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Operator: Hello and thank you for standing by. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the Oracle Corporation Q1 FY2026 conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star then the number one on your telephone keypad. I would now like to turn the call over to Ken Bond, Head of Investor Relations. Ken, please go ahead. Ken Bond: Thank you, Tiffany. Good afternoon, everyone, and welcome to Oracle's first quarter fiscal year 2026 earnings conference call. A copy of the press release and financial tables, which include a GAAP to non-GAAP reconciliation and other supplemental financial information, can be viewed and downloaded from our investor relations website. Additionally, a list of many customers who purchased Oracle Cloud Services or went live on Oracle Cloud recently will be available from the investor relations website. On the call today are Chairman and Chief Technology Officer, Lawrence Ellison, and Chief Executive Officer, Safra Catz. A reminder, today's discussion will include forward-looking statements, including predictions, expectations, estimates, or other information that might be considered forward-looking. Throughout today's discussion, we will present some important factors relating to our business, which may potentially affect these forward-looking statements. These forward-looking statements are also subject to risks and uncertainties that may cause actual results to differ materially from statements being made today. As a result, we caution you against placing undue reliance on these forward-looking statements and we encourage you to review our most recent reports, including our 10-K and 10-Q, and any applicable amendments for a complete discussion of these factors and other risks that may affect our future results or the market price of our stock. And finally, we are not obligating ourselves to revise our results or these forward-looking statements in light of new information or future events. Before taking questions, we'll begin with a few prepared remarks. And with that, I'd like to turn the call over to Safra. Safra Catz: Thanks, Ken, and good afternoon, everyone. Clearly, we had an amazing start to the year because Oracle has become the go-to place for AI workloads. We have signed significant cloud contracts with the who's who of AI, including OpenAI, xAI, Meta, NVIDIA, AMD, and many others. At the end of Q1, remaining performance obligations or RPO now top $455 billion. This is up 359% from last year and up $317 billion from Q4. Our cloud RPO grew nearly 500% on top of 83% growth last year. Now to the results. Using constant currency growth rates, as you can see, we've made some changes to the face of our income statement to better reflect how we manage the business and so you can understand our cloud business dynamics more directly. So here it goes. Total cloud revenue, that's both apps and infrastructure, was up 27% to $7.2 billion. Cloud infrastructure revenue was $3.3 billion, up 54% on top of the 46% growth reported in Q1 last year. OCI consumption revenue was up 57% and demand continues to dramatically outstrip supply. Cloud database services, which were up 32%, now have annualized revenues of nearly $2.8 billion. Autonomous Database revenue was up 43% on top of the 26% growth reported in Q1 last year. Multi-cloud database revenue, where Oracle regions are embedded in AWS, Azure, and GCP, grew 1529% in Q1. Cloud application revenue was $3.8 billion, up 10%, while our strategic back-office application revenue was $2.4 billion, up 16%. Total software revenue for the quarter was $5.7 billion, down 2%. So all in, total revenues for the quarter were $14.9 billion, up 11% from last year and higher than the 8% growth reported in 17% to $6.2 billion. We have also been on an accelerated journey to adopt AI internally to run more efficiently. I expect our operating income will grow mid-teens this year and higher still in FY2027. Non-GAAP EPS was $1.47 while GAAP EPS was $1.01. The non-GAAP tax rate for the quarter was 20.5%, which was higher than the 19% guidance and caused EPS to be $0.03 lower. For the last four quarters, operating cash flow was up 13% to $21.5 billion and free cash flow was a negative $5.9 billion with $27.4 billion of CapEx. Operating cash flow for Q1 was $8.1 billion while free cash flow was a negative $362 million with CapEx of $8.5 billion. At quarter end, we had $11 billion in cash and marketable securities and short-term deferred revenue balance was $12 billion, up 5%. Over the last ten years, we've reduced the shares outstanding by a third at an average price of $55, which is, at this point, much less than a quarter of our current stock price. This quarter, we repurchased 440,000 shares for a total of $95 million. In addition, we paid out dividends of $5 billion over the last twelve months, and the board of directors again declared a quarterly dividend of $0.50 per share. Given our RPO growth, I now expect fiscal year 2026 CapEx will be around $35 billion. As a reminder, the vast majority of our CapEx investments are for revenue-generating equipment that is going into the data centers and not for land or buildings. As we bring more capacity online, we will convert the large RPO backlog into accelerating revenue and profit growth. Now before I dive into specific Q2 guidance, I'd like to share some of the overarching thoughts on fiscal year 2026 and the coming year. Clearly, it was an excellent quarter, and demand for Oracle Cloud infrastructure continues to build. I expect we will sign additional multibillion-dollar customers and that RPO will likely grow to exceed half a trillion dollars. The enormity of this RPO growth enables us to make a large upward revision to the cloud infrastructure portion of our financial plan. We now expect Oracle Cloud Infrastructure will grow 77% to $18 billion this fiscal year and then increase to $32 billion, $73 billion, $114 billion, and $144 billion over the following four years. Much of this revenue is already booked in our $455 billion RPO number and we are off to a fantastic start this year. Now while much attention is focused on our GPU-related business, our non-GPU infrastructure business continues to grow much faster than our competitors. We are also seeing our industry-specific cloud applications drive customers to our back-office cloud app. And finally, the Oracle database is booming with 34 multi-cloud data centers now live inside of Azure, GCP, and AWS, and we will deliver another 37 data centers for a total of 71. All these trends point to revenue growth going higher. For fiscal year 2026, we remain confident and committed to full-year total revenue growth of 16% in constant currency. Beyond fiscal year 2026, I'm even more confident in our ability to further accelerate our top and bottom line growth rate. As mentioned, we will provide an update on our long-range financial targets at our financial analyst meeting at Oracle AI World in Las Vegas in October. Now let me turn to my guidance for Q2, which I'll review on a non-GAAP basis and assuming currency exchange rates remain the same as they are now. Currency should have a $0.03 positive impact on EPS and a 1% positive effect on revenue depending on rounding. However, the actual currency impact may be different as it was in Q1. Here it goes. Total revenue is expected to grow from 12% to 14% in constant currency and is expected to grow from 14% to percent in US dollars at today's exchange rate. Total cloud revenue is expected to grow from 32% to 36% in constant currency and is expected to grow from 33% to 37% in US dollars. Non-GAAP EPS is expected to grow between 8% to 10% and be between $1.58 and $1.62 in constant currency. Non-GAAP EPS is expected to grow 10% to 12% and be between $1.61 and $1.65 in USD. And lastly, my EPS guidance for Q2 assumes a base tax rate of 19%, however, one-time tax events could cause actual tax rates to vary as they did this quarter. Larry, over to you. Lawrence Ellison: Thank you, Safra. Eventually, AI will change everything. But right now, AI is fundamentally transforming Oracle and the rest of the computer industry. Though not everyone fully grasped the magnitude of the tsunami that is approaching. Look at our quarterly numbers. Some things are undeniably evident. Several world-class AI companies have chosen Oracle to build large-scale GPU-centric data centers to train their AI models. That's because Oracle builds gigawatt-scale data centers that are faster and more cost-efficient at training AI models than anyone else in the world. Training AI models is a gigantic multi-billion dollar market. It's hard to conceive of a technology market as large as that one. But if you look close, you can find one that's even larger. It's the market for AI inferencing. Millions of customers using those AI models to run businesses and governments. In fact, the AI inferencing market will be