsy or alternatively, the biopsy tissue is not accessible. So that's 2 major benefits for them. The third potential benefit is actually looking at patients before the tissue diagnosis. So if you have a test, you can do a blood test without any major impact on the patient. So you can do it very early when, in fact, you might not choose to do a tissue biopsy because of the invasive nature of that. So Myriad has made a commitment to expanding its offering across the cancer care continuum. And we see Myriad as an excellent major partner for commercialization. They have, as I mentioned, a very large-scale clinical laboratory establishment, and they're a major player. They have around $800 million in revenue as it stands at the moment. And they're an outstanding partner for us to work with for commercialization because they have already got all the market channels in place. We expect to see other medtech partnerships coming through in due course. Now the reason I've highlighted this area of targeting metastasis is because the Parsortix system has unearthed some amazing information. The fact that there are large-scale circulating tumor cell clusters present in patient blood and that these circulating tumor cell clusters are absolutely incredibly important in terms of the metastasis of the patient. In fact, the Aceto Lab in Switzerland has demonstrated using Parsortix in a mouse model that the cancer is 100x more likely to spread. The metastatic potential is 100x greater where there are circulating tumor cells in a cluster than when the same number of circulating tumor cells are separate rather than attached to one another. And these large-scale circulating tumor cell clusters have never been seen before the advent of Parsortix. Now we previously reported the publications by this group over the last 4 or 5 years in nature. But what they've done is they've stepped forward, and we announced in January a publication again in Nature Medicine, where they have used the Parsortix system with breast cancer patients to identify patients with circulating tumor cell clusters. And then they have given them a heart-related drug called digoxin and showed again using Parsortix, the ability to separate these circulating tumor cell clusters into individual cells. That same process in a mouse reduced the spread and pretty much stopped the cancer progression in the mice compared to identical mice that didn't have the heart-related drug. So there was now a spin-out company that's been set up in Switzerland with the idea of developing a new class of drugs to stop the spread of cancer. And this can only be possible if the Parsortix system is used to identify whether the patient has circulating tumor cell clusters and ensure that the right patients get the drug and then monitored with routine blood test to see whether they need to have the drug again. We expect that there will be major clinical trials using Parsortix in order to progress this further. So a very exciting development for cancer management of the future, and it's entirely enabled by the Parsortix system. So our system has a lot of evidence behind it, and that continues to build. So now we have 46 independent cancer centers in 15 different countries, who have published between them 115 peer-reviewed journal publications on Parsortix across 23 different solid tumor cancers. And all of these publications are positive. So we are now into the phase of commercialization. As I mentioned earlier, we have had some adverse market conditions, which have temporarily slowed the decision-making process at some of the largest companies. However, we have a very major pipeline that we have developed, and we expect to see a whole series of developments coming through in the relative near term. So we're getting started on the Myriad Genetics collaboration, porting their tissue test to CTCs, and we expect to see that expanding over time. We have discussions going with several large pharma companies in relation to multiple projects, and that's being progressed further at an upcoming conference, the World CDx Conference in Boston on the 21st of September, where we have many meetings with pharma to progress these discussions. We also have engagement with multiple med tech companies who will be at that conference, including some who have declared themselves wanting to do joint sales with ANGLE of CTCs -- potential CTC solutions marrying their downstream technology and offering that to pharma, which is a welcome addition to our sales approach. The partnership for DNA dual analysis. So this evidence is now beginning to get out there, and we have several molecular companies, both NGS and other molecular downstream analysis companies looking to partner with us to take that further forward. So we expect to see progress in relation to that. We also have some companies interested in partnering with ANGLE in relation to protein analysis. So this is looking at the proteins such as the HER2 and the Androgen Receptor that I mentioned earlier on in the presentation. There's many different ways that you can analyze these proteins, but you have to have intact cancer cells to do it, and we provide that solution, which isn't otherwise available. The methods can involve immunofluorescence, immunohistochemistry and FISH, to name a few. So there are several companies wanting to partner with us on that. We're hopeful that we'll be able to agree a suitable clinical study with the NHS soon, which would be then to evaluate the benefits that can come from analyzing and circulating tumor cells, first for lung cancer, but then for other cancers. And obviously, the target there would be to generate the clinical evidence which will be sufficient for the NHS to seek to adopt solution from ANGLE as a routine solution. And obviously, we're a U.K. company. We're close to the Royal Marsden, who's heavily involved in this, and we have a number of benefits that we can offer them over and above their current solutions, which are based from the U.S. ctDNA companies. And we -- the NHS is the largest medical market in the world in terms of a single customer, and we believe that adoption by NHS would drive -- further drive worldwide interest in our technology. And as I mentioned, we're working on our own clinical laboratory accreditation. That's going very well, and we expect to see that complete by the end of the year. So in summary, we have a breakthrough technology, and it is capable of transforming cancer patients' outcomes, both diagnosis and treatment as well as reducing costs for health care providers. We believe it provides the best sample for analysis, and particularly that is now being proven for next-generation sequencing, which is the major area of focus for all the health care providers. And it's interesting that NGS is getting a lot of attention. The cost of NGS sequencing is dropping and the sensitivity is increasing. The adoption of artificial intelligence is increasing. And again, that enables patents to be seen that might be missed otherwise and the cost of AI is dropping. So what you actually end up with is a limiting factor is access to the best sample. And we believe that intact living cancer cells taken at a real-time point from the patient blood provides the best possible sample. In terms of downstream analysis, we have got a unique DNA molecular analysis of intact cancer cells married also with the ctDNA, and that gives the ability to look at clonal evolution. And looking at clonal evolution and how the cancer is changing is the driver to get ahead of the spread of disease. And that's why the new drugs to block cancer progression based on Parsortix are a major development. And that's also why the NHS is now expressing strong interest in what ANGLE is doing. So thank you very much for listening. We'll now move to Q&A, and Ian Griffiths, our CFO, will join me for that. Operator: [Operator Instructions] We have our first question from Adam McCarter from Cavendish. Adam McCarter: I've just got a few. So yes, just you talked during the presentation about the challenging environment sort of experienced during H1. Just wanted to know if you've started to see any encouraging signs of these headwinds begin to subside at all in the second half of the year? So second question then just on the NHS. Just how do we sort of think about those NHS clinical studies that Parsortix could be incorporated into the opportunity and the materiality there? And then the final question is obviously good to see sort of more of those high-impact journal publications for Parsortix, particularly the Nature Med one. Are these types of publications helping sort of in your BD efforts and helping progress those conversations with pharma and the medtech? Andrew David Newland: Thank you very much, Adam. The first comment -- question was about encouraging signs. Well, certainly, the Myriad Genetics signing up to go ahead with us was a very encouraging sign. That was a conversation that had been going on for quite some time. And they've taken the decision that despite the conditions, they want to start investing in this. I listened recently to the Chief Executive's presentation of their own results, and they specifically referred to extending their offer into the continuing cancer care continuum. So I thought that was a very promising sign. That said, there are multiple others, which I would have liked to have dropped by now. So let's hope to see -- we'll see some more of them coming through in a similar way. In terms of the NHS side of things, what that's generally speaking about is the fact that they are adopting the blood test-first in lung cancer patients for 15,000 patients per year. And interestingly enough, they literally do throw away the blood cells. And that's quite a compelling argument. You're throwing away the best part of the sample with Parsortix, we can analyze that. So I guess we'll start off with a pilot study first and then if they like it, we can expand. But the good thing is they don't even have to take an additional tube of blood to address this. And in terms of the -- Ian, you can add to this if you wish to. But in terms of the publication side, absolutely, we use these peer-reviewed publications to drive business development. We have a medical writing team that packages that information, and it forms a lot of the interaction that we have with prospective collaborators and customers. Ian Griffiths: Yes. And I'd probably add to the encouraging sign a couple of things. So one is increasing sort of awareness of the need to incorporate multi-omics into oncology and multi-omics, just for clarity, it means not just DNA, but adding in RNA and protein information. And if you look at Illumina, in particular, the way they're developing their next-generation sequencing is they can already do RNA and the sensitivity and cost points are improving that all the time. But they're also introducing a new protein solution as well. So obviously, we've got the perfect sample to fit with the Illumina equipment. And then the other thing is in discussions. So obviously, we produced data earlier in the year on the dual analysis. And that's generating a lot of interest because I think people are quite surprised how much additional DNA information we're finding with CTC-DNA, not just what the ctDNA produces alone. So there's quite a lot of interest around that complementary nature, but the fact that there's a lot of additional data. Operator: Our next question comes from Edward Sham from Singer Capital Markets. Edward Sham: Congratulations on all the operational progress despite the tough sector headwinds. I've got a few questions. But if I could just first start with your kind of your large pharma contracts because you've obviously completed in the first half, the 3 contracts with Eisai and AstraZeneca. I was just wondering how much visibility do you have in converting those into further contracts? And just can you give me a sense of the wider pipeline? Are you seeing strong traction across pharma? Or is it more medtech? Andrew David Newland: So in terms of the visibility on the new contracts, regrettably, we don't control the timing of these large pharma, and they will tell us when they're ready to do whatever it is that they want to do. So that's a bit of a challenge. But we are seeing increased wider interest from large pharma, and we have a very strong roster of meetings at World CDx. And this includes pharma that we've been dealing with for some time. We have been called on by several large pharma to provide them with -- essentially, they call it an RFI, a statement of what we can analyze from CTCs and how that works and how much we would charge them for that. So we do know that there are multiple players at these large pharma who are actively considering adoption of our solutions. What we don't know is when they might decide to jump in and also when those studies would start. So that's it really. I mean basically, there is mounting evidence and mounting interest, but we've got to get it converted. Edward Sham: No, that's really helpful. And then maybe just on the Myriad Genetics collaboration. Can you just outline the key milestones and importantly, how the economics would work if that was to be commercialized at scale? And just kind of give me an idea would that -- would ANGLE's revenues primarily be through services? Or is that also driving part sorting sales and consumables as well? Andrew David Newland: So we gave an announcement in relation to the work with Myriad. It was a bit lighter on details, and that's because they don't want to disclose some of those bits of detail. But I can talk in principles. So initially, we are being paid to provide some direct services to assess our sample going into their test. Some of that work has already been done. Now we're looking at various different modifications, which may improve the outcomes. So that's paid for service work. Assuming that progresses, what I would anticipate is there will be more paid for service work in terms of clinical trials to actually assess how well the CTC test does against the tissue biopsy test. And then beyond that, an implementation would involve us selling them a whole lot of Parsortix machines and setting up -- they would have to set up a Parsortix laboratory. So we'd have quite a lot of product sales. And every single sample, of course, would then need a Parsortix cassette as a consumable. And we currently charge $300 a cassette for that purpose. So that's on the specific tests we're working on at the moment. But they have a whole series of tests. And if the first one is looking good, there's absolutely no reason why they wouldn't do all their tests in a similar way. So we'd expect to see them getting -- wanting to get closer and closer to ANGLE. And then what I just described in terms of the sort of revenue flows being multiplied out by multiple different tests. Edward Sham: That sounds like a really great opportunity. And then just maybe just one last question on costs and runway. So you've highlighted your cash runway goes into Q1 '26. But I was just wondering beyond that, you've mentioned the alternative sources of funding. I was just thinking what can you do now? So realistically, can you take further cost out of the business and kind of what do you think your cash burn is going to look like through to kind of the end of the year? Andrew David Newland: Ian, do you want to cover that one? Ian Griffiths: Yes. Obviously, we are -- and you've seen that from the half year, we are continuing to try and manage our costs tightly. So certain spend has been sort of paused, certain costs have been cut back. But the nature of us being a regulated industry and having to have the sort of capability and capacity to deliver on the projects, deliver on the milestones means there's a certain level of underlying spend. So we're focused very heavily on the sort of that milestone delivery, and that can in itself be sort of one of the potential sources of funds. As we highlighted in the interims, there's a variety of sources of funding that are available to us. It's not just the revenues, but there's also commercial milestones, licensing, other income from collaborations with industry partners as well as sort of debt and equity funding, which is what we've historically done with the company. So we flagged, we will need to raise additional funding through one or a combination of such sources. We know there's challenges on the AIM market and biotech sector, which are well documented. And so our focus is very much is generate the milestones, generate the contracts that show that we're making that commercial progress to secure that support. Operator: [Operator Instructions] We currently have no further audio questions. We'll now move on to our text questions. Our first question is from Franc Gregory from Trinity Delta. She asks, following up on Adam's question, what can you tell us about the state of discussions with large pharma and large medtech companies? Andrew David Newland: So Franc, thanks for the question. So I think I gave a fair amount of information on that. We're talking to large pharma. There's multiple large pharma involved and across a variety of different drug categories. Just to recap, the protein analysis, which is what we've done so far for pharma, such as HER2 Androgen Receptor and the DNA Damage Response proteins, those are all things that have to be done by looking at cells and looking for expression. So they cannot go elsewhere for that. And there is, therefore, quite a lot of interest and particularly from antibody-drug conjugate companies because the antibody-drug conjugate attaches to the cancer cell via the protein. And if that protein is not there, then it won't work. And as an example, AstraZeneca's drug in HER2 is a HER2 antibody-drug conjugate. It is prescribed currently based off tissue biopsy. So if the patient is HER2 positive or HER2 low, then they'll be given that drug but as a second or third-line therapy, and that can be 3, 5 or even more years after the tissue biopsy. So there's published independent data that shows that up to 40% of the HER2 status would have changed in that time frame. This is mirrored across all the different proteins, and that's why the pharma are interested in that. The second interest for the pharma is in relation to the DNA dual analysis. And our pitch there is that the circulating -- so some of the pharma are adopting circulating tumor DNA analysis in their clinical trials. And our pitch to them is you're missing out on information, which might be critical in your clinical trial by not analyzing the circulating tumor cells in the blood cellular component. And that is beginning to gain traction as well. It's obviously a new area because we've only just developed it, but that is the subject of a lot of the conversations in the World CDx. So hopefully, that's a little bit more information on the pharma relationships. In terms of the med tech, we've got several big med tech product providers who offer molecular or protein-based testing solutions, which are sold worldwide, but they don't have access to a repeat sample. And those people are beginning to talk to us about implementing a CTC solution, which could be sold to their customers. And also, there's quite a lot of interest in working for -- jointly to get sales from pharma. And that would help us a lot because credibility of a very big company that they already do companion diagnostics with in tissue, wanting to work with ANGLE would obviously be a credible offering to the pharma. Operator: We have a follow-up question from Franc. How long and complex is the selling cycle into these partnership discussions? Andrew David Newland: Sorry, I missed that. Could you repeat the question? Operator: How long and complex is the selling cycle into these partnership discussions? Andrew David Newland: That's very variable. So what's happened is that the selling cycle has been longer than anticipated for the reasons that I said that these pharma are delaying commitments to various different things. But generally speaking, you're looking at a 6-month engagement before you can actually get into a sale because you're providing information to the pharma on the specific data from -- it was an earlier question, but data from the publications, for example. And then we sometimes do some pilot work ourselves. And so we have to submit a lot of data to be considered before they then decide to go forward. Operator: Our next question comes from Nigel Birks from Cavendish. [ BSL ] highlighted the unique potential of Parsortix in cluster cells a while back. What is new now? And how might this be commercialized? Andrew David Newland: So that's a great question. Thank you very much, Nigel. So what is new is that they have actually used the Parsortix system with breast cancer patients to identify circulating tumor cell clusters. And then they have dosed these patients with the heart drug, digoxin, and they've showed that the circulating tumor cell clusters separate into individual cells. So this is a completely new way of trying to approach cancer therapy is to reduce the competence of the circulating tumor cells to actually grow somewhere else and cause the secondary cancer. The reason that's significant is because well over 90% of patients who die from the metastatic spread to secondary cancer sites. Now that is caused by the circulating tumor cells in clusters landing somewhere else and growing. And there's -- so -- and they've demonstrated in a mouse model that if this heart drug is given, then the circulating tumor cell clusters disaggregate in the mouse and the mouse does not then succumb pretty much at all to the cancer. So it doesn't spread and kill the mouse. So the hope is that, that will translate to cancer patients. Now normally, there would be quite a big risk associated with a transfer of a mouse model across to a human model because there are a variety of differences, which mean that it might not be successful. So this first step shown that they have been successful in disaggregating the circulating tumor cell clusters is incredibly important. But the second element is that there was work done in the mid-1980s and 1985, the first large-scale study was done looking at breast cancer patients and trying to work out differences between the ones who had a successful outcome and the ones who didn't. And what they found was that actually a good factor for a better outcome was relating to having a comorbidity of a heart condition. So can you believe that? So if you've got cancer, you'd be better off if you have a heart condition, you're more likely to survive your cancer than if you don't have a heart condition, which is patently absurd. So the only -- and nobody understood that in the '80s and late '80s when this was investigated in detail. But they then -- and they sort of gave up on it. But now, of course, when we now know that heart drugs disaggregate circulating tumor cell clusters, there's the possibility that, that's the reason why we're seeing the progress in the mouse model. So the spin-out company is now working on some other drug targets very similar to digoxin, but with greater potency for CTC cluster disaggregation and basically less side effects. So that's super exciting because it could likely lead to a lot of work with Parsortix on clinical trials, which we can obviously enable and make money out of. And then as and when it potentially comes to market, the Parsortix is an absolutely crucial element. It would have to be used with every patient on multiple time points. Operator: We currently have no further questions. So I will now hand back to Andrew for closing remarks. Andrew David Newland: Well, I'd like to thank everybody for their support. It's obviously very disappointing that we didn't deliver higher revenue lines. We're hopeful that this will change, and it will change as we get our large pharma and our large med tech collaborations moving forward. And as I mentioned, our clinical lab will open up the potential for us to actually start providing tests for patients. And there is a very, very strong demand from the medical world and patients for this approach. And the fact that the NHS has started engaging with ANGLE is, I believe, a very strong positive. So thank you very much for your support. Have a good day, everybody.
Andrew Briggs: Thank you, Claire, and good morning, everyone, and welcome to Phoenix's 2025 Half Year Results. Today, I'll start with a summary of the progress we've made. Nick will then take you through the first half financial performance, and I will close with an overview of some of the strategic developments we'll be delivering over the coming months before taking your questions. Last March, I set out our vision to become the U.K.'s leading retirement savings and income business, helping more people on their journey to and through retirement. Today marks the halfway point of our 3-year strategy, and there are 3 key messages I'd like you to take away. The first is that we're making strong progress on executing against our strategic priorities. We're meeting more of our customers' needs and driving organic growth. Second, I'm particularly pleased that this set of results evidences that the balance sheet pivot is beginning to show. So we can confidently say we're on track to deliver all of our financial targets. And third, what I'm most excited about is that we're uniquely positioned to capture the momentum in our structurally growing markets. Progress towards achieving our vision is delivered through our strategic priorities of grow, optimize and enhance. We've achieved a number of material strategic milestones already this year. To grow, we need the products which meet the needs of our customers and build out our ability to engage with them both directly and through advisers. From an engagement perspective, it's great that we've received approval from the FCA for our in-house advice proposition, which we'll launch later this year. And from a product perspective, we've launched the Standard Life Guaranteed Lifetime Income Fund, completing our full product suite. So we're now able to help customers at every stage of their retirement journey from when they first start saving right into later life. Within Optimize, we've taken a material step forward on the journey to in-housing the asset management of annuity backing assets that I spoke to you about back in March. And we're currently preparing to in-house a further GBP 20 billion, which I'll come on to later. Lastly, enhance. Key here is completing the migration of customer administration to modern technology-enabled platforms. We migrated a further 0.8 million policies onto the TCS Bank's platform in the first half. We also entered into a new strategic partnership with Wipro to manage an additional 1.9 million policies. This delivers an acceleration in our cost savings run rate and increases execution certainty as we are no longer migrating these policies. Progress against our strategic priorities is translating directly into attractive financial outcomes. And hence, our first half performance has been strong across our financial framework of cash, capital and earnings. Operating momentum is excellent with 9% growth in operating cash generation and 25% growth in IFRS adjusted operating profit. And I'm particularly pleased with capital, where our solvency capital coverage ratio grew from 172% at the end of last year to 175% at the half year, even after retiring GBP 200 million of debt. Our leverage ratio improved from 36% to 34%, taking us a step closer to our 30% target. And we are materially accelerating delivery of our cost savings target. So firmly on track across the board. The U.K. retirement savings and income market is already huge with over GBP 3.5 trillion of stock. It's also structurally growing, driven by a range of demographic and socioeconomic trends. Summarizing the gray boxes across the top, there are 2 themes I'll draw out. Firstly, the structural growth is driven by the aging population and the shift from defined benefit to defined contribution. Secondly, people simply are not on track to have saved enough for a decent standard of living in retirement. And most are doing this without any advice or guidance. We feel passionate about helping everyone achieve financial security in retirement, and it's a huge opportunity for us. We will continue to advocate for the changes that will make the biggest difference to our customers. So I'm really encouraged by recent regulatory and political proposals that create additional tailwinds to our industry as outlined in the orange boxes on the slide. These will accelerate the existing structural growth drivers in the market. As a top 3 player in workplace, we're already well in excess of the GBP 25 billion minimum threshold requirement for default funds as set out in the government's pension scheme bill. So we are ready to take on business from corporates who need a secure provider. We think the pension adequacy review must raise savings levels through an increase in auto enrollment contribution rates to help close the pension savings gap. And the introduction of targeted support and pension dashboard has the potential to be a game changer for engaging customers and helping them make better financial decisions. We are well positioned to benefit from these structural market drivers. Turning to Slide 8. The top of the slide shows how those market trends are driving substantial flows across the savings and retirement market. The bottom half of the slide sets out our ambition and strategy where our business mix is diversified and balanced across the key markets we operate in. We are the only at-scale U.K. player focused solely on the retirement savings and income market via workplace, retail and annuities. And we're already taking a good share of flows in each, but with plenty of upside potential. Specifically in Workplace, our ambition is to consolidate our top 3 position as that market grows strongly and consolidates down. In retail, we're looking to move from a top 10 to a top 5 position, and we'll continue to focus on this. And in Retirement Solutions, we aim to maintain a top 5 position. These clear ambitions are underpinned by robust strategies supported by the strength of our franchise, brand, customer base and product set. Essential to a robust strategy is being crystal clear on how we are well positioned to win share in these growing markets. And this starts with the 3 competitive advantages of the group. Customer engagement is key and with 1 in 5 U.K. adults being customers of Phoenix, including a large existing workplace book, we have an exceptional level of customer access. This gives us deep customer insights, which in turn supports how we develop and design propositions. We also benefit from capital efficiency from our diversified business model, comprising both capital-light fee-based and capital utilizing spread-based businesses. And we have cost advantages, underpinned by our scale with 12 million customers and which have been achieved by leveraging technology across our business. This will increase further through our cost savings program. These 3 group advantages then directly translate to the specifics needed in our customer offerings in each market. Taking workplace as an example, on the bottom left of the slide, where we're one of the top 3 players in the market. I regularly meet our employee benefit consultant partners, and they consistently tell me that we win by having excellent customer engagement through offering leading employer propositions as we truly understand what customers, both employers and their employees want and need. Offering excellent service is also key to winning. When I was in Edinburgh at our workplace pitch last week, it was clear that providing their employees with exceptional service is critical. Our ability to succeed here is underpinned by our strong digital capabilities, which include our market-leading app rated 4.7 stars on the App Store. Alongside this, our capital and cost efficiency and inherent scale mean we can offer our products at competitive prices while delivering attractive margins. Let me now touch on some of the activity the teams have been doing to enable us to keep winning in these markets from both an engagement and product perspective, starting with pensions and savings. Engagement is key here. And on this slide, I call out the imminent launch of our Retail advice proposition that I mentioned earlier. So as we start to roll out trusted in-house advice, we'll provide customers with a compelling reason to stay with Standard Life. To be clear, we'll start small here and scale over time. In partnership with digital engagement specialists Life Moments, we've launched Family Finance Hub. And Standard Life also completed its connection to the pension dashboard ecosystem, both being examples of ways we've looked to empower our customers and increase engagement with them. Testament to our commitment to excellent service, we are the first workplace provider to win the Master Trust Treble across the Pensions -- Corporate Adviser, Pensions Age and Professional Pensions Awards. I'm really proud of the team for this external recognition. From a financial perspective, our pensions and savings business is simple. It's about growing assets, which we've done, and it's about expanding margins, which we've also done. Together, this delivered 20% growth in operating profit. We've also continued to develop winning products for customers in Retirement Solutions. We launched the Standard Life Guaranteed Lifetime Income plan for advisers on the Fidelity platform in March. Separately, we've enhanced our BPA offering. Many DB schemes have existing longevity reinsurance, and we've leveraged our extensive expertise to novate these into a BPA transaction. What does this mean? It means we're better placed to win by helping corporates with their broad range of requirements. As proof, this, among other innovations, enabled us to complete our largest ever BPA deal in July worth GBP 1.9 billion. This particular transaction was the in-house scheme of a large employee benefit consultant, so a really positive testament to our proposition. The other item I'd call out on this slide is the launch of the U.K.'s first fully digital signature-free application for annuities. As you'll know from your own experiences, having a hassle-free digital experience is increasingly important. So we're always looking at ways to make our customer journeys easier. Looking at the financials, Nick will come on to the actual annuity volumes in the first half, which were relatively modest, but we've now secured over GBP 3 billion of BPAs with individual annuities performing strongly, too. Of course, our focus remains on value, not volume, and our execution here enabled 36% growth in profits. To optimize customer outcomes and enhance returns, we've been evolving our approach to asset management. Historically, we've had an outsourced operating model for all assets. For our Pensions and Savings business, which represents the majority of our assets, this strategy is unchanged. Moving forward, we expect to consolidate the number of asset managers we partner with, and Aberdeen continues to be our key asset management strategic partner, potentially attracting a greater share of these assets. As signaled in March, our strategy for the management of the annuity backing assets is evolving to one which is predominantly in-house. We will leverage the internal capabilities we have built to manage public credit and private assets alongside partnering to source differentiated and unique private assets. We are now managing GBP 5 billion of our GBP 39 billion portfolio in-house and are preparing to in-house a further GBP 20 billion. To be clear, this in-housing only covers our annuity backing assets. We have no intention of becoming a fully fledged asset manager nor are we looking to manage third-party assets. But we're excited about the benefits this brings by underpinning the delivery of management actions in annuity portfolio reoptimization and with greater cost efficiency. Our strategic execution is creating financial flexibility for the future. This chart focuses on operating cash generation. This is the most important way to look at our financials because it's the sustainable surplus generation in our Life operating companies, that's also remitted as dividends up to the holdco. Hence, it's the primary driver of shareholder dividends. We reiterate our ongoing target of mid-single-digit percentage growth for the full year and going forward. This level of cash generation not only means that our dividend of circa GBP 550 million is well covered and secure, but also generates at least GBP 300 million of excess cash per annum after financing our recurring uses. We will deploy this excess in accordance with our capital allocation framework with our current focus continuing to be on deleveraging as we remain laser-focused on achieving our 30% target. As you would expect, the Board will look to allocate capital to the highest returning opportunity, and we are excited about the optionality our strategy is creating. With that, I'll hand over to Nick, who will talk in detail about our financial performance. Nick? Nicolaos Nicandrou: Thank you, Andy. Good morning, everyone, and may I extend my own welcome to all of you joining us today. I am pleased to be reporting strong operational performance in the first half, evidenced by the profitable growth in both our pension and savings and our Retirement Solutions operations, by the execution of sizable recurring management actions and by the acceleration of our cost savings initiatives. This operational momentum is driving strong value creation with improvements across all 3 pillars of our financial framework with growth in operating cash generation of 9%, growth in net recurring capital generation of 4 percentage points and growth in IFRS operating profit of 25%. It is also supporting the emerging balance sheet pivot with both leverage and overall solvency capital levels improving. This means that we are firmly on track to achieve all of our 2026 targets. Turning to the financial highlights. Operating cash generation grew to GBP 705 million, and we delivered total cash generation of GBP 784 million. The shareholder solvency coverage ratio increased to 175%, remaining in the top half of our operating range, and our Solvency II leverage ratio improved to 34%. IFRS operating profit increased to GBP 451 million. And whilst the IFRS loss after tax was GBP 156 million, the impact of this loss was cushioned by CSM growth of 10% with IFRS adjusted shareholders' equity closing at GBP 3.4 billion. In line with our policy, the Board declared a 2.6% increase in the interim dividend to 27.35p per share. Let me now take you through these results in more detail. Operating cash generation, shown on the left, was up 9% to GBP 705 million, supported by growth in surplus emergence to GBP 411 million and an increase in recurring management actions to GBP 294 million. I am committed to providing you with the segmental OCG analysis by business, and we'll do so with the full year results. For now, I continue to share an indicative split. As you can see, the contribution from Retirement Solutions is greater given the capital-heavy nature of this business. The contribution from the capital-light pensions and savings business is lower, but is growing fast, benefiting from new business flows and cost savings. On the right, you can see that operating cash generation more than covered our dividends and recurring uses, generating excess cash of GBP 246 million in the period. This result has been flattered by the relatively low level of annuity investment in the first half, reflecting timing of BPA deals. At the full year, we expect excess cash to be at least in line with the GBP 0.3 billion reported last year. Turning next to recurring management actions. These represent repeatable sources of value that we deliver year after year across our business. In any given period, these will vary in quantum between the 3 categories we first highlighted in March, which are repeated on this slide. On the left, the largest component relates to annuity portfolio yield reoptimization actions, which generated GBP 189 million of OCG in the first half. By way of reminder, we capture such opportunities by making frequent small-sized trades through market cycles, which optimize the risk-adjusted return of our portfolio without taking on more risk, whilst remaining duration and cash flow matched. We delivered GBP 81 million of OCG through capital improvement actions, representing a long-standing Phoenix capability of extracting recurring value from model and data improvements, primarily from our capital-heavy business. On the right, you can see the GBP 24 million OCG contribution from ongoing fund simplification. In the first half, we closed 65 out of a total of around 5,000 funds, delivering further operational and service fee reductions. This component represents an enduring source of value as we continue to simplify our fund range with further fund closures expected in the second half. Our half year performance puts us firmly on track to deliver recurring management actions in the order of GBP 500 million at the full year, in line with our guidance. Having delivered GBP 705 million of OCG in the first 6 months, going forward, we expect a more even half-on-half profile compared to 2024, which was second half weighted. And so we reiterate the mid-single-digit percentage annual OCG growth guidance. On the right, you can see that the total cash generation over the last 18 months of GBP 2.6 billion is also tracking towards our GBP 5.1 billion cumulative 3-year target. Turning from cash to capital. I set out on this slide, the shareholder solvency walk, which I will step through in some detail. Looking at the 2 book ends of the chart, you can see that we increased both our solvency surplus to GBP 3.6 billion and our solvency coverage ratio to 175% after repaying GBP 200 million of debt in February. In between these bookends, we analyze the various recurring and nonrecurring components of the walk and show the corresponding own funds and SCR values in the table below. You will see that our recurring net capital generation represented by the items grouped in the top left box of the chart was positive GBP 0.2 billion, equivalent to 4 percentage points of solvency coverage ratio. The corresponding recurring own funds generation shown in the bottom left box, was also positive GBP 0.2 billion, supporting the favorable evolution of our leverage ratio. The items grouped in the top right box show a net positive generation from nonrecurring items of GBP 0.1 billion. Stepping through each component in turn, other management actions were GBP 0.1 billion positive and include benefits arising from 2 sources. The first relates to the expense savings from in-housing annuity backing assets. And the second results from selling the shareholders' 10% share of future income in one of our 90/10 funds to the estate of this fund. We have initiated a program covering 12 with-profit funds, which over the next 2 years will release total surplus of around GBP 150 million. There is more detail in the appendix for those who are interested. Economics and temporary strain were neutral overall. Our hedging strategy delivered as expected, producing a GBP 0.1 billion negative, which was offset by the unwind of the annuity temporary strain that we carried over from full year '24. The investment spend and other component reflects continued spending on our investment program, offset by the beneficial impact of the Wipro strategic partnership, which has accelerated the start point from which the lower per policy administration charges apply on the GBP 1.9 billion impacted policies. Before leaving the slide, I would note that the capital improvement in the period is flattered by the timing of BPA deals. By way of illustration, if we had written the same BPA volumes as in the first half of 2024, the coverage ratio would have been around 3 points lower, reflecting both the day 1 capital investment and the related temporary