much, much larger than the AI training market. AI inferencing will be used to run robotic factories, robotic cars, robotic greenhouses, biomolecular simulations for drug design, interpreting medical diagnostic images and laboratory results, automating laboratories, placing bets in financial markets, automating legal processes, automating financial processes, automating sales processes. AI is going to write, that is, generate, the computer programs called AI agents that will automate your sales and marketing processes. Let me repeat that. AI is going to automatically write the computer programs that will then automate your sales processes and your legal processes and everything else and your factories and so on. Think about it. AI inferencing. It's AI inferencing that will change everything. Oracle is aggressively pursuing the AI market. And we're not doing badly in the AI training market, by the way. The difference seems bigger. Oracle is aggressively pursuing the inferencing market as well as the AI training market. We think we are in a pretty good position to be a winner in the inferencing market because Oracle is by far the world's largest custodian of high-value private enterprise data. With the introduction of our new AI database, we added a very important new way for you to store your data in our database. You can vectorize it. And by vectorizing it, by vectorizing all your data, all your data can be understood by AI models. Then we made it very easy for our customers to directly connect all their databases, all their new Oracle AI databases, and cloud storage OCI cloud storage, to the world's most advanced AI reasoning models. ChatGPT, Gemini, Grok, Lama, all of which are uniquely available in the Oracle Cloud. After you vectorize your data and link it to an LLM, the LLM of your choice, you can then ask any question you can think of. For example, how will the latest tariffs impact next quarter's revenue and profit? You ask that question. The large language model will then apply advanced reasoning to the combination of your private enterprise data plus publicly available data. You get answers to important questions without ever compromising the safety and security of your private data. Again, I'd like you to think about this for a moment. A lot of companies are saying we're big into AI because we're writing agents. Well, guess what? We're writing a bunch of agents too. But when they introduced ChatGPT almost three years ago, what you've got to do is have a conversation and ask questions. You weren't automating some process with an agent. You could ask whatever question you wanted to ask and get a well-reasoned answer with all of the latest and best information and high-quality reasoning to go along with it. Who's offering that to customers? We'll be the first. When we deliberate and demonstrate it at AI World next month. That's what our customers have been asking for ever since the introduction of ChatGPT 3.5, almost three years ago. I wanted to ask questions about anything. And, therefore, you need to understand my enterprise data as well as all the publicly available data. Then you can answer the questions that are most important to me. Well, now they can ask those questions. Back to you, Safra. Safra Catz: Thank you, Larry. Tiffany, please poll the audience for questions. Operator: At this time, if you would like to ask a question, press star, then the number one on your telephone keypad. To withdraw your question, simply press star 1 again. Your first question comes from the line of John DiFucci with Guggenheim Securities. Please go ahead. John DiFucci: Thank you for taking my question. Listen. Even I am sort of blown away by what this looks like going forward. And this question, I guess, is sort of purposely open-ended. So Lawrence Ellison and Safra Catz, Oracle's become the de facto standard for AI training workloads, and you make money from it. And you have a lot of faith in that. But, clearly, there's more here than just AI training. I know it's a big part of it. You talked about it. But can you talk about what else, a little more detail about what else is driving these pretty amazing forecasts? Safra Catz: Go ahead, Larry. I mean, that you were discovering this. Lawrence Ellison: Yeah. Well, a lot of people are looking for inferencing capacity. I mean, people are running out of inferencing capacity. I mean, the company that called us, I mentioned it, I think, either last quarter or the quarter before, someone called us, we'll take all the capacity you have that's currently not being used anywhere in the world. We don't care. And I've never gotten a call like that. That's a very unusual call. That was for inferencing, not training. There's a huge amount of demand for inferencing. And if you think about it, in the end, all this money we're spending on training is going to have to be translated into products that are sold, which is all inferencing. And the inferencing market, again, is much larger than the training market. And, yes, we are building like everybody else, we're building agents with our application. But we're doing much more than that. You know, I no one's shown me a ChatGPT 3.5. Again, the three years ago, a little less than three years ago when ChatGPT amazed the world. And you could simply talk to your computer and ask questions and get well-reasoned answers based on the latest and most precise information. As long as you ask those questions about publicly available data. And there's a lot of publicly available data. But if you combine the publicly available data with the enterprise data, which companies really don't want to share, you have to do it in such a way that your private enterprise data stays private yet the large language model can still use it for reasoning so as to answer your question, like, how do the latest tariffs or the latest steel prices or whatever affect my quarterly results? Affect my ability to deliver products, affect my revenue, affect my cost. You know, answer those kinds of questions. To answer those kinds of questions, we have to and we have. We had to change our database, fundamentally change our database so you can vectorize all data. That's the form in which large language models understand information is that after it's been vectorized. And then allowing people to ask any question they want about anything. And that's exactly what we've done. But unless you have a database that is secure and reliable and linked to all of the popular LLMs. And we've done all of that. Unless you have that, and you have you have to tell me who else has that besides Oracle. Unless you have that, this can be very hard for you to deliver a ChatGPT-like experience on top of your data as well as publicly available data. That's a unique value proposition for Oracle. And that's because, again, we're the custodian of all of much more data than any of the application companies. They have their application data. They measure their customers in tens of thousands. We measure our customers in millions of databases. So we think we're better positioned than anybody to take advantage of inferencing. In addition, by the way, aside from just our GPU and all of that, we have become the de facto cloud for many of our customers. Again, they want to put some things in our public cloud or in our competitor public cloud working with the Oracle database. Simultaneously, there are a lot of reasons why they want what's called either a dedicated region or cloud at customer. We give our customers so much choice that they're very unusual for us not to be able to meet a customer's needs in one way or another. And then, of course, we have every piece of the stack. We have the infrastructure, we have the database that you're going to hear a lot about. As really the only reasonable store for data that you want to use AI models again, and then we have all of these applications that are just taking off. So we've we just have a lot of different layers. They're all moving in the same direction, and they all benefit our customers when used together. John DiFucci: Listen. My dad, let me just go ahead. Go ahead, John. I've got don't mean to cut you're gonna compliment us and interrupted you. What a what a I'm so I apologize for being rude. Listen. I was just gonna say my hat's off to both of you. I have been doing this a really long time, and I tell my old team, pay attention to this. Even those that are not working on Oracle. Because this is a career event happening right now, and it looks it's just amazing. And I guess I'm just really happy for you and congrats on this. Amazing. Lawrence Ellison: Thanks. John DiFucci: A lot of work. Keep doing it. Keep doing it. Lawrence Ellison: It's been a lot of work. And well, let me mention two other things. I think that are actually shocking. We have gotten the entire Oracle cloud, the whole thing, every feature, every function of the Oracle cloud, down to something we can put into a handful of racks, three racks. We call it butterfly. It costs $6 million. So we can give you the we can give you a private version of the Oracle Cloud with every feature, every security feature, every function, everything we do. For $6 million. I think the cost for the other hyperscalers is more than five more than a 100 times that. So we can actually give our customers cloud at customer, the full cloud at customer, and we have companies like Vodafone in I I'm not sure which companies I can name or which companies I can't. We have large companies that are buying basically their own Oracle Cloud region. In fact, multiple Oracle Cloud regions. Because they don't want to have any neighbors in their cloud. They don't want other companies in their cloud. But they want the full cloud. They want to pay as they consume. They want all the features, all the function, all the safety, the security. They don't want to have to buy it. They don't want to have to buy and own the software and the hardware. They want us to maintain it, build the network, supply all of that, and they just want to pay for consumption. We can do that at an entry-level price that's 1% of what our competitors can offer. That's one thing. Another thing. Let me give you one more, and I'll stop there. We also have the most advanced application generator of any company. It's interesting. We're an application company and a cloud infrastructure company. And, therefore, we build applications. And as we build applications, we'd like to be more efficient. And the way to be more efficient is to build AI application generators. And we have been doing that. And the latest applications that we are building we're not building them. They're being generated by AI. And we think we're far, far ahead of any of the other application companies in terms of generating the applications. So that's another very significant advantage we have. And, of course, and it's funny. You know, I made the comment that we don't charge separately for our AI and our applications because our applications are AI. They're entirely AI. The new ones, the new ones that we're building, they're nothing other than a bunch of AI agents that we generate that are linked together with workflow. That's all they are. How do you charge separately for that? That's it. That's every application that we have. But the applications are better, and, hopefully, we'll sell more, and that's the way we'll get paid for them. I got thank you, John, for the very nice compliment. Thank you, Larry. Thank you, Safra. Safra Catz: Thank you, John, for all these years following us. So kindly also. Thanks. Great day. Probably time for another question. At this point. Your next question comes from the line of Brad Zelnick with Deutsche Bank. Please go ahead. Brad Zelnick: Great. Thanks very much. And I think we're all kind of in shock in a very, very good way. Larry, there's no better evidence of a seismic shift happening in computing than these results that you just put up. And Oracle has in your fifty-year track record of navigating transitions and coming out on top. But as we think about enterprise applications, investors are fairly pessimistic these days, and I'd love to hear your perspective. Where do you see this all going for the industry? Where does the market share go for the companies that don't have the database, that don't have the advantages that you have all the way down to the silicon? Is this maybe an extinction event, you know, curious to hear what you think. Lawrence Ellison: Well, I think we have substantial advantage because we are an infrastructure company, and we are an application company. There are two things that happen. As an application company, we knew we had to start generating our applications. We just couldn't do it with armies of people anymore. We still need people. Don't get me wrong. But the number of people we need is substantially less. And we can build slash generate much better applications than we can hand build. And we've been working on these AI application generators for some time, and then we're actually using them. But the thing is we're not just building application generators. We're building application generators, and then we're building the applications. Which gives us insights to make the application generator better. It's a huge advantage to be on both sides of that equation. Both being an application builder and a builder of the technology of the application generation technology. The AI, the underlying AI application code generators. That's a huge advantage. Let me give you another advantage, which is often a disadvantage. We're very large. We no longer sell individual discrete applications. We sell suites of applications. We decided to go into the medical business against Epic believing that we could solve much more of the problem. Because we're much bigger than they are. And we're by the way, we're much bigger than Workday. And, or ServiceNow. And we're solving a larger portion of the problem. We're able to do all of ERP then we can add all of CRM. But all the pieces are engineered to fit together. That makes it so much easier for customers to consume. So we think that selling being good at application generation, the underlying technology, makes us better build better applications, enables us to build more applications so we can solve more of the problem. So the customers don't have to do all that system integration across multiple vendors. We can just build a suite where all the pieces are engineered to fit together. I think we have tremendous advantages in the application space. We have tremendous advantages in the AI inferencing space where we can again, what we'll demonstrate at Oracle AI World next month is we've taken all of our customer data, all of it. I want to go into all the details now. But you can ask any question you want to ask. Who's your salesperson? Who's the number one prospect in my territory? What product should I be selling them next? What are the best references for me to use to persuade them to use our product? You can get all of those questions answered for you immediately if you're a salesperson. The engineers can look at which features of Oracle Financials are people making the most errors when they're using those features. What do I have to fix and make easier to use? You just ask the question. Because all of that data is available to AI models. Is there anyone else doing this? Not that I know of. It's a huge advantage for us. Brad Zelnick: We look forward to AI World, Larry. Thank you. It's an amazing day for Oracle. It's a remarkable day for the industry. Thanks again, and congrats. Lawrence Ellison: Thank you. Thank you so much. Operator: Next question comes from the line of Derrick Wood with TD Cowen. Please go ahead. Derrick Wood: Great. Thanks for taking my question. I'll echo my congratulations on this momentous quarter. Safra, the fact that you delivered over $300 billion of new RPO in Q1, just really amazing to see it's going to require a lot of infrastructure build-out. So could you provide a bit more context on how much CapEx and operational cost structure will be needed to fully service these contracts, how we should think about the ramp of these costs relative to the ramp in revenue over the next few years, and generally, how investors should be thinking about the ROI on the spend? Safra Catz: Sure. So first of all, as I mentioned in the prepared remarks and as I've said very clearly beforehand, we do not own the property. We do not own the buildings. What we do own and what we engineer is the equipment, and that's equipment that is optimized for the Oracle Cloud. It has extremely special networking capabilities. It has technical capabilities from Larry and his team that allows us to run these workloads much, much faster. And as a result, it's much cheaper than our competitors. And depending on the workload. Now because of that, what we do is we put in that equipment only when it's time, and, usually, very quickly assuming that our customer accepts it, we're already generating revenue. Right away. The faster they accept the system and that it meets their needs, the faster they start using it. The sooner we have revenue. This is, in some ways, I don't want to call it asset light, from the finance world, but it's assets pretty light. And that is really an advantage for us. I know some of our competitors, they like to own buildings. That's not really our specialty. Our specialty is the unique technology, the unique networking, the storage, the just the whole way we put these systems together. And by the way, they are identical, and very simplified and, again, making it possible for us to be very profitable while still being able to offer our customers an incredibly compelling price. What I have indicated is that CapEx looks like it's going to be about $35 billion for this fiscal year. But because we're monitoring this, we're literally putting it in