strain. Notwithstanding this, the underlying capital improvement in the first half remains strong. Turning to leverage. We made a clear commitment to bring this ratio down to 30% by the end of 2026. Leverage improved to 34% in the period, supported by the GBP 200 million debt repayment and the growth of regulatory Own funds, reflecting the drivers that I covered in the previous slide. We remain firmly in control of our path to 30%, supported by the GBP 650 million of excess cash that we expect to generate over the next 18 months. As I said before, the path to 30% will not be linear and deleveraging will be managed within the upper half of our 140% to 180% operating range. Our IFRS adjusted operating profit increased by 25% with our 2 main business divisions growing at a strong double-digit rate. I will come back to their respective performances shortly. The overall increase to GBP 451 million is supported by business growth, which has driven our asset base higher and increased both investment contract revenues and insurance contract CSM releases. It is also supported by a high level of investment margins, reflecting the value added by Phoenix Asset Management and by cost savings, which I will cover on the next slide. Our successful delivery of our grow, optimize and enhance strategic initiatives puts us well on track to achieve our GBP 1.1 billion operating profit target by full year '26. Consistent with the comment I made earlier on OCG in-year profile, IFRS operating profit will also be more even first half on second half going forward. In March, I shared my assessment that our cost savings target of GBP 250 million was credible and that I was looking for opportunities to accelerate its delivery. The actions we have taken in the period, namely the introduction of Wipro as a strategic partner for customer administration and other changes to our operating model have accelerated the delivery profile with GBP 160 million cumulative run rate savings now expected to be achieved by full year '25, some GBP 35 million higher than our previous guidance. At the end of the half, cumulative run rate savings reached GBP 100 million with actions taken in the period, adding GBP 37 million to the full year '24 total. Some GBP 40 million of this run rate total was earned in the period. Our cost savings initiatives remain a key underpin to delivering the 2026 operating profit target and to supporting ongoing business margin improvements. Our Pensions and Savings business continues to grow in assets, profitability and margins. As Andy outlined earlier, we continue to win in workplace with a leading employer proposition, excellent customer service and competitive pricing. This translated into GBP 4.9 billion in workplace gross inflows, including GBP 0.7 billion in new scheme wins. You may recall that last year, we won a GBP 0.9 billion large scheme, which are relatively infrequent, boosting the prior year comparator. Excluding new scheme wins, we reported robust growth in gross inflows to GBP 4.2 billion, highlighting the workplace flywheel effect as the combination of strong new business flows in recent periods and low bulk losses expands our overall regular premium base. Our workplace pipeline is at a very healthy level, reinforcing our optimism of sustained business growth. Workplace outflows were slightly up year-on-year, reflecting higher base AUA and the natural attrition from those taking their pensions or porting their workplace schemes to their new employer. Moving across the slide to retail business flows. It is pleasing to see an uptick in gross inflows with outflows stabilizing. Positive market effects have more than offset the overall net fund outflows with average AUA closing up year-on-year. Looking at the bottom half of the slide, IFRS operating profit increased 20% to GBP 179 million. The improved investment contract result is supported by higher fee revenues from the 5% growth in average AUA and continued cost discipline. Our scale and operating leverage supported an improved operating margin of 19 basis points. Our Retirement Solutions business also delivered a strong operating performance in the first half. As a reminder, new volumes are not the primary driver of profits here. We run GBP 39 billion of annuity assets. So it is the management of this large book of business that drives most of our profitability. Stepping through the slide, starting in the top left, BPA volumes were GBP 0.3 billion in the first half, reflecting market factors and our selective participation. We have since completed a GBP 1.9 billion deal, and we are at an exclusive stage for deals totaling GBP 1 billion. So at GBP 3.2 billion year-to-date, our BPA volumes are robust. In individual annuities, new premiums grew by 20% to GBP 0.6 billion with our market share rising to 13%. In the bottom right, you can see that operating profit increased strongly in the period, up 36% to GBP 286 million. The improvement is supported by higher CSM releases, reflecting growing business scale, higher investment margins, reflecting the value add by Phoenix Asset Management and ongoing operational leverage. We have maintained pricing discipline with business incepted at a similar level of strain to last year of around 3%, generating mid-teen IRRs. We remain committed to deploying up to GBP 200 million of capital this year, provided with secure sufficiently attractive returns. The 10% increase in our store of insurance contract value recorded in the CSM represents another key underpin to our future operating profitability. This increase reflects ongoing contributions from the usual sources as well as a sizable contribution in this period from strategic projects, namely the expense savings benefit from in-housing annuity backing assets and the impact of the Wipro strategic partnership on associated contracts. Completing the IFRS picture, this next slide shows the first half movement in IFRS adjusted shareholders' equity. Our higher operating profitability means that we continue to close the gap between recurring sources and uses being negative GBP 36 million in the period compared to negative GBP 139 million period last year. Nonoperating expenses reduced to GBP 184 million, reflecting the tapering of our planned investment spend. We reported adverse economic variances of GBP 275 million, driven primarily by the negative marks on equity hedges following a 7% rise in markets. As I illustrated back in March, this is a known consequence of our hedging strategy, which protects cash and solvency capital that gives rise to an accounting mismatch under IFRS. The slide which accompanied the explanations provided in March is included in the appendix. Actions such as the with-profits initiative to sell GBP 0.7 billion of future shareholder transfers to the estate will reduce our overall equity risk exposure, allowing us to shrink the size of the equity hedging program by around 10%. On the right of the chart, you will see that we closed the period with an adjusted shareholders' equity of GBP 3.4 billion. Before leaving this slide, I reiterate that our aim is for IFRS shareholders' equity ex economics to grow from 2027. Moving next to dividend. Phoenix is a highly cash-generative business. We have a strong track record of consistent dividend growth and operate a sustainable and progressive dividend policy. I outlined in March the financial metrics that the Board considers when undertaking the annual dividend assessment. These are repeated on this slide being mainly OCG, the solvency coverage ratio and the parent company distributable reserves, all of which remain healthy. Consistent with previous guidance, the Board continues to consider that the group's consolidated IFRS shareholders' equity does not give rise to any practical limitations to dividend payments. To conclude, we have made a -- we have made positive progress at the midpoint of our 3-year strategy, and we have increased execution certainty across all of our 2026 financial framework targets. We have positioned the business to generate mid-single-digit percentage annual OCG growth, producing a level of OCG, which more than covers our recurring uses and delivered excess cash of GBP 300 million or more per annum. We're on track to reduce our leverage ratio to 30% by 2026 with all the levers required to achieving this being firmly within our control. Finally, supported by the acceleration of our cost-saving plans, we are on track to deliver GBP 1.1 billion of IFRS operating profit in 2026, enabling us to cover our recurring uses on this reporting basis as well. Thank you for your attention. I will now hand you back to Andy. Andrew Briggs: Thank you, Nick. Our vision is simple: to become the U.K.'s leading retirement savings and income business, serving customers of all stages of their life cycle from 18 to 80 plus, and we're making great progress. We have built leading propositions across our Pensions and Savings and Retirement Solutions businesses and enhanced our asset management capabilities. Our focus will now turn to further building out our customer engagement tools, which will be enhanced by our increasingly digitally enabled customer interface shown in the lighter purple. Our strategic priorities are clear, and we're excited about what comes next. Looking forward, we expect the second half of 2025 to be just as busy as the first as we continue to execute against our strategic priorities. For growth, while we'll continue to consolidate our excellent position in Workplace and Annuities, the focus of our investment is in retail as we build out our capabilities. Priorities here are engaging our customers. So I'm particularly excited about the imminent launch of our Retail advice proposition also connecting our full range of products into key platforms. And so the launch of our Smooth Managed Fund on the Quilter platform, one of the largest in the market is a key step forward to reach more customers. For Optimize, we will progress our shift to in-housing annuity backing assets. And for Enhance, by the end of the year, 75% of policies will be on their end state platform. Today, we're announcing our intention to change our group name from Phoenix to Standard Life plc in March 2026. Our move to Standard Life brings our most trusted brand to the forefront and demonstrates our commitment to helping customers secure a better retirement. It's a brand known to all of you and the brand we are already using for new business in the pensions and savings and retirement solutions markets. The move aligns our brand strategy with our group strategy, supporting our focus on organic growth. It unifies our colleagues and strengthens our employer brand. And it simplifies our business, reducing duplication and cost. In summary, we are executing -- successfully executing on our vision to be the U.K.'s leading retirement savings and income business. Let me recap the 3 key messages. I'm delighted with the progress we're making against our strategic priorities. I'm pleased that the balance sheet pivot is beginning to emerge, and I'm optimistic about the future. Delivering on our strategy is enabling us to meet more customer needs and in turn, deliver strong shareholder returns. So with that, let us move to questions. So we'll start with questions from the audience in the room. If you can raise your hand if you have a question and we'll direct one of the roving microphones to you. Please you can start by introducing yourself and the institution you represent. For anyone watching on the webcast, please use the Q&A facility and we'll come to your questions after we've answered those in the room. Andrew Briggs: So we start with Abid. I hope it's 3 questions first. Abid Hussain: So 3 questions. It's Abid Hussain from Panmure Liberum. The first one is on your own funds. You're making a number of investments across the business now and margins are moving in the right direction. So when do you expect the own funds to start increasing? That's the first question. And the second one is on your dynamic hedging. Can you give us an update on your plans to reduce the overhedged nature of the Solvency II balance sheet or as I see it, the overhedged nature of that Solvency II balance sheet. I think you previously said you were going to move to a more dynamic approach on that. So any update, please? The third question is on margins across the pensions and savings business. Where do you think those margins might settle down to. It's good to see the operational leverage coming through, but I suspect there's an element of over earnings. So just sort of any guidance on that. And as a subpart to that, if I can, just very quickly. Can you give us any color on where the Workplace savings margins might be? Andrew Briggs: Sure. So I'll take the first and third of those, and Nick will take the second. So on Own Funds, so unrestricted Tier 1 Own Funds, the Own Funds, excluding the debt did grow from GBP 4.2 billion to GBP 4.4 billion. But obviously, what we're then doing is paying down debt to reduce the leverage ratio. So we had GBP 0.2 billion growth in the recurring Own funds. And then the nonrecurring, basically the one-off management actions covered the cost of the investment. So that was neutral on Own funds. And so very pleased with that progress. And that's a key focus for us. So I know there's a lot of focus on shareholder equity. But the point of the hedging is to protect that Own funds growth and the solvency surplus, which protects the dividend in due course. So we want to keep momentum in growing that Own funds going forward as we've shown in the first half. In terms of pensions and savings and margins there, so you saw the margin increase from 17 basis points to 19 basis points. The revenue margin was broadly flat and the revenue was up by 5% because the average AUA was up by 5%, and that was coupled with reducing costs, which led to the growth in the margin. Probably the guidance I'd just reiterate is back in March, we talked about that over half of the growth from '24 to '26 in operating profit would come in pensions and savings. That basically implies pensions and savings will hit around GBP 450 million of operating profit next year. If you work that through, that will be a margin getting into the sort of low 20 basis points. And I think what we'd expect to do over time is you would see a gradual slow decline in the revenue margin. But ultimately, we want to hold the costs broadly flat and absorb inflation and therefore, you continue to get the benefits of operating leverage. We don't disclose the margin split between the different areas in any detail. But broadly speaking, Workplace would be typically high 20s would be the sort of revenue margin there. And that's what's leading to the sort of slight decline, but only marginal decline in the overall revenue margin of 46 basis points in the first half. Nick, do you want to take the hedging question? Nicolaos Nicandrou: Will do Andy. So we hedge around 80% of the equity risk. That's where we are. And the way we think about this is that, if you like, that relates to the equity exposure of the legacy book, which is in runoff. And we, therefore, don't hedge the new business that we write. That 80% will gradually taper over time as the legacy book runs off, clearly 6 months on from when I updated to you, there's been minimal movement in that. But the initiatives to effectively neutralize our shareholders' transfer will have an impact. As I said, that GBP 700 million of future shareholder transfers. There is substantial equity risk associated with that. And as we deliver that program, we will see a 10% reduction in the notional. The program is across 12 out of our 22 with profit funds. Those 12 funds are 9 to 10 funds with very strong estates. The customers want to take more risk, but we don't want to do that, hence, the transactions that we're putting in place. Three of those with profit funds will be completed by the end of the year, another 7 next year and the final 2 in 2028. And the benefits, whether it's the GBP 150 million of extra surplus that, that will generate or whether it's the 10% reduction in the hedging will come through around 50% this year, 30% next year and 20% in 2027. So Gradual decline sort of to summarize gradual declines as the legacy book runs off, and then we'll take 10 points off that, 5 this year, 3 next year and 2 the year after. Andrew Briggs: So we go along to Andy. Andrew Sinclair: It's Andy Sinclair from Bank of America, and great to see the Standard Life brands coming back to the fore. Three for me, please. First, just on the operating profit balance H1 versus H2. Just trying to get a little bit more color on that comment. I guess I thought pensions and savings stronger in H2 with higher AUM, retirement I have thought about flattish, and that's before the cost saves coming through. So should we still be expecting H-on-H growth H2 on H1? And just a little bit more color on that, please. Second was actually on IFRS nonoperating on the amortization of intangibles. I think the guide for that has typically been down about 8% a year, but it dropped, I think, 16% last year, and it's, I think, 11% year-on-year in H1. Clearly helpful to have that nonoperating drag dropping away. Is there any reason why that's going faster? And how should we think about that? Should we still think about 8%? Or should we think about it going faster? And then just third, just on those with-profit transactions you're mentioning. As I understand it, for the equity hedging, one of the positives is when equity markets go up, yes, you lose on the short term from the hedging, but you gain that back with higher fees, et cetera, over time. How -- where are we seeing that IFRS kind of unwind from that hedging coming through at the moment? Is there anything that's coming through maybe in H2 as kind of a one-off coming through there? And does that change the sensitivities as well as sensitivities already updated? Andrew Briggs: I'm going to let Nick do all 3 of those. While he's just thinking of those, if you didn't know, Andy started his career at Standard Life in Edinburgh, hence, the reference to brand, he's feeling good about it. So Nick? Nicolaos Nicandrou: Well, I didn't mean to imply that H2 is going to be exactly the same as H1. Inevitably, there will be factors that shift that. I mean clearly, the higher CSM base should benefit the second half in the same way as it's done this year. We'll see what the AUA does on the investment contracts. Cost savings, yes, we'd expect more to emerge in the second half. But compared to what we saw last year, both in relation to OCG and IFRS, you should see a much more balance. It was 45-55. That's not the shape we're going to have going forward. Amortization of intangibles, there has been an acceleration. If you look in the recent past. That's merely a reflection of some of these books running off completely. So it's great to see that we are on a tapering path for that. And actually, that's also true in relation to interest costs. It's also true in relation to the, if you like, the nonoperating investment spend. All of this very helpful as we seek to get to 2026 and cover all our recurring uses and 2027 to cover all uses, except the hedge-related volatility. I mean on equity, I think you answered the question that there is a mark-to-market. The benefit will come through higher charges going forward. There's been no discernible change in the equity strategy or approach. So I wouldn't expect to see anything different in the second half compared to what we've seen in the first, unless I misunderstood your question. Andrew Sinclair: I was just asking for the with-profits transactions that you're doing, if I can understand it reduces the equity hedging going forward, but are you giving away some of that benefit of expecting in future to get those higher charges through? Just kind of interested to know a bit more in terms of the color of. Nicolaos Nicandrou: So the impact on IFRS of the with-profits program will be second order. I mean, before we used to get effectively 10% of the increase in asset share come through. That was hedged. So we didn't -- if you like, the risk-weighted contribution to the result was modest. As we go forward, that will be replaced effectively by an investment return on whatever it is that we're investing the proceeds in. So the impact will be second order. Mandeep Jagpal: Mandeep Jagpal, RBC Capital Markets. Three for me as well, please. First one on management actions. You plan on bringing a further GBP 20 billion of annuity assets in-house. Just to clarify, are the potential expense savings that you mentioned already included in your nonrecurring management action guidance? And then it also supports the delivery of recurring management actions. So is that already included in your GBP 500 million per annum guidance? Or could there be upside to both these targets quite soon? And then just on the -- follow-up question on the hedging. How should we think about the impact of the hedges to the with profits with respect to the SCR? So trying to understand if we should expect the increase in market exposure to increase the SCR potentially? And finally, you highlighted the pension adequacy review as a tailwind. What does Phoenix think the contribution rate should eventually get to make pension adequate? And how long do you think it would take to get there in the U.K.? Andrew Briggs: Thanks, Mandeep. So I'll take the first and third and ask Nick to take the second. So in terms of the GBP 20 billion of housing annuities, so the 2 benefits of that. One is more cost efficient, and that is one of the drivers of the nonoperating Own funds growth that we showed and I talked about to Abid a moment ago. So that's taken through there. It also -- by having the assets in-house ourselves with our own people, it is favorable in terms of the annuity reoptimization portfolio actions that we undertake. We're not increasing the guidance from the GBP 500 million per annum, but it's going to be easier to get there now effectively, yes. So it puts us in a strong position. In terms of the contribution rate, so we have a think tank. It was called Phoenix Insights. It's rebranded to the Standardized Center for Future Retirement, a bit of a clue of the direction of travel for the group. We did that earlier this year. And we did a piece of independent research work there. And the proposal that came out of that was that we should look to increase the auto enrollment contribution rate from 8% to 12%. So that was the kind of the independent research. Just giving you a kind of sense of this from a couple of perspectives. So although the minimum rate in the U.K. is 8%, the average savings rate is 10%. In Canada, the average saving rate is 20% to give you a sense of where U.K. consumers are heading compared to Canadian counterparts. Of that 8% in the U.K., the employer contribution is 3%. Australia is just increasing their employee contribution to 12%. So this is why we're calling this out quite very loudly. It's not going to be that visible because people retiring today still have significant defined benefit pensions. But in 10, 20 years' time, we are heading for real impoverished retirements. Now the bit that's interesting in all of this is actually our market is huge, GBP 3.5 trillion. It's already growing really strongly, as you can see from the fund flows I had on Slide 8. But if we address this under provision, it's going to grow even faster still, yes. And that's what we're advocating for and driving for. Nick, do you want to take the second one. Nicolaos Nicandrou: Yes. With profit. So just to add some more numbers and some more detail, if I may. On the solvency -- so these funds there's about GBP 700 million of shareholders' interest in future transfers. And that GBP 700 million is on the solvency balance sheet. In addition to that, there's about GBP 200 million of shareholders' interest in the estate. The solvency rules don't allow us to take credit for that GBP 200 million. So in making this transaction, albeit it's a small discount to the values that I've just quoted, we get to recognize the GBP 200 million shareholders' interest in the estate, hence, why there is an impact on solvency. Now that GBP 700 million was subject to a whole host of risks. Yes, there was equity risk and interest rate risk, but that was hedged. So very modest SCR in relation to that. But there's credit risk associated with the investments that are backing up. There is expense overrun risk, there's mass lapse risk. So there was an SCR associated with those. And clearly, as we complete those transactions, that SCR falls away. If it's replaced by cash, we won't hold any risk capital in relation to that. So the benefits come through recognizing the shareholders' interest in the estate and removing the SCR. Andrew Briggs: I think just a couple of quick comments on this. This is a sensible simplification. So in the shoes of a customer, historically in these funds, basically, there was this concept of you're sharing the profits 90/10 between the customer and the shareholder. It's not the easiest concept for your average consumer to get your head around. Where we're effectively going to by doing this is we're making the with-profit funds kind of mutual with-profit funds. So the customer gets the smoothing, but it's just the same as any other fund they can invest in. There will be an annual management charge and our revenue is charges less expensive than the same is on the unit-linked business. So it's a much simpler customer proposition. It also is beneficial financially. It reduces the equity hedging risk. It adds own funds. So it's beneficial. But I wouldn't overplay it. And all the things we're talking about today, this is quite a small part of the picture of the value creation of the group. Dominic O''mahony: Dom O'Mahony, BNP Paribas Exane. I've got 3, if that's all right. The first is just on the in-housing of the assets. Great to see the benefit across all the financial metrics on that. Is there more you can do? Clearly, that's about -- it's now just over the majority of the annuity book, but there's anything to stop you doing the rest. And on the -- you're very clear in saying that you're not trying to become a third-party asset manager. But on the with-profits book in particular, I guess you have quite a lot of discretion about how you manage that. Is there anything you could do to in-house any of that? Second question was just on the excess cash build, which is very pleasing, clearly. In terms of deployment, Page 13 runs through the way you're thinking and it's very helpful. Would you feel that you would have to get above the 180% solvency ratio before deploying that into, say, additional capital returns beyond your existing deleveraging program or indeed to shareholders? And more broadly, what would be your priorities for using excess cash beyond this -- beyond the deleveraging plan? And then third question, the bond yield curve has moved in an interesting way since the end of the half. It moves every day, of course, but I think there's been some steepening. My guess is that your fixed income duration is quite long. Should we be focusing more on the 30-year or the 10-year when we think about the various impacts on your balance sheet? Andrew Briggs: Thanks, Dom. So I'll take the first 2 and ask Nick to take the third. So in terms of the in-housing of assets, so we have GBP 39 billion of annuity backing assets. We have 5 already in-house. And today, we're announcing a plan to in-house a further GBP 20 billion. So there is a bit more that we could go after in due course. But I wouldn't envisage we end up with all of the assets in-house because we'll do public credit in-house, derivatives and so on. We'll do some private debt in-house, but we'll also continue to partner with third parties that can get us access to particular differentiated private credit that we couldn't get directly ourselves, yes. So it wouldn't be the whole GBP 39 billion in due course. In terms of with-profits, no plan to change our current approach there. So view that the same as the pensions and savings side where we are determining the right strategic asset allocation. We're partnering with external asset managers that have real expertise in different sectors that we will continue to partner and outsource those assets. In terms of excess cash flow, so as we said, we're once again reiterating that we will have at least GBP 300 million per annum of excess cash. That's significant. We're paying a dividend of GBP 550 million. And then on top of that, after all recurring uses, we have GBP 300 million of excess cash. So it shows the strong solid cash generation. The great thing about Phoenix is because of the approach we take to hedging, you're going to get that money because the solvency balance sheet is protected, and that's why we hedge in the way we do so that, that money comes out. In terms of how we're using it, the priority at the moment is using it to delever. We believe that's the highest return on capital. And in many ways, you can kind of see that in terms of our share price performance, the market implied WACC has come down, and it's increased the intrinsic value by the most amount, if you like. So that seems to us to be proving to be the right call. What we basically will then do once we get the leverage down to 30% is we will allocate the excess cash against the highest return opportunity using our capital allocation framework. So historically, we've illustrated that could be investment in organic growth. It could be considering M&A. It could be further deleveraging beyond the 30% level or it could be further capital return, share buybacks we'll make a call -- the Board will make a call at the time based on what would be the highest return on capital for shareholders of how we deploy that excess capital. I wouldn't see that we would need to be north of 180% to do that. We have a target range of 140% to 180%. We would rather be in the top half of that target range so that in the event that we're extreme shocks, we're still above the bottom, although obviously, our balance sheet is much less sensitive to market movements than our peers for the reasons I've said. So it wouldn't need to be above 180% to deploy excess cash. As indeed, we're not above 180% at the moment, and we're deploying the excess cash against deleveraging. Nicolaos Nicandrou: We're deploying the excess cash to grow, optimize and enhance. So the deployment is happening. On your question on duration, I mean it's not -- it's less a question of choice. We have to hedge in line with the duration of our annuity liabilities. At the moment, we hedge the 1 in 200 cash flows, and that takes us somewhere in the 15- to 17-year point. So our hedging program kind of reflects the -- if you like, the length or the tenor of those liabilities on a 1 in 200. And yes, what the impact that we've seen on our solvency balance sheet of the rate movements since the half year, indeed equity markets and some of the other is de minimis, both at the own fund level and at the surplus level. So hedging is delivering exactly what it's designed to do, which is to provide stability to our balance sheet, to our solvency balance sheet and in doing so, underpin the progressive dividend policy. Andrew Briggs: Andrew? Then we'll come from Andrew. Andrew Baker: Andrew Baker, Goldman Sachs. I'll go 3 as well, if that's okay. You just mentioned de minimis impact in the second half on solvency balance sheet. What would that be on the IFRS equity side, if that's okay? And then secondly, we've seen quite a bit of M&A recently in the U.K. bulk annuity space. Do you expect this to have any impact on your ability to deploy the GBP 200 million of capital that you have in your plans at attractive margins? And then finally, is there anything you're able to say on sort of the life insurance stress test later in the year and what we should be expecting there? That would be really helpful. Andrew Briggs: Okay. I'll let Nick do 1 and 3, and I'm happy to pick up the second one on the M&A in the BPA market. So I think there's 3 things I'd say. The first is it's actually quite good, isn't it, that all this capital wants to come into the U.K. savings and retirement market. It shows it's a really attractive market. The market is growing strongly. The margins are attractive. The profit pools are attractive and people are prepared to pay a lot of money to get them to be part of it. I'd say that's a real strong endorsement of the market. I mean in terms of ourselves, we feel in a good position competitively. We're far more diversified than many of our competitors. So we have a capital efficiency advantage because we've got a much more diversified overall business mix. So we find we can compete well in the market currently, and we're well placed to compete well. The Standard Life brand lands really positively in this market. But we also have a whole host of developments that we're undertaking to continue to evolve our competitive position. So the in-housing of assets is really helpful that we're announcing today. We continue to look to partner with external asset managers that have unique differentiated private asset capabilities. That's a key focus for us. And I'm also really pleased with the build-out of individual annuities. So our individual annuities grew 20% first half on first half. That took our market share up from 11% to 13%. And obviously, a lot of this external capital coming in is going to focus on BPA rather than individual annuity. So all in all, are we confident that over time, we'll be able to deploy our GBP 200 million of capital? Yes, we are. But we will be disciplined, and we will not deploy the capital if we can't get attractive returns. We're focused on returns. The beauty for us of having a very diversified business mix is we can afford to then be disciplined and focused in what we're doing. Nick, do you want to take the other 2? Nicolaos Nicandrou: Yes, happy to. Maybe just to add an addendum to your answer. the 3% strain data point that I gave earlier and the mid-teens IRR, those relate to effectively the year-to-date GBP 3.2 billion of BPAs that we've written and the GBP 600 million of the individual annuities at the first half. So if you like, it's an updated -- it's a current number. Let me take list because that would be quick. Yes, like everyone else, we submitted our stress test results in relation to Phoenix Life Limited. The PRA will publish information later this year, sometime in early Q4 on the industry impact and specific impact, nothing to say at this point, and we can have a conversation at the point that those are published. On the impact of market movements, I'll answer the question on IFRS, but if you permit me, let me explain to you why I regard that as noise. okay? So as far as -- for as long as we continue to grow our OCG to cover our uses for as long as we have a very healthy solvency base and for as long as we're increasing our IFRS operating profits that we can sit here so that they can cover the recurring uses. As long as we're doing that appropriately, then I am unconcerned about the hedge-related volatility that comes to IFRS. And why is that? As we have explained before and as it's set out on Slide 44 in the appendix, the hedging is giving us the stability to the solvency balance sheet. You can see that this time around, you can see that going back. But the offset, the IFRS balance sheet doesn't cover all the components that we hedge. So it's a mismatch and it's noise. What matters, as I said, when it comes to dividend is the distributable reserves that we have in plc. They were GBP 5.6 billion at the end of full year '24. At the half year point, they've increased to GBP 5.7 billion. What's feeding that are remittances from the Life subsidiaries. We've just filed accounts for the Life subsidiaries. They showed that in 2024, we made GBP 500 million of profit and the hedging resides within these Life companies, GBP 500 million of profit, their distributable reserves going up to GBP 1.8 billion. In the first 6 months of this year, the U.K. Life subsidiaries made another GBP 400 million of U.K. GAAP profit after absorbing the -- again, the hedge-related impact. Why U.K. GAAP is the same economic basis of reporting as we see in Solvency II. And therefore, the numbers are exceedingly healthy. That's why we're confident that there are no practical implications to that hedge-related noise that is coming through the IFRS. Again, I'll repeat what I said a minute ago on the solvency balance sheet, de minimis impact, both on our own funds and in relation to the solvency, the accounting noise, if you like, since the half year is adverse GBP 150 million. Nasib Ahmed: Nasib Ahmed from UBS. Three questions from me as well. Firstly, on the retail business. You say you're trying to get from top 10 to top 5. What does that mean in terms of flows? Do you reduce the GBP 7 billion of outflows? Or do you increase the GBP 2.5 billion of inflows in that business as well? If you can kind of give us some update on -- I think you have targets for the end of this year. It seems like they're not going to be met, but maybe next couple of years, where do you see the net inflow on the retail business going to? Second question on M&A. It seems like -- I mean, you've been pretty clear it's not a focus or not as big a focus anymore. But there was a deal done by HSBC Life. What was the reason for not going for that one? Was it just the new business proposition was not aligned to where you guys are? And then on disposals as well, Europe and Sun Life over 50s, where is your thinking around disposals of those 2 businesses? And then finally, on leverage, Nick, you say it's not going to be linear, but it seems like if you retire the Tier 2 this year and the Tier 3 next year, you're kind of there. Why would you not do that? Why is it not linear? Andrew Briggs: Okay. So I'll take the first 3 and let Nick take the fourth. So on the retail side, so to answer your question, basically, top 10 to top 5 is roughly going from GBP 5 billion of inflows to GBP 10 billion of inflows to give you a kind of sense of it, yes. Key focus for us. We very consciously went about this strategic pivot to organic growth by looking at the 3 markets in a logical order. We started with BPA, then workplace. We're now turning our attention much more to retail. The reason we did the first 2 first is that in those, you've got a small number of expert buyers in the employee benefit consultants and corporates, you can get to them quite quickly, and we've successfully done that and that those businesses are performing very strongly indeed. Retail will take more time because we're trying to get to literally millions of customers and thousands of individual advisers. So it's going to take more time, but we are confident we're on that journey. We're confident we've got structural advantages to get there. I think the other thing I would say as well, just that when you look at our overall business, roughly half of our outflows are actually customers taking their income in retirement. That's what we're here to do. That's our whole purpose in life. So that half goes with a big smile on our face and our hands clapping. We're delighted we're helping with a kind of GBP 14 billion payroll of U.K. retirees, yes. I mean that's what we're here to do. So we really focus on the other half that is transferring elsewhere. That's the particular focus on the outflow side. So in terms of M&A, what I'd say is M&A remains something that we would absolutely consider. What's great for us now is that we're delivering strong organic growth. So we no longer have to do M&A. It becomes a choice. We are still the first port of call for anyone considering looking at M&A. We still see M&A as the opportunity to create value, build scale. But what we're doing is we're basically allocating our capital. We now have far more choices where we can allocate. We're allocating our capital where we can get the highest returns on that capital. So I'm not going to comment on any specific deal, obviously. But rest assured, any M&A going on, we would get the call, and we would look at it, and we would think about it compared to alternative returns on capital and other sources, and we will deploy against the highest value returns. In terms of potential disposals, so on Sun Life, you may recall, we considered potentially selling that last year and then the FCA came up with their protection market review. Not an issue for us specifically, but when we were trying to sell the distribution arm and one of the key focuses was on commission rates between the manufacturing arm and distribution arm, we own both. So we're agnostic as to what that is internally. That basically became an issue. We've got a great team of people there in Sun Life. They're doing a great job. I'm going to let them get yes. I'm not going to disrupt them again, if you like. In terms of Europe, you mentioned that as well. So what we said on Europe is that we have a number of things that we need to do to that business, which are the right things to do to it organically. We need to get it on to more modern technology. We need to get a partial internal model in place. Those initiatives are still in train and will run for another period of time, and they are the right things to do for that business organically for the future, but also would create greater optionality as well in a number of dimensions. Nick, do you want to pick up on leverage? Nicolaos Nicandrou: Yes. On leverage, really to reiterate the comments that I made in my prepared remarks that we have all the levers to be able to get to 30%. What do I mean by that? Well, clearly, we have the recurring capital generation, sizable enough to more than cover the recurring uses. So we can finance it. And then, yes, we have the instruments that are coming up that fit within the kind of the timing -- the time frame that is covered by our target. Andrew Briggs: The bottom line there, is if we keep growing own funds, we won't need to take out all of the debt coming up over the next 12 months to get to the target. And so the point is we may choose to refinance some of that potentially and still get to the target if we keep growing own funds. That's the point if we want to refinance some. We may or may not. It's a decision we'll make at the time. Andrew, you've been pretty quiet so far. Unknown Analyst: Okay. I've got 10 questions if I may. I was just going to ask on the pensions and savings business and particularly the savings element of it. Could you split down the net flows in the retail bit between the old-fashioned individual unit linked and the new retail? And perhaps give some sense in pensions and savings as to the split of the profits between those 3 elements within that because you have one legacy business within there. Nicolaos Nicandrou: So that second bit again. Unknown Analyst: And then give us some sense of the legacy profits within the pensions and savings business. And then secondly, you're talking about Europe, need for more modern technology and a partial internal model. When will you have completed that and therefore, can look at your options? Andrew Briggs: Sure. So on pensions and savings, the -- if you look at the sort of annualized retail inflow of around GBP 5 billion that we have gross flows, roughly half of that is regular premiums on existing customers. So all the workplace levers, for example, end up in retail. And the other half is effectively transferred in, so lump sum. So if you want to sort of draw the distinction, roughly half is regulars, roughly half is transfers in. In terms of breaking down the profits between the different segments, it's not something we do, Andrew, and I do hear that people want more, and it's something we will give some thought to in time. But the point I'd draw is that an awful lot of the cost of being in this business are fixed. And therefore, the marginal revenue fund flow you generate, generates significant marginal value. And that's exactly what we're seeing. So our margin at 19 basis points is materially higher than our other main listed peers, materially higher. And it's not actually that we're much