right when we take possession, and then handing it over to generate revenue right away. So we have a very good line of sight for our capabilities to put this out and to just spend on that CapEx right before it starts generating revenue. But at this point, I'm looking at $35 billion for the year. And I think, I mean, it could be a little higher, but I think and if it is higher, it's good news. Because it means more capacity has been handed to me in terms of floor space. And as you also know, we are embedded in our competitors' clouds, again, all we are responsible for to pay for is in fact our equipment, and that goes right away. And there, we're moving ultimately to 71 data centers embedded in our competitors or flash partners. Derrick Wood: Very encouraging to hear. Lawrence Ellison: Can I let me add a couple of very short things? One is we just turned over a giant data hall to one of our customers. And the acceptance time could have been as long as a couple of months. It was one week. It was one week from the time we, quote, owned officially owned the equipment. And they were testing it to the time they started paying for it. One week. So we have an extraordinary team that's doing an extraordinary job of making sure that we get the equipment working very quickly. And our customer is going to accept it. They want to accept it as fast as possible. Because they want to do the work. They want to train their models. And this one took a huge hall, took one week for acceptance. It was an extraordinary event. The other we are a very large consumer of networking equipment, GPUs, etcetera. Because we are a very large consumer, we are able, I think, to get better financing terms from the vendors than some of their people. So I think we have that going for us as well. I think we're going to do very, very well on the finance side. We have advantages there as well. Derrick Wood: Great. Thank you, Larry. Thank you, Safra. Operator: Of course. Your next question comes from the line of Mark Moerdler with Bernstein Research. Please go ahead. Mark Moerdler: Thank you very much, Larry and Safra, and, frankly, team Oracle. Amazing and congratulations. I'd like to focus on the AI training business you've been winning. Could you please explain to us how Oracle can create enough of a differentiated moat to assure this business does not get commoditized and how do you continue to drive strong earnings and free cash flow from the training business even if training slows. I think people really need to understand that. Lawrence Ellison: Well, I got let me I mean, I could do it in with one sentence. Our networks move data very, very fast. And if we can move data faster than the other people, if we have advantages in our super our GPU super clusters that are performance advantages, if you're paying by the hour, if we're twice as fast, we're half the cost. Safra Catz: Yeah. Well, that's tight. Hard to beat that. Impressive. Mark Moerdler: I agree. Operator: Your final question comes from the line of Alex Zukin with Wolfe Research. Please go ahead. Alex Zukin: Hey, guys. I really appreciate you squeezing me in. I originally was going to ask you if the new Oracle AI database really opens up the general enterprise inferencing market, and based off your script, it sounds like the answer to that question is hell yes. So I guess my follow-up question would be, how do you see that pacing happening over the course of the next few years? How soon after the introduction of the Oracle AI database would you expect your enterprise customers, your sophisticated customers to really be open to interrogating their enterprise data in this fashion? And how does the current supply constraint environment stand in the way of that demand or is it solving as we speak? Safra Catz: I don't know if, Larry, you want to cover it. You covered it in No. We've got it. Lawrence Ellison: Good. Marks. Go ahead. You got it. Go ahead. Okay. I think who wouldn't want that? I mean, I think everyone says they want to use AI. I mean, every I mean, CEOs, they don't want to use AI. Heads of state, heads of government say they want to use AI. We've never had consumers like that. I mean, we nor historically, we don't deal with CEOs. Now we deal with CEOs. Now we deal with heads of government and heads of state. On this because AI is so important. And letting people have you know, use AI on top of their data. That is what they want to do. But they didn't know how to do it securely. They didn't know how to well, they didn't know how to do it, period. And then one of the big risks was, oh my god. I can't share my JPMorgan Chase can't share all of its data. Goldman Sachs can't share all of its data with OpenAI. They won't do it. So or XAI or LAMA or, you know, Meta. They won't it's got to keep it private. So we've got to keep your private data private. We've got to keep your private data secure. But we have to make it available for inferencing by the latest and best reasoning models from OpenAI and XAI and everyone else. And because we have the database, because we can vectorize all the data in the database, because we have very elaborate security models in our database, in the Oracle database, we can do all that. We can deliver all that. And then what we chose to do was to with the AI database was not only make sure we can vectorize all the data so it can be understood by the AI model, we then bundled it with all of the AI models. That's why we did a deal with Google. That's why we did all of these deals where, you know, Gemini you can get Gemini from the Oracle Cloud. You can get from the Oracle Cloud. You can get from the Oracle Cloud. You get Walmart from the Oracle Cloud. I could go on. So we bundled them together. So it's very easy for our customers to use these large language models on a combination. And that's what they want is a combination of all of the publicly available data and all of their enterprise data. Which allows them to ask and get answered any question they can think of, any question that's important to them. Everyone wants it. I think the demand is going to be insatiable. But we can deliver a lot of databases and a lot of AI across our cloud over the next several years. We're in a good position to do that. Safra Catz: And this is going to be one of the reasons that Oracle databases, which are still the bulk of the enterprise market by a lot, are going to finally move into the cloud. Many of them will move in the public cloud using the Oracle AI database, but many and the largest enterprises will want their own either dedicated regions or Oracle Cloud at customer. And, again, they can finally get the benefit of AI for their own data using any LLM that they want because they're all in our cloud too. Alex Zukin: It sounds like very high margin AI revenue, guys. Congratulations. Safra Catz: Thank you. Thank you. Okay. Ken Bond: Thanks, Alex. A telephonic replay of this conference call will be available for twenty-four hours on our Investor Relations website. Thank you for joining us today. With that, I'll turn the call back to Tiffany for closing. Operator: Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.
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.
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: Good morning, and welcome to the Designer Brands Second Quarter 2025 Results Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to [ Ashley Ferlin, ] Investor Relations. Please go ahead. Unknown Executive: Good morning. Earlier today, the company issued a press release comparing results of operations for the 13-week period ended August 2, 2025, to the 13-week period ended August 3, 2024. Please note that the financial results that we will be referencing during the remainder of today's call excludes certain adjustments recorded under GAAP unless specified otherwise. For a 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. Douglas 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 to 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 sign-ups for our VIP rewards program happened in stores. So 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 end 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 8 brands also continued to outperform the balance of chain with a positive 1% comp for the quarter. Penetration of our top 8 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 we will continue to focus on the 2 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 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 percentage 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 8 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 boots, 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 Fit Finder 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 Brands 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 overreliance 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. And 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 brands, 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 2-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 continue to see challenges throughout the quarter, Topo remained a standout in our assortment, posting 45% growth in sales year-over-year. Within our dress and seasonal assortment, Jessica and Vince continue 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 on 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 debt, 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 macro 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'm confident that we are well positioned to advance our strategy. With that, we will open the call to questions. Operator? Operator: [Operator Instructions] The first question comes from Mauricio Serna from UBS. Mauricio Serna Vega: I guess I wanted to ask if you could elaborate on the intra-quarter trends. It seems like things really got better as the quarter progressed. Could you give us a sense of like 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? Douglas Howe: Yes. Mauricio, this is Doug. Thanks for your question. Yes, we saw a sequential improvement as we moved through the quarter. And as we said in the prepared remarks, we're obviously very encouraged by the trend that we saw in athletic, both in kids and adult. But 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 a core area of strength for us, obviously. That has continued even as we've advanced into August, as we said. So we're very encouraged by that. And I mentioned it's very early on, but the initial boot selling, specifically regular price is very encouraging as well. So we think that bodes well for not only the -- 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 Vega: Got it. And I guess just wondering like at the end of the quarter, were you still on negative comps? Or just trying to -- or like were you actually like positive on as a total company? Douglas Howe: Still slightly negative. And then again, we've seen sequential improvement as we've now moved into -- 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. And so 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. And so we're really focused on where we can provide a differentiation, which is our stores and are seeing some really strong trends there. And as Doug mentioned in his script, we saw that turn to positive in August in our stores comp. So 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. Douglas Howe: And then to Jared's point, I mean, we are seeing positive conversion in stores as a result of both the assortment and the inventory fulfillment strategy that we've spoken about. So that was actually very encouraging to see that the assortment is resonating with customers, specifically in stores. Mauricio Serna Vega: Got it. And then just one quick follow-up on the topic of profitability. Could you maybe give us a little bit more detail on the Q3? Like how much of pressured are you foreseeing because of tariffs? I guess at this point, like you already have that inventory. So you probably have an idea of like what's like the weighted average tariff or the incremental cost just related to that in your Q3, yes. Douglas Howe: Yes, Mauricio, let me kind of give you some high level and Jared can add some color here as well. I just want to remind everyone that the overwhelming concern that we've had from the onset has not been the direct impact of tariffs because when you look at it in the grand scheme of things, like our brands portfolio only import about 20% of product. The rest of it, we land domestically. And at DSW, obviously, we're largely reliant on our brand partners. So we have always been most concerned about the indirect impact of tariffs. We've been working very closely on the retail side. We've had brand partners strategically, very selectively pass on price increases. We've largely passed those on and maintained our IMU. But the majority of those are just now coming customer-facing in the last couple of weeks. So we're cautiously optimistic, but that's why we have concern. But 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 a negative reaction to that. But again, it's early days, and we are kind of cautiously optimistic as we move through the balance of the back half. Operator: [Operator Instructions] The next question comes from Dana Telsey at Telsey Group. Dana Telsey: 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? And you mentioned the store in Framingham. 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 and marketing as a percent of sales, how are you thinking about that this year? Douglas Howe: Dana, this is Doug. Yes, we're very excited about the brand campaign. It is really early days. We just launched that actually in Q3. So 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. A bit of a wink and a nod. It's whimsical, 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. So we're happy about that. But it's very early days as it relates to the reaction. We've gotten a lot of impressions and pickup on the press. That's all been very overwhelmingly positive as well. And then to your point, I mean, we're going to be very thoughtful around how this shows up in store in our CM -- CRM and all of our marketing channels. We're obviously, as Jared said, really focusing on channel profitability. So we want to make sure that we're continuing to focus on optimizing that marketing investment. And we'll be happy to report out as we get a little bit further along, but it's fairly anecdotal at this point. But again, very encouraged by the work. And it was all informed by qualitative and quantitative research. So we took the appropriate time to actually get to the messaging. But to me, it feels like kind of reminiscent of DSW's core strength, surprising by great brands, great value, great assortment in our stores. So again, we look forward to reporting out on the specifics, but it's a bit premature to do that at this point. Jared Poff: Dana, from the marketing as a percentage of sales, I would say we have -- 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 chain 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. But 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. So 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. But 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. And then you had mentioned Birkenstock as one of the brands within activation that performed well. What are you seeing from brands? How is Nike performing? And any highlights of what you're expecting for brand activations or performance in Q4? Douglas Howe: Yes, Dana, that's a great question. Birkenstock was among the top 8 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. So that 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, and that will continue to be our focus going forward. But 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 8 brands, of which Nike is obviously one of them. Operator: And we have a follow-up from Mauricio Serna of UBS. Mauricio Serna Vega: Great. Just a quick follow-up. I think I recall you mentioned you're planning to have like deeper assortment. Could you elaborate a little bit more on what you're bringing maybe from a brand perspective or category perspective? Like where is this steepening in assortment taking place? And just as a reminder, maybe on the puts and takes on your expectation of SG&A dollars to be down $20 million to $30 million for the full year. Like could you break that out like into what are the different buckets that are driving that decline? Douglas Howe: Yes. 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. So that applies to the top brands at a price that applies to the top categories. But 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 #1 reason when a store -- when a customer leaves a store without a purchase is they didn't find their size. So again, 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. So that's the benefit we're actually seeing on the inventory productivity. Jared Poff: And on the $20 million to $30 million, I would kind of bucket it this way. About 1/3 of that is professional fees, consultants and things like that, that we have been using for various initiatives that 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. So there was 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. And then the balance is just some puts and takes along lines like depreciation, occupancy, things like that. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Doug Howe for any closing remarks. Douglas Howe: I'd just close 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. And 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. And thanks 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 day, and welcome to the First Quarter Fiscal Year 2026 Casey's General Stores Earnings Conference Call. [Operator Instructions] As a reminder, this call may be recorded. I would now like to turn the call over to Brian Johnson, Senior Vice President, Investor Relations and Business Development. Please go ahead. Brian Johnson: Good morning, and thank you for joining us to discuss the results for our first quarter ended July 31, 2025. I'm Brian Johnson, Senior Vice President, Investor Relations and Business Development. With me today are Darren Rebelez, Chairman, President and Chief Executive Officer; as well as Steve Bramlage, Chief Financial Officer. Before we begin, I'll remind you that certain statements made by us during this investor call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include any statements relating to the potential impact of the Fikes transaction, expectations for future periods, possible or assumed future results of operations, financial conditions, liquidity and related sources or needs, the company's supply chain, business and integration strategies, plans and synergies, growth opportunities and performance at our stores. There are a number of known and unknown risks, uncertainties and other factors that may cause our actual results to differ materially from any future results expressed or implied by those forward-looking statements, including, but not limited to, the integration of the recent acquisitions, our ability to execute on our strategic plan or to realize benefits from the strategic plan, the impact and duration of conflicts in oil-producing regions and related governmental actions as well as other risks, uncertainties and factors, which are described in our most recent annual report on Form 10-K and quarterly reports on Form 10-Q as filed with the SEC and available on our website. Any forward-looking statements made during this call can reflect our current views as of today with respect to future events, and Casey's disclaims any intention or obligation to update or revise forward-looking statements whether as a result of new information, future events or otherwise. A reconciliation of non-GAAP to GAAP financial measures referenced in this call as well as a detailed breakdown of the operating expense increase for the quarter can be found on our website at www.caseys.com under the Investor Relations link. With that said, I would now like to turn the call over to Darren to discuss our first quarter results. Darren? Darren Rebelez: Thanks, Brian, and good morning, everyone. Before we dive into our strong first quarter performance, I'd like to congratulate the entire Casey's team for executing an outstanding summer plan at a high level and delivering a terrific guest experience across Casey’s Country. I'd also like to highlight the positive impact Casey's is making on our communities. As students head back to school, Casey's is excited to see the impact of our Cash for Classrooms grants come to life. Last year, we awarded $900,000 to schools throughout our communities. Thanks to the generosity of our guests and team members, along with the support from our supplier partner, Coca-Cola, this August campaign raised over $1 million, fueling our continued commitment to supporting education and enriching the lives of children across our footprint. Now let's discuss the results from the quarter. Diluted EPS finished at $5.77 per share, a 19% increase from the prior year. The company generated $215 million in net income and $414 million in EBITDA, both of which are an increase of 20% from the prior year. Inside the store, we saw positive traffic growth as guests responded well to our innovation and promotional activity in the prepared food and dispensed beverage category. We also experienced margin expansion, driven primarily by the grocery and general merchandise category. Our fuel team is doing an excellent job balancing fuel volume and margin, achieving positive same-store gallons and margins above $0.40 per gallon. As we work through the last year of our 3-year strategic plan, I'm extremely confident in our team's ability to execute at a high level and continue to grow the business. I would now like to go over the results and share some of the details in each of the categories. Inside same-store sales were up 4.3% for the first quarter or 6.7% on a 2-year stack basis, with an average margin of 41.9%. Same-store prepared food and dispensed beverage led the way as sales were up 5.6% or 10.2% on a 2-year stack basis, with an average margin of 58%. Whole pies and bakery performed well in the quarter. Margin was down approximately 30 basis points from the prior year as the lower margin from the recently acquired CEFCO stores was partially offset by modest retail price adjustments, primarily in bakery and cost of goods management. Same-store grocery and general merchandise sales were up 3.8% or 5.4% on a 2-year stack basis, with an average margin of 35.9%, an increase of approximately 50 basis points from the prior year, primarily due to favorable mix shift to higher-margin items such as energy drinks and nicotine alternatives within their categories. Turning to fuel. Same-store gallons sold were up 1.7% with a fuel margin of $0.41 per gallon. According to OPIS fuel gallons sold data, the Mid-Continent region saw an approximate 3% decline this quarter, suggesting we continue to grow market share. The fuel team is successfully balancing volume and margin, and the performance shows it. We continue to be judicious managing operating expense with an increase of 3% on a same-store, excluding credit card fee basis, lapping a 0.7% increase in the prior year. Our focus on simplifying the operations once again resulted in reduced training and overtime hours, yielding an overall decrease of 1% in same-store labor hours. I would now like to turn the call over to Steve to discuss the financial results from the first quarter. Steve? Stephen Bramlage: Thank you, Darren, and good morning. We're clearly starting the third year of our 3-year strategic plan on a really strong note, and I'm extremely proud of the hard work of the team during the quarter. Total revenue for the quarter was $4.6 billion. That's an increase of $469 million or 11.5% from the prior year. That's due primarily to higher inside sales as well as higher fuel gallons sold, partially offset by a lower retail fuel price. Results were also favorably impacted by operating approximately 8% more stores on a year-over-year basis. Total inside sales for the quarter were $1.68 billion, an increase of $210 million or 14.2% from the prior year. For the quarter, prepared food and dispensed beverage sales rose by $53 million to $458 million, an increase of 13.2%, and grocery and general merchandise sales increased by $156 million to $1.23 billion, that's an increase of 14.6%. Retail fuel sales were up $178 million in the quarter as an 18% increase in fuel gallons sold was partially offset by a 9% decline in the average retail price. The average retail price of fuel during this period was $3 a gallon, and that compares to $3.31 a year ago. We define gross profit as revenue less cost of goods sold, but excluding depreciation and amortization. Casey's had gross profit of $1.11 billion in the quarter, an increase of $157 million or 16.5% from the prior year. This is driven by both higher inside gross profit of $91.1 million or 14.8%, as well as higher fuel gross profit of $59 million or 18.8%. Inside gross profit margin was 41.9%, up 20 basis points from a year ago. Prepared food and dispensed beverage margin was 58%. That's down 30 basis points from prior year. Cheese was $2.11 per pound for the quarter compared to $2.09 per pound last year. That's an increase of 1% or less than 10 basis points. There was an approximately 110 basis point headwind from the CEFCO stores that was partially offset by modest retail price adjustments as well as strong cost of goods management. The grocery and general merchandise margin was 35.9%, an increase of 50 basis points from the prior year. And the change is primarily due to favorable mix shift within the category. Fuel margin for the quarter was $0.41 per gallon. That's up $0.03 per gallon from prior year. This is inclusive of an approximately $0.015 per gallon drag due to the CEFCO stores. Total operating expenses were up 14.6% and were $88.7 million in the quarter. Approximately 10% of the total operating expense increase is due to unit growth as we operated 221 more stores than in the prior year. Same-store employee expense accounted for approximately 1.5% of the increase, as modest increases in wage rates were partially offset by the reduction in same-store hours. Higher insurance and property taxes contributed to approximately 1% of the increase. Net interest expense was $26.9 million in the quarter, and that's up $12.8 million versus the prior year, which is primarily due to the financing associated with the Fikes transaction. Depreciation in the quarter was $109 million, and that's up nearly $15 million versus the prior year, primarily due to operating more stores. The effective tax rate for the quarter was 22.7%. That's compared to 24.1% in the prior year. The