better. It's that we just have more scale. And so if you try and do the cost allocation down, you've got a large fixed cost of being in this business, the systems and processes and so on involved that you'd be allocating around. So the point I'd really draw to is going forward from here, we would expect to be obviously, there will be a runoff of revenue. Think about the revenue line and the cost line separately. There will be a runoff of revenue over time as customers take their income in retirement. We'll have all the new flows coming in, and we kind of give a bit of a sense of the revenue margin. The average is 46. Workplace is down in the high 20s. So you can get a bit of a sense of that. And then in terms of the cost base, the cost base is going to continue to come down in line with our GBP 250 million cost reduction. So in trying to model the picture going forward, I'd encourage you to split the revenue and the cost side out. There's a trajectory of cost that I think is sort of clearly defined by our cost reduction target, and then you can get a sense of the revenue picture. But I do hear you, and it's something we will give some thought to. Europe, I would say 18 to 24 months would be the order of magnitude frame. I'm looking at Jackie in the front row, you're going to be horrified at that 18 to 24 months, that's fine, yes. 18 to 24 months will be a sense of time frame. Nicolaos Nicandrou: Your question was on the partial internal model as well in relation to Europe. I mean I -- look, it's a good question. It's one example of many things that are available to us to kind of optimize the balance sheet. And let me just expand on that a little more, if I may. Clearly, business-led drivers such as the Wipro, such as in-housing of annuities, the cost savings programs is driving capital efficiency. Ultimately, it's helping our operating leverage as well. But there's many balance sheet type actions that we can do with profit simplification is one example. I mean the other few I would flag just by way of example, we -- unlike many of our peers, up until now, we've only done one major model change. That's when we put Phoenix and Standard Life together. Others have done 3 or 4. So our capital models or our approved model is a little behind the curve. We're in the process of making our second ever application as we look to increase the sophistication of the way we model credit risk. At the moment, it's very simple. We're moving to a transition and default approach in stressing it. Others have done that since day 1. Whether it's Europe on a partial internal model or ReAssure on a standard formula, Sun Life on a standard formula, again, there will be other applications that will come over the next year or 2 as we move those to an internal model. And in doing so, we will benefit from the diversification benefits that come across when you integrate it. In Ireland, we're happy with the partial internal model, but there are further transactions such as a mass lapse reinsurance, for example, that will put that partial internal model to an outcome that is very similar to a full internal model. Lots and lots of activities and a big runway over the next few years to generate more value. And all these things are in our scope, and we will address those systematically and extract the benefits. Andrew Briggs: Any other questions in the room? Do we have any questions on the webcast? Operator: Three questions from Farooq at JPMorgan. Firstly, on the asset management side, can you let us know how many external asset managers you think you'll end up working with? Secondly, can you talk about your use of a heavier gilt-based investment strategy compared to and any use of derivative strategies to capture a higher spread from gilts? And lastly, right now, how is further deleveraging versus other uses of excess cash looking on a return on capital basis? Andrew Briggs: Okay. So on the -- I'll take the first and -- you'll take the second. Do you want to do a third or should I do a third? What do you think? I have to think about it. Nicolaos Nicandrou: Write it down. So we're thinking about the second. Andrew Briggs: Okay. I will do the first and the third. So on the asset management side, how many partners will we work with? We don't have a sort of set specific number we're targeting. We just feel that with 5,000 funds and the broad range of partners we currently have, we can simplify that down. We can get a better outcome for our customers by having a smaller number of funds and a smaller number of partners. And we would expect Aberdeen as our key strategic asset management partner are likely to be a beneficiary of that exercise. In terms of the return on capital looking at different options, we're very clear. We have stated a target of a 30% leverage ratio on a Solvency II basis and we're aiming for that. And there's nothing we've seen that suggests that there will be a higher return on alternatives to doing that. So that is absolutely our focus. Expect us to use excess cash to delever until we get to that 30% target. And then Nick, on the second? Nicolaos Nicandrou: On gilts, 2 or 3 things to say. Yes, we're long gilt at the moment. The opportunities to deploy some of the new premiums that we've collected over the last year or so into credit are not as valuable as we would like them. So yes, we're long gilt about GBP 1.5 billion. We -- but we don't do -- I think if your question was referring to sort of leverage gilt approaches to improve deal economics, we do very modest amounts of that. Andrew Briggs: I think the point I'd just quickly add there is we're quite happy with the strain around 3% because we're quite happy to deploy capital and then generate an attractive return on that capital and hence, make a decent amount of money. There is a little bit of a tendency in the market at the moment to focus on getting the strain as low as possible. So for example, doing these leverage gilt trades, it does bring the strain down, but you end up making an attractive return on very little capital, so don't actually make that much money. And if you do the leverage gilt trades, you then can't do the annuity portfolio optimization over time either. And so it kind of takes away another source of ongoing value. So we're -- we view the value creation is the primary thing we're trying to achieve here rather than get the strain as low as we possibly can. It's -- we've got plenty of capital. We're high surplus cash generation. So we're happy to deploy where we get attractive returns. Any other web questions? Okay. So that brings us to the close. I'm actually going to go off piece here and the team don't even know I'm going to do this. Claire looks very worried, Joe looks worried. But I was chatting to [ Barry Corns ] earlier today. And you tell me, Barry, that after over 1,200 analyst company meetings, today is your very last one and your last day. Is that correct? So I think that -- over 1,200. I think it deserves a round of applause to finish, hope you agree. I've always gone quite well with Barry. I think he's completely bought to ever speak to me again. But anyway, thanks, everyone, for coming along. We'll be around for a while if you have any further questions, but thanks so much for your time. Much appreciated.
Operator: Thank you for standing by, and welcome to Skillsoft's Second Quarter Fiscal 2026 Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers present, there will be a question and answer session. Please note that today's call is being recorded and a replay of the call and webcast will be available shortly after the call concludes for a period of twelve months. I would now like to hand the conference over to your first speaker today, Stephen Poe, Investor Relations. Thank you. Please go ahead. Stephen Poe: Thank you, operator. Good day, and thank you for joining us to discuss our results for the second quarter ended July 31, 2025. Before we jump in, I want to remind you that today's call will contain forward-looking statements about the company's business outlook and our expectations that constitute forward-looking statements within the meaning of The U.S. Private Securities Litigation Reform Act of 1995, including statements concerning financial and business trends, our expected future business and financial performance, financial condition, and market outlook. These forward-looking statements and all statements that are not historical facts reflect management's current beliefs, expectations, and assumptions and therefore are subject to risks and uncertainties that could cause actual results to differ materially from the conclusions, forecasts, estimates, or projections in the forward-looking statements made today. For a discussion of the material risks and other important factors that could affect our actual results, we refer you to our most recent Form 10-K and other documents that we file with the Securities and Exchange Commission. We assume no obligation to update any forward-looking statements or information as of their respective dates. During the call, unless otherwise noted, all financial metrics we discuss will be non-GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles. For example, listeners should be cautioned that references to phrases such as adjusted EBITDA and free cash flow denote non-GAAP financial measures. Non-GAAP financial measures should not be considered in isolation or as a substitute for GAAP financial measures. A presentation of the most directly comparable financial measures determined in accordance with GAAP, as well as the definitions, uses, and reconciliations of non-GAAP financial measures included in today's commentary to the most directly comparable GAAP financial measures, is included in our earnings press release, which has been furnished to the SEC on Form 8-Ks, is available at www.sec.gov, and is also available on our website at www.skillsoft.com. Following today's prepared remarks, Ron Hovsepian, Skillsoft's Executive Chair and Chief Executive Officer, and John Frederick, Skillsoft's Chief Financial Officer, will be available for Q&A. With that, it's my pleasure to turn the call over to Ron. Ron Hovsepian: Thanks, Stephen. Good afternoon, and thank you for joining us. Economic uncertainty extended Q1 headwinds into Q2 and weighed on revenue primarily through lower customer discretionary training spending. The impact was most pronounced on our live learning offers, which include nearly all of global knowledge products while affecting only one product, coaching and TDS. With clearer visibility and established buying patterns, and given Q1 and Q2 contribute 30 to 40% of our annual bookings, we are updating our full-year revenue guidance. Despite a lower revenue base, we delivered consistent profitability and improved adjusted EBITDA margins, reflecting the success of our expense reduction, operational improvement, and resource allocation initiatives executed to date. As a result, we are maintaining our full-year expectations for adjusted EBITDA and free cash flow, which John will cover in more detail. Ahead of our results, we want to update you on our transformation. We're about one year into our execution plan, which is producing encouraging proof points. Most notably, a fourth consecutive quarter of revenue growth in our TDS enterprise solution, which represents more than 90% of the TDS segment. The people transformation and new roles are foundational to the next phase of our transformation, which are driving the new AI innovation-based product roadmap and our new positioning that will focus on intelligent learning design, skills intelligence, and immersive learning experiences. To summarize our key transformation actions, since launch last August, we have created and implemented a dual business unit structure, improved our operational execution, conducted a significant shift in critical resources, and recently finished building out our talented bench of leaders to drive our strategy forward. In total, these actions help deliver $45 million in expense reductions, contributed significantly to profitability and margin expansion, and we have begun to stabilize our core TDS enterprise segment. Turning to the second quarter, broad macro and geopolitical headwinds weighed heavily on GK during the first quarter and continued into the second quarter, with the largest impact coming from slower demand in North America and in The Middle East. These were driven by external factors. As a result, we are updating the revenue guidance. John will provide the specifics. Our teams continue to deliver on our strategic priorities. First, we have focused on leveraging the existing scale of our platform and our relationship management teams that already serve nearly 3,000 customers, all more than $1 million of total contract value. I'd like to share three examples of customer wins from Q2, which validate our strength in providing value to enterprise organizations. A global athletic apparel brand partnered with us to enhance leadership capabilities and drive cultural transformation. Our unified learning solution integrated risk-based compliance, inclusive leadership development, and innovation training. Our personalized learning pathways and analytical tools help the organization to track progress and elevate engagement while streamlining global compliance. A global semiconductor manufacturer engaged our team to enhance their learning ecosystem for 43,000 employees with a focused AI-powered content and personalized learning paths. The program includes certifications in cloud, cybersecurity, and agile methodologies. Our ability to deliver high-impact learning at scale is helping the customer meet aggressive innovation timelines and improve cross-functional collaboration. A leading European provider of digital services partnered with us to launch a large-scale workforce transformation initiative. We were selected for our ability to deliver strategic learning at scale, which we accomplished with them. In just eighteen months, the company's global workforce earned over 20,000 certifications in cybersecurity, cloud, data, and AI, and service management. These wins reflect the growing demand for scalable, high-impact learning solutions as organizations adapt to rapid shifts in workforce and AI technology. To meet this need, we are evolving our product strategy to focus on AI-native design, skills intelligence, and enterprise-grade flexibility. This shift is not limited to an enterprise HR team; it is increasingly relevant to the executives across the organization who are focused on building workforce capabilities that directly link to measurable outcomes. Later this month, we will share details about a new AI authoring experience designed to change the way organizations create and deliver learning. This innovation is part of a broader roadmap focused on personalized skills development, scalable certification, and advanced analytics. These capabilities will enable enterprises to produce high-quality content faster at a lower cost, localize and govern it at scale, shorten time to competency, and quantify the ROI through deeper skills and compliance insights. As part of our roadmap, we advanced Casey by adding full voice mode, five-level proficiency scoring, an improved feedback rubric, and a new behavior trait for more dynamic conversations. For enterprises, this scales realistic role play delivers consistent and audible proficiency signals, speeds time to competency, lowers coaching costs, and links skills progress to faster sales ramp, higher customer satisfaction, and stronger compliance. We expanded global learner support with a unified language experience in over 50 languages, an intuitive page builder for custom enterprise landing pages, and broadened HR and technology certifications with comparative dashboards by department, geography, each having custom attributes as desired. For enterprises, this delivers faster global rollouts, higher adoption and completion, consistent governance, and clearer ROI from skills and compliance gains. Skillsoft Precipio platform momentum continues with technology learners up 50% year over year, AI learners up 74%, and AI learning hours up 158%. Enterprises are scaling with Skillsoft to close the skill gaps, reach competency faster, adopt AI more broadly, cut training and onboarding costs, and improve their KPIs. Bringing it all together, we're confident in our core businesses' durability and in the strategic investments in our go-to-market and product portfolio, all of which will enable us to return to market growth rates. With that, now let me hand the call over to John to cover our financial results in more detail. John? John Frederick: Thank you, Ron, and good afternoon, everyone. As a reminder, and as noted at the opening of the call, consistent with prior quarters, this section covers non-GAAP measures, unless otherwise stated. As Ron noted, we continue to advance our transformation and are seeing encouraging signs even amid persistent macroeconomic and geopolitical challenges, particularly in public sector spending within our global knowledge segment. We have made considerable investments in our go-to-market enterprise customer resources and products, and while it's too early to conclude on the efficacy of these investments, I wanted to share some initial insights. With respect to enterprise customers, we invested in specialized subject matter experts, SMEs, to help our customers make the most of their talent development journey. These SMEs improved dollar retention rates by more than 10 percentage points better than the average. Investments made in Q2 will take time in the market for us to see the effects. Aiding this rollout of key investments, we now have a new marketing leader and expect to make some exciting product announcements in the upcoming weeks, as Ron referenced earlier. Now turning to the results. Revenue per talent development solutions, or TDS, was $101.2 million in the second quarter, slightly down year over year. Our TDS performance continues to benefit from our efforts to capitalize on the evolving market shift from traditional learning and skills development towards more comprehensive talent development solutions. However, during the quarter, growth in our TDS enterprise solutions was masked by declines in our learner product line, reflecting fundamental changes in the B2C market over time. Global knowledge revenue of $276 million in the quarter was down approximately $2.9 million or 9.6% year over year. We continued to see softening demand reflecting lower discretionary spending, particularly in North America, and from geopolitical instability in The Middle East, which impacted GK during the quarter. These market conditions are central to our view on full-year guidance, which we'll cover shortly. Total revenue of $128.8 million in the second quarter was down $3.4 million or 2.6% year over year. Our TDS LTM dollar retention rate, or DRR, as of the second quarter was 99%. This compares to 99% last quarter and 98.4% one year ago. Churn and erosion in our federal business had a material effect on DRR in the quarter, reducing our performance within the quarter by approximately four percentage points. Putting the materiality of this in the proper context. Now I'll walk through expense measures, which again saw a year-over-year improvement as a result of the cost reduction initiatives we executed in the back half of last year. Cost of revenue of $32.7 million in the second quarter, or 25% of revenue, was up 1.6% year over year, reflecting higher utilization of certain platform features by our customers. Content and software development expenses of $13.2 million in the quarter were 10% of revenue, down approximately 5.9% year over year. These improvements largely reflected productivity gains from leveraging AI and a sharper focus. Selling and marketing expenses of $38.5 million in the second quarter were 30% of revenue, down approximately 3% year over year. General and administrative expenses were $16.1 million in the second quarter, or 12% of revenue, down approximately 10.5% year over year. Total operating expenses were $100.5 million in the second quarter, or 78% of revenue, down $3.4 million or 3.2% year over year. Despite the lower revenue base compared to the prior year period, we once again delivered strong profitability with adjusted EBITDA of $28.3 million, flat compared to last year. Adjusted EBITDA margin as a percentage of revenue for the quarter was 22% compared to 21.4% last year. GAAP net loss was $23.8 million in the second quarter compared to a GAAP net loss of $39.6 million in the prior year period. GAAP net loss per share was $2.78 compared to $4.84 per share in the prior year period. Adjusted net income of $7.9 million in the second quarter compared to adjusted net income of $7.1 million in the prior year. Adjusted net income per share of $0.92 in the second quarter compared to adjusted net income per share of $0.87 in the prior year. Moving to cash flow and balance sheet highlights. Free cash flow for the quarter was negative $22.6 million compared to negative $16.1 million in the prior year period. As we anticipated and as we alluded to in the last quarter's call, most of the positive free cash flow we generated in the first quarter reversed in Q2. However, year-to-date free cash flow remains positive and was approximately $3.5 million as compared to a cash usage in the prior year of $5.7 million. Again, this was driven largely by normal seasonality as Q2 is typically our weakest cash flow quarter, as well as timing of collections and certain disbursements in the quarter. Looking to the balance of the year, improving free cash flow and generating consistent positive free cash flow continues to be a top priority. And accordingly, we're reiterating our expectation of $13 million to $18 million for the full year. GAAP cash, cash equivalents, and restricted cash were $103.4 million at quarter end. Total gross debt on a GAAP basis, which includes borrowings on our term loan and accounts receivables facility, was $579 million at the end of Q2, down slightly from approximately $581 million at the end of 2025, reflecting normal amortization. Total net debt, which includes borrowings on our term loan and accounts receivable facility, net of cash, cash equivalents, and restricted cash, was approximately $475 million, down from approximately $477 million at the end of 2025. Turning to the outlook for the full year, as Ron already mentioned, we are adjusting our previously communicated revenue range outlook for fiscal '26 to account for the now anticipated continued softness in federal spending. We now expect revenue of $510 million to $530 million for the full year. However, because of continued operational execution and cost optimization, we're reiterating our expectations for adjusted EBITDA of $112 million to $118 million. We also remain confident in our ability to drive positive free cash flow in fiscal '26 and are reiterating our expectation of $13 million to $18 million for the full year. We're continuing to monitor external market conditions and impacts to our business and are diligently focused on continuing to accelerate our transformation and optimizing our performance, including examining all areas of the business for profitability improvements. With that, operator, please open the call up to questions. Operator: Thank you. And at this time, we will conduct a question and answer session. Our first question comes from Ken Wong with Oppenheimer. Please state your question. Ken Wong: Fantastic. Thanks for taking my question. Ron, I wanted to touch on your comments about the softer live learning environment. Appreciate the color in North America and The Middle East. Are you able to give any additional color on if any particular sectors stood out in terms of kind of material softening? I know last quarter, we saw some softer government discretionary, but would love a sense of kind of what end markets might be impacted. Ron Hovsepian: Yeah. No. Thank you, Ken. The answer is, yeah, it's kind of an interesting story. It's a tale of two cities here. What I see in North America specifically, I did see public sector get affected in North America and The Middle East in terms of live learning. Right? That was a direct hit there. When I look at what's happening in our live learning, in particular, in Europe, we're actually showing good progress there. I think as John referenced in his comments. So it's interesting. We've been and that's a booking statement. Is what you're hearing from me. We're seeing that progress. So it gives me confidence we see a clear path on how to fix that business and get that business to growth again. And proof points that we can do it. And we'll give more color in the near term on what we'll see then. We'll have some things to share. The interesting part, though, is where we got really, really hit in the quarter was really public sector. The uncertainty in The Middle East was a big one on that piece of it. And then in North America, the uncertainty that we're all familiar with and the expense got. Ken Wong: Got it. And any I'm sure the natural question from some investors might be, you know, why you're confident that this might be more of a macro dynamic versus potentially a competitive situation here. Any color you're seeing in the pipeline or just your deal commentary with customers that suggest that it's more the former rather than the latter? Ron Hovsepian: Yeah. When I look down into the bookings and what I'm seeing happen specifically in Europe, which is probably six to nine months ahead of its recovery compared to, like, The US. What I see there is actually really nice large dedicated public sector deals being signed by the team. And that will become revenue and convert over time. And those are nice numbers. We haven't shared those numbers publicly, and we'll figure out when and where, if any, of that gets shared. But I can tell you that part is working. So that's where I'm getting the confidence from when you hear me say that, and that is where we're really seeing good progress. I would share with you that the rest of the market, when I look inside the sector of virtual instructor-led training and physical instructor-led training, those two pieces of it, it's the people who deliver it, are also seeing I looked at about six companies that deliver portions of it. And I saw a range of negatives from those companies reporting in that one live learning bucket is what I'm referring to. So I saw four out of the six not have growth. One of them have growth at 1%. So I didn't feel like we were way out of line with what's occurring across the market, again, in that narrow sector. There's another four or five companies I track, but they don't publish numbers. So that's a very important piece, Ken, of what I saw happening inside the market, as well. As I think about it. Yeah. And I think so hi, Ken. This is John. John Frederick: A couple of things. So first, from a confidence perspective, we did see some green shoots as Ron alluded to in Europe with respect to GK. So we're starting to see some improvement from a bookings perspective such that that business is largely that piece of the business is largely inflected in that quarter. So that's a one-quarter inflection point. I wouldn't call it a full inflection, but it certainly gives us a reason to feel a little bit more confident with some of the activities we're conducting in that region. The second piece really is around confidence. When we adjusted our guidance down, almost all of that guidance adjustment pertained to GK specifically. So we're really trying to do our best to be careful and thoughtful about taking that piece of the risk profile of the forecasting out of the mix, if you will. Ken Wong: Got it. Okay. Perfect. And that somewhat segues into my next question, John, and just you feel that that $17 million, that three-point cut to revenue, that feels appropriately fenced off. I mean, you characterize that as being based on what you saw in your bookings in the quarter, or did you guys embed some further erosion as a potential safeguard? John Frederick: Yeah. So it's a great question. Thank you. So first half revenue for the company was down about $7 million. When you think about this business from a normal seasonality perspective, from a bookings perspective, about 35% of our business is in the first half, about 65% is in the second half. So we have a bunch of commercial activity happening in the back half of the year. We took that into consideration when we set the low end of our guidance range. So, you know, said differently and more directly, first half down $7 million. That implies the back half being down $13 million to get to the low end of our guidance. So we tried to take that heavier seasonality in the back half of the year into consideration, if you will. Ken Wong: Perfect. Okay. Really appreciate the color there. I think that makes a lot of sense. And then yeah, I guess this could go for either you, Ron, or John. But with you know, you guys were projecting to a little bit of growth previously, and now the new guy, you know, bit of a decline from fiscal 2024. And I know the aim with all the moving pieces, the first, you know, first part of the year was to get back to growth, Ron. Do you think that that timeline is now hugely dependent on macro, or do you feel there's still elements that are within your control that potentially get this business back on track? John Frederick: Ken, this is John. So great question. Why don't we start with what our strategic aim was last year? So we started with the transformation. We reduced some costs. We made a bunch of investments in the first half of the year, predominantly in the second quarter. So, you know, we haven't had quite enough time in the market to see how those investments were really gonna pay off. We certainly expect that they will. And when you play this out, I'd say that we've tried to do our very best to, to actually, I wanna actually, really wanna shift to a different topic here, but to give you a little bit more context. But I think what we really wanna do is make the investments. We have confidence in the investments that we've made. We've seen some green shoots in the business. We've also seen in the TDS enterprise product line that that business has continued to grow over the last four quarters. And that gives us a lot of confidence that given that that's 90% of the TDS segment, you kind of break the two pieces out, we derisk the forecast on the GK side. We've got the transformation seeming to work on the TDS enterprise product side. Our strategic target was that enterprise customer. If you go back to that beginning last August, so to kind of just summarize, the target was the enterprise customer. That segment of the customer is growing. We've derisked the GK side. I think we're feeling pretty good about what the outlook is. Ron Hovsepian: Yeah. And just to finish answering your question on the macro uncertainty and the impact on the long term or near term plan, from my perspective, this macro uncertainty has hit us for about three to six months on timing roughly. As I look out into it. We were a little slow in some of the hiring. The macro uncertainty piece hit. So that piece of it is what I would contextualize it in. I feel very comfortable over the next twelve months to eighteen months we can make up at least one quarter of that. So I'm not I'm gonna let the economy do its thing. And as I shared with you and the rest of the group at the beginning of the year, we did not account for macro uncertainty because it was too difficult to predict at the beginning of the year. As we got through the first half here, we had a lot more facts in our patterns. We could see things and everything John said then kicked in in his prepared comments and just now. But when I look at it, I'm just looking at the time window of it. I see it hitting us for about six months right now, and I believe we can easily make up one of those quarters over the next twelve to eighteen months. Right? I don't wanna act like we can get back time, but some of that we can make up. And that's a financial statement in terms of getting back to the growth plans that we have. That's not that's I don't see it making a big shift or a tectonic plate shift, which is what you were, I think, really asking. Ken Wong: Perfect. Okay. Fantastic. And then yeah, maybe shifting to, again, more a more positive note. Does sound like TDS, especially the enterprise customers, was tracking the plan. Any update or any incremental color on maybe how the dollar retention rate looked for that business? And then to the extent that there's any color on maybe the 10% that's not the enterprise mix, any color on how that performed? John Frederick: Yeah. Great question. So our year-to-date DRR was around 99 as you probably heard. And within the quarter, we had a fairly significant impact from our North American federal business. I think in terms of the prepared remarks, we were that had about a four percentage point impact negative in the quarter. So, you know, obviously, we're absent that effect. We would have had a bit better DRR. When I think about it relative to the competitive set in the marketplace, I think we're really holding our own nicely from a DRR perspective and setting the table for future growth. For sure. I think when you look at the smaller piece of the business that remaining less than 10% of the TDS business, which is really the B2C business, if you just kind of run the math. That business is down double digits on a year-over-year basis. So that was putting some fairly intense pressure on the TDS segment. Having said that, our real focus is on the enterprise customer. Ken Wong: Got it. Okay. Perfect. Ron Hovsepian: Good. Yeah. That's fine. Keep going. Ken Wong: Yeah. I was gonna just ask and I know this is always it's always tricky, but I mean, given the cuts that you guys have laid out there, obviously, some incremental weakness to account for the seasonality in the second half. I mean, would it be fair to call Q2 a trough or I guess it'd be more I guess, could be maybe three Q depending on how we weight the guidance. But how would you help us kind of frame kind of where we are in terms of the magnitude of headwinds that you're facing? John Frederick: Yeah. I think we've programmed in a bit of reduction in the back half of the year for sure. So if we were to kind of separate the two segments, we don't obviously, we don't give segment guidance. But we're certainly more negative in our outlook on the GK piece in terms of the guidance adjustment that we made. I think in the end, we can certainly expect that the TDS business should continue to perform at or about the level it's been from a revenue perspective. It's, you know, the seasonality is relatively modest in that business. It's basically a fifty-fifty business. Can it has some predictability to it. So I don't see a lot of negativity coming the way of TDS. With respect to a trough, we programmed in more of a trough on the GK side in the back half of the year. I think the way to think about it is kind of the tale of two cities again, with TDS performing reasonable to expectations. In fact, I'll say it more directly. Had we not had some of the headwinds on GK, we probably would be having the conversation about reducing guidance. Ken Wong: Got it. Understood. Ron Hovsepian: And I think on the guidance, Ken, I think John answered that perfectly, so I don't want to add anything to add there. But just for I just want to remind everybody, we're balancing in this conversation your trough question. When I look at it, at the top level. We're balancing macro uncertainty, right, that we talked about, which your question was built on, but I'm also balancing a transformation at the same time. So your question about is it the trough, we're right you know, right in the middle of that transformation as well. Right? You as I indicated in my comments, you'll see you'll see a set of announcements shortly, very shortly. You will you we are hiring, as John pointed out in his things, very quickly, right, in this past quarter in particular. Right? So as you look at it, I the transformation also happening. That'll add to a little bit of the trough here that we're in. And so there's a financial part you were and then there's the transformational part. I think we just gotta remember we're doing both at once, which adds a little, you know, extra degree of difficulty. To what we're getting done from an overall business perspective. So in terms of the transformation layer of it, I believe we're hitting as we enter next year, I feel very good about the overall strategy and the execution of the go-to-market changes, the product changes, and the overall business changes that we're making. And those things will start to then be they'll be fully instantiated as we hit next year. And we will begin to see those things start to pay off. So I'll let you design the timing on the trough on that one. Ken Wong: Understood. I appreciate that, Ron. And then maybe the last question for me just look. While you know, little disappointing on the revenue side, you guys were able to maintain EBITDA and it sounds like cash flow will still be on the positive end. How should we think about kind of the levers that were pulled to the extent that there's further softening? I mean, do you feel there's still some capacity to sustain the kind of profit that you guys have been pushing forward since the start of the year? John Frederick: Yeah. So we, Ken, we're certainly always cognizant of how we can become more efficient during the course of the year. So we're, you know, we're almost in a constant mode of assessing, particularly as part of this transformation, as we make these investments trying to become continuing to be more efficient. And so you can reasonably expect that we'll have a business model that comports with the current trajectory of the business. Yeah. Ken Wong: Understood. And I guess maybe a follow-up to that. I guess, how much of the cost management, the incremental productivity is just simply because a variable component to your cost structure, obviously, if your bookings and the revenue do not align with a certain compensation level for sales and marketing, you can dial that back. Versus, you know, what might have been more deliberately cut, whether it's on G and A or product to get aligned with kind of the current conditions. John Frederick: Actually, very little of it was pure variable cost changes as a result of revenue. It was mostly the effects of fixed costs that we've taken out previously. Ken Wong: Alright. Perfect. I think that's it on my end, guys. Really appreciate the incremental color there. And yes, best of luck on the back half. John Frederick: Thank you. Thank you. Operator: Thank you. And there are no further questions at this time. I'll hand the floor back to Ron Hovsepian for closing remarks. Thank you. Ron Hovsepian: Thank you, Diego. I'm as excited as ever about the opportunities in front of us at Skillsoft. While the challenging macroeconomic headwinds in some markets have caused choppiness in our revenues over the short term, the disciplined execution of our transformation, key investments, and the up-and-coming product announcements put us on sound footing to participate in the AI-fueled opportunities emerging in this market. Allowing us to really return the company to market growth in line with our long-range plan. So I'm confident where we're heading, and I look forward to seeing where and when and how fast we can get ourselves there. With that, thank you all for participating in the call today. Talk soon. Operator: Thank you. This concludes today's call. All parties may disconnect. Have a good day.