decrease was driven by an increase in tax benefits that we recognized on share-based awards. Additionally, as part of the One Big Beautiful Bill Act, our cash taxes will be reduced by approximately $90 million related to capital spending over the course of the fiscal year. This will not impact the tax rate for EPS purposes. Net income was up versus the prior year to $215.4 million, an increase of 19.5%. EBITDA for the quarter was $414.3 million. That's an increase of 19.8%. Our balance sheet remains in excellent condition, and we have more than ample financial flexibility. On July 31, we had total available liquidity of $1.4 billion. Also on July 31, our debt-to-EBITDA ratio was 1.8x as calculated under the covenants in our credit facilities. For the quarter, net cash generated by operating activities of $372 million, plus purchases of property and equipment of $110 million resulted in the company generating $262 million of free cash flow, and that compares to $181 million generated in the prior year. At the September meeting, the Board voted to maintain the quarterly dividend of $0.57 per share. During the first quarter, we repurchased approximately $31 million in shares, and we have approximately $264 million remaining on our existing share repurchase authorization. As a reminder, investing in EBITDA and ROIC accretive growth investments remains our primary capital allocation priority. But consistent with our fiscal year 2026 outlook and given our modest leverage levels of strong cash flows, we repurchased shares during the quarter, and we expect to continue to do so for the remainder of the fiscal year. Consistent with our past practice, we plan to update annual guidance on our second quarter earnings call when we're through the seasonally largest time of the year. Now our results for August were as follows. Same-store volumes, both inside and outside the store, are consistent with our annual guidance expectations. Fuel CPG was near $0.40 per gallon and current cheese costs are slightly favorable versus the prior year. As a reminder, the second quarter is the final quarter where we're going to be comping nonownership of Fikes in the prior year. With this in mind, we expect second quarter operating expense to be up mid-teens, as we had previously communicated. I'll now turn the call back over to Darren. Darren Rebelez: Thanks, Steve. I'd like to thank the entire Casey's team for an outstanding first quarter. We started our fiscal year off strong and are doing an excellent job of executing on the 3-year strategic plan. The summer months are the busiest inside the store and our team met guest expectations extremely well. Our merchandising plan for the summer was executed at a high level throughout the organization. From those that created the plan to those at the stores carrying out the plan to our supply chain and fuel teams and every team member in-between, this team effort resulted in positive traffic to our stores and strong performance across the entire business. We also brought back our most popular LTO with the Barbecue Brisket pizza and whole pies were a growth driver for the category. Using guest insights and data gathered from our nearly 9.5 million Casey's Rewards members helps us get the right products on the shelves at competitive prices for our guests. All of this resulted in strong same-store results that were primarily driven by positive units in traffic. At the pump, we continue to gain market share as our same-store gallons growth outpaced OPIS data in our region. We believe our robust inside offering and competitive fuel pricing gives guests reasons for Casey's to be the one-stop shop for prepared food, grocery items and fuel. Overall, we're extremely excited about the Casey's business model and have high confidence in our ability to carry this momentum into the future. We will now take your questions. Operator: [Operator Instructions] And our first question comes from Pooran Sharma with Stephens Inc. Pooran Sharma: Congrats on the strong quarter here. I guess I just want to start off with maybe understanding cheese costs. You mentioned they're slightly favorable versus the prior year. I was just maybe wondering if you could help us unpack that benefit a little bit. And if you could help us understand how much of your needs you have booked for the year? Darren Rebelez: Pooran, you kind of broke up on that question. Could you repeat that, please? Pooran Sharma: Yes. Just wondering if you could help us unpack the benefit from lower cheese cost and help us understand how much of your needs you have booked for the year. Stephen Bramlage: Yes. So in the quarter, it was obviously really close to prior year. I mean we were a little less than 10 basis points difference on a year-over-year basis from a cheese cost perspective. As we sit here today, we are about 70%, 7-0 percent locked on our forward cheese requirements for the remainder of this fiscal year. So Q2, Q3 and Q4 are all right around 70% locked. And we only lock if we can lock at it comparable or generally slightly favorable rates on a year-over-year basis. And so we feel pretty good about the certainty of cheese costs going forward. And with the 30% of the strip that's open for us in the second quarter and the 70% we have hedged, that's why we're sitting here today, we're just a little bit ahead on a year-over-year basis. Pooran Sharma: Okay. I appreciate that color there. And I just wanted to understand kind of the strength behind the fuel business. I mean you mentioned it in your prepared comments, you're outpacing the region. You have a strong offering that drives traffic inside the store. But maybe I was wondering if you could talk about Fuel 3.0. Last quarter, I think you said about 3% of your supply was coming in from this initiative. So I was wondering if you could provide us with an update on that initiative? Darren Rebelez: Yes. With respect to Fuel 3.0, we continue to procure more of our fuel through that vehicle. For the combined business, it's about 8.8% of our total fuel procured and I would say that the majority of that is coming from the Fikes acquisition. As you recall, there's a fuel terminal we picked up and they have been shipping fuel like this for a while. So the bulk of it is there. We're about 3% of our fuel on the base business is being procured through Fuel 3.0. So making good progress. The team is still integrating, but we like what we see so far on that. Operator: Our next question comes from Chuck Cerankosky with Northcoast Research. Charles Cerankosky: Great quarter. Could you go into a little more detail on price versus volume in store, please? You mentioned bakery, but how about some of the other categories? Darren Rebelez: Well, just overall, Chuck, we have about 1.5% in traffic increase and then about 3% coming from price overall. So that will get you to roughly your 4.5%. The majority of that price is coming through the tobacco category with cigarettes. And so has been our practice for years, as those manufacturers pass on cost increases, we pass this on to the guest, and that's what's driving the tobacco side of it. Outside of that, there's very modest price increases at all in the quarter. And a little bit on candy, just passing on cost increases but very little. And really, what we're seeing is more units purchased in the basket, which is really helping to drive the sales as well. Charles Cerankosky: Darren, would that increase in units be true for both prepared foods and the grocery/merchandise? Darren Rebelez: Yes, it is. It is, Chuck. I mean more so in the prepared foods than in the grocery, but I mean, we're seeing really good strength in nonalcoholic beverages in the grocery category and in snacks as well. Operator: Our next question comes from Chuck Grom with Gordon Haskett. Charles Grom: Great quarter. I was wondering if you could just speak to the overall health of your consumer across income cohorts, any incremental evidence of trade down. And then regionally, is there anything to note in the border stores, Texas region? Darren Rebelez: Yes. I'll first talk about guest strength from an income cohort standpoint. For the rewards members that we have, where we can really track their behavior and have full visibility, we're really seeing relatively strong performance across all income cohorts. And the way we break that down is $50,000 or less in income, $50,000 to $100,000, and then everybody above $100,000. And so the lower income group, that $50,000 under are still shopping the stores and still buying at a fairly healthy clip, just not as much as the other income cohorts, about 160 basis points lower than the higher income cohorts, but still coming to the store, still buying. And really, where we're seeing the most strength inside of that is in our prepared foods business. I think that value proposition for the quantity and quality of the food that you're getting is really resonating with that group as well