Operator: Hello, and welcome to the Core & Main Q2 2025 Earnings Call. My name is Alex, and I'll be coordinating today's call. [Operator Instructions] I'll now hand it over to Glenn Floyd, Director of Investor Relations. Please go ahead. Glenn Floyd: Good morning, and thank you for joining us. I'm Glenn Floyd, Director of Investor Relations at Core & Main. We appreciate you taking the time to be with us today for our fiscal 2025 second quarter earnings call. Joining me this morning are Mark Witkowski, our Chief Executive Officer; and Robyn Bradbury, our Chief Financial Officer. On today's call, Mark will begin by sharing an overview of our business and recent performance. Robyn will follow with a review of our second quarter results and our outlook for the rest of fiscal 2025. We'll then open the line for Q&A, and Mark will wrap up with closing remarks. As a reminder, our press release, presentation materials and the statements made during today's call may include forward-looking statements. These are subject to various risks and uncertainties that could cause actual results to differ materially from our expectations. For more information, please refer to the cautionary statements included in our earnings press release and in our filings with the SEC. We will also reference certain non-GAAP financial measures during today's discussion. We believe these metrics provide useful insight into the underlying performance of our business. Reconciliations to the most comparable GAAP measure are available in both our earnings press release and the appendix of today's investor presentation. Thank you again for your interest in Core & Main. I'll now turn the call over to our Chief Executive Officer, Mark Witkowski. Mark Witkowski: Thanks, Glenn, and good morning, everyone. We appreciate you joining us today. If you're following along with our second quarter earnings presentation, I'll begin on Page 5 with a business update. I'm proud of our associates' dedication to supporting customers and delivering critical infrastructure projects. Our teams drove nearly 7% net sales growth in the quarter, including roughly 5% organic growth. Municipal demand remained healthy, supported by traditional repair and replacement activity, advanced metering infrastructure conversion projects and the construction of new water and wastewater treatment facilities. Our nonresidential end market was stable in the quarter. Highway and street projects remain strong, institutional construction has been steady, and we're seeing continued momentum from data centers. While data centers represent a small portion of our sales mix today, customer sentiment points to continued growth in this space, and we expect it to become a larger portion of our sales mix over time. On the residential side, lot development for single-family housing, which accounts for roughly 20% of our sales, slowed during the quarter, especially in previously fast-growing Sunbelt markets. We believe higher interest rates, affordability concerns and lower consumer confidence are weighing on demand for new homes. And until these macro headwinds ease, we expect activity in this end market will continue to soften through the second half. As a result, we are factoring in a lower residential outlook into our full year expectations, which Robyn will speak to in more detail. Against this market backdrop, we drove significant sales growth and market share gains across key initiatives, including treatment plant and fusible high-density polyethylene projects, where our technical expertise and consistent execution continue to differentiate Core & Main in the industry. We are also deepening relationships with large regional and national contractors, especially those pursuing critical infrastructure projects across the country. These customers increasingly value our ability to support them with consistent service, scale and product availability wherever their projects take them. Sales of meter products declined year-over-year, primarily due to project delays in the current year and a difficult comparison to last year's 48% growth rate. However, we have a growing backlog of metering projects we expect to release in the second half of the year, supporting our expectation for strong full year metering sales growth. Additionally, a healthy pipeline of bids and continued project awards gives us confidence in both the near- and long-term outlook for metering upgrade projects. Gross margins performed well in the quarter at 26.8%, up 10 basis points sequentially from Q1 and up 40 basis points year-over-year. Our gross margins reflect strong execution of our private label and sourcing initiatives, while our local teams continue to capture market share. At the end of the day, our performance is largely driven by how well we support our customers, making sure they have the right products at the right time with the service they need to keep projects on schedule and on budget. At the same time, our operating costs were elevated this quarter. We've experienced unusually high employee benefit costs and inflation in other categories like facilities, fleet and other distribution-related expenses. We have also carried higher costs from recent acquisitions, which have contributed to sales growth but have not yet reached their full synergy potential. Although we anticipated some of these pressures, certain costs were more pronounced than expected. To address these factors, we have implemented targeted cost-out actions to improve productivity and operating margins. We expect a portion of the savings to be realized in the second half of this year with a larger annualized benefit in 2026. We expect to achieve additional synergies tied to recent acquisitions. Our integration approach is phased and growth-oriented, starting with people, sales and operations to position each business for success. Once that foundation is in place, we evaluate opportunities in terms of costs and resources and develop plans to drive SG&A synergies. Our approach to cost management will be measured and focused on realigning the business with the demand environment without jeopardizing future performance, growth opportunities or the ability to serve our customers. We remain confident in the long-term growth and profitability prospects of Core & Main, including our ability to drive SG&A improvements and generate substantial value for shareholders. We continue to be balanced in how we allocate capital. During the quarter, we generated $34 million of operating cash flow and deployed approximately $24 million across organic growth initiatives, share repurchases and debt service. Year-to-date, we have repurchased $47 million of shares, reducing our share count by nearly 1 million. Our growth strategy is driven by organic growth and complementary acquisitions. After the quarter, we announced the acquisition of Canada Waterworks, a 3-branch distributor of pipe, valves, fittings and storm drainage products in Ontario, Canada. We expect the transaction to close later this month, further enhancing our position in the multibillion-dollar Canadian addressable market. With this acquisition, we now have 5 locations in Ontario, all established through value-enhancing M&A. This has created a platform for meaningful growth in Canada. On the organic side, we're making prudent investments to enhance our capabilities and better serve customers. We recently opened new locations in Kansas City and Wisconsin, strengthening our presence in priority markets. We are also evaluating additional high-growth markets for future expansion. These investments are designed to generate long-term growth, strengthen our market share and support our goal of delivering above-market growth over the coming years. We have plans to open several more locations this year, and I look forward to sharing updates on these initiatives. Before turning the call over to Robyn, I want to reiterate my confidence in Core & Main's growth and margin expansion opportunity. We are well positioned to benefit from future investments in aging U.S. water infrastructure. We have the right team in place to execute on the opportunities ahead, and we look forward to delivering even greater value to our customers, suppliers, communities and shareholders. Thank you for your continued support and trust in our vision. With that, I'll turn the call over to Robyn to walk through our financial results and outlook for the remainder of the year. Go ahead, Robyn. Robyn Bradbury: Thanks, Mark. I'll start on Page 7 of the presentation with some highlights from our second quarter results. As Mark mentioned, we grew net sales nearly 7% in the quarter to $2.1 billion. Organic sales were up roughly 5% with the balance of growth coming from acquisitions. Prices continue to be flat overall, and our teams worked diligently to sustain pricing in an evolving tariff and end market environment. In total, we estimate that our end markets grew in the low single digits range. We outperformed the market with significant sales growth and market share gains in our treatment plant and fusible high-density polyethylene initiatives. Gross margin came in at 26.8%, up 10 basis points from the first quarter and up 40 basis points year-over-year. The sequential and year-over-year improvement were both largely driven by continued execution of our private label and sourcing initiatives and contribution from accretive acquisitions. SG&A expenses increased 13% this quarter to $302 million. Roughly half of the $34 million increase was related to incremental costs from acquisitions and timing of onetime and other nonrecurring costs. The remainder was made up of volume-related growth, inflation and distribution-related costs and investments to drive future growth and market share gains. We implemented certain productivity and cost-out measures earlier this year, but with higher costs and inflation continuing to pressure our operating margins and our expectation of softer residential demand, we will be taking additional targeted cost reduction actions in areas that won't impact our ability to serve customers. Importantly, we will continue to make strategic investments to strengthen the business. We're seeing strong results from our sales initiatives, and we have opportunities to accelerate that with additional investment. We intend to keep expanding through greenfield locations to better serve customers and capture share while also investing in technology solutions that improve efficiency and support long-term margin expansion. Interest expense was $31 million in the second quarter, down from $36 million in the prior year. The decrease was primarily driven by lower fixed and variable interest rates on our senior term loan credit facilities and lower average borrowings under our ABL credit facility. Our provision for income tax was $41 million compared to $42 million in the prior year. Our effective tax rate was 22.5% for the quarter versus 25% a year ago. The decrease in effective tax rate was primarily due to tax benefits associated with equity-based compensation. Adjusted diluted earnings per share increased approximately 13% to $0.87 compared to $0.77 in the prior year. The increase reflects higher adjusted net income as well as the benefit of a lower share count following our share repurchase activity across fiscal years 2024 and 2025. We exclude intangible amortization because a significant portion of it relates to the formation of Core & Main following our leverage buyout in 2017. We believe adjusted diluted EPS better reflects the results of our operating strategy and the value creation we're delivering for shareholders. Adjusted EBITDA increased 4% to $266 million in the quarter, while adjusted EBITDA margin declined 40 basis points to 12.7%. The decline in adjusted EBITDA margin was driven by higher SG&A as a percentage of net sales, which we are taking actions to optimize. Turning to the balance sheet and cash flow. We ended the quarter with net debt of $2.3 billion and net debt leverage of 2.4x within our stated goals. Total liquidity was $1.1 billion, consisting primarily of availability under our ABL credit facility. Net cash provided by operating activities was $34 million in the quarter, down from $48 million in the prior year. The decline was primarily due to higher investment in working capital, partially offset by higher net income, lower tax payments and timing of interest payments. During the second quarter, we returned $8 million to shareholders through share repurchases, bringing our total for the first half of fiscal 2025 to $47 million and reducing our share count by nearly 1 million shares. As of today, we have $277 million remaining under our share repurchase program. Next, I'll cover our revised outlook for fiscal 2025 on Page 9. We are very pleased with our sales growth, gross margin expansion and capital allocation efforts through the first half of the year. However, higher operating costs and softer residential demand have resulted in operating margins coming in below our expectations. As a result, we are lowering our guidance to reflect current market conditions and higher operating expenses. We now expect net sales of $7.6 billion to $7.7 billion, adjusted EBITDA of $920 million to $940 million, and operating cash flow of $550 million to $610 million. We expect end market volumes to be slightly down for the full year. Municipal end market volumes are expected to grow in the low single digits, nonresidential volumes are expected to be roughly flat and residential lot development is expected to decline in the low double digits. Residential volumes were soft in the quarter and have weakened further through August, consistent with our updated guidance. We still expect pricing to have a neutral impact on full year sales, and we remain on track to deliver 2 to 4 percentage points of above-market growth. We expect adjusted EBITDA margins in the second half of the year to be slightly lower than the first half, reflecting continued gross margin performance, offset by a softer residential market and a higher SG&A rate. In summary, we continue to execute our growth initiatives, expand gross margins and make the strategic investments needed to position the business for long-term success. We have favorable long-term demand characteristics across each of our end markets, many levers to drive organic above-market performance, a healthy M&A pipeline, and numerous opportunities to improve operating margins. We are taking targeted actions to align the business with current demand trends and deploying capital to accelerate growth and enhance shareholder returns. We are confident in our ability to execute on the opportunities ahead, and we look forward to delivering even greater value to our customers, suppliers, communities and shareholders. With that, we'll open it up for questions. Operator: [Operator Instructions] Our first question for today comes from Brian Biros of Thompson Research Group. Brian Biros: On the guidance changes, I guess, the adjustment to the resi outlook from flat to down low double digits looks to account for maybe a little bit more than the adjustment to total sales overall. So it seems like maybe there's something at least positive partially offsetting that resi impact. Maybe that's slightly better municipal market, maybe it's just recent M&A being added in. Can you just touch a little bit more on the puts and takes to the revenue guidance there? Because it seems like there's more than just the resi impact to the top line. Robyn Bradbury: Yes. Thanks, Brian, for the question. You're right. Resi is the kind of the main driver for the reduction in the sales guide. We were expecting that to be flat kind of earlier in the year. It has declined kind of during the quarter, continued to soften after the quarter, and we're expecting that to be in the low double digits range now. That's the majority of the decline there. And then we do have some other areas of bright spots on the top line that are offsetting some of that. So some of our sales initiatives continue to perform really well, like things like treatment plant. Some of our fusible high-density polyethylene product lines are performing well. The municipal market remains strong with ample funding, and we're seeing a lot of demand there, too. So those are kind of the puts and takes on the top line with the revised guide. Brian Biros: Understood. And then second question for me, I guess, just the water category overall is kind of getting a lot of attention now. It used to kind of be a green initiative angle. Now it's seemingly a crucial part of the AI infrastructure build-out and kind of just the general reindustrialization trend. You highlighted in some of your prepared remarks and I think in the press release, things about your technical expertise, your consistent execution, leading to share gains, focusing on the larger contractors. So I guess just bigger picture here kind of going forward, where do you see, I guess, the biggest opportunities for growth with the way the water market is evolving? Mark Witkowski: Yes. Thanks, Brian. Great question. And I would tell you, we're obviously very favorable on the overall water market. And we've really seen more and more demands for water as you've seen these data centers going up in certain areas that need energy and water to satisfy those types of projects. So we're seeing the demands with projects like that. I think the value of water has improved. You're seeing rates passed at the local level more and more so that the municipalities are very healthy right now. And that's giving them more opportunities to get projects designed and ultimately improve the aging infrastructure, which is really the key piece that's really behind the multiyear tailwinds that we have in that municipal market. But then when you throw on top of that some of the demands now for water, which are even more with some of these projects that are going on, obviously sets us up really well. And that's a big part of why we continue to invest in this business, invest in resources, invest in facilities. Those tailwinds are there. We're capturing a lot of those as you're seeing in the municipal results. We're obviously facing some temporary headwinds here with the residential market being softer. We're on the front end of a lot of this with lot development. Our results obviously go into the July period. So I think we're facing some of this a little earlier than some are seeing it on the residential side. But that municipal strength and then that strength that we're seeing with some of these projects in the nonresidential space like data centers is definitely helping offset some of that weakness. Operator: Our next question comes from Matthew Bouley of Barclays. Matthew Bouley: So just a question on the, I guess, the makeup of the guide. So at the midpoint, I guess, revenue cut by $50 million and EBITDA cut by $45 million. So I guess I hear you on the higher operating expenses, but then you're also taking these targeted cost actions as well. So is it more just -- it just simply takes a lot of time to get these cost actions into place. You mentioned more of a 2026 impact, I believe. Or is the kind of maybe changed mix of business with residential a lot weaker impacting the margin as well? I guess just what else would explain that kind of larger decremental EBITDA margin? Robyn Bradbury: Yes. Thanks, Matt. Yes, we are taking cost out. We have already taken some costs out. We started taking some out in the first quarter. We continue to do so in the second quarter. There is some kind of stubborn inflation and other higher cost areas that are continuing to offset some of that. So we will continue to do additional cost-out actions. We will see some of that in the second half, but the larger majority of that will be seen into FY '26. Some of the cost-out actions that we made earlier in the year were in our fire protection product line that was experiencing some softness given some market pressures on nonresidential at that time and also the steel pricing pressures that we were seeing in the fire protection. That has since rebounded. So we took some cost out earlier in the year. It was very targeted to certain areas that we knew wouldn't disrupt the business, and now we're seeing that recovery, and we're well positioned for that. So we'll continue to do additional cost out, targeted actions that won't impact our ability to service our customers or service growth. We'll continue to make investments in growth. And Mark and I have been around the business for a long time. So we kind of know where those cost actions can come out and where we need to make investments. Matthew Bouley: Okay. Got it. And then secondly, just on residential specifically, obviously, a fairly substantial change to the outlook over the past -- relative to 90 days ago. So I guess what I'm trying to get at is sort of, a, your visibility into that end market? And b, maybe how did residential look during both Q1 and Q2? You're talking about kind of low double digits. I'm wondering if the expectation is that it would weaken a lot further in the second half. And so yes, just any color on that kind of cadence of residential and then just more specifically, what you're hearing from customers in that group? Mark Witkowski: Yes. Thanks, Matt. On the residential side, as we kind of worked our way into 2025, really felt like that market was going to be flat overall as we got into the first quarter. And we actually saw some pretty, I'd say, decent residential performance in Q1. Obviously, wasn't great, but we at least saw some projects going earlier in the year and obviously had a really good first quarter. And some of that was just, I'd say, better performance there than we expected. If you go back to Q1, we were well over our consensus and expectations on the top line. And really, what we saw as we got into Q2, really saw residential weaken really throughout the quarter. We definitely started to hear some of those signs at the end of the first quarter, but it was more of like scaling back some projects and frankly, just continue to weaken as we got throughout Q2 and definitely into August, as Robyn had mentioned. So that residential really kind of whipsawed from Q1 into Q2. We do think low double digit is the right way to look at it from here through the end of 2025. Obviously, we're expecting some kind of rate cut here in September. I think that's starting to be reflected a little bit on the mortgage rate side, but we're definitely not seeing the investments in the infrastructure from the builders. That's kind of been a mixed bag. Some are investing in land, some aren't. Definitely, we're not seeing the level of lot development going into those at this point. So the results that we're seeing, I think, are kind of reflective of what obviously we're hearing from the customers, and the scaling down is definitely what we felt in Q2. So we'll work through that. Obviously, we think there's continued significant pent-up demand that that's just creating. At some point, that's going to release, and we want to be well positioned to capture that when it does. Operator: Our next question comes from David Manthey of Baird. David Manthey: You might have just answered this in relation to one of Matt's questions there. But what was the residential market in the first half in terms of growth rate? And then your down low double-digit outlook, what does that imply for the back half? Mark Witkowski: Yes. Thanks, Dave. I'd say for the first half of the year, it was kind of down low -- or down mid-single digit to high single digit. And in the second half, obviously, I think that's overall going to be low double digit, slightly worse just to get to the low double digit over the full year. David Manthey: Got it. Okay. And then maybe back on the SG&A side. I think last quarter, you said that your organic revenues were up mid-single digits and organic same-store SG&A was up 4% year-over-year. Could you provide those organic figures for this quarter as well so we can compare that? Robyn Bradbury: Yes, Dave, when you think about how M&A impacted us in the quarter, it contributed about 2 points of growth to the top line. And then if you think about our growth in SG&A for total company, it contributed about 3 points of that overall growth. David Manthey: Okay. And then also last quarter, thinking about operating expenses, I believe you sort of implied you're expecting to see improving SG&A as a percentage of sales each quarter as we move through the year, which on the old forecast, I think, sort of implied lower dollars each quarter. But assuming no major M&A from here, do you think that the second quarter will be the high watermark for SG&A dollars this year as you implement these cost-out actions and normal seasonality impacts those numbers? Robyn Bradbury: Yes, Dave, we do. We've got -- as we talked about M&A and the record year we had in M&A that we did in the prior year, we've got a lot of opportunities there on the synergies. Those are things that we're working through. So we expect to continue to work through those and get some of those synergies recognized in the back half of the year and into FY '26. There were some onetime items in the second quarter that we don't expect to continue. So that's contributing to a little bit higher SG&A kind of rate and dollars in the quarter. And so with those things combined, we do expect to start seeing some progress on SG&A. And we do have some seasonality in there. But when you look at the SG&A rate year-over-year each quarter, we do expect that to kind of improve sequentially as we go throughout the rest of this year. David Manthey: Yes. Okay. And if I could sneak one more in here as we're talking about all the seasonality and 2025 being an unusual year in terms of lack of acquisitions versus all the deals you've done historically. When you think about normal seasonality ex acquisition, sort of the organic progression, how do you think about that? Do you think about it in terms of percentage of total full year sales per quarter? Do you think of sort of quarter-to-quarter growth rate? How do you think about the seasonality? And if you could just give us an idea of what we should expect this year because of the fact that you have very few or no acquisitions other than this Canada deal you just announced? Robyn Bradbury: Yes, Dave, I'll give you some color around that. So I would think about the second and the third quarter are typically similar size-wise. And then we typically see about a 15% to 20% decline in the top line from the third quarter to the fourth quarter. We can see a little bit of uplift in the first quarter from the fourth quarter, but those are typically pretty well in line. So it is a pretty kind of standard bell curve of the second and third quarter being the highest with it being a 15% to 20% decline from there ex any M&A activity. Operator: Our next question comes from Sam Reid of Wells Fargo. Richard Reid: I wanted to touch on your updated guide perhaps from a slightly different perspective. Just on the second half EBITDA margins. So it sounds like you're still expecting favorable year-over-year gross margin, if I heard correctly, Robyn. But can you talk about what that looks like sequentially on the gross margin line relative to Q2? So just basically the guide path for gross margin as we look into Q3 and Q4? Robyn Bradbury: Yes. Yes, we're expecting it to be stable, which would imply up in the 20 basis points range for the second quarter for gross margins. But our gross margin initiatives are performing very well. Private label has been performing well. Sourcing has been performing very well. We expect to continue to make improvements on gross margins. But I would say, as we think about the back half of the year, we're thinking about it as stable to the second quarter. We've made a lot of progress in gross margins kind of already in the first half of the year and expect to see those trends continue and be stable in the second quarter -- or second half. Richard Reid: That helps. And then as a follow-up, so one, could you just give us a rough sense as to the size of private label today, perhaps how much you were able to grow that in the second quarter relative to the first quarter? And then just a follow-up on the SG&A optimization initiatives. Could you just offer up some perspective on sizing those just so we have a rough sense as to where you're going to exit the year into 2026? Mark Witkowski: Yes. On the private label piece, as Robyn mentioned, we made some really good progress there, continue to drive that through the business. Right now, it's about 4% of our revenue, but I'd say steadily growing and expect that to be even more as we exit 2025. So very pleased with the new products we've introduced. The pull-through to the branch network has been strong. And if we get a little help from the volume in the second half, we'll make even more progress on pulling some more private label through. And I'll let Robyn cover the SG&A question. Robyn Bradbury: I think, Sam, your question was on the sourcing side, right? We've made a lot of progress there, too... Richard Reid: It was on the sizing of the SG&A initiatives. Robyn Bradbury: Okay. Sorry about that. Yes, let me give you a little bit of color on that, on the cost-out actions. So acquisition synergies is a big part of that and a big area that we have begun taking cost out there, and we've got a lot of opportunity. We've talked about that. Taking quite a bit of time to get through as we integrate these businesses. We've got a lot of controllable spend reductions that we've been working on with things like travel and overtime. One thing that we've done a really good job on as a business is managing headcount and any of those controllable expenses. So the sizing of it is really inflation related. Some of our incentive comp increases are a little bit larger given the improvement on gross margin. And so those are some of the big areas that we're looking at. And as you look at the back half of the year, the SG&A rate is a little bit higher than the first half, just given some of these inflationary and trends that we're seeing there. Operator: Our next question comes from Mike Dahl of RBC. Michael Dahl: Sorry to keep harping on the SG&A. But in terms of the actual variance versus your expectations, you've noted some things were even more pronounced. Can you just be more specific on what came in worse than expected? And then back to the question of kind of segmenting out actions, when you think about all those different actions, do you have a good way of giving us kind of roughly how much is headcount related versus kind of fleet and infrastructure related in terms of the cost outs? Robyn Bradbury: Yes. Thanks, Mike. Let me break down a little bit for you the kind of the contribution in the quarter. So if you think about the 13% increase in SG&A over the year, what we talked about was about half of that was M&A-related kind of onetime nonrecurring items. So if you think about that 13% growth, about 3 points of that was M&A, and that's an area, like I said, we've got synergy opportunities there. About 1 point of that growth was related to some onetime items, some changes that we're making to improve performance over time. Those are things like retention and severance and relocations. And then we had about 2 points of, I would call it, a surge in the quarter related to just some higher medical claims, insurance costs, things like that, that are a little bit unusual and had some timing impacts in the quarter. So that's kind of the first half. The second half of the SG&A increase year-over-year was a lot of items related to increased volume, inflation and investments that we're making into the business. So I mentioned incentive compensation. That's up more than our sales, just given our gross margin enhancement and the nature of those compensation plans that's worth about 1 point. We've seen a lot of inflation on our facilities and fleet that's worth about 1 point. On the medical side and some of those insurance claims, we've seen a lot of inflation in that area. We've seen some higher cost claims that's worth about 2 points. And then we've got a little bit of a difference in the way that the equity-based compensation is showing up. We've just got a new run rate there with 3 years of vesting. So that's worth about 1 point. And then like Mark and I said, we're going to continue to make investments in growth. So we feel good about the long-term dynamics of this business. We're continuing to make investments in greenfields, investments in growth initiatives, investments in technology, and that's worth about a couple of points as well. So that kind of gives you the breakdown for that 13% growth that we saw in the quarter versus what we consider M&A and onetime versus kind of more structural related to volume and inflation. Some of those inflation items were a lot higher than we were expecting. And so that's what we need to work to offset. So we've got several million dollars of cost-out actions that have been executed in the first half of the year. I would say we've got a meaningful amount of actions that are in process that we're working through. And to date, we've already managed headcount very well. It's not up much on a year-over-year basis. It's kind of more in that flatter range, and we'll take a look at that. But we're looking at areas where we can maybe not backfill, where we can have some selective hiring, where we have underperforming areas where we can take some cost out there. But we feel like we've got a lot of levers to pull here on the SG&A side. We're going to get it under control and offset some of this inflation, but we're also going to continue to make some of those investments for growth because of the long-term market dynamics. Michael Dahl: Okay. Got it. My second question, just on pricing. I think you said it was neutral. Can you just give us a better sense of kind of how the commodity side trended through the quarter into 3Q? And as you think about kind of neutral or better for the year, just elaborate a little more on what you're seeing on finished goods versus commodity right now? Mark Witkowski: Yes, Mike, I'll take that one. On the pricing side, it kind of played out exactly the way we thought it would, neutral for the quarter. We did see some increases come through related to some of the, call them, the non-pipe-related products, some of which are imported by our suppliers. There's a little bit of tariff probably increase there into some of those prices that some of the suppliers passed along to start the year, which ultimately offset some of the moderating of the larger diameter water PVC pipe that we have. We saw some moderation of that pricing through the first half of the year. That will be likely a little bit of a headwind into the second half, but these other product categories that have seen increases has effectively offset that and expect that to continue to be stable like we've talked about for a while. Operator: Our next question comes from Collin Verron of Deutsche Bank. Collin Verron: First, I just wanted to touch on the meter sales. It was a bit surprising just given the magnitude. You called out some project delays. I guess how much of the decline do you think was due to project delays? And what are your expectations for meter sales through the rest of the year and sort of how you're thinking about long-term growth in that category still? Mark Witkowski: Yes, sure. Thanks for the question. I would tell you on the meter side, the primary driver of the somewhat small decline in the quarter was the substantial growth we saw last year. We were up 48% in a quarter on meter sales. So that just gives you the magnitude of the initiative that we're driving there, and that performance last year was really, really strong. We did have some meter delays in the quarter. But really, I think the way to think about that is really just created a nice backlog for us that we expect to ship out in the back half of the year. Collin Verron: That's helpful color. And you guys also talked about some greenfield opportunities here. I guess how should we think about the decision between greenfield and M&A and sort of the expenses associated with opening these branches and how quickly they ramp to sort of the company average metrics? Mark Witkowski: Yes, sure. When we think about greenfields, we think about those in conjunction with M&A. So as we look across the U.S. and Canada for priority markets, we're evaluating both of those opportunities. Is there an M&A opportunity? Is there a greenfield opportunity? Both are very attractive to us. We've been able to generate really strong returns, whether we do a greenfield or an acquisition. Obviously, if you do an acquisition, you're going to pick up that revenue and profitability much quicker. Greenfields will take a little longer, but typically, we're breaking even within the first couple of years and expect to be at kind of the company average in 3 to 5. So there is a little bit of ramp-up in cost when you do greenfields. We're definitely accelerating our greenfield strategy with, I'd say, a renewed focus on driving our organic core growth in the business and I expect that you'll continue to see greenfields open up throughout the country in these priority markets as we review them and continue to have a nice healthy pipeline of M&A as well that we're evaluating. So we like having both of those levers as we look at those priority markets. Operator: Our next question comes from Patrick Baumann of JPMorgan. Patrick Baumann: A lot has been covered already. Just wanted to go back to the resi side quickly. So the move from flat to down low double just seems like a bigger revision than what we've seen from the starts data. So from that perspective, just trying to understand, was there like an overbuild of lots that are now being reduced at a greater magnitude than what we're seeing in starts? Maybe just address where lot development stands today to provide some context versus history and for the revision. Mark Witkowski: Yes, sure. If you go back again to the early part of the year, we felt it was going to be flat. That did kind of worsen throughout the first half of the year. I would say we probably saw some buildup in developed lots in the earlier part of the year. Obviously, single-family starts has not really met that early expectation, even though it was only kind of guided to at flat. So I think that's part of it. Obviously, we've seen a phasing down of a lot of these projects. And then we did see in parts of the country where we performed really well, frankly, in parts of Florida and the Southeast, which were pretty hot markets for a while, which was helping kind of keep resi kind of in at least that flat territory really fall off as we got late into Q2 and here to start Q3. So we've definitely seen the activity weaken on the lot side. And we'll see ultimately when those developers decide to reinvest and get that going. I wouldn't say there's a significant amount of developed lots, but there's definitely been an increase there just given the slowdown that we've seen in single-family. But again, believe that is temporary. We'll work through that this period of time. And then we're going to be really well positioned to capture that growth as it comes back, as these rates ease, you're seeing lumber prices drop. Some of these things may ultimately lend themselves to better affordability, and we'll see that pent-up demand release. Patrick Baumann: Okay. And then on the acquisition you did, just to clean up here. I assume that's not in the guidance since it hasn't closed. Any perspective on size of that deal? And then any update on how the pipeline for M&A looks these days? Mark Witkowski: Yes, sure, Pat. The acquisition we did in Canada was a 3-branch acquisition with 2 locations around Toronto and another one in Ottawa. And I would say those branches are typical kind of branch size for us and kind of the $15 million range and really excited about that one. It really builds a great platform for us to grow from in Canada. That's now the second acquisition we've completed there. I think it gives us a really good opportunity to not only build on the synergies there that we think we can bring, but start to put in some greenfields in Canada as well. So expect some continued growth there. So one that we're really excited about. We've got a great management team with that one and it is really going to allow us to capture a lot of that addressable market in Canada that just hasn't been available for us before. And then the pipeline continues to be healthy. We've got a series of deals that we're looking at right now, I'd say, in various stages and varying sizes. We've got a lot of different opportunities that we're evaluating right now and really excited about it. Obviously, we absorbed a lot of M&A from the 2024 year. You saw us get this one announced in Canada and excited to continue to drive that part of our growth strategy as we go forward. Operator: Our next question comes from Anthony Pettinari of Citi. Asher Sohnen: This is Asher Sohnen on for Anthony. I just wanted to ask about the current kind of competitive environment, if that's changed at all from the prior quarter. Maybe there's industry response to kind of resi demand slowing. Just any thoughts on competitive environment? Mark Witkowski: Yes. Thanks for the question. I would tell you there's been no real meaningful change in the competitive environment. It's been pretty typical for several quarters. I expect it to continue along those lines. We've had -- I'd say, in some very limited markets across the U.S., we've had some regional competitors kind of going after each other pretty good, which frankly, plays right into our hands. I think our customers like the stability that Core & Main brings both in service and value. And overall, it's been, I'd say, a pretty typical kind of competitive environment for several quarters now. Asher Sohnen: Great. And then can you just remind us which of your product groups are kind of most exposed to the resi end markets? And if that softness in resi is making any kind of -- or that you anticipate kind of in the second half as well, kind of driving any shift in the mix or strategy around inventory positioning? Mark Witkowski: No, I wouldn't say there's a major difference on the resi side outside of -- if you think about our fire protection product category that we have is much more focused on kind of non-resi for us, which includes that multifamily piece, and most of that is kind of steel pipe on that piece of it. But the rest of the end markets for resi, non-resi and municipal really have a kind of a standard mix for the most part of all of our product categories. It's obviously very local. It depends on what those local specifications are. Really, for us, it's really an assessment of where we're aligning some of those resources. So if resi gets softer in an area, we may move some of that head count and resources into other areas that are driving growth. So when we think about resource allocation, that's really more of how we think about the moves that we've got to make. And as part of the kind of the targeted actions that Robyn was referring to that we're making and putting in place, so we can continue to invest in the business where we're growing. Where there's market headwinds or underperformance, we're shifting some of those resources and ultimately managing the cost that way to make sure we continue to capture the growth that's there. Operator: Our next question comes from Keith Hughes of Truist Securities. Julian Nirmal: This is Julian on for Keith. I know you already touched on it a little bit, but how should we think about the pricing in third quarter versus fourth quarter? Robyn Bradbury: For pricing, we're expecting it to be flattish for the remainder of the year, and I would think about that for both the third quarter and the fourth quarter. The pricing has been very stable over the last few quarters now, and we're expecting that to continue. So I would say no notable changes expected there. Operator: Our next question comes from Nigel Coe of Wolfe Research. Nigel Coe: Yes, look, we've touched on a lot of the stuff here. But I just want to circle back to SG&A, if I may. Just so I understand the guide, if gross margins are going to be fairly flat to second quarter, it seems like SG&A dollars stepped down versus the $302 million in 2Q. Just want to make sure that's correct. And I'm just wondering what the impact of the 53rd week has on SG&A specifically. Robyn Bradbury: Yes. Thanks, Nigel. You're right. The SG&A dollars are going to step down quite a bit in the second half compared to the first half, and that's related to cost-out actions and also just the lower volumes that we're expecting, which then creates a little bit of pressure on the rate in the second half because of the lower volumes. But you're thinking about that the right way. And then the way that we're thinking about the 53rd week, that's an extra -- or 1 less week of sales kind of we categorize it in the fourth quarter in that January time frame. Obviously, there's variable SG&A related to that, that will come out. But when you think about it from an EBITDA perspective, it should be in that kind of $8 million to $10 million range. Nigel Coe: Okay. That's helpful. And then obviously, I think we understand the drivers of the residential weakness and maybe the flat outlook was a tad optimistic in hindsight. Nonres, I think, is the big debate, though, and it seems it could go in 2 directions here. We've got a weakening economy, but then we've got a lot of these mega projects, data centers, et cetera. So I'm just curious, Mark, Robyn, how you see, based on, I don't know, feedback from the field, customers, what sort of direction do you think this breaks into as we go into 2026? Do you think nonres as a category gets stronger? Or is there some risk there as you go into '26? Mark Witkowski: Yes. Thanks, Nigel. I think that's definitely how we're seeing the nonresidential area right now. There's a lot of puts and takes in that market, both by project types and, frankly, by geography as well. So we're seeing a lot of variation there. I do think there's a lot of good things there to be excited about, in particular, on the highway work, street work, that we get a lot of storm drainage product put in place on those types of projects. That's been really strong. The data center activity seems like that's got plenty of legs to it yet, and we pick up, I'd say, more than our fair share of that work, which has really helped cushion some of the softer commercial and retail kind of development in that area, which I wouldn't expect that we're going to see any near-term return of that really until we see some of the pent-up residential start to release. So I'd expect probably more of the same out of non-resi kind of for us. Just given our exposure there and how those work, it's going to -- kind of just the broad project types that we service, it's going to kind of flatten out, which is what we've experienced in '25. So I wouldn't see a lot of upside or downside as we think about that one going forward, at least in the very near term. Operator: At this time, I'll now hand back to Mark Witkowski for any further remarks. Mark Witkowski: Thank you all again for joining us today. I want to close out by recognizing our associates for their dedication and commitment to delivering exceptional service to our customers. This quarter, we delivered solid sales growth driven by resilient end market demand, stable pricing and continued market share gains. We're seeing strong results from our growth initiatives, and we believe there's an opportunity to accelerate that momentum with additional investment. We recently expanded our presence with new locations in priority markets and announced an acquisition that broadens our footprint in Canada. These actions reflect our disciplined approach to investing in the business to drive long-term growth. We're well positioned to capitalize on long-term secular drivers of water infrastructure investment, including aging systems, population growth and increasing regulatory requirements. With the right team in place, a growing platform and a proven strategy, we are confident in our ability to execute on the opportunities ahead and deliver even greater value to our customers, suppliers, communities and shareholders. Thank you for your continued interest in Core & Main. Operator, that concludes our call.
Operator: Good day, and thank you for standing by. Welcome to the SailPoint Second Quarter 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Scott Schmitz, SVP of Investor Relations. Please go ahead. Scott Schmitz: Good morning, and thank you for joining us today to discuss SailPoint's fiscal second quarter 2026 financial results. Joining me today are SailPoint's Founder and CEO, Mark D. McClain, and our Chief Financial Officer, Brian Carolan. For the Q&A portion of today's call, we will also be joined by our President, Matthew Mills. Please note that today's call will include forward-looking statements. Because these statements are based on the company's current intent, expectations, and projections, they are not guarantees of future performance. A variety of factors could cause actual results to differ materially. This call will also include references to non-GAAP results, which exclude certain items that do not reflect our underlying business performance. Please reference this morning's press release and our supplemental earnings presentation posted on investors.sailpoint.com for further information regarding our forward-looking statements and non-GAAP financial measures, including reconciliations to the nearest comparable GAAP financial measures. And with that, I'd like to turn the call over to Mark. Mark D. McClain: Thank you, Scott. Good morning, everyone, and thank you for joining us today. We're thrilled to share our fiscal Q2 2026 results. This was another exceptionally strong quarter for SailPoint, where we executed well against the opportunity in front of us. We closed the quarter with $982 million in annual recurring revenue or ARR, a 28% year-over-year increase, with SaaS ARR growing 37% year-over-year. Our ARR growth reflects the strong demand for the breadth and depth of identity security controls that SailPoint provides to more than 3,100 enterprises worldwide. This quarter, we saw a 48% year-over-year increase in customers with ARR greater than $1 million. This highlights our unique ability to support the tremendous scale and complexity prevalent among enterprises today. This momentum reflects a market transformation. Let me explain the key themes that are driving this demand and why we believe our approach positions us to lead this evolution. First, enterprises now expect identity to solve full-fledged security challenges by anchoring them in deep governance constructs. We believe SailPoint's heritage and leadership in governance mean we're the only provider that can elevate identity to this broader security role with confidence. Second, static admin time controls are giving way to real-time and dynamic enforcement as enterprises face new classes of risk, especially from AI and machine identities. With SailPoint, customers will soon be able to adapt to these risks quickly, applying identity intelligence to stop threats before they spread. Third, security leaders are realizing that identity alone is not enough and that they need security and data context as well, which was highlighted in our recently released Horizons of Identity Security report. Our ability to create a trifecta across these vectors of identity, security, and data context is highly differentiated and enables customers to make rapid, precise decisions that reduce risk without slowing the business. And finally, the market and SailPoint is operating well beyond traditional IGA, delivering an extensible platform that governs and secures all identities, human and nonhuman, and their access to data so that context can be leveraged to strengthen every layer of the entire security stack. Let me walk you through how these shifts are reshaping the market and why we believe we're built to lead in this new era. CIOs and CSOs are prioritizing their investment in identity security because they recognize it has become the backbone of securing their enterprise. As identity becomes the primary threat vector, enterprises are realizing they need real-time controls across all identities, human and machine, to properly secure their environment. Security companies may excel at threat detection, but without identity context layered in, today's threats are nearly impossible to understand against the backdrop of business risk. That's where we believe SailPoint is uniquely positioned. We've built a platform that is bringing together identity, data, and security in real-time, and that advantage becomes even more critical as AI agents enter the enterprise. These autonomous actors are making access decisions independently, often spinning up sub-agents or executing workflows at machine speed. Static admin time policies simply weren't built for this speed or scale. We believe real-time authorization, especially for this new class of AI, is no longer optional. Securing them requires more than static authentication controls or basic policy. It demands deep governance, with identity context and controls applied at the most granular level and for the duration of the workflow. Every enterprise will soon face two critical questions. First, can you guarantee that an agent isn't accessing data the human owner shouldn't see? And secondly, can a human use that agent to circumvent security controls? To properly answer these questions, agent governance must be built on a foundation of deep identity context and intelligent automation. With SailPoint Agent Identity Security, launching at this year's Navigate, we're delivering what we believe is the only solution that is designed to govern AI agents and the sub-agents they create across the full life cycle. It's powered by the same policy engine and entitlement level precision that we believe has always set SailPoint apart. The rise of AI agents in the workforce is driving a fundamental shift from static admin time governance to dynamic real-time identity security. With the innovations we're delivering today, we are helping enterprises address an entirely new class of identity challenges. We believe SailPoint provides the critical platform to enable broad enterprise adoption of AI, purely and at scale. The game has changed, and so have we. With our heritage in traditional IGA, we are able to bring together the context of identity, data, and security in ways that are difficult for others to replicate. While others are rolling up swim lanes like access, PAM, and IGA, we've chosen to bring together the capabilities that truly work to solve the next generation identity security challenges. Aggregation may simplify procurement, but it doesn't solve the security problem, especially at enterprise scale. Instead of stitching tools together, we've built a unified platform that brings identity context, data context, and security context into one extensible control play. Importantly, we believe our twenty-year foundation in identity gives us something others don't have: deep, contextual understanding of how identity works across the enterprise. Today, we manage over 125 million identities and their deep fine-grained entitlements across 3,100 customers, spanning legacy systems, SaaS applications, cloud platforms, and hybrid environments. That's the kind of complexity most vendors just can't touch. We believe that depth of identity and entitlement data isn't just foundational to securing the modern enterprise; it's essential to governing the rise of AI agents, which interact with every layer of this ecosystem. In this regard, the recent flurry of M&A activity in our space validates what we've said for years: identity is now central to enterprise security. It also highlights a key difference. While others focus on connecting identity and threat, we're addressing the deeper challenge, bringing identity and data together, tightly integrated across the security ecosystem to provide risk-aware authorization and context into breaches across all identities. Solving identity security at scale requires more than consolidation. It requires deep expertise. SailPoint is purpose-built for this. With two decades of industry expertise, broad identity coverage, and an open partner ecosystem. In a market increasingly defined by consolidation, roll-ups, and bundled point solutions, SailPoint remains one of the only independent enterprise-scale identity security platforms, offering the objectivity, extensibility, depth, and scale large complex enterprises demand. Just as enterprises embrace multi-cloud strategies for choice and resilience, they rely on SailPoint for the same flexibility and identity. And at our annual Navigate event, we'll show exactly how this will come to life through things such as real-time authorization across all identities, human, machine, and AI, advanced security solutions for orchestration, risk-based intelligence, and automated remediation. Privileged security posture management, our dynamic approach to help achieve zero standing privilege. We recognize that all identities can be privileged at some point. We secure the full identity landscape, privileged or not, by applying identity context at the entitlement level. Whereas traditional PAM uses a static model focused mainly on privileged identities, which represent at most 10% of all identities in any large enterprise. It's one more example of how SailPoint is redefining the control plane for identity security, unifying policy, intelligence, and enforcement across every corner of the enterprise. We believe this is a market transformation, not incremental innovation. Our goal is to build the foundation for the next generation of enterprise security, where identity operates at the heart of the security operations center, delivering real-time protection at the speed and scale the modern enterprise demands. Now let me spend a few minutes on our execution this quarter before I hand over to Brian, who will dive deeper into our financial results. We continue to execute with discipline, translating our strategy into strong results. Enterprises around the world are embracing our comprehensive, intelligent approach to identity security, and we're arming them for what's next via new innovations that address both existing as well as new emerging challenges. For example, we recently introduced SailPoint Accelerated Application Management to directly address an ongoing enterprise challenge: the frustration that comes from limiting how many applications customers connect to identity security solutions due to complexity and lack of time or resources. This is a breakthrough offering from SailPoint that transforms how enterprises discover, govern, and secure applications at scale. By uniting visibility, intelligence, speed, and automation, we enable organizations to quickly onboard and deeply govern hundreds of applications, something previously out of reach for most. We shattered the old notion that it takes years to make hundreds of applications visible in an identity solution. Our customers can now do this in hours or days and then move to a deeper level of governance. Our acquisition of key assets from Saviynt, expected to close later this year subject to customary closing conditions, stands to further enhance this offering with what we believe is best-in-class SaaS application visibility and identity risk detection. This will strengthen our ability to reduce application sprawl and deliver faster time to value, lower costs, and reduced risk. Likewise, we're tackling emerging challenges through key product innovations like SailPoint Non-Employee Risk Management, SailPoint Data Access Security, and SailPoint Machine Identity Security. Each is seeing strong sustained demand, with ARR across these offerings more than doubling in the first half of this year compared to the same period last year. SailPoint Machine Identity Security, in particular, is delivering record-breaking momentum, our fastest-growing new product in SailPoint's recent history, demonstrating the market's appetite for advanced enterprise-grade identity solutions. To highlight a couple of key wins in Q2, a leading technology company turned to SailPoint to govern their identity landscape, which spans employees, cloud infrastructure, and machine identities. In fact, their machines now outnumber human identities 20 to 1, underscoring the scale and complexity we believe SailPoint is uniquely built to handle. In another example, a 2,000 auto manufacturer modernized on SailPoint's platform to address an evolving identity landscape that spans employees, contractors, cloud workloads, and machines. This was one of our largest deals of the quarter and reflects the growing demand for a future-ready platform that can unify governance across all identities. While much of our growth is outside of traditional IGA today, we continue to capitalize on competitive displacements. Increasingly, enterprises recognize that legacy solutions can't take them into the future, and they're turning to SailPoint's modern platform to get them there. They buy from us not only to solve today's identity challenges but to prepare for tomorrow's. From governing machine identities to securing AI agents and addressing the entitlement explosion that legacy approaches weren't built to handle. A recent win with one of Europe's largest retailers replacing a stalled deployment from another vendor that lingered for more than three years underscores the strength of our future-ready approach and the value of SailPoint as a proven modernization partner. On the partner front, inbound interest from global systems integrators and leading technology firms continues to accelerate. Our newly announced partnership with HCL Technologies brings enterprise-scale modern identity security to more markets and geographies, especially in the age of AI. The market is validating our strategy. Our execution is solid, and we believe our position has never been stronger. We're building the identity security platform that enterprises trust to govern every identity, contextualize every access decision, and secure every interaction, human or machine, in real-time. While there is a lot of convergence in the industry, we're converging what we believe matters most to customers: identity, data, and security. That's what modern security demands, and that's what we believe positions SailPoint to lead in a world defined by agent scale, data sensitivity, and escalating complexity. With that, I'll turn it over to Brian, who will share more details on our financial results from the quarter. Brian? Brian Carolan: Thank you, Mark, and good morning, everyone. Thank you for joining us today. Fiscal Q2 2026 was another strong quarter with robust demand for our leading identity security platform. We believe the depth and breadth of our platform set us apart and make us uniquely positioned to govern and secure complex enterprise environments, which is evident in our results. We ended fiscal Q2 with ARR of $982 million, an increase of 28% year-over-year, with SaaS ARR of $623 million growing 37% year-over-year. Total Q2 revenue increased 33% year-over-year, and adjusted operating margins expanded 980 basis points to 20.4%. We also generated a record $50 million of cash flow from operating activities. Let's dive in. We continue to see many durable growth drivers across the business and across industry verticals. While our ARR growth remained largely balanced between new logos and existing customer extension, Q2 was our largest new logo ARR quarter ever, primarily driven by SaaS. Notably, we saw a 30% increase in average ARR per new SaaS customer. More and more often, new customers are landing with our most fully featured offerings, which include advanced AI and automation features as well as cloud infrastructure entitlement management, which helps customers understand the identity context of their cloud workloads. Many of these new logos are also buying our emerging add-on modules, which include Non-Employee Risk Management, Machine Identity Security, and Data Access Security. In fact, new SaaS customers had a 40% attach rate of add-on modules compared to 25% in the same quarter last year. Our add-on modules are also driving expansion within our existing customer base. Once again, the ARR from our emerging add-on modules more than doubled year-over-year, contributing nicely to our NRR of 114%. Overall, we continue to see good balance across all four of our primary NRR drivers, including cross-sell, upsell, suite upgrades, and platform modernizations inclusive of migrations. Turning to revenue. In Q2, we delivered revenue of $264 million, an increase of 33% year-over-year, with subscription revenue growing 36% year-over-year. This better-than-expected result was due to strong bookings and SaaS term mix. We also benefited from the timing of term contract renewals, most materially in the Fed sector. This resulted in $7 million more upfront revenue recognition in Q2 versus what was originally expected in Q3. Please note, there was no material impact to ARR because these were renewals. In Q2, we delivered strong incremental operating leverage, which resulted in adjusted operating income of $54 million or 20.4% margin, which increased 980 basis points year-over-year. Our strong top-line growth with the increasing size of new customer wins is leading to economies of scale and strong margin expansion. In Q2, we generated cash flow from operating activities of $50 million and free cash flow of $46 million or 17.4% margin. This is a reflection of our robust growth profile, disciplined expense management, and strong collection efforts. Turning now to guidance. For simplicity, I will refer to the midpoint of our guidance ranges. Full details can be found in this morning's press release and supplemental earnings deck. For 2026, we expect ARR to cross the $1 billion mark at $1.029 billion, up 26.5% year-over-year. For our fiscal year 2026, we are increasing our ARR outlook by $10 million to $1.11 billion, up 26.6% year-over-year compared to our prior guidance of 25.5% growth. On a trailing twelve months basis, our guidance also assumes revenue will cross the $1 billion mark in 2026, with Q3 revenue of $270 million, an increase of 15% year-over-year, making our year-to-date revenue growth rate 23%. We expect adjusted subscription gross profit margin to be approximately 82% due to a higher mix of SaaS revenue versus last Q3, with adjusted operating margin of 16%. We expect our diluted share count to be approximately 562 million shares and adjusted EPS to be approximately $0.06. As I mentioned earlier, our Q2 results benefited from the timing of term renewals, which flow through our P&L at a high margin rate. Our Q3 revenue and adjusted operating margin guidance reflect the $7 million quarterly timing dynamic as well as future investments. As Mark mentioned, we'll be sharing much more about our exciting innovation and product initiatives at our Navigate conference in three weeks. For fiscal year 2026, we are increasing our revenue outlook by $16 million to $1.055 billion, up 22.4% year-over-year compared to our prior guidance of 20.6% growth. We are also increasing our adjusted operating income by $16 million to $179 million or 17% margin compared to our prior guidance of 15.7% margin. We expect our diluted share count to be approximately 565 million shares and adjusted EPS to be $0.21. Additionally, we remain comfortable with the second half consensus estimates for free cash flow of approximately $85 million, with roughly one-third generated in Q3 and two-thirds in Q4. Please note, we included additional modeling notes in our supplemental earnings deck. In summary, we believe we are well-positioned to win the next generation of identity security because of the depth and breadth of our platform, our continued product innovation, and our relentless focus on execution. With over 125 million identities with deep and fine-grained entitlements created over our twenty-year history, we believe we have a strong competitive position and the right to win as we combine identity, security, and data into a modern platform. We look forward to providing a deep dive into our new innovations and customer testimonials at our Navigate conference in September. With that, let's invite Matt Mills, our President, to join us and open the call for questions. Operator? Operator: And our first question today will come from Brian Lee Essex of JPMorgan. Your line is open, Brian. Brian Lee Essex: Great. Congratulations on a strong quarter, guys, and thank you for taking the question. Maybe Brian, for you, could you peel back a layer on the guidance a little bit? I caught the commentary about the upfront revenue recognition from the renewals on the federal side, but we'd love to dig into that and understand the impact on ARR from the non-SaaS ARR and how you think like did anything change with regard to the methodology of your guidance? It seems like ARR guidance was increased a bit more last quarter than it was this quarter. Just would love a little additional color there. And then maybe adjacent to that Fed comment, like confidence in going into next quarter, which is obviously a seasonally heavy Fed quarter? Thank you. Brian Carolan: Sure. Good morning, Brian. So first of all, we're really pleased with our first half of the year. We're ahead of expectations on all guided metrics. We feel really good about us heading into the second half of the year now. We raised on all key metrics, we raised ARR by 100 basis points, up from the prior guide, up to 27% year-over-year growth. We're raising revenue by 200 basis points versus the prior guide, up 22.4% for the full year, and we're also raising adjusted operating income. So we feel really good heading into it. As you noted, this was merely a dynamic of term renewals, especially in the federal space. So when you go into a quarter such as Q2, you have to make a judgment call and you want to use some prudency around whether that's going to land in Q2 or Q3. Well, we actually had a 100% renewal rate of our term-based Fed renewals in fiscal Q2. And with the dynamics of term-based revenue recognition, as you may know, you recognize all that revenue upfront in the period of renewal. So basically, that shifted $7 million. Again, it was a timing shift, had nothing to do with anything of a pull forward of revenue. It just was merely a timing shift from Q3 that we originally expected into Q2. So we're going to be very consistent with our approach to guidance. I think we've been able to demonstrate kind of a beat and raise cadence. We feel like this is a prudent approach heading into the second half of the year. We feel like we're well-positioned. We're coming off a very strong quarter for us. We had record free cash flow. We had record net new logo ARR. It's our best quarter ever. And we feel really strong going into the second half of the year. And then just lastly, just your question on ARR impact. There was no ARR impact driven by these term-based renewals because they were renewals. They were sitting in our ARR, and we successfully renewed them at a 100% renewal rate. Brian Lee Essex: All right. Helpful. Thank you. Operator: And one moment for our next question, which will be coming from Meta Marshall of Morgan Stanley. Your line is open, Meta. Meta Marshall: Great, thanks. Appreciate the question. I guess just diving a little bit further into that. Just the net new ARR decel in Q3 from Q2 and then just kind of what gives you confidence in the pickup in Q4? Just a little bit more diving into the Q3, Q4 dynamics would be helpful. Thanks. Brian Carolan: Sure. Good morning, Meta. Yes. So if you look at Q2, we achieved a $57 million. That was consistent with last year. But bear in mind, it was a very tough comparable going back to last year. So if you look at this on a kind of a two-year CAGR basis, we were over 40%. So we feel good about heading into Q3 now. We feel like it's a prudent place to start. And hopefully, we can demonstrate again our beat and raise as we head into the second half of the year. Meta Marshall: Great. Thanks. Operator: One moment for our next question, which will be coming from Todd Weller of Stephens. Your line is open, Todd. Todd Weller: Let me echo the congratulations and thanks for the question. Mark, can you talk about machine identity? It's a complex market. All sorts of types of identities that are out there from service to secrets and cloud apps to the emerging world of AgenTic. And I know AgenTic is coming soon, but maybe today, where are you seeing the most opportunity? What are the use cases driving your machine identity solution? And competitively, what are you seeing in those instances? Mark D. McClain: Thanks, Todd. Thanks for the question. Yeah, I think we've tried to make sure we're trying to clarify and even delineate a little bit what we're doing from others. In our case, the machine identity approach we're taking is pretty consistent with how we've handled the governance of non-human identities. And as you noted, for now, that does not include AgenTic. We're going to cover in our Navigate launch here shortly a new product focused on agents. Our machine product would be covering things, as you said, like service accounts and software bots and RPA, maybe even some intelligent devices. I'd say in general, we're finding the situation where customers have sort of woken up, so to speak, to the fact that while some of these agents, excuse me, identity categories and machine are not new, they're a new part of the attack vector. So it's not that there's been a brand new introduction to machine identities. They've been there in many cases for some time. Now they're being recognized as part of the attack vector. And so what we've highlighted for folks in our offering is there's two things that are kind of unique about what we're doing for machines versus humans historically. One is you have to find them. You have to discover them. In many cases, customers really don't have a good grasp of the inventory of all these nonhuman identities that are already in their environment. And once you find them, then you need to kind of assign ownership. The other challenge is often there's some service account out there, there's some device out there, but it's not clear what human is responsible. So this idea of discovery and then assignment is kind of unique and new in the case of machine identity. Once we get through that step, though, in some cases, the ongoing governance and security of these identities looks pretty familiar. It's the lifecycle. It's the certification. Is this still a valid identity, who's responsible for it, has anything changed, is there any evidence of compromise? The kind of questions we answer for human identity. So we are finding that customers are very interested in this topic, and they are looking at our offering as pretty different from some of the offerings, say, that are focused more on, like, certification of servers, which is another offering for machine identity out there today. And that offering is more akin to authentication for a human. They want to validate that the machine is actually the machine they think it is, there's not a governance lifecycle approach. We're bringing our traditional lifecycle approach to these machine identities. Operator: And one moment for our next question. And our next question will be coming from Jonathan Rakover of Cantor Fitzgerald. Your line is open, Jonathan. Jonathan Rakover: Yes, good morning. So I'd be curious to hear your thoughts on the AI-driven connector integration. I mean, just from my perspective, it seems it turns what has been more of a passive kind of pipeline for access data into, let's call it, an enabler of more intelligent and automated processes. It seems to open up use cases around risk detection, potentially better context around access control. So I'd love to hear your thoughts on this opportunity. Is it going to be a part of the upcoming agent identity security solution? Is it separate in one of the incremental monetization opportunities? Mark D. McClain: Okay. Jonathan, I'll do my best. That's a complex question there. I'm going to tackle it. I think where I hear you there is saying, look, there are some unique characteristics of the emerging agent world. And as we've all read, there's been a lot of interest and a lot of experimentation, maybe a little less full-scale deployment than maybe folks thought we might be at this stage. And I guess I'd also remind people that the two classes of agents, really oversimplifying for a moment, are those that are coming through the software vendors. Workday and Salesforce and others saying, here, I'm going to introduce agentic capabilities into my platform. But then mid to large customers are going to clearly be spending time developing their own bespoke agents that make sense in their business that they think they need to develop. Right? Well, in both cases, these agents, as you said, are going to perform in some ways like a human. They're going to be trying to access the data they need to do their job. And one of the things, the themes you're going to hear from us at Navigate very strongly, we hit it somewhat on the call today, is that what's been kind of lacking in the realm of identity historically is a very tight alignment with deep entitlement data. Right? Like, how do you really understand all the data elements an identity can access? Well, in the world of AgenTic, we're going to have to get very crisp and very clear on that because these agents are going to go out trying to quote solve a problem, and they're going to go looking for data wherever they can find it. If they're allowed access to data they weren't actually supposed to see, they're going to return results that maybe weren't supposed to be visible to that person or that entity. So this idea of tying together very tightly the identity landscape, which is our historical focus, and all the deep understanding of the data so that we can have a complete picture of identity and data access, then tie that into the security landscape, that's going to be critical in this emerging world of agents. If we're going to really understand the agents and their access and their potential for risk, we have to fully understand all their characteristics and all the data they can access and then map that into the security ecosystem. There's a lot of new things coming to support that, but at a macro level, that's why we think this problem is going to be pretty challenging for enterprises. They haven't mapped those entitlements and data terribly well to the human identities today. They've got to get that right if they're really going to secure these agents in this rapidly evolving world. Operator: And one moment for our next question. Our next question will be coming from Robbie David Owens of Piper. Your line is open, Rob. Robbie David Owens: Hi. Good morning, guys, and thanks for taking my question. Mark, in your prepared remarks, you talked a lot about modernization. And just would love you to double click a little bit on where a lot of customers are at this point, how much legacy still remains within that installed base? And with a record new logo ARR quarter, do you think we're starting to see a tipping point just in terms of a transformation of identity within that legacy base? Thanks. Mark D. McClain: Thanks, Rob. And if you don't mind, I'm going to flip this to Matt. We invited Matt to join us on the Q&A, and he's very close to a lot of our customers with legacy environments that are contemplating moving. I think we have seen a bit of acceleration in interest there. I'll let Matt kind of talk about what we're seeing out there. Matthew Mills: Yes. Thanks, Mark. Thanks, Rob. Look, I do think we're seeing an acceleration of migrations from our installed base. I would even argue that we're seeing an acceleration of movement in the legacy business as well. And I think when we sit here and look at it, there's a number of things we talk about here today, I think that are really starting to accelerate that. I don't think agents are an if, right? It's a win. And I think a lot of these companies that have these very, I'll just say, customized solutions that are out there are woefully inadequate to be able to support this. And I think it's creating a little sense of urgency, if you will. And so we're seeing an increase in opportunities in both the legacy world and then our modern platform. Robbie David Owens: Great. Thank you. Operator: And one moment for our next question. Our next question will be coming from Gabriela Borges of Goldman Sachs. Your line is open, Gabriela. Gabriela Borges: Hi, good morning. Thank you. Mark and Brian, I think you've been pretty consistent in saying that the mix of your business between SaaS and term will ebb and flow. My question for you is, how do we think about what that ebb and flow might look like over the next twelve months? What I mean is, is it possible that you've seen sort of an adoption conversion for some of your most tech-savvy customers in the first phase of cloud adoption or the first phase of cloud migrations and now perhaps we're in a little bit more of an ebb where it might take longer for the next phase of cloud migration? Just curious what you're seeing in the pipeline and some of your larger customer conversations as well. Thanks. Brian Carolan: Let me start, Gabriela, and then maybe pass it over to Mark or Matt. In terms of the mix, the Q2 mix is largely in line with our ongoing targets where we target about 90% SaaS of our net new bookings. In fact, it was about 86% in Q2. You can expect this coming quarter in Q3 with the Fed year-end to be a little bit heavier for term, not materially heavier, but a little bit heavier. This is going to ebb and flow a little bit. But we still see the ongoing trend for mostly SaaS and the vast majority being SaaS. A lot of our new offerings are going to be SaaS-enabled. You'll learn more at Navigate. And I think that's really the wave of the future. Having said that, we've got a lot of happy customers that are on-prem and iQ. We're happy to meet them where they are. We happened to see some upsell opportunities, some new term deals, especially in EMEA this past quarter. So they will come along from time to time. It may not be a high number of customers that choose that, but sometimes they're larger dollar size. Mark D. McClain: Yes. I mean, I think in general, Gabriela, the trend is still strong. There's probably two things, as Matt just commented, that probably in our minds could put the potential for a little more acceleration of our installed base moving and some of that legacy. One is this pull toward AgenTic, I think, is going to maybe be the straw that breaks the back of the camel here on people thinking they can continue to live with their old solution and quote get by. I think they're starting to recognize those old legacy solutions are not going to get them there in any case. I think the other, and we are fortunate to continue to put up some strong results. But I think we all acknowledge there's not a wonderfully great macro backdrop here, right? So I think in some ways, there are times when customers might lean towards a modernization program but defer it a little in kind of tougher economic situations. We have people talking to us about having stalled that a little in the first half and bringing it back onto the plate in the second half. So we'll see how this progresses. But no, I certainly wouldn't think if the sense of your question was have we seen kind of the flow and are we about to see an ebb that's going to slow down, I don't think we are seeing that. If anything, it would maintain or perhaps even increase a little bit the rate of movement to the SaaS. Matthew Mills: This is Matt. I would just add, when you look at the total percent of transactions, it's very small every quarter. And the thing is they're typically chunky deals. When you look at the Fed business or some of the typically, Fed business is outside of the U.S. largely. But there are not many of them. They're just chunky. Term can look like it's having a bigger impact than it is, but the counts are pretty low. And then again, of that installed base, the movement to SaaS, I'd say, is either consistent as it's been or perhaps even looking like it might pick up a little. Hope that helps. Gabriela Borges: Absolutely. Good detail. Thank you, gents. Operator: And one moment for our next question, which comes from Saket Kalia of Barclays. Your line is open. Saket Kalia: Okay, great. Hey, guys. Thanks for taking my question here. Mark, maybe for you, can you just talk a little bit about the relative difference in pricing per identity in machines versus humans? I mean, to your point, it feels like customers are finally seeing that as an attack surface. How are they sort of how are they willing to pay for that governance versus what they're paying for human identities? Brian, if I can squeeze in a clarification because I think it's important, can you just remind us also what drove that tough comp last year on net new ARR and how you think about that sort of on a more normalized year-over-year basis? Thanks. Matthew Mills: Hey, this is Matt. Real quick, as it relates to last year, and then on the pricing, I'll touch on both and then I'll pass it back to Mark and Brian. When you look at our pricing, our baseline really starts with the workforce. And everything, if you've heard us talk about machine identities in prior conversations, we always talk about it being about one-third or 35%, 30%, 35% accretive to our workforce. And when you sit here and you start thinking about agents, right, it's very similar. I mean, we talked about two different types of agents. I think the first type of agent looks very similar to what a machine would look like and is priced accordingly. When you start talking about some of these autonomous agents that operate and look much more like a human being, right, they'll be priced very similar to what we price our workforce at today. And that's really how you should think about that. Brian Carolan: Sure, yes. So Saket, just looking back to last Q2, again, we were up 86% year-over-year last Q2 in terms of net new ARR. This was driven by a strong migration quarter. Also, it just happened to be a good customer expansion cohort. These come along in terms of renewals, and depending on the cohort, you can see some really nice expansion opportunities. Really looking at this over a two-year period, again, our compound annual growth rate is over 40%. But more importantly, we are really pleased. We had a really strong SaaS quarter in terms of net new ARR. We achieved $49 million. I mean, it was $9 million ahead of our total net new ARR guidance of $40 million. So we're pleased with that. Again, I mentioned it was the best SaaS new logo ARR quarter ever. And then I also mentioned on the call, we saw a 30% year-over-year increase in average ARR per new SaaS customers. So that's really a testament to the fact that we are landing larger and larger with our customers. And they're also attaching more add-on modules to their initial purchase. That was at 40%, which was up from 25% last year. Saket Kalia: All super helpful. Thank you. Operator: And our next question will be coming from Patrick Colville of Scotiabank. Your line is open, Patrick. Patrick Colville: Thank you for having me on. And it's great to be part of the SailPoint story. Mark and Brian, I guess I just want to double click on the competitive environment. We've got other public competitors talking much more about governance, which is nice validation of the governance space. But can you just talk about changes in enterprise governance bake-offs that you're seeing? Are you seeing those guys in the play? Or are those firms you're seeing in bake-offs very similar now to a year ago? Thank you. Mark D. McClain: Thanks, Patrick. Yes, good question. Yes, this is something I think may become thematic for us almost every quarter, which is while there is a lot of noise, I guess, is the right term out there from some of the folks that have more recently entered the governance space from other parts of the landscape. For the great majority of our deals, the competitive landscape in our deals hasn't changed for the great majority of those deals. As you get to, as we said often, the lower end of our enterprise market, we talked about strategics being kind of accounts with rounded off 10,000 employees and up, and then enterprise kind of from there down to a few thousand. In that lower end of that enterprise market, we will see a little more attempt at encroachment from some of these newer offerings. With very limited success. But for the most typical kinds of deals we're fighting, it hasn't changed that in the mid to large enterprise and certainly in the strategic. It's still kind of the IGA players that have been out there with pretty rich offerings. Our win rates against those competitors continue to be very strong. We continue to watch closely for kind of the progression of these other offerings and see how much they're having an impact. I think that whole converged story is more appealing down market and has a little more success. Know Matt, would you add anything to that? That's kind of what we're seeing. Matthew Mills: Yes. No, Patrick, I would just say in that enterprise space, as Mark said, it's a little bit more challenging, right? Because typically, they're unsophisticated or less sophisticated, I'll say, buyers. And I would just offer it's terribly confusing. If you're a new buyer. Right now in terms of all the way everybody's in the identity security business, for instance. So I think it becomes a bit of a challenge down there. And then you've got the convergence play, which to those smaller, less sophisticated buyers is somewhat appealing. Patrick Colville: Thank you very much. Operator: Thank you. And our next question will be coming from Tal Liani of Bank of America. Your line is open. Tal Liani: Hi. Most of the questions about the quarter were answered. I want to ask you more about the market. So I want we spoke with one of your competitors who made the big acquisition recently. And what they're saying, and I want to hear your comment on this is number one, as the price of privileged access is coming down and the ease of deployment is becoming easier, more customers will do privileged versus regular employee identity because it is just more rigorous, better solution. And that will take away from the traditional players like yourself. And the second thing that they said is identity was sold so far standalone, it's going to be part of a platform. You'll sell it with cloud security, with other things. And so far, this market was very standalone kind of market. So just wanted to hear your views on these topics just because it relates to kind of future growth and future opportunity. Thanks. Mark D. McClain: Okay. Thanks, Tal. Those are great questions. And we'll all continue to not name who we know we're talking about. But yes, the large vendor that bought an identity vendor, I think, has made some interesting claims about how this world is going to go. Look, I think the idea that more companies will want the ability to kind of we call it escalate or de-escalate or have dynamic privilege controls over their entire identity landscape. That's accurate. The problem is for that vendor, the ways that those folks in that industry have approached privileged identities, privileged users with a very deep, very static set of controls for folks who lived in a permanent identity landscape, meaning a database administrator or a sysadmin. So you gave those people a vault to check out credentials. You recorded every keystroke. That's not what companies are talking about doing for their broad landscape. They're saying when Brian, the CFO, is logging in from a foreign country on a laptop in the middle of the night, I may want to have a tighter level of control over that than when Brian's logging in from his desktop in the office. So the idea of escalation or de-escalation or dynamic privilege controls, tighter assurances that identity is who or what I think it is, that's coming, this idea of dynamic privilege. Just our contention is it's not the traditional technology that defined the PAM market that are going to be the successful ways to do that. At scale in a highly dynamic environment. So the idea that privilege will become more prevalent is accurate. We disagree that the right way to do that is to take traditional PAM technology and try to apply them across the enterprise. That's not going to work. That's not going to scale. On the other side, on your general point about standalone identity, but before I leave it on the PAM point, I would point you to a couple of numbers. We highlighted in our earnings today that we have 125 million identities under management. And by the way, it's a little conservative. We just felt like we could absolutely defend that number. The comment from that vendor about what's just inherited was about 8 million identities with 500 to 2,000 per account. That is an order of magnitude or two lower than what we offer and often are managing in an account. So I think it's nontrivial to go a couple of orders of magnitude of scale and for people to act like that's a simple thing to do is not really logical to us. Secondly, on the standalone point, again, we would agree that companies are looking for a tighter integration of the identity ecosystem with the traditional security ecosystem, we would also kind of challenge whether they're going to want that all bundled into one offering because there isn't actually a single dominant player that owns the entire security landscape, right? I guess, the name now, a couple of folks, Palo Alto, Zscaler, CrowdStrike, all very significant players in the security landscape. We think if we do a good job of bringing the identity and data together that I talked about earlier, into a single control plane that we can manage and deliver value to the customer, we're going to need to tie that into multiple parts of the security ecosystem. So we want to be able to make sure that a customer who's leaning on any one of those other key players in the security world can tie that into their identity picture, that's our job. We want to have a complete robust picture of the identity data landscape and then expose that bidirectionally with the security vendors to make sure we can feed them information, they can feed us so customers can manage these threats that are usually targeted at identities in very real-time. Tal Liani: Got it. Thank you. Operator: And one moment for our next question. Our next question will be coming from Gregg Moskowitz of Mizuho. Your line is open, Greg. Gregg Moskowitz: Great. Thank you for taking the question. Accelerated application management, very interesting technology. Mark, can you elaborate on how you will enhance this with assets from Savvy later this year? Also, what is the competitive landscape like in this area today? Thanks. Mark D. McClain: Thanks, Greg. Good to talk to you. Yes, I guess on the first part, yes, the Advanced App Management module, not module, excuse me, service from us is going to be kind of multifaceted. We've been working on multiple types of technology that we think can accelerate how rapidly we can onboard applications. And by the way, let me define onboard for a second. One of the confusions out there in the market today is people talking about how fast they can connect to an application. Well, what we believe is there's actually multiple layers or types of connection, right? It's one thing to get visibility to an app. Do I know that app's out there? Am I aware of the identities that are connected to that app? That is one of the things that we will accelerate with this offering from Savvy, the easy and rapid discovery and connection to that application just to bring it under the domain of SailPoint, meaning I'm aware that that app's out there. But there's another level of sophistication required in your connection technology to do governance over that, to do certifications and management. And then a third even deeper level of connectivity required to do automated lifecycle provisioning, to do real-time remediation, you know, spin up, spin down access based on changes in the security landscape. So one of the confusions out there, Matt commented earlier how confusing it is for customers when people are running around saying, I've got connectivity that's simple and comprehensive. We're like, what kind of connectivity are you talking about? Right? We need to make sure we're delineating for customers to have visibility across everything as rapidly as possible is a great goal. Then you need the ability to also deepen that into governance compliance, into lifecycle deep automated provisioning. And that's the depth technology we've been doing for many years that most folks who are claiming to have rapid easy connectivity aren't capable of. They can get you visibility. They can't actually do those other things at depth. And I'll bridge from there to your competitive landscape. Yeah, there's some newer vendors, particularly that are making some good noise and getting people excited about how easy it is to connect. We're aware of many of those. And as we dig into that, some of them have shown up kind of next to us in a couple of accounts. We find that there is a bit of exaggeration of what they could do. Like, yeah, they can connect to things easily. Can they deeply govern and manage those? Not always. And so I think we highlighted this in our road show even six, seven months ago that the challenge in this environment is to be both deep and wide. And that is our heritage. You have to be able to cover the breadth of the landscape that customers care about, you have to go deep into the entitlement layers within that landscape. That's very difficult to do for folks that haven't got that kind of technology. So I think that's really where we're differentiated and we'll continue to be differentiated. Gregg Moskowitz: Very helpful. Appreciate that, Mark. Thank you. Operator: And one moment for our next question. Our next question will be coming from Shaul Eyal of TD Cowen. Your line is open. Shaul Eyal: Thank you. Hi. Morning, guys. Congrats. Brian, Matt, or Mark, so operating margin performance was absolutely stellar. Aside from the top-line beat, is it just a prudently disciplined approach you've been taking? And maybe in that context, how do you think about the second half hiring plan? Brian Carolan: It's Brian here. I'll take that one. So yes, to your point, I mean, really drives the margin, the top-line growth. We continue to be disciplined. We had revenue growth, we raised 200 basis points by our prior guide, up to 22.4% for the full year. We're now projecting 17% adjusted operating margins. It's up 160 basis points. So clearly, we have proven that we can expand margins responsibly. But looking out to Q3, we want to be cognizant here of we've got some investments that we need to make on a couple of different fronts. One is we're launching a series of new products and modules at Navigate. We want to be able to have a successful start to that. So we want to continue to invest in that significant opportunity in front of us. And we also want to scale our go-to-market engine, heading into FY 2027. So margins do reflect that heading into the second half of the year. But again, I think we've demonstrated that we can improve margins pretty handily if we need to. Shaul Eyal: Thank you. Operator: And our next question will be coming from Keith Bachman of BMO. Your line is open. Keith Bachman: Hi, yes. Thank you. Good morning. I wanted to ask two questions. One to follow on Moskowitz's question is, if you think about the application segment, what are customers are you displacing existing solutions? And Part B, the question is really when could this be in a position, this aggregate segment, be in a position whereby it could contribute to net new ARR growth? Is it next year? Then my second question is hoping you could just talk a little bit about your customer growth or what to expect in terms of new logo growth over the next number of quarters? And part of it is all the things you're doing on GenTyc, how might that pull customers? The breadth of solution you have, your 250,000 ARR customer count is going up 27%. I understand that. But that also includes customers that upsell into that category. Just trying to get a little more granularity on how your customer count may help contribute to total growth over the next number of quarters. That's it for me. Brian Carolan: So Keith, there's a couple of parts there. It's Brian here. So I think what you were referring to is our SailPoint Accelerated Application Management and its contribution to NRR. I think this will happen over time. We are trying to get off the blocks very quickly with this offering and service. So hopefully, we'll see a nice uptake of that. And I think what happens is there's a faster time to value with the customers, right? So we're going to become stickier on a whole tier of applications, Tier one, two, and three, from compliance to very deep governance with the more complex applications. And I think the faster we get there, we're going to have a more entrenched time to value, and that will show up in the form of NRR. With respect to customer count, I think we need to be careful here just because adding volumes and volumes of customers has not really been our approach. It's really the quality and the size of the land. So we are focused on the right customers. These are more larger, more complex environments. These tend to be programs, not projects. I think you saw that we had a 48% year-over-year increase in customers with greater than $1 million of ARR. You noted that there was a 27% increase in customers with greater than $250,000 of ARR. But more importantly, out of our net new ARR this quarter, it wasn't necessarily the volume of the customers, it's the size of the lands that we're doing. Our ASP, our ARR per those new logos is up 30% year-over-year, and it's also the attach rate of other modules. So again, it's not the number of customers, it's the quality and size of the customers that we land. Operator: And our next question will come from Gray Wilson Powell of BTIG. Gray, your line is open. Gray Wilson Powell: Okay, great. Thanks for taking the question. And yes, I hear that Gray Powell guy is a pretty good analyst. He's been following me around for a while. Mark D. McClain: That was great. It so does brother Gray, I heard. Gray Wilson Powell: Yeah. Thanks. Okay. So a lot of good questions have been asked. Maybe just sort of a high-level macro one. There's a lot of uncertainty in the macro environment around tariffs back in April and May. Just how much have things changed the last three or four months, if at all, just how does your visibility on demand and your pipeline feel today versus a few months ago? Thanks. Brian Carolan: I'll get that correct. I think we're fortunately in a very resilient market. These tend to be mission-critical, not nice to have but must-have decisions for enterprise-level customers to make. So I think we're fortunate to be in that. In terms of our ability to navigate through the macro environment and the tariff situation, we have not seen material impact on our funnels. We're cognizant of it, but it hasn't been something that we're overly concerned about. And what's nice is that we sell into all verticals. So we've got a very, very balanced growth strategy among many different verticals. So we're not relying upon any single one vertical. So again, I think we're feeling very good heading into the second half of the year. Gray Wilson Powell: All right. Got it. Thank you very much. Operator: And I would now like to turn the call back to Mark for closing remarks. Mark D. McClain: Thank you. And Latonya, no worries on Gray and Gary. Happened to him so much that's why we joked about it. Thanks, everyone. Really appreciate these great questions. Obviously, it's a we believe a very strong story, but some complexity, and I really appreciate the opportunity to clarify where we are and kind of the dynamics of the landscape and the financial performance. So we look forward to continued dialogue. Thanks, everyone, for joining the call. Well, have a great day. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Hello and welcome to the Core & Main Q2 2025 earnings call. My name is Alex. I'll be coordinating today's call. If you'd like to ask a question at the end of the presentation, please press star followed by one on your telephone keypad. I'll now hand it over to Glenn Floyd, Director of Investor Relations. Please go ahead. Glenn Floyd: Good morning and thank you for joining us. I'm Glenn Floyd, Director of Investor Relations at Core & Main. We appreciate you taking the time to be with us today for our fiscal 2025 second quarter earnings call. Joining me this morning are Mark Witkowski, our Chief Executive Officer, and Robyn Bradbury, our Chief Financial Officer. On today's call, Mark will begin by sharing an overview of our business and recent performance. Robyn will follow with a review of our second quarter results and our outlook for the rest of fiscal 2025. We'll then open the line for Q&A, and Mark will wrap up with closing remarks. As a reminder, our press release, presentation materials, and the statements made during today's call may include forward-looking statements. These are subject to various risks and uncertainties that could cause actual results to differ materially from our expectations. Glenn Floyd: For more information, please refer to the cautionary statements included in our earnings press release and in our filings with the SEC. We will also reference certain non-GAAP financial measures during today's discussion. We believe these metrics provide useful insight into the underlying performance of our business. Reconciliations to the most comparable GAAP measure are available in both our earnings press release and the appendix of today's investor presentation. Thank you again for your interest in Core & Main. I'll now turn the call over to our Chief Executive Officer, Mark Witkowski. Mark R. Witkowski: Thanks, Glenn, and good morning, everyone. We appreciate you joining us today. If you're following along with our second quarter earnings presentation, I'll begin on page five with a business update. I'm proud of our associates' dedication to supporting customers and delivering critical infrastructure projects. Our teams drove nearly 7% net sales growth in the quarter, including roughly 5% organic growth. Municipal demand remained healthy, supported by traditional repair and replacement activity, advanced metering infrastructure conversion projects, and the construction of new water and wastewater treatment facilities. Our non-residential end market was stable in the quarter. Highway and street projects remain strong, institutional construction has been steady, and we're seeing continued momentum from data centers. While data centers represent a small portion of our sales mix today, customer sentiment points to continued growth in this space, and we expect it to become a larger portion of our sales mix over time. Mark R. Witkowski: On the residential side, lot development for single-family housing, which accounts for roughly 20% of our sales, slowed during the quarter, especially in previously fast-growing Sunbelt markets. We believe higher interest rates, affordability concerns, and lower consumer confidence are weighing on demand for new homes. Until these macro headwinds ease, we expect activity in this end market will continue to soften through the second half. As a result, we are factoring in a lower residential outlook into our full-year expectations, which Robyn will speak to in more detail. Against this market backdrop, we drove significant sales growth and market share gains across key initiatives, including treatment plant and fusible HDPE projects, where our technical expertise and consistent execution continue to differentiate Core & Main in the industry. We are also deepening relationships with large regional and national contractors, especially those pursuing critical infrastructure projects across the country. Mark R. Witkowski: These customers increasingly value our ability to support them with consistent service, scale, and product availability wherever their projects take them. Sales of meter products declined year over year, primarily due to project delays in the current year and a difficult comparison to last year's 48% growth rate. However, we have a growing backlog of metering projects we expect to release in the second half of the year, supporting our expectation for strong full-year metering sales growth. Additionally, a healthy pipeline of bids and continued project awards gives us confidence in both the near and long-term outlook for metering upgrade projects. Gross margins performed well in the quarter at 26.8%, up 10 basis points sequentially from Q1, and up 40 basis points year over year. Our gross margins reflect strong execution of our private label and sourcing initiatives, while our local teams continue to capture market share. Mark R. Witkowski: At the end of the day, our performance is largely driven by how well we support our customers, making sure they have the right products at the right time with the service they need to keep projects on schedule and on budget. At the same time, our operating costs were elevated this quarter. We've experienced unusually high employee benefit costs and inflation in other categories like facilities, fleet, and other distribution-related expenses. We have also carried higher costs from recent acquisitions, which have contributed to sales growth but have not yet reached their full synergy potential. Although we anticipated some of these pressures, certain costs were more pronounced than expected. To address these factors, we have implemented targeted cost-out actions to improve productivity and operating margins. We expect a portion of the savings to be realized in the second half of this year, with a larger annualized benefit in 2026. Mark R. Witkowski: We expect to achieve additional synergies tied to recent acquisitions. Our integration approach is phased and growth-oriented, starting with people, sales, and operations to position each business for success. Once that foundation is in place, we evaluate opportunities in terms of costs and resources and develop plans to drive SG&A synergies. Our approach to cost management will be measured and focused on realigning the business with the demand environment without jeopardizing future performance, growth opportunities, or the ability to serve our customers. We remain confident in the long-term growth and profitability prospects of Core & Main, including our ability to drive SG&A improvements and generate substantial value for shareholders. We continue to be balanced in how we allocate capital. Mark R. Witkowski: During the quarter, we generated $34 million of operating cash flow and deployed approximately $24 million across organic growth initiatives, share repurchases, and debt service. Year to date, we have repurchased $47 million of shares, reducing our share count by nearly 1 million. Our growth strategy is driven by organic growth and complementary acquisitions. After the quarter, we announced the acquisition of Canada Waterworks, a three-branch distributor of pipe, valves, fittings, and storm drainage products in Ontario, Canada. We expect the transaction to close later this month, further enhancing our position in the multi-billion dollar Canadian addressable market. With this acquisition, we now have five locations in Ontario, all established through value-enhancing M&A. This has created a platform for meaningful growth in Canada. On the organic side, we're making prudent investments to enhance our capabilities and better serve customers. Mark R. Witkowski: We recently opened new locations in Kansas City and Wisconsin, strengthening our presence in priority markets. We are also evaluating additional high-growth markets for future expansion. These investments are designed to generate long-term growth, strengthen our market share, and support our goal of delivering above-market growth over the coming years. We have plans to open several more locations this year, and I look forward to sharing updates on these initiatives. Before turning the call over to Robyn, I want to reiterate my confidence in Core & Main's growth and margin expansion opportunity. We are well-positioned to benefit from future investments in aging U.S. water infrastructure. We have the right team in place to execute on the opportunities ahead, and we look forward to delivering even greater value to our customers, suppliers, communities, and shareholders. Thank you for your continued support and trust in our vision. With that, I'll turn the call over to Robyn to walk through our financial results and outlook for the remainder of the year. Go ahead, Robyn. Robyn Bradbury: Thanks, Mark. I'll start on page seven of the presentation with some highlights from our second quarter results. As Mark mentioned, we grew net sales nearly 7% in the quarter to $2.1 billion. Organic sales were up roughly 5%, with the balance of growth coming from acquisitions. Prices continued to be flat overall, and our teams worked diligently to sustain pricing in an evolving tariff and end-market environment. In total, we estimate that our end markets grew in the low single-digits range. We outperformed the market with significant sales growth and market share gains in our treatment plant and fusible HDPE initiatives. Gross margin came in at 26.8%, up 10 basis points from the first quarter, and up 40 basis points year over year. The sequential and year-over-year improvement were both largely driven by continued execution of our private label and sourcing initiatives and contribution from accretive acquisitions. Robyn Bradbury: SG&A expenses increased 13% this quarter to $302 million. Roughly half of the $34 million increase was related to incremental costs from acquisitions and timing of one-time and other non-recurring costs. The remainder was made up of volume-related growth, inflation and distribution-related costs, and investments to drive future growth and market share gains. We implemented certain productivity and cost-out measures earlier this year, but with higher costs and inflation continuing to pressure our operating margins and our expectation of softer residential demand, we will be taking additional targeted cost reduction actions in areas that won't impact our ability to serve customers. Importantly, we will continue to make strategic investments to strengthen the business. We're seeing strong results from our sales initiatives, and we have opportunities to accelerate that with additional investment. We intend to keep expanding through greenfield locations to better serve customers and capture share, while also investing in technology solutions that improve efficiency and support long-term margin expansion. Robyn Bradbury: Interest expense was $31 million in the second quarter, down from $36 million in the prior year. The decrease was primarily driven by lower fixed and variable interest rates on our senior term loan credit facilities and lower average borrowings under our ABL credit facility. Our provision for income tax was $41 million compared to $42 million in the prior year. Our effective tax rate was 22.5% for the quarter versus 25% a year ago. The decrease in effective tax rate was primarily due to tax benefits associated with equity-based compensation. Adjusted diluted earnings per share increased approximately 13% to $0.87 compared to $0.77 in the prior year. Robyn Bradbury: The increase reflects higher adjusted net income, as well as the benefit of a lower share count following our share repurchase activity across fiscal years 2024 and 2025. We exclude intangible amortization because a significant portion of it relates to the formation of Core & Main following our leveraged buyout in 2017. We believe adjusted diluted EPS better reflects the results of our operating strategy and the value creation we're delivering for shareholders. Adjusted EBITDA increased 4% to $266 million in the quarter, while adjusted EBITDA margin declined 40 basis points to 12.7%. The decline in adjusted EBITDA margin was driven by higher SG&A as a percentage of net sales, which we are taking actions to optimize. Robyn Bradbury: Turning to the balance sheet and cash flow, we ended the quarter with net debt of $2.3 billion and net debt leverage of 2.4 times within our stated goals. Total liquidity was $1.1 billion, consisting primarily of availability under our ABL credit facility. Net cash provided by operating activities was $34 million in the quarter, down from $48 million in the prior year. The decline was primarily due to higher investment in working capital, partially offset by higher net income, lower tax payments, and timing of interest payments. During the second quarter, we returned $8 million to shareholders through share repurchases, bringing our total for the first half of fiscal 2025 to $47 million and reducing our share count by nearly 1 million shares. As of today, we have $277 million remaining under our share repurchase program. Robyn Bradbury: Next, I'll cover our revised outlook for fiscal 2025 on page nine. We are very pleased with our sales growth, gross margin expansion, and capital allocation efforts through the first half of the year. However, higher operating costs and softer residential demand have resulted in operating margins coming in below our expectations. As a result, we are lowering our guidance to reflect current market conditions and higher operating expenses. We now expect net sales of $7.6 to $7.7 billion, adjusted EBITDA of $920 to $940 million, and operating cash flow of $550 to $610 million. We expect end market volumes to be slightly down for the full year. Municipal end market volumes are expected to grow in the low single digits, non-residential volumes are expected to be roughly flat, and residential lot development is expected to decline in the low double digits. Robyn Bradbury: Residential volumes were soft in the quarter and have weakened further through August, consistent with our updated guidance. We still expect pricing to have a neutral impact on full-year sales, and we remain on track to deliver 2% to 4% of above-market growth. We expect adjusted EBITDA margins in the second half of the year to be slightly lower than the first half, reflecting continued gross margin performance offset by a softer residential market and a higher SG&A rate. In summary, we continue to execute our growth initiatives, expand gross margins, and make the strategic investments needed to position the business for long-term success. We have favorable long-term demand characteristics across each of our end markets, many levers to drive organic above-market performance, a healthy M&A pipeline, and numerous opportunities to improve operating margins. We are taking targeted actions to align the business with current demand trends and deploying capital to accelerate growth and enhance shareholder returns. Robyn Bradbury: We are confident in our ability to execute on the opportunities ahead, and we look forward to delivering even greater value to our customers, suppliers, communities, and shareholders. With that, we'll open it up for questions. Operator: Thank you. As a reminder, if you'd like to ask a question, please press star followed by one on your telephone keypad. If you'd like to remove your question, that's star followed by two. Our first question for today comes from Brian Biros of Thomson Research Group. Your line's now open. Please go ahead. Brian Biros: Hey, good morning. Thank you for taking my questions today. On the guidance changes, I guess the adjustment to the RESI outlook from flat to down low double digits looks to account for maybe a little bit more than the adjustment to total sales overall. It seems like maybe there's something at least positive partially offsetting that RESI impact. Maybe that's slightly better in the municipal market. Maybe it's just recent M&A being added in. Can you just touch a little bit more on the puts and takes to the revenue guidance there? It seems like there's more than just the RESI impact in the top line. Robyn Bradbury: Yeah, thanks, Brian, for the question. You're right. Residential lot development is kind of the main driver for the reduction in the sales guide. We were expecting that to be flat kind of earlier in the year. It has declined kind of during the quarter, continued to soften after the quarter, and we're expecting that to be in the low double digits range now. That's the majority of the decline there. We do have some other areas of bright spots on the top line that are offsetting some of that. Some of our sales initiatives continue to perform really well, like things like treatment plants. Some of our fusible HDPE product lines are performing well. The municipal market remains strong with ample funding, and we're seeing a lot of demand there too. Those are kind of the puts and takes on the top line with the revised guide. Brian Biros: Understood. Second question for me, I guess just the water category overall is kind of getting a lot of attention now. It used to kind of be a green initiative angle. Now it's seemingly a crucial part of the AI infrastructure build-out and kind of just the general reindustrialization trend. You highlighted in some of your prepared remarks and I think in the press release things about your technical expertise, your consistent execution, leading to share gains, focusing on the larger contractors. I guess just bigger picture here going forward, where do you see, I guess, the biggest opportunities for growth with the way the water market is evolving? Thank you. Mark R. Witkowski: Yeah, thanks, Brian. Great question. I would tell you, we're obviously very favorable on the overall water market. We've really seen more and more demands for water. You've seen these data centers going up in certain areas that need energy and water to satisfy those types of projects. We're seeing the demands with projects like that. I think the value of water has improved. You're seeing rates passed at the local level more and more so that the municipalities are very healthy right now. That's giving them more opportunities to get projects designed and ultimately improve the aging infrastructure, which is really the key piece that's really behind the multi-year tailwinds that we have in that municipal market. When you throw on top of that some of the demands now for water, which are even more with some of these projects that are going on, it obviously sets us up really well. That's a big part of why we continue to invest in this business, invest in resources, invest in facilities. Mark R. Witkowski: Those tailwinds are there. We're capturing a lot of those, as you're seeing in the municipal results. We're obviously facing some temporary headwinds here with the residential market being softer. We're on the front end of a lot of this with lot development. Our results obviously go into the July period. I think we're facing some of this a little earlier than some are seeing it on the residential side. That municipal strength and that strength that we're seeing with some of these projects in the non-residential space, like data centers, is definitely helping offset some of that weakness. Brian Biros: Yeah, thank you. I'll pass it along. Operator: Thank you. Our next question comes from Matthew Adrien Bouley of Barclays. Your line is now open. Please go ahead. Matthew Adrien Bouley: Hey, good morning, guys. Thank you for taking the questions. Just a question on the, I guess, the makeup of the guide. At the midpoint, I guess revenue cut by $50 million and EBITDA cut by $45 million. I hear you on the higher operating expenses, but then you're also taking these targeted cost actions as well. Is it more just, you know, it just simply takes a lot of time to get these cost actions into place? You mentioned more of a 2026 impact, I believe. Is the kind of, you know, maybe changed mix of business with residential a lot weaker impacting the margin as well? I guess just what else would explain that kind of larger decremental EBITDA margin? Thank you. Robyn Bradbury: Yeah, thanks, Matt. Yeah, we are taking costs out. We have already taken some costs out. We started taking some out in the first quarter, and we continue to do so in the second quarter. There is some kind of stubborn inflation and other higher cost areas that are continuing to offset some of that. We will continue to do additional cost-out actions. We will see some of that in the second half, but the larger majority of that will be seen into FY2026. Some of the cost-out actions that we made earlier in the year were in our fire protection product line that was experiencing some softness given some of the market pressures on non-residential at that time and also the steel pricing pressures that we were seeing in the fire protection. That has since rebounded. We took some costs out earlier in the year. It was very targeted to certain areas that we knew wouldn't disrupt the business. Now we're seeing that recovery and we're well positioned for that. Robyn Bradbury: We will continue to do additional cost-out targeted actions that won't impact our ability to service our customers or service growth. We will continue to make investments in growth. Mark and I have been around the business for a long time, so we kind of know where those cost actions can come out and where we need to make investments. Matthew Adrien Bouley: Okay, got it. Thank you for that, Robyn. Secondly, just on residential specifically, obviously a fairly substantial change to the outlook over the past, you know, relative to 90 days ago. I guess where I'm trying to get at is sort of, A, your visibility into that end market, and B, maybe how did residential look during both Q1 and Q2? You're talking about kind of low double digits. I'm wondering if the expectation is that it would weaken a lot further in the second half. Any color on that kind of cadence of residential and then just more specifically what you're hearing from customers in that group. Thank you. Mark R. Witkowski: Yeah, thanks, Matt. You know, on the residential side, as we kind of worked our way into 2025, it really felt like that market was going to be flat overall as we got into the first quarter. We actually saw some pretty, I'd say, decent residential performance in Q1. Obviously, it wasn't great, but we at least saw some projects going earlier in the year and obviously had a really good first quarter. Some of that was just, I'd say, better performance there than we expected. If you go back to Q1, we were well over our consensus and expectations on the top line. Really what we saw as we got into Q2, we saw residential weaken really throughout the quarter. We definitely started to hear some of those signs at the end of the first quarter, but it was more like scaling back some projects and frankly just continued to weaken as we got throughout Q2 and definitely into August, as Robyn had mentioned. Mark R. Witkowski: That residential really kind of whipsawed from Q1 into Q2. We do think low double digit is the right way to look at it from here through the end of 2025. Obviously, we're expecting some kind of rate cut here in September. I think that's starting to be reflected a little bit on the mortgage rate side, but we're definitely not seeing the investments in the infrastructure from the builders. That's kind of been a mixed bag. Some are investing in land, some aren't. Definitely, we're not seeing the level of lot development going into those at this point. The results that we're seeing, I think, are kind of reflective of what obviously we're hearing from the customers and the scaling down is definitely what we felt in Q2. We'll work through that. Obviously, we think there's continued significant pent-up demand that that's just creating. At some point, that's going to release, and we want to be well positioned to capture that when it does. Matthew Adrien Bouley: Got it. Okay, thanks, Mark. Good luck, guys. Mark R. Witkowski: Yep. Operator: Thank you. Our next question comes from David John Manthey of Baird. Your line's now open. Please go ahead. David John Manthey: Thank you. You might have just answered this in relation to one of Matt's questions there, but what was the residential market in the first half in terms of growth rate? Your down low double digit outlook, what does that imply for the back half? Mark R. Witkowski: Yeah, thanks, Dave. I'd say for the first half of the year, it was kind of down low or down mid-single digit to high single digit. In the second half, I think that's overall going to be low double digit, slightly worse just to get to the low double digit over the full year. David John Manthey: Got it. Okay, thank you for that. Maybe back on the SG&A side, I think last quarter you said that your organic revenues were up mid-single digits and organic same-store SG&A was up 4% year over year. Could you provide those organic figures for this quarter as well so we can compare that? Robyn Bradbury: Yeah, Dave, when you think about how M&A impacted us in the quarter, it contributed about 2% of growth to the top line. If you think about our growth in SG&A for total company, it contributed about 3% of that overall growth. David John Manthey: Okay. Also, last quarter, thinking about operating expenses, I believe you sort of implied you were expecting to see improving SG&A as a % of sales each quarter as we move through the year, which on the old forecast, I think sort of implied lower dollars each quarter. Assuming no major M&A from here, do you think that the second quarter would be the high watermark for SG&A dollars this year as you implement these cost-out actions and normal seasonality impacts those numbers? Robyn Bradbury: Yeah, Dave, we do. We've got, you know, as we talked about M&A and the record year we had in M&A that we did in the prior year, we've got a lot of opportunities there on the synergies. Those are things that we're working through. We expect to continue to work through those and get some of those synergies recognized in the back half of the year and into FY2026. There were some one-time items in the second quarter that we don't expect to continue. That's contributing to a little bit higher SG&A kind of rate and dollars in the quarter. With those things combined, we do expect to start seeing some progress on SG&A. We do have some seasonality in there, but when you look at the SG&A rate year over year each quarter, we do expect that to kind of improve sequentially as we go throughout the rest of this year. David John Manthey: Yeah, okay. If I could sneak one more in here as we're talking about all this seasonality and 2025 being an unusual year in terms of lack of acquisitions versus all the deals you've done historically, when you think about normal seasonality ex-acquisition, sort of the organic progression, how do you think about that? Do you think about it in terms of % of total full-year sales per quarter? Do you think of, you know, quarter-to-quarter growth rate? How do you think about the seasonality? If you could just give us an idea of what we should expect this year because of the fact that you're very few or no acquisitions other than this Canada Waterworks deal you just announced. Robyn Bradbury: Yeah, Dave, I'll give you some color around that. I would think about the second and the third quarter are typically similar size-wise, and we typically see about a 15% to 20% decline in the top line from the third quarter to the fourth quarter. You know, we can see a little bit of uplift in the first quarter from the fourth quarter, but those are typically pretty well in line. It is a pretty kind of standard bell curve of the second and third quarter being the highest with it being a 15% to 20% decline from there ex any, you know, M&A activity. David John Manthey: Got it. Thank you very much. Operator: Thank you. Our next question comes from Sam Reid of Wells Fargo. Your line's now open. Please go ahead. Sam Reid: Awesome. Thanks so much. I wanted to touch on your updated guide, perhaps from a slightly different perspective, just on the second half EBITDA margins. It sounds like you're still expecting favorable year-over-year gross margin, if I heard correctly, Robyn. Can you talk about what that looks like sequentially on the gross margin line relative to Q2? Just basically the guide path for gross margin as we look into Q3 and Q4. Robyn Bradbury: Yeah, we're expecting it to be stable, which would imply, you know, up in the 20 basis points range for the second quarter for gross margins. Our gross margin initiatives are performing very well. Private label's been performing well. Sourcing's been performing very well. We expect to continue to make improvements on gross margins. I would say as we think about the back half of the year, we're thinking about it as stable to the second quarter. We've made a lot of progress in gross margins kind of already in the first half of the year. I expect to see those trends continue and be stable in the second quarter or second half. Sam Reid: That helps. As a follow-up, could you just give us a rough sense as to the size of private label today, perhaps how much you were able to grow that in the second quarter relative to the first quarter? To follow up on the SG&A optimization initiative, could you just offer up some perspective on sizing those just so we have a rough sense as to where you're going to exit the year into 2026? Thanks. Mark R. Witkowski: Yeah, on the private label piece, as Robyn mentioned, we made some really good progress there. Continue to drive that through the business. Right now, it's about 4% of our revenue, but I'd say steadily growing and expect that to be even more as we exit 2025. Very pleased with the new products we've introduced. The pull-through to the branch network has been strong. If we get a little help from the volume in the second half, we'll make even more progress on pulling some more private label through. I'll let Robyn cover the SG&A question. Robyn Bradbury: I think, Sam, your question was on the sourcing side, right? We've made a lot of progress there too. Sam Reid: It was on the sizing of the SG&A initiative. Robyn Bradbury: Okay. Sorry about that. Let me give you a little bit of color on that, on the cost-out actions. Acquisition synergies is a big part of that and a big area that we have begun taking costs out there. We've got a lot of opportunity. We've talked about that. Taking quite a bit of time to get through as we integrate these businesses. We've got a lot of controllable spend reductions that we've been working on with things like travel and overtime. One thing that we've done a really good job on as a business is managing headcount and any of those controllable expenses. The sizing of it is really inflation-related. Some of our incentive comp increases are a little bit larger given the improvement on gross margin. Those are some of the big areas that we're looking at. As you look at the back half of the year, the SG&A rate is a little bit higher than the first half, just given some of these inflationary trends that we're seeing there. Sam Reid: That helps. Thanks so much. I'll pass it on. Operator: Thank you. Our next question comes from Michael Glaser Dahl of RBC. Your line's now open. Please go ahead. Michael Glaser Dahl: Morning. Thanks for taking my questions. Sorry to keep harping on the SG&A, but in terms of the actual variance versus your expectations, you've noted some things were even more pronounced. Can you just be more specific on what came in worse than expected? Back to the question of kind of segmenting out actions, when you think about all those different actions, do you have a good way of giving us kind of roughly how much is headcount-related versus kind of fleet and infrastructure-related in terms of the cost deaths? Robyn Bradbury: Yeah, thanks, Mike. Let me break down a little bit for you the kind of the contribution in the quarter. If you think about the 13% increase in SG&A over the year, what we talked about was about half of that was M&A-related, kind of one-time non-recurring items. If you think about that 13% growth, about three points of that was M&A, and that's an area, like I said, we've got synergy opportunities there. About one point of that growth was related to some one-time items, some changes that we're making to improve performance over time. Those are things like retention and severance and relocations. We had about two points of, I would call it a surge in the quarter related to just some higher medical claims, insurance costs, things like that that are a little bit unusual and had some timing impacts in the quarter. Robyn Bradbury: That's kind of the first half. The second half of the SG&A increase year over year was a lot of items related to increased volume, inflation, and investments that we're making into the business. I mentioned incentive compensation. That's up more than our sales, just given our gross margin enhancement and the nature of those compensation plans. That's worth about a point. We've seen a lot of inflation on our facilities and fleet. That's worth about a point. On the medical side and some of those insurance claims, we've seen a lot of inflation in that area. We've seen some higher cost claims. That's worth about two points. We've got a little bit of a difference in the way that the equity-based compensation is showing up. We've just got a new run rate there with three years of vesting. That's worth about a point. Robyn Bradbury: Like Mark and I said, we're going to continue to make investments in growth. We feel good about the long-term dynamics of this business. We're continuing to make investments in greenfields, investments in growth initiatives, investments in technology, and that's worth about a couple of points as well. That kind of gives you the breakdown for that 13% growth that we saw in the quarter versus what we consider M&A and one-time versus kind of more structural related to volume and inflation. Some of those inflation items were a lot higher than we were expecting, and that's what we need to work to offset. We've got several million dollars of cost-out actions that have been executed in the first half of the year. I would say we've got a meaningful amount of actions that are in process that we're working through. To date, we've already managed headcount very well. Robyn Bradbury: It's not up much on a year-over-year basis. It's kind of more in that flatter range, and we'll take a look at that. We're looking at areas where we can maybe not backfill, where we can have some selective hiring, where we have underperforming areas where we can take some cost out there. We've got a lot of levers to pull here on the SG&A side. We're going to get it under control and offset some of this inflation, but we're also going to continue to make some of those investments for growth because of the long-term market dynamics. Michael Glaser Dahl: Okay. Got it. Thank you for that. My second question, just on pricing, I think you said it was neutral. Can you just give us a better sense of kind of how the commodity side trended through the quarter into 3Q? As you think about kind of neutral and better for the year, just elaborate a little more on what you're seeing on finished goods versus commodity right now? Mark R. Witkowski: Yeah, Mike, I'll take that one. On the pricing side, it kind of played out exactly the way we thought it would, neutral for the quarter. We did see some increases come through related to some of the, I'd call them the non-pipe related products, some of which are imported by our suppliers. There's a little bit of tariff probably increased there into some of those prices that some of the suppliers passed along to start the year, which ultimately offsets some of the moderating of the, you know, water, larger diameter water PVC pipe that we have. We saw some moderation of that pricing through the first half of the year. That'll be likely a little bit of a headwind into the second half, but these other product categories that have seen increases have effectively offset that and expect that to continue to be stable, like we've talked about for a while. Michael Glaser Dahl: Okay. Excellent. Yep. Operator: Thank you. Our next question comes from Collin Andrew Verron of Deutsche Bank. Your line's now open. Please go ahead. Collin Andrew Verron: Morning. Thank you for taking my questions. My first, I just wanted to touch on the meter sales. It was a bit surprising just given the magnitude. You called out some project delays. I guess, how much of the decline do you think was due to project delays, and what are your expectations for meter sales through the rest of the year and sort of how you're thinking about long-term growth in that category still? Mark R. Witkowski: Yeah, sure. Thanks for the question. I would tell you on the meter side, the primary driver of the, you know, somewhat small decline in the quarter was the substantial growth we saw last year. We were up 48% in a quarter on meter sales. That just gives you the magnitude of the initiative that we're driving there, and that performance last year was really, really strong. We did have some meter delays in the quarter, but really, I think the way to think about that is it really just created a nice backlog for us that we expect to ship out in the back half of the year. Collin Andrew Verron: Quick caller. You guys also talked about some greenfield opportunities here. I guess, how should we think about the decision between greenfield and M&A and the expenses associated with opening branches and how quickly they ramp to the company average metrics? Mark R. Witkowski: Yeah, sure. You know, when we think about greenfield locations, we think about those in conjunction with M&A. As we look across the U.S. and Canada for priority markets, we're evaluating both of those opportunities. Is there an M&A opportunity? Is there a greenfield opportunity? Both are very attractive to us. We've been able to generate really strong returns, whether we do a greenfield or an acquisition. Obviously, doing an acquisition, you're going to pick up that revenue and profitability much quicker. Greenfield locations will take a little longer, but typically, we're breaking even within the first couple of years and expect to be at kind of the company average in three to five. There is a little bit of ramp-up in cost when you do greenfield locations. We're definitely accelerating our greenfield strategy with, I'd say, a renewed focus on driving our organic core growth in the business. I expect that you'll continue to see greenfield locations open up throughout the country in these priority markets as we review them and continue to have a nice, healthy pipeline of M&A as well that we're evaluating. We like having both of those levers as we look at those priority markets. Collin Andrew Verron: Great. Thank you for taking my questions. Mark R. Witkowski: Thanks. Operator: Thank you. Our next question comes from Patrick Bauman of JP Morgan. Your line's now open. Please go ahead. Patrick Bauman: Oh, hi. Good morning. Lots been covered already. Just wanted to go back to the RESI side quickly. The move from flat to down low double just seems like a bigger revision than what we've seen from the starts data. From that perspective, just trying to understand, was there like an overbuild of lots that are now being reduced to, you know, at a greater magnitude than what we're seeing in starts? Maybe just address where residential lot development stands today to provide some context versus history and for the revision. Mark R. Witkowski: Yeah, sure. If you go back to the early part of the year, we felt it was going to be flat. That did kind of worsen throughout the first half of the year. I would say we probably saw some build-up in developed lots in the earlier part of the year. Obviously, single-family starts has not really met that early expectation, even though it was only kind of guided to it at flat. I think that's part of it. Obviously, we've seen a phasing down of a lot of these projects. We did see in parts of the country where we perform really well, frankly, in parts of Florida and the Southeast, which were pretty hot markets for a while, which was helping keep RESI kind of in at least that flat territory, really fall off as we got into late into Q2 and here to start Q3. Mark R. Witkowski: We've definitely seen the activity weaken on the lot side. We'll see ultimately when those developers decide to reinvest and get that going. I wouldn't say there's a significant amount of developed lots, but there's definitely been an increase there just given the slowdown that we've seen in single-family. Again, believe that is temporary. We'll work through this period of time. We're going to be really well positioned to capture that growth as it comes back. As these rates ease, you're seeing lumber prices drop. Some of these things may ultimately lend themselves to better affordability. We'll see that pent-up demand release. Patrick Bauman: Okay. Thanks for the perspective. On the acquisition you did, just to clean up here, I assume that's not in the guidance since it hasn't closed. Any perspective on, you know, size of that deal and any update on how the pipeline for M&A looks these days? Mark R. Witkowski: Yeah, sure, Pat. You know, the acquisition we did in Canada was a three-branch acquisition with two locations around Toronto and another one in Ottawa. Those, I would say, those branches are typical kind of branch size for us in kind of the $15 million range. Really excited about that one. It really builds a great platform for us to grow from in Canada. That's now the second acquisition we've completed there. I think it gives us a really good opportunity to not only, you know, build on the synergies there that we think we can bring, but start to put in some, you know, greenfield locations in Canada as well. Expect some continued growth there. One that we're really excited about. Mark R. Witkowski: We got a great management team with that one, and it's really going to allow us to capture a lot of that addressable market in Canada that just hasn't been available for us before. The pipeline continues to be healthy. We've got a series of deals that we're looking at right now, I'd say, in various stages and varying sizes. We've got a lot of different opportunities that we're evaluating right now and really excited about it. Obviously, we absorbed a lot of M&A from the 2024 year. You saw us get this one announced in Canada and excited to continue to drive that part of our growth strategy as we go forward. Patrick Bauman: Okay, thanks for the time. Mark R. Witkowski: Yeah, thanks, Pat. Operator: Thank you. Our next question comes from Anthony James Pettinari of Citi. Your line's now open. Please go ahead. Asher Sonin: Hi. This is Asher Sonin on for Anthony. Thanks for taking the question. I just wanted to ask about the current kind of competitive environment, if that's changed at all from the prior quarter. Maybe there's industry response to kind of residential demand slowing. Just any thoughts on the competitive environment? Mark R. Witkowski: Yeah, thanks for the question. I would tell you there's been no real meaningful change in the competitive environment. It's been pretty typical for several quarters. I expect it to continue along those lines. We've had, I'd say, in some very limited markets across the U.S., we've had some regional competitors kind of going after each other pretty good, which, frankly, plays right into our hands. I think our customers like the stability that Core & Main brings, both in service and value. Overall, it's been a, I'd say, pretty typical kind of competitive environment for several quarters now. Asher Sonin: Great. Thanks. Can you just remind us which of your product groups are most exposed to the residential end markets? If that's not, is residential making any kind of, or that you anticipate in the second half as well, driving any shift in the mix or strategy around inventory positioning? Mark R. Witkowski: No, I wouldn't say there's a major difference on the RESI side outside of, you know, if you think about our fire protection product category that we have, it is much more focused on, you know, kind of non-RESI for us, which includes that multifamily piece. Most of that is kind of steel pipe on that piece of it. The rest of the end markets for RESI, non-RESI, and municipal really have a kind of a standard mix for the most part of all of our product categories. It's obviously very local. It depends on what those local specifications are. Really, for us, it's really an assessment of where we're aligning some of those resources. Mark R. Witkowski: If RESI gets softer in an area, we may move some of that headcount and resources into other areas that are driving growth. When we think about resource allocation, that's really more of how we think about the moves that we've got to make. As part of the targeted actions that Robyn was referring to, that we're making and putting in place, we can continue to invest in the business where we're growing. Where there's market headwinds or underperformance, we're shifting some of those resources and ultimately managing the costs that way to make sure we continue to capture the growth that's there. Asher Sonin: Great. Thanks. I'll turn it over. Operator: Thank you. Our next question comes from Keith Hughes of True Securities. Your line's now open. Please go ahead. Julie: Hey, this is Julie. I know you already touched on it a little bit, but how should we think about the pricing in third quarter versus fourth quarter? Robyn Bradbury: For pricing, we're expecting it to be flattish for the remainder of the year. I would think about that for both the third quarter and the fourth quarter. Pricing's been very stable over the last few quarters now, and we're expecting that to continue. I would say no notable changes expected there. Julie: Got it. Thanks. That's all for me. Operator: Thank you. Our next question comes from Nigel Edward Coe of Wolfe Research. Your line's now open. Please go ahead. Nigel Edward Coe: Oh, thanks. Good morning. Yeah, look, we've touched on a lot of the stuff here, but just want to circle back to SG&A, if I may. Just so I understand the guide, you know, if gross margins are going to be fairly flat to second quarter, it seems like SG&A dollars stepped down versus $302 million in Q2. Just want to make sure that's correct. I'm just wondering what the impact of the 53rd week has on SG&A specifically. Robyn Bradbury: Yeah, thanks, Nigel. You're right. The SG&A dollars are going to step down quite a bit in the second half compared to the first half. That's related to cost-out actions and also just the lower volumes that we're expecting, which then creates a little bit of pressure on the rate in the second half because of the lower volumes. You're thinking about that the right way. The way that we're thinking about the 53rd week, that's an extra or one less week of sales. We categorize it in the fourth quarter in that January timeframe. Obviously, there's variable SG&A related to that that will come out. When you think about it from an EBITDA perspective, it should be in that kind of $8 to $10 million range. Nigel Edward Coe: Okay. That's helpful. Thanks. I think we understand the drivers of the residential weakness, and maybe the flat outlook was a tad optimistic in hindsight. Non-RESI, I think, is the big debate, though. It seems it could go in two directions here. We've got a weakening economy, but we've got a lot of these mega projects, data centers, et cetera. I'm just curious, Mark, Robyn, how you see, based on feedback from the fields, customers, what sort of direction do you think this breaks into as we go into 2026? Do you think non-RESI as a category gets stronger, or is there some risk there as we go into 2026? Mark R. Witkowski: Yeah, thanks, Nigel. I think that, you know, that's definitely how we're seeing the non-residential area right now. There's a lot of puts and takes in that market, both by project types and, you know, frankly, by geography as well. We're seeing a lot of variation there. I do think there's a lot of good things there to be excited about, in particular in this highway work, street work, that we get a lot of storm drainage product put in place on those types of projects. That's been really strong. The data center activity seems like that's got plenty of legs to it yet. We pick up, I'd say, more than our fair share of that work, which has really helped cushion some of the softer commercial and retail kind of development in that area, which I wouldn't expect that we're going to see any near-term return of that really until we see some of the pent-up residential start to release. Mark R. Witkowski: I'd expect probably more of the same out of non-residential kind of, you know, for us, just given our exposure there and how those work. It's going to kind of just the broad project types that we service, it's going to kind of flatten out, which is what we've experienced in 2025. I wouldn't see a lot of upside or downside as we think about that one, you know, going forward, at least in the very near term. Nigel Edward Coe: Okay, thank you. Operator: Thank you. At this point, I'll now hand back to Mark Witkowski for any further remarks. Mark R. Witkowski: Thank you all again for joining us today. I wanted to close out by recognizing our associates for their dedication and commitment to delivering exceptional service to our customers. This quarter, we delivered solid sales growth driven by resilient end-market demand, stable pricing, and continued market share gains. We're seeing strong results from our growth initiatives, and we believe there's an opportunity to accelerate that momentum with additional investment. We recently expanded our presence with new locations in priority markets and announced an acquisition that broadens our footprint in Canada. These actions reflect our disciplined approach to investing in the business to drive long-term growth. We're well-positioned to capitalize on long-term secular drivers of water infrastructure investment, including aging systems, population growth, and increasing regulatory requirements. Mark R. Witkowski: With the right team in place, a growing platform, and a proven strategy, we are confident in our ability to execute on the opportunities ahead and deliver even greater value to our customers, suppliers, communities, and shareholders. Thank you for your continued interest in Core & Main. Operator, that concludes our call.
Operator: Morning and welcome to the Designer Brands Inc. Second Quarter 2025 Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star, then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Ashley Furlan, Investor Relations. Please go ahead. Ashley Furlan: Good morning. Earlier today, the company issued a press release comparing results of operations for the 13-week period ending August 2, 2025, to the 13-week period ending August 3, 2024. Please note that the financial results that we will be referencing during the remainder of today's call exclude certain adjustments recorded under GAAP unless specified otherwise. For complete reconciliation of GAAP to adjusted earnings, please reference our press release. Additionally, please note that remarks made about the future expectations, plans, and prospects of the company constitute forward-looking statements. Results may differ materially due to the various factors listed in today's press release and the company's public filings with the SEC. Except as may be required by applicable law, the company assumes no obligation to update any forward-looking statements. Joining us today are Doug Howe, Chief Executive Officer, and Jared Poff, Chief Financial Officer. Now let me turn the call over to Doug. Doug Howe: Good morning and thank you everyone for joining us. I'd like to begin by saying how proud I am of the improvements we've made throughout the quarter, due in no small part to the hard work and dedication of our associates. We are pleased with the meaningful progress against our strategic initiatives throughout the second quarter and are excited to report this positive momentum has carried forward into August. In the second quarter, we delivered sequential improvement over Q1, reflecting the impact of targeted operational efforts and the resilience of our team. Our total sales for the quarter were down 4% year over year, with a 5% decline in comparable sales. This was a 280 basis point improvement from the first quarter comps, and despite remaining volatility and uncertainty, we believe this reflects the effectiveness of our strategies and gradual improvement in consumer sentiment. On the expense side, adjusted operating expenses were down over $14 million last year, and we achieved 350 basis points of leverage compared to Q1, demonstrating disciplined cost management and supporting year-over-year EPS growth. Let me review some highlights from each segment with the second quarter. Starting with our retail businesses. For the second quarter, U.S. retail comps were down 5%, with total sales also down 5%. These declines were an improvement from the first quarter, correlated with slightly improved consumer sentiment and sequential improvement in store traffic as we move through the quarter. While broader macroeconomic pressures persist, these trends offer encouraging signs that some headwinds may be starting to ease. Additionally, we know that the largest number of signups for our VIP rewards program happened in stores. As store traffic improves, it should have a positive impact on the program, whose members drive over 90% of our transactions. Store conversion was up 1% versus last year, as our strong assortment and improved in-stock levels resonated with customers. To support further improvements in traffic and conversion, we are continuing to invest in marketing both in and outside of stores, meeting our customers where they are, with the styles they are seeking. In stores, we've seen positive results from the collateral and branded in-caps that have echoed consistent improved messaging. Our simplified pricing strategy also helped drive clearance sales up 3% versus last year. Delivering value has always been a core part of our model, and this approach reinforces our commitment to making it even easier for customers to find. As we utilize marketing to acquire new customers, we've also successfully launched a new partnership with DoorDash. While it's early in this relationship, we're encouraged that approximately 85% of our transactions from the DoorDash marketplace so far represent customers that are new to DSW. We believe this is also helping to bolster interest in our stores across local geographies. Within our stores, we launched several trend-driven campaigns with key national brands this summer. Specifically, we executed a Birkenstock front-of-store takeover across all locations. The campaign was fully integrated across all channels, reinforced by a revitalized digital storefront and VIP program integration. Additionally, social engagement continued to climb in Q2, fueled by stronger content strategies and creator partnerships that continue to build relevancy with the consumer. We are excited to continue to leverage these partnerships throughout the back-to-school season. In our U.S. retail business, a few categories meaningfully outpaced the balance of the business. This was led by strength in the women's dress category, which delivered a positive 5% comp, a 900 basis point improvement from the first quarter. Our top eight brands also continued to outperform the balance of chain with a positive 1% comp for the quarter. Penetration of our top eight brands grew 300 basis points over last year, accounting for 45% of total sales in the quarter. On the athletic side, our adult business showed sequential improvement, and Kids Athletic posted a flat comp, representing a 500 basis point improvement over the prior quarter, underpinned by a strong start to the back-to-school season. As we discussed last quarter, we have been leaning more overtly into our back-to-school marketing to reinforce our position as a true destination and see this resonating as we continue to see positive momentum in August, with further sequential improvement in comps. We spoke last quarter about our improved distribution strategy and increased focus on enhancing digital profitability. We made progress on this in the second quarter, optimizing our marketing spend and placing stronger focus on cultivating customers across channels. Looking ahead, we plan to continue leaning into our omnichannel approach to deepen relationships and enhance customer lifetime value. Turning to our Canadian business, total sales in the second quarter showed sequential improvement over Q1 and held flat year over year. The trajectory continued to sequentially improve throughout the quarter, with July turning to a positive comp. Overall, this steady progress gives us cautious optimism as we look ahead. Now to our brands portfolio segment. Although sales were down 24% compared to last year, this was largely driven by lower internal sales as anticipated. Importantly, wholesale activity across all other external retail partners delivered year-over-year growth. Turning to our near-term areas of focus, we remain confident in our strategy and will continue to focus on the two pillars of customer and product within our retail businesses. In brands, we will drive growth by scaling private label, building a more profitable wholesale model, and investing in strategic growth brands like Topo Athletic and Keds. Our customer remains our first priority, and we are committed to delivering meaningful, consistent value to them across all channels. With our customer squarely in mind, we are excited about the DSW brand repositioning that we recently launched. This includes implementation of newly branded customer-facing assets, including an updated DSW logo, a refreshed fall marketing campaign, gift cards, and evergreen signage. As part of our brand repositioning, we were excited to unveil our new tagline, "Let Us Surprise You." This marks a pivotal step in reinvigorating our DSW brand identity and leans back into what truly differentiates the DSW shoe buying experience. We are actively bringing the campaign to life with an optimized marketing approach, which will help to balance spend between top-of-funnel and personalized activations, raise brand awareness, and deepen customer engagement. We're also consistently focusing on highlighting the value we provide. As we discussed before, we have moved clearance pricing to a flat % off versus the multiple discount levels we used in the past. We are selectively offering additional discounts on clearance, marketed as buzzworthy, as well as rolling out exciting limited-time events. While it's early, we're encouraged by the trends we are seeing, particularly as average clearance markdown rates are trending lower than in prior periods. Shifting to our product pillar, we continue to operate with focus on elevating and evolving our assortment while driving improvement in inventory availability and productivity. We are meaningfully reducing our choice count while simultaneously increasing our depth on key styles throughout the year. Our choice count for the back half of 2025 is planned down 25% versus last year, and our depth is planned up 15%, underscoring our focus on inventory productivity. Looking ahead, we are adding depth in our core styles, including our top eight brands, ensuring we are focusing on the areas of highest demand. Going into fall, we are also seeing positive signs as it relates to regular price boosts, which we believe may signal potential strength in our seasonal merchandise this fall. On the product availability side, we have continued to shift inventory allocation in the U.S. between digital fulfillment centers and our store locations to optimize in-store product availability. Our in-stock levels of regular priced products materially improved to approximately 70%, a clear sign of progress in our inventory availability. We are seeing this strategy validated by our DSW store customers, who are driving our positive conversion comps. We continue to optimize our digital fulfillment through our distribution center, which is operationally more efficient than fulfilling from stores, while also protecting store inventory to ensure the shoe she wants is in the store when she visits. In the second quarter, we fulfilled over 80% more of our digital demand through our logistics center compared to last year. Overall, this adjustment has allowed us to protect our in-store inventory, focus on cost efficiencies, and post higher store conversion rates, all of which are foundational elements to better serve our customers. As we continue to focus on the pillars of customer and product in our retail businesses, we recently unveiled a reimagined DSW store in Framingham, Massachusetts. This store is the first within the DSW fleet to fully integrate the DSW brand positioning of "Let Us Surprise You," with immersive, playful elements designed to drive deeper customer engagement and discovery within our curated assortment. As we pilot new and emerging technologies for potential integration across our retail footprint, this store location will be an important testing ground for modern and innovative shopping experiences. Aligned with our larger retail strategy to transform and differentiate our retail experience, this new store format features a suite of services, including Fitfinder technology, shoe protection services, and a dedicated try-on area with augmented reality-enabled try-on kiosks that allow customers to build complete outfits from toe to head. A customization station further elevates the experience, enabling customers to personalize their purchases through embroidery, engraving, and digital printing. We believe this initiative represents a meaningful step forward in our efforts to evolve the DSW brand, deepen customer loyalty, leverage our stores as differentiators, and unlock long-term value. Turning to our brand segment, our sourcing team has done an admirable job mitigating the impact of tariffs and has made meaningful progress in our strategy to continue to diversify our supply base. Moving forward, we will continue to prioritize diversification to avoid over-reliance on any one country of origin, as the tariff environment remains highly unpredictable. Turning to our brands themselves, at Topo, we continue to meaningfully expand door count and shelf space in existing locations. Additionally, our DTC business continues to deliver outsized growth. Topo was early in raising prices as we saw tariff risks materialize, and they have helped to mitigate a significant portion of these costs. We have seen no impact on sales or growth rates by doing so. Before I conclude, I want to share a few thoughts on our 2025 guidance. Given the ongoing volatility with the recent tariff increases extended and the continued consumer caution around discretionary spending, we decided to continue to withhold our guidance. We will remain focused on disciplined execution across the areas within our control as we navigate the near-term environment. By doing so, I'm confident we're building a business grounded in the strength of our brand, centered on the customer, and positioned to drive sustainable long-term value. I want to emphasize that we remain committed to our strategy and our transformation. We are encouraged by the early signs of positive momentum and pleased with the sequential improvement we've delivered. We remain cautiously optimistic for the remainder of the year, as there is still a lot of macro uncertainty. As always, I am deeply proud of our team members, whose commitment, resilience, and focus have been the driving force behind our progress. Their ability to navigate challenges while continuing to deliver excellence exemplifies the culture and strength of our organization and will position us well for long-term growth. With that, I'll turn it over to Jared. Jared? Jared Poff: Thank you, Doug, and good morning, everyone. I want to begin by echoing Doug's comment that the sequential improvement we've seen this quarter is a significant step forward. Despite ongoing macroeconomic headwinds and continued pressure on consumer discretionary spending, our focus on advancing our strategy is delivering improved results. Let me provide a bit more detail on our second quarter financial results. For the second quarter of fiscal 2025, our net sales of $739.8 million declined 4.2% year over year, with comp sales down 5%. This represents a significant improvement from Q1, where net sales were down 8% from last year. In our U.S. retail segment, sales declined 4.8% year over year, with comp sales down 4.9%. This represents another significant improvement from Q1. We are also encouraged by our women's dress performance, which posted a 5% positive comp in the quarter and represents a significant part of the business at almost 12% of total sales. While athletic sales were a slightly negative comp of down 2%, we did see a two-point comp improvement from the first quarter. In our Canada retail segment, sales were up 0.4% in the second quarter compared to last year, with comps down 0.6%, another significant improvement from the first quarter. Finally, in our brand portfolio segment, total sales were down 23.8% to last year, largely driven by the anticipated decline of internal sales to DSW. I would like to echo Doug's comment about the strength of our brand's external wholesale business, which was up 7%. While we continued to see challenges throughout the quarter, Topo Athletic remained a standout in our assortment, posting 45% growth in sales year over year. Within our dress and seasonal assortment, Jessica Simpson and Vince Camuto continued to be strong performers, achieving sales growth of 12% and 17% in wholesale sales to partners outside of DSW. Consolidated gross margin was 43.7% in the second quarter and decreased by 30 basis points versus the prior year, primarily driven by lower IMU due to increased penetration of the athletic category, but leveraged 70 basis points from the first quarter. For the second quarter, adjusted operating expenses dropped $14.1 million versus last year, slightly leveraging by 20 basis points year over year. As we discussed in our last call, in response to the highly volatile macro environment and its impact on our business, we have taken an aggressive, disciplined approach to managing our expense structure and capital expenditures. With these actions, we currently are on track to deliver approximately $20 million to $30 million in expense dollar savings across fiscal 2025 as compared to 2024. As a reminder, our third quarter will include a headwind of $9 million compared to the prior year from our bonus accrual reversal last year during Q3. For the second quarter, adjusted operating income was $30.3 million compared to operating income of $32.5 million last year. In the second quarter of 2025, we had $11.7 million of net interest expense compared to $11 million last year. Our effective tax rate in the second quarter on our adjusted results was 10.1% compared to 20.6% last year. Our second quarter adjusted net income was $16.7 million versus $17.1 million last year, and $0.34 in adjusted diluted earnings per share for the quarter, which I'm happy to report was above last year's EPS of $0.29. Turning to our inventory, we ended the second quarter with total inventories down 5% to last year. During the quarter, we utilized excess cash to pay down debts, ending the quarter with total debt outstanding of $516.3 million. Subsequent to the end of the second quarter, we have further paid down debt to end fiscal August with outstanding debt of $476.1 million. We ended the second quarter with $44.9 million of cash, and our total liquidity as of the end of the second quarter, which includes cash and availability under our revolver, was $149.2 million. While we are encouraged by the progress made since Q1 and remain cautiously optimistic about the second half of fiscal 2025, there is still work ahead. Persistent macroeconomic headwinds and uncertainties related to tariffs have led us to the decision to continue to withhold full-year guidance as we focus on the factors within our control. To conclude, I'm encouraged by the progress we achieved during the second quarter, and as the macro environment stabilizes, I am confident that we are well positioned to advance our strategy. With that, we will open the call to questions. Operator? Operator: We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Mauricio Serna at UBS. Please go ahead. Mauricio Serna: Great. Good morning. Thanks for taking my question. I guess I wanted to ask if you could elaborate on the interquarter trends. It seems like things really got better as the quarter progressed. Could you give us a sense of what were the comps, how the comp sales looked during the quarter, and how to think about that, considering that you mentioned the momentum continued into August so far? Thank you. Doug Howe: Yeah. Hi, Mauricio. This is Doug. Thanks for your question. Yeah, we saw a sequential improvement as we moved through the quarter. As we said in the prepared remarks, we're obviously very encouraged by the trend that we saw in athletics, both in kids and adults. Most notably, the dramatic improvement that we saw in women's dress, which was a 900 basis point improvement in the quarter, that's always been an explorer area of strength for us, obviously. That has continued even as we've advanced in August, as we said. We're very encouraged by that. I mentioned very early on that the initial boot selling, specifically regular price, is very encouraging as well. We think that bodes well for not only the, you know, it's really a fashion inning, so we feel really strongly about that assortment and are cautiously optimistic as we move through the back half of the year. Mauricio Serna: Got it. I guess just wondering, at the end of the quarter, were you still on negative comps, or were you actually positive as a total company? Doug Howe: Still slightly negative, we've seen sequential improvement as we've now moved through August. Jared Poff: Mauricio, one thing I would remind you, and we talked about it on the last call, we are taking a very different approach than we historically have towards our digital business, recognizing there's a large part of that that it's very difficult to make actual money on. We have been very deliberately pulling back the marketing we spend to chase some of those empty calorie sales as well as the sales themselves. We're really focused on where we can provide a differentiation, which is our stores, and are seeing some really strong trends there. As Doug mentioned in his script, we saw that turn to positive in August in our stores' comps. When you do look at the total, you do need to make sure and understand there's a piece of it that we're okay with negative comps on, on the digital specifically, as long as we're improving our profitability. Doug Howe: To Jared's point, we are seeing positive conversion in stores as a result of both the assortment and the inventory fulfillment strategy that we've spoken about. That was actually very encouraging to see that the assortment is resonating with customers specifically in stores. Just one quick follow-up on the topic of profitability. Could you maybe give us a little bit more detail on Q3, like how much of a pressure are you foreseeing because of tariffs? I guess at this point, you already have that inventory, so you probably have an idea of what's the weighted average tariff or the incremental cost just related to that in Q3, in your Q3, yes. Doug Howe: Yeah, Mauricio, let me kind of give you some high level, and Jared can answer the color here as well. I just want to remind everyone that, you know, the overwhelming concern that we've had from the onset has not been the direct impact of tariff. Because when you look at it in the grand scheme of things, like our brand's portfolio, only import about 20% of product. The rest of it, we land domestically. At DSW, obviously, we're largely reliant on our brand partners. We have always been most concerned about the indirect impact of tariff. We've been working very closely on the retail side. We've had brand partners strategically, you know, very selectively pass on price increases. We've largely passed those on and maintained our IMU. The majority of those are just now coming customer-facing in the last couple of weeks. We're cautiously optimistic, but that's, you know, why we have concern. It's always been more around that indirect impact that it would have on overall consumer sentiment as opposed to the direct impact. We've selectively taken price increases in some of our private label products. Haven't had, you know, a negative reaction to that. Again, it's early days and we are kind of cautiously optimistic as we move through the balance of the back half. Mauricio Serna: Thank you so much. Operator: Again, if you have a question, please press star then one. The next question comes from Dana Telsey at Telsey Group. Please go ahead. Dana Telsey: Hi, good morning, everyone. As you just put out the new marketing campaign with "Let Us Surprise You," what are the markers that you're looking for given that 70% of your customer base shops in store? You mentioned the store in Framingham, Massachusetts. How are you thinking of store productivity with this campaign? How are you thinking of openings and closings? Is there any real estate bent to it that you'll get from the enhanced marketing? Marketing is a percent of sales. How are you thinking about that this year? Thank you. Doug Howe: Yeah, good morning, Dana. This is Doug. Yeah, we're very excited about the brand campaign. It is really early days. We just launched that actually in Q3. It went live on September 2. I'd say anecdotally, the feedback has been very, very positive from both customers' interactions, certainly from our associates. We are very happy with just the positioning of it. It's a bit of a wink and a nod. It's whimsical. It just feels like encouraging her to come in and kind of enjoy shopping in our stores, which again, we believe are very much our core differentiator. You walk into one of our stores, there's 2,000 choices of footwear. We want her to really enjoy that experience. They spend well over 30 minutes in the store. We're happy about that. It's very early days as it relates to the reaction. That's gotten a lot of impressions and pickup on the prep. That's all been very overwhelmingly positive as well. To your point, I mean, we're going to be very thoughtful around how this shows up in-store in our CRM and all of our marketing channels. We're obviously, as Jared said, really focusing on channel profitability. We want to make sure that we're continuing to focus on optimizing that marketing investment. We'll be happy to report out as we get a little bit further along, but it's fairly anecdotal at this point. Again, very encouraged by the work. It was all informed by qualitative and quantitative research. We took the appropriate time to actually get to the messaging. To me, it feels kind of reminiscent of, you know, DSW's core strength. Surprising by great brands, great value, great assortment in our stores. We look forward to reporting out on the specifics, but a bit premature to do that at this point. Jared Poff: You know, Dana, from the marketing as a % of sales, I would say we are certainly cognizant. We are probably at the higher end of much of our peer set, but we think it's important to highlight where the differentiation is for DSW versus other shoe chains and shoe stores that are out there. We have mentioned when we kicked this off, it has been a minute, a very long minute since we have done some DSW brand marketing. Also, we just talked about how we are pulling back on aggressively chasing some of those empty calorie digital sales, which has freed up some marketing dollars on that front. Overall, we're not seeing or expecting significant deleverage on our marketing SG&A line. We think it's more of an optimizing and kind of pivoting. As long as it's getting the returns that we're seeing and we're tracking that and we're tracking it very closely, we'll continue to fund that where it makes sense. Dana Telsey: Got it. You had mentioned Birkenstock is one of the brands with an activation that performed well. What are you seeing from brands? How is Nike performing? Any highlights of what you're expecting for brand activations or performance in Q4? Thank you. Doug Howe: Yeah, Dana, that's a great question. You know, Birkenstock was among the top eight brands that we're tracking. We're really encouraged by the fact that those brands, as we said, delivered a 1% comp and their penetration increased to 45% of total sales. Birkenstock is one example, but the team has done a really good job of providing more brand collateral in stores, really telling a brand story, getting behind those brands that the customers are craving right now. That'll continue to be our focus going forward. We're fortunate to have great partnerships with those key brands. We're maintaining better in-stock levels with them, getting more access to product, and continue to be very encouraged by those top eight brands, of which Nike is obviously one of them. Dana Telsey: Thank you. Doug Howe: Sure. Operator: We have a follow-up from Mauricio Serna of UBS. Please go ahead. Mauricio Serna: Great. Thanks. Just a quick follow-up. I think, you know, I recall you mentioned you're planning to have like deeper assortment. Could you elaborate a little bit more on what you're bringing, you know, maybe from a brand's perspective or category perspective? You know, like where is this deepening in assortment taking place? Just as a reminder, maybe on the puts and takes on your expectation of SG&A dollars to be down $20 to $30 million for the full year. Could you break that out into what are the different buckets that are driving that decline? Thank you. Doug Howe: Yeah, thanks, Mauricio. I'll take the first part of that and then I'll let Jared answer the SG&A piece. From an inventory perspective, as we've shared earlier this year, the teams are really focused on increasing our product availability, so our in-stock. That applies to the top brands, it applies to the top categories. As I said in my prepared remarks, our choice count for the back half is down 25%, but our depth is up 15%. That's a meaningful change and is driving a pretty strong result in store conversion. When we do customer intercept interviews, the number one reason when a customer leaves a store without a purchase is they didn't find their size. This goes squarely at that with regards to making sure that we have the style she wants and the size she wants when she comes into the store. That's the benefit we're actually seeing on the inventory productivity. Jared Poff: On the $20 to $30 million, I would kind of bucket it this way. About a third of that is professional fees, consultants, and things like that that we had been using for various initiatives that, you know, we have certainly ratcheted that down to things that are just absolutely critical. We're getting an immediate payback. We've got roughly around half of the savings from personnel-related type of actions. There were some corporate actions taken earlier in the year, as well as the flex that goes with the comps that we're seeing out in the store land. The balance is just some puts and takes along lines like depreciation, occupancy, things like that. Mauricio Serna: Understood. Thank you very much. Operator: This concludes our question and answer session. I would like to turn the conference back over to Doug Howe for any closing remarks. Doug Howe: I just closed by saying that we are encouraged by the early signs of positive momentum, and we were pleased with the sequential improvement that we delivered throughout the quarter. I want to say thank you again to all of our team members for their unwavering commitment and their focus as they continue to operate with a sense of urgency to move the business forward. Thank you to all of you for joining us today. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good afternoon, and welcome to the Ambiq Micro Second Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, September 4, 2025. I would now like to turn the call over to Ms. Charlene Wan. Charlene, please go ahead. Charlene Wan: Good afternoon, and welcome to Ambiq's Second Quarter 2025 Earnings Conference Call. I'm Charlene Wan, Vice President of Corporate Marketing and Investor Relations at Ambiq. I'm joined today by Ambiq's CEO, Fumihide Esaka; and Ambiq's CFO, Jeff Winzeler. As part of today's call, we will review our quarterly financial performance and provide a summary of our outlook. Our earnings release and the accompanying financial levels are available on the Investor Relations page of our website at www.ambiq.com. Before I turn the call over to Fumi, I'd like to remind our listeners that during the course of this conference call, the company will provide financial guidance, projections, comments and other forward-looking statements regarding future market development, the future financial performance of the company, new products or other matters. These statements are subject to the risks and uncertainties that we discuss in detail in our documents filed with the SEC. Specifically, the final perspective related to our initial public offering and our most recent 10-Q, which identify important risk factors that could cause actual results to differ materially from those contained in the forward-looking statements. Also, the company's press release and management statements during this conference call will include discussions of certain non-GAAP financial measures. These financial measures and related GAAP to non-GAAP reconciliations are provided in the company's press release and related current report on Form 8-K. For those of you unable to listen to the entire call at this time, a recording will be available via webcast in the Investor Relations section of the company's website. And now it's my pleasure to turn the call over to Ambiq's CEO, Fumihide Esaka. Fumi, please go ahead. Fumihide Esaka: Thank you, Charlene. Good afternoon, and thank you to everyone for joining us on our first earnings call since our IPO on July 30. Ambiq has been on an incredible journey. The company was founded in 2010 to put intelligence everywhere using the world's most power-efficient chips. At this point, we have enabled more than 280 million devices in applications ranging from personal devices to medical and health care to the industrial edge to smart home and smart buildings. We are excited about enabling the next billion devices as AI move out of the cloud and on to the edge. For those of you new to Ambiq's story, I'd like to give you a quick overview of our business. Ambiq is a pioneer and leading provider of ultra-low power semiconductor solutions. Our mission is to enable intelligence and AI everywhere by delivering the lowest power semiconductor solutions. As many of you know, most of to date's AI computation including both training and inference happens in data centers, which are far away from the action. Moving AI inference to the edge is a great alternative because it offers lower latency, greater privacy, improved security and reduced costs. However, we haven't yet seen the full potential of edge AI because edge devices tends to be smaller and battery-powered. With that innovation, it's nearly impossible for those devices to run AI without quickly draining their batteries. Ambiq has solved this power problem with our SPOT platform. SPOT stands for Sub-threshold Power Optimized Technology. It significantly reduces total system power consumption and enables devices to run AI locally without sacrificing battery life. SPOT has been foundation for 5 generations of our flagship SoC family called Apollo. In addition to hardware, we also offer extensive software solutions to help our customers reduce their products and design cycle. More and more people are realizing potential of running AI at the edge as that's where the action takes place. If your smart watch is capable of running on device AI, you get a doctor or personal trainer on your wrist. Hearing aid with onboard AI models can filter out the noise in a restaurant and enhance the 1 voice you actually want to hear. And the factory machinery equipped with a wireless fault detector can identify failure before it happens and calls for help without bringing the factory line down. With our energy-efficient products and solutions, Ambiq is well positioned to drive and benefit from the edge AI revolution. In that, let me now turn the call over to Jeff Winzeler, our CFO, to discuss our second quarter results and third quarter outlook in more detail. And then I will talk more about our strategic priorities as we look ahead to the coming quarters and year. Jeffrey Winzeler: Thank you, Fumi, and thanks, everyone, for joining us today. Before I review the financials, please note that I will focus my discussion on non-GAAP financial results and refer you to today's press release for a detailed reconciliation of GAAP to non-GAAP financial results. The non-GAAP adjustments relate to stock-based compensation, depreciation, amortization, warrant value and other charges. Revenue for the second quarter of 2025 was $17.9 million compared to $15.7 million in the first quarter and $20.3 million in the second quarter of 2024. The sequential increase in second quarter revenue was driven by increased customer demand and favorable product mix. The year-over-year decrease in net sales reflected the company's strategic decision to diversify revenue toward higher-value opportunities with customers outside of China. In the second quarter of 2025, net sales to end customers in Mainland China were 11.5% as compared to 42% in the second quarter of 2024. Non-GAAP gross profit for the second quarter of 2025 was $7.6 million or 42.7% of revenue compared to $7.4 million or 47.1% of revenue in the prior quarter and $6.7 million or 32.9% of revenue in the same quarter a year ago. The sequential and year-over-year increases in non-GAAP gross profit for the second quarter of 2025 were the result of a more favorable product end customer mix, as the company continued to execute on its strategic prioritization of geographies outside of China. Non-GAAP operating expenses in the second quarter of 2025 were $13.8 million compared to $13.1 million in the prior quarter and compared to $14.4 million in the second quarter of 2024. The breakdown of non-GAAP operating expenses for the second quarter of 2025 are as follows: Research and development expenses were $7.3 million compared to $7 million last quarter and $7.3 million in the same quarter a year ago. One of our top strategic initiatives post-IPO is to continue growing our technical capabilities and investing in our product development road map to capture the opportunities ahead of us. SG&A expenses in the second quarter were $6.5 million compared to $6.2 million in the prior quarter and $7.1 million in the second quarter of 2024. Total other income in the second quarter was $315,000, consisting mainly of interest income from our cash reserves compared to $461,000 in the prior quarter and $337,000 during the same quarter a year ago. Net loss for the second quarter of 2025 was $8.5 million or $18.90 per share based on 449,785 weighted average shares outstanding. This compares to a net loss of $8.3 million or $18.96 per share in the first quarter of 2025 and net loss of $10.6 million or $34.59 per share in the second quarter of 2024. The per share amounts have been adjusted to reflect a 1 for 28 reverse stock split that was affected prior to our IPO. Second quarter non-GAAP net loss was $5.9 million compared to non-GAAP net loss of $5.2 million in the first quarter of 2025 and non-GAAP net loss of $7.4 million in the second quarter of 2024. The loss per share in the second quarter of 2025 was $0.43 based on unaudited pro forma common shares of 13.6 million as disclosed in the company's F-1. Turning to the balance sheet. Cash and cash equivalents were $47.5 million at the end of Q2 2025. On July 30, the company completed an initial public offering, consisting of 4.6 million shares of common stock issued at $24 per share. After deducting underwriting costs, commissions and other transaction costs, the net proceeds were $97.2 million. Now let me turn to our guidance for the third quarter of 2025. We expect revenue to be in the range of $17.5 million to $18 million. Non-GAAP loss per share is expected to range between $0.35 loss per share and $0.28 loss per share on a weighted average post-IPO share count of approximately 18.2 million shares. This share count reflects the pre-IPO reverse split and conversion of preferred shares into common plus the common shares issued at the IPO and is the baseline share count for the company going forward. In summary, during Q2 2025, Ambiq grew revenue from the previous quarter and importantly, grew gross profit dollars, both sequentially and year-over-year in support of our ambitions for profitable growth. Subsequent to the quarter, we successfully completed the company's initial public offering and secured the necessary financial resources to execute on our strategic business plan, which Fumi will now detail further. With that, let me pass the call back to Fumi. Fumihide Esaka: Thank you, Jeff. Since this is our first earnings call, I'd like to take a moment to outline our mission and strategic initiatives. Our goal is to drive long-term shareholder value through sustainable and profitable growth. After our successful IPO we intend to use the proceeds to support the execution of 3 key initiatives. Our first initiative is to expand into new markets and geographies with our existing products. This will fuel our revenue and margin growth. We have demonstrated a strong end customer adoption with market leaders. These top tier brands validate the value proposition of our Apollo products and have helped us acquire a growing number of new customers. We will be expanding our sales and support resources to enable these new customers. We are proud to share 1 great example of our recent new customer announcement. Whoop, a leader in health-oriented wearables recently chose Apollo for their newest fitness tracker product line. The new Whoop 5.0 and Whoop energy products give an incredible intelligent view of your health and even your blood pressure in a small band that lasts for more than 14 days on the battery. Ambiq's Apollo delivers 10x better battery efficiency allowed Whoop to utilize on-device AI to process biometric data intelligently. In addition to personal devices and wearables markets, we are pursuing new edge AI use cases such as AR/VR glasses, heart monitors, smart medical patches, oxygen condition monitors, smart alarms and locks and robotics. We are also sifting our geographic concentration. Historically, we had significant sale with end customer in Mainland China. As the demand for edge AI grows globally, we are prioritizing sales efforts towards other meaningful geographies. In 2023, 66% of our net sales were to the end customer in Mainland China. This fell to 50% in 2024. In the second quarter of 2025, only 11.5% of our net sales were to end customers in Mainland China. This is a big reduction compared to the 42% number we saw in the second quarter of 2024. We currently anticipate this mix to continue in 2025 and beyond. Our second key initiative is to expand our existing Apollo family and introduce the new atomic product line. As a high-growth company, we are scaling our R&D and go-to-market capability to capture the edge AI opportunities. Since we launched the first Apollo SoC in 2015, we have introduced new products nearly every year. The original Apollo 3 and 4 SoCs are being used for a variety of early edge AI deployments. The new Apollo510 and Apollo330 SoCs launched in the past 18 months add better accelerated AI compute. Last week, we announced the expansion of our Apollo 5 line with Apollo510B wireless SoC. It has a 250 megahertz Cortex-M55 coprocessor alongside a dedicated 40 megahertz network processor and Bluetooth Low Energy 5.4 radio. Target applications include wearables, AI glasses, heart monitors, smart locks and factory condition monitors. The fourth Atomic family product is currently in development. This innovative product is expected to deliver our highest performance and lowest power consumption for AI model at the edge. It targets edge AI applications with demanding compute requirements, especially for vision. Atomic features a full Neural Processing Unit, or NPU, for high-performance AI acceleration along with new memory innovations. And lastly, our third and long-term initiative is to build a variant of the SPOT platform that enables IP licensing to third parties. As this is the most energy-efficient edge AI chip design platform, we have received numerous increase to license SPOT. There are specialized applications that require power efficiency, such as data centers and automotive AI processing. To reach these markets, we plan to develop SPOT into IP and chip development platform. This offering will enable other companies to license or partner with us to incorporate SPOT into their own low-power chip designs. Our plan to develop this IP and technology platform for licensing would take place over the next 3 to 5 years. To conclude my prepared remarks, I want to first thank our investors, customers, partners, suppliers and employees for their support of Ambiq over the past 15 years. Thank you for helping us become a public traded company. The future of Ambiq is very bright and we are only at the beginning of unlocking the full potential of AI at the edge. I look forward to reporting our continued progress and meeting with each of you in the coming quarters. With that, I will open the call to questions. Operator, please go ahead. Operator: [Operator Instructions] Our first question comes from the line of Vivek Arya with Bank of America. Vivek Arya: Welcome to the public markets. Fumi, for my first question, I'm curious how does Ambiq kind of define edge AI? And what percentage of your sales today would kind of fit that definition? And how do you see that mix evolving in any kind of ASP benefits as that mix evolves towards more edge AI? Fumihide Esaka: Again, edge AI is growing in medical, industrial edge, personal devices, smart home and buildings, and we ourselves is really focusing on enabling this edge AI market. It is very hard to define. The percentage of AI use at our end customers, but most of our customers are already using intelligence. And that's where we add a lot of value. So we believe that more than half of the business is already using intelligence on their devices and we will continue to grow. Vivek Arya: Okay. And for my follow-up, I think the IP licensing opportunity sounds very interesting. But you did mention that it might take a few years to fully develop. Is there anything that you can do -- so first of all, what kind of use cases and applications are asking you for that licensing and chiplet-type architecture? And then can you do anything to accelerate that development of being able to license SPOT technology? Fumihide Esaka: Yes, Vivek, we believe that data center, automotive and mobile devices, those could take advantage of our SPOT technology. And as we are focusing on enhancing our R&D capability, we may be able to accelerate our development, our IP, with more resources and funding available. And we do have a dedicated team that is focusing on our SPOT licensing. And as previously discussed, they are right now focusing on 12-nanometer SPOT platform. And with proven that 12-nanometer development, we believe that we can accelerate our plan. Operator: Our next question comes from the line of Tim Arcuri with UBS Financial. Dino Ragazzo: Hello. This is Dino on for Tim. Welcome to the public markets. Could you talk about your progress on the non-wearable's opportunities as of now? You previously announced some design wins in medical and industrial. Can you just give us an update on your progress there? Fumihide Esaka: Well, again, about 17% of our funnel is already towards medical, industrial edge, smart home and building, and we believe that more than 20% is already -- we're working with some of the customers to define Atomic edge AI in vision. So we're making great progress even since we talked last time. Dino Ragazzo: Got it. And then I guess another question, just on your Q2 results, do you see any signs of pull-ins that impacted results? Jeffrey Winzeler: I think we had a pretty good ramp from Q1 to Q2. And if you think about our business typically seasonally, you would expect Q2 to be higher than Q1 and growth throughout the year. I think the 1 thing that kind of impacted this year was the announcement or the possibility of tariffs. And with the uncertainty of that, we did see some upside demand from customers in Q2 that drove revenue slightly higher than what we had originally anticipated in our model. That's really the only pull-in activity that we saw in the quarter. Operator: Then your next question comes from the line of Quinn Bolton with Needham & Company. Quinn Bolton: Fumi and Jeff, congratulations on the successful IPO. I guess I wanted to start with just looking at some of your end customers fitness tracker area, they seem to have pretty good results. Garmin, I think, reported a 41% year-on-year increase. And I guess I was wondering, can you give us a sense of just like the order trends you saw through the second quarter? Is your customer end market success leading to higher order rates? And then I guess a related question, how far in advance would you guys ship the Apollo processor ahead of when the end device might sell? Is that typically like a quarter lead time, but any sense on how far in advance you might ship ahead of your customers' end device sale would be helpful. Fumihide Esaka: Typically, our customers do place an order about 16 weeks lead time, and we do see our end customer, like you mentioned, but we cannot be -- we cannot make a very -- comment about the specific customer, but we see that the healthy growth, and we're very optimistic that they will continue to grow. Quinn Bolton: I guess maybe just on the orders, are you seeing kind of with that 16-week lead time, is that order book sort of suggesting sort of a healthy second half? I think you guys had previously seen some uncertainty around tariffs that had led to perhaps some caution on the second half. Any update on the tariff impact as you look into the second half of the year? Jeffrey Winzeler: Yes. I mean in terms of our guidance for Q3 revenue reflects the fact that we think there's a little bit of upside to what our financial model was, so that's a good thing. And we're cautiously optimistic. We also have seen the same news from the customers. I think in general, there's a macro feel that some of the tariff is not going to be as impactful as our end customers previously thought. So as I said, we're cautiously optimistic that the second half of the year will be better than what we had originally built into our plans. Quinn Bolton: Excellent. And then lastly, Jeff, any thoughts on gross margin as you look into the third quarter, I think you were around 43% in Q2. Would you expect gross margins to be relatively flat, up or down in the third quarter? Any directional comment would be helpful. Jeffrey Winzeler: Yes. We've taken a big step up from previous years, obviously, with exit out of China and the focus on other markets. So the 43% that we announced in Q2, I think, is relatively indicative of where our gross margin is today. Now going forward, that will vary by a point or 2 depending on the product mix in any given quarter, manufacturing yields, et cetera. But in general, I think that's a pretty safe place in terms of where our business is today. Operator: Our final question comes from the line of Tore Svanberg with Stifel. Tore Svanberg: Fumi, Jeff, welcome to the public market, and congrats on that Whoop win. So Fumi, you talked about the sort of first long-term strategic initiative. Clearly, you're starting to broaden the applications and markets that you are going into, especially on wearables. As we look at maybe in the next 4 months or so, which are some of the applications you expect to see revenue from? I know it's hard to kind of think out a few, but any color you could share with us that would be great. Fumihide Esaka: Well, we're not going to see a revenue from a new application, and again, this coming quarter, but definitely, some of the AR glasses are taking a first would -- working with some of the AR glass customers that definitely will be in the market very near term. And also, worker safety monitors and machine health monitor, those are already in the market, and we continue to -- we believe that to grow that market segment. So we believe that our application is growing really fast. Tore Svanberg: Very good. That's exactly what I was looking for. And then as my follow-up, could you just give us an update on Atomic, where we sort of are in the development process there? I think you have previously talked about that product being potentially available sometime next year. But yes, any -- well, precisely and obviously not for production, but any updates there would be helpful. Fumihide Esaka: Well, we're very excited to talk about Atomic, because we started working with early adopter on spec soon after we did a public offering. And activity is more active than ever before. Again, I believe that becoming a public company and our customers becoming more comfortable with working with Ambiq, we believe that we're going to make great progress coming quarters. Operator: With no further questions in queue, I will hand the call back to Jeffrey Winzeler for closing remarks. Jeffrey Winzeler: Thank you. Before closing the call, I'd like to let you know that we'll be attending the UBS Global Technology Conference in Scottsdale, Arizona on December 3, and the following day, December 4, we'll be at the Stifel Deep Tech Forum in Menlo Park, California. If you'd like to arrange a meeting with us at these events, please contact our IR firm, the Shelton Group. You can find the relevant contact information on the Investor page of our website, ambiq.com. Thank you again for joining us today, and we look forward to discussing our continued progress on our next earnings call. Operator, you may now disconnect. Operator: Thank you. Thank you for joining us today. This does conclude today's conference call. You may now disconnect.
Operator: Good morning, ladies and gentlemen, and welcome to the First Quarter 2026 Results Conference Call. I would now like to turn the meeting over to Ryan Hanley. Please go ahead, Mr. Hanley. Ryan Hanley: Thank you, and good morning, everyone. As mentioned, we would like to welcome you to Major Drilling's conference call for the first quarter of fiscal 2026. With me on the call today are Denis Larocque, President and CEO; and Ian Ross, CFO. Our results were released last night and can be found on our website at www.majordrilling.com. We also invite you to visit our website for further information. Before we get started, we'd like to caution you that during this conference call, we will be making forward-looking statements about future events or the future financial performance of the company. These statements are forward-looking in nature, and actual events or results may differ materially from those currently anticipated in such statements. I'll now turn the presentation over to Denis Larocque, President and CEO. Denis Larocque: Thanks, Ryan, and good morning, everyone, and thank you for joining us today to discuss our first quarter results. So we got off to a slower start to the calendar year due to delayed mobilizations, but we're pleased to see activity levels steadily accelerate through the beginning of fiscal 2026. As we reach our previously stated growth target achieving 21% revenue growth over the last 3 months, showing momentum across the business. We were particularly pleased with activity levels in Peru and Chile with Peru's revenue run rate continuing to increase following the completion of the Explomin acquisition last November. This growth is expected to more than offset temporary softness in the Australian -- Australasian market where pauses at certain projects caused by changing exploration plans led to a reduction of activity in the quarter. While the North American market was impacted by forest fires, permitting delays and continues to see elevated levels of competition, activity levels began to improve towards the end of the quarter. That recovery, combined with our strong positioning in Latin America gives us confidence in our platform as we face further growth in exploration budget over the years to come. Overall, we remain optimistic as we move into the second quarter of fiscal 2026. I'll discuss the rest of the outlook when Ian has taken us through the financials. Ian Ross: Thanks, Denis. Revenue for the quarter was $226.6 million, up 20.8% from the prior quarter and 19.3% from the $190 million over the same period last year. Revenue growth was driven by continued strength in the South and Central American region, in particular, Peru, but partially offset by Australasia, which were impacted by unexpected modifications to certain drill programs. The unfavorable foreign exchange translation impact on revenue when compared to the effective rates for the same period last year was approximately $1 million. While the impact on net earnings was minimal, expenditures and foreign jurisdictions tend to be in the same currency as revenue. The overall adjusted gross margin percentage, excluding depreciation, was 25.2% for the quarter compared to 28.9% from the same period last year. The decrease in margins was attributable to the continued competitive environment in North America as well as by some mobilization costs as a few additional projects ramped up in the quarter. Additionally, Explomin's margin profile is reflected given its focus on longer-term contracts and a higher proportion of underground drilling. While these programs typically result in more margins, they provide increased revenue diversification and stability. G&A costs increased $3.2 million compared to the same quarter last year due to the addition of Explomin along with annual inflationary wage adjustments. Company generated EBITDA of $32.1 million in the quarter compared to $34.3 million in the prior year period with net earnings of $10.1 million or $0.12 per share compared to net earnings of $15.9 million or $0.19 per share for the prior year period. The company ended the quarter with $2.8 million in net debt while working capital grew by $13.1 million to $206.8 million, driven by an increase in receivables, which coincided with the ramp-up in activity levels. The total available liquidity of $127 million and strong levels of cash flow expected to be generated through the busier months of the year, the company remains very well positioned moving through fiscal 2026. During the quarter, we strategically relocated drill rigs within certain regions to areas experienced higher levels of demand, which when combined with prior investments in the fleet, resulted in lower-than-expected CapEx spending of $14.4 million in the quarter and improved utilization. A total of 5 new drill rigs and support equipment were added, while 4 older, less efficient rigs were disposed of, bringing total rig count at quarter end to 709. The breakdown of our fleet and utilization in the quarter is as follows: 307 specialized drills at 46% utilization, 163 conventional drills at 50% utilization, 239 underground drills at 54% utilization for a total of 709 drills at 50% utilization. As we've mentioned before, specialized work in our definition is not necessarily conducted with a specialized drill. Rather, it is work that requires that meet the rigorous standards of our customers in terms of technical capabilities, operational and safety standards and other related factors. These standards are becoming increasingly important to our customers. In the first quarter, specialized work accounted for 60% of our total revenue. We continue to see high levels of demand for our specialized services and expect this trend to continue as deposits become increasingly more challenging to find with discoveries continuing to be in remote locations. Conventional drilling, which is mostly driven by juniors, increased slightly to 14% of revenue for the quarter, while underground drilling contributed 26% of total revenue, aided by the contribution of Explomin. We continue to see the bulk of our revenue driven by seniors and intermediates representing 92% of our revenue this quarter as they continued their elevated efforts to address the depleting reserves. While junior financings have begun to increase, the amount of capital raise is still well below the level seen in prior cycles. As a result, juniors continue to represent approximately 8% of our revenue in the first quarter. In terms of commodities, oil represented 41% of revenue in the first quarter with continued high gold price, while copper accounted for 34% of revenue, driven primarily by strength in the South and Central American region. Iron ore continues to make a meaningful contribution at 11% aided by our Australian operations and demonstrating the diversity in the commodities for which we drill forward around the world. With that overview of the financial results, I'll now pass the presentation back to Denis to discuss the outlook. Denis Larocque: Thanks, Ian. As we head into Q2, we expect to see some top line momentum driven by additional projects, particularly in the South American region. As we previously discussed, our Peru revenue base -- our Peru revenue run rate has continued to grow since the acquisition of Explomin that was closed back in November. This trend is expected to continue in the second quarter as more long-term contracts are added, while our Peruvian operation also addresses the growing demand for underground drilling. These types of projects provide stable and diversified streams of incremental revenue. As well, we remain optimistic on the North American region as the junior financing market has begun to show signs of life while discussions surrounding more streamlined permitting processes in both Canada and U.S. are also expected to lead to an increase in activity. On the commodity side, as you probably know, gold just hit another record high and the outlook for copper and other base metals is looking strong. We anticipate these elevated prices to support further growth in exploration budget over the years to come as mining companies use the additional cash flow generated from these high commodity prices to address their need to replace depletion and continue to build reserves. From an operational standpoint, we're in great shape. Our fleet in a great condition, inventory levels are solid and our crews are doing an outstanding job on safety and performance. Thanks to prior investments in infrastructure and equipment, we do not foresee the need for significant incremental CapEx. This positions us to unlock a meaningful operational leverage as activity scales up and demand continues to grow. With that, we can open the call to questions. Operator? Operator: [Operator Instructions] Our first question is from Donangelo Volpe from Beacon Securities. Donangelo Volpe: First question from me. Can you talk about the dynamics you guys are seeing in North America. We've been seeing a modest uptake in junior financings. Just wondering how you view the pipeline in Canada versus the United States. And I was just wondering if you could provide any additional commentary related to the streamlined permitting process you're seeing in both regions. Denis Larocque: Yes. Well, in Canada, the activity has -- as we said, we've seen -- as we progress through the quarter, we've seen a pickup in activity. Some of that's driven by juniors, but they're still not back in great force, if I might say, as the financings that were done, there's always a period before we see that come through in the field. And I think we certainly saw some of that coming near the end of the quarter. We didn't see that uptick in the U.S., though at this point. From the permitting perspective, I must say that we haven't seen -- well, we definitely haven't seen an impact in terms of drilling because it takes -- again, there's -- it takes a bit of time before you see that coming through. And frankly, it's still not moving as quick as I personally would have thought it would following our Canadian election. And in the U.S., you had resolution, for example, just as an example in the U.S. that still got blocked a few weeks ago. So it's still not -- we're still not seeing a great uptick in permitting in North America, while we're certainly seeing more activity coming from that in other areas of the world. Donangelo Volpe: Okay. And then I guess that kind of segues into my next question. With the outlook pointing towards continued top line growth driven by out performance in South America. Can you discuss some of the stronger regions you foresee in the future? And what some of the dynamics are there that will be driving that growth? Denis Larocque: Yes. Well, Peru, we're seeing that operation continues to grow over the next quarter for sure. Lots of activity, but at the same time, as we said, lots of mobilization activity, preparation of rigs, additional people that were brought in and with its load of onboarding costs since the beginning of the year. But we're looking forward to all of that basically hitting cruising altitude by next quarter. So Peru is certainly an area. We see North America like financings, with financing, as you said, picking up lots of time that comes in North America. So we are seeing Canada continuing to increase going into next quarter as well. We'll see in the U.S. if that happens as well. And then the rest is going to be really stated by what mining companies where mining companies end up spending their next budgets. Donangelo Volpe: Okay. Perfect. I appreciate the color. And then last question for me. Just CapEx was about $14 million for the quarter. Can you discuss some of the dynamics that led to the lower-than-expected CapEx? And can we still expect it to be in the $60 million to $70 million range on an annual basis? Denis Larocque: Yes. Part of it really was, as I mentioned, I mean, we prepared 30-some rigs for Peru. And the good news is that we were able to move some of those rigs to some of those rigs from other operations to Peru, which helped. You saw that come through on the utilization rates, which are higher. We've hit 50% for the first time in a long time. And so that played part of it in terms of the growth that we expected and not having to spend as much on CapEx. Going forward, we don't foresee having to spend a lot more than what we had expected. So we'll see how it plays out. Again, it all depends which region, where the demand comes from and the type of demand. But at the moment, we don't foresee needing more CapEx than what we had guided at the last quarter. Operator: [Operator Instructions] Following question is from Brett Kearney from American Rebirth Opportunity Partners. Brett Kearney: Terrific to see the continued strength in your major markets and you guys' ability to capitalize and execute on that in the precious metals and copper front. Just curious, as there's been a heightened focus on critical minerals and I guess, the expanded list of the resources included therein. I know they're all small individually, but just curious kind of in aggregate, whether you're seeing any opportunity across some of more niche mining areas from rare earths, tin, tungsten, antimony in aggregate currently or going forward that can move the needle at all for you all? Denis Larocque: Yes. Well, like you said, all of those individually are not big contributors to exploration. But in aggregate, can certainly have an impact. So I mean, you mentioned tin, we have part of our operation in Peru that's drilling for 10. Lithium comes back on and off, depending on the times and you've got nickel, you've got uranium down the road that could be a contributor in terms of the whole electricity and everything that is needed there. So when you -- again, when you put it, it's still going to be -- we're still going to have between 70% to 80% of our activity that's going to come from gold and copper. But those other metal, I always use the flavor of the day kind of comment and critical minerals certainly the flavor of the day. So we expect to see activity from some of these metal... Brett Kearney: Excellent. And then maybe an extension of that, given your guys' size and trusted position as a mining services provider to Canada, North America, the West. To the extent you can comment, are you all actively engaging in or been approached at all in some of the security discussions as the importance of these metals, including even copper takes quite in priority. Are you guys being looked in at all to conversations involving discussions around NATO, the West. Denis Larocque: Well, I mean, not directly because we're just a supplier to the mining industry, but we are certainly having discussions with different people involved with ministers and trying to drive the point that our Canadian economy really need resources, and we need to get on if we're going to track investment, we need to make the -- we certainly need to make the environment or the business environment conducive to that. So we're certainly participating in those discussions and making that heard. It's just a matter of speed the intentions are there, and it's just a matter of speed of making this happen. And we certainly see other countries basically taking action much quicker than we see in Canada. But the conversation is certainly heading the right way, let's put it that way. It's more a question of... Operator: Following question is from James Vail from Arcadia Advisors, LLC. James Vail: Denis, you said that the second quarter top line is showing momentum. I guess I'll get to the bottom line is what you see change the dynamics of the third fiscal quarter and expecting maybe less of a slowdown that you've had historically, so that the activity wouldn't slow down as quickly as it did last year and slower to pick up in the spring. Is that a possibility? Or is that -- will those historic dynamics still be in place? Denis Larocque: Yes. To be frank, Jim, we -- it's too early to tell because we typically have those discussions when we get to October, November when they start to have plans. And lots of time, those -- even those decisions of continuing or not close to Christmas are made when they get to October, November, if they haven't spent all of their budgets or the environment like right now with gold running up, they say, okay, well, let's just add more -- 2 more months of budget to this year and keep going and so those decisions typically happen in October, November. So it's early to tell, but the environment with commodity prices is certainly positive for that to maybe continue later in the season. But again, too early to tell. James Vail: Okay. And then just finally, looking at the segment information, and there's the asterisk that says Canada U.S. includes revenues for Canada. If you do the arithmetic, it looks like the U.S. was down 20% in the quarter. Is that correct? Is that accurate? Denis Larocque: Yes. It is. There's been a slowdown. We've seen some slowdown in the U.S. A lot of that was driven by juniors. That's where -- last year, we had a lot of junior customers that didn't come back this season and we're waiting to see that. But then basically, as you mentioned, Canada has certainly grown from last year. James Vail: Yes, that's up 20%. That's encouraging. That is good. Okay. Are you going to present at Beaver Creek, Denis? Denis Larocque: No. We're not. Basically Beaver Creek is only for mining companies in terms of presenting. So we won't be at that conference. Operator: [Operator Instructions] We have no further questions registered at this time. I would now like to turn the meeting back over to Denis Larocque. Denis Larocque: Well, thank you. And please don't forget to join us. It's our AGM today, which will be held in-person and virtually at 3:30 Eastern Time. And all the details related to the AGM can be found on our website. So thank you for joining us today, and I hope to see you at our AGM. Operator: Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.