as the others. Probably on the other side, the category most pressured by lower income consumer is cigarettes. But again, our cigarette mix is lower than most of the industry. So I think we're a bit insulated from that perspective. Charles Grom: Individually? Darren Rebelez: Yes, you asked about the Texas stores. There's a little bit more pressure down there than there is with the base business. But keep in mind also, those CEFCO stores are still CEFCO stores right now. They're not Casey's stores. We've converted 3 proof-of-concept stores, but we haven't converted anything else. So they don't have the food proposition that we have in our base business. And so as we start to remodel those stores, we'll start to change the trajectory of that -- those businesses, but it's a bit -- it's under a bit more pressure than our base business at the moment. Charles Grom: Okay. I appreciate that. And then my follow-up question is just on the CEFCO business, the drag on the prepared foods line. In particular, I believe in the back half of last year, it was around 150 basis points, 160 basis points. You called out about 110 basis points this quarter, which is a really nice improvement. Can we dive into that? What are you guys making progress on? And how should we think about that drag on the total business in the coming quarters? Darren Rebelez: Yes. We've made a few adjustments to the assortment, really just kind of some basic stuff, just clean up some things where maybe some items weren't selling very well, so we've eliminated those items. And so that's definitely helped. They've adopted a little bit more of our promotional approach, not 100% yet because they don't have all the assortment. But we're evolving in that direction. And so we're starting to see a little bit of benefit. We won't see the biggest benefit until we convert the kitchens and start selling the full assortment. So at the moment, their prepared foods business runs at a margin rate just slightly greater than half of the margin rate of a Casey's store. So there's going to be that drag until we get those stores converted and fully up to speed. Stephen Bramlage: And just as a reminder, realistically, we don't expect significant synergy capture from remodeling the stores until a year-plus from now, and that's a function of just timing of us being able to get permitting and construction, et cetera, finished. Operator: Our next question comes from Bobby Griffin with Raymond James. Robert Griffin: A great start to the fiscal year. I guess Darren, first, I just wanted to maybe touch on the wings test, if there's anything more you can share there? I know you guys are still in kind of very early learnings, but we touched on it last quarter. Just curious, anything incremental over the last couple of months? Darren Rebelez: Not too much. I mean the team is definitely working on it. And we're taking the approach on this that we have with a lot of other product innovations. And I think it's worked to our benefit is that we'll continue to work it, continue to evolve it until we get it right, and it will roll out when it's ready to roll out. And so we've identified a few opportunities with some flavor profiles, with some builds. We're still tweaking some equipment needs, but we like what we're seeing. We're making progress. And as soon as we feel confident we have it completely dialed in, that's when we'll start to expand. Robert Griffin: Fair enough. And I appreciate those details. And then I guess, secondly, it does seem the last couple of quarters, the core prepared food business out of Casey's has really found some nice momentum on the margin side, enough so that you can offset the Fikes dilution. Can you maybe unpack that a little bit more? I mean I think you guys mentioned Fikes is a 110-basis point drag. So it implies the core was up nicely. How much is left there? And kind of what do you think that -- does that create a better pricing opportunity for you guys to even push harder on competition? Or how do you think about that if this core margin improvement is sustainable? Darren Rebelez: Yes. Our -- with our prepared food margin, I think we've got a couple of things. One is we've made some progress on the procurement side from a cost of goods standpoint. So that's certainly helped particularly on dispensed beverages. I think the other big piece of it is the acceleration of our whole pie business. Our whole pie business is the largest or the highest margin subcategory within prepared foods, and it's the largest. And so when that sorts to grow, everything gets better in our prepared food business when that's growing, and that's what we're experiencing right now. So we like what we see and hoping for that momentum to continue. Operator: Our next question comes from Anthony Bonadio with Wells Fargo. Anthony Bonadio: So just to dig in a little bit on that earlier fuel question. A lot of your peers are sort of struggling to just try to water on fuel gross profit dollars. And you guys managed to grow both same-store gallons and fuel margins with the Fikes headwind in there. So can you just talk a little bit more about what you think is driving that dispersion and then what you're seeing out there competitively, just given some of the commentary we're hearing from your peers? Darren Rebelez: Yes. I'd say there's really 3 things that we think are helping out our fuel volume. The first is really our prepared foods offer. And as we talked about before, Anthony, you fill up your tank once a week or so, but you eat 3, 4, 5 times a day. And I think with our food proposition really resonating with people, it's driving more traffic to the stores. So we just simply have more shots on goal from a fuel standpoint, once you're already on the lot than perhaps some of our competitors do. The second piece is our value perception. And in the research we do with our Guest Insights team, we ask guests to compare us to our largest competitors. We score the highest on offering low prices and on good value for the money. And so I think there's a perception, people are coming to the store anyway for prepared foods, but we also have a great value perception overall with the store. So there's not a lot of incentive to go shopping around for fuel price. And great credit to our fuel team, over the last number of years, they've been able to very consistently execute our pricing strategy. And so over time, guests build some confidence around the idea that we're always going to be competitively priced. If you're already at the store anyway and you know we're going to be competitively priced, there's just not a good reason to shop around. And so I think that consistency has helped our fuel business. And it -- and we haven't had to get overly aggressive from a margin standpoint because we've been always competitive and consistently so. Operator: Our next question comes from Michael Montani with Evercore ISI. Michael Montani: Just wanted to ask a two-parter. First off, I was wondering if you could comment a little bit about the M&A backdrop that you're seeing out there, both in terms of smaller deals and then also potentially the larger kind of 50-plus store deals. So that was one thing. And then the other one was just on seasonality. I understand you don't want to update the full year guide, but in the past, 2Q earnings power is usually pretty similar to 1Q and then you get maybe a 40%, 50% step down in the back half of the year. So just wanted to understand if there's any puts or takes on the timing side or otherwise, we need to keep in mind when we're thinking about kind of the sequential earnings cadence through the year? Darren Rebelez: Alright, Michael, with respect to M&A, and I'll let Steve talk about seasonality. But on the M&A front, I would say on the small deal M&A, it's kind of business as usual. Our team is out in the market. We're seeing a lot of interest from sellers. We think that's a good environment. I'd say it's nothing different than normal. On the larger deal M&A, we're having some conversations with folks. We haven't had anything active at the moment, but we're in the market, and we'll see how things evolve as we get through the year. Stephen Bramlage: And on the seasonality, no changes in our view of kind of how seasonality works and we believe that by the time we get to the second quarter earnings call, we've got visibility really to the first 7 months of the year at that point. And I think those are 7 of the 8 largest months we have in our fiscal year, and it just allows us to have a pretty high degree of confidence dialing in a refined view of the full year. So we feel like we've had a good start, for sure, to the beginning of this year, but we've got a lot of work in front of us and a long way to go. And so we'll stick with the play that we feel has worked for us so far around kind of managing expectations. Operator: Our next question comes from Bonnie Herzog with Goldman Sachs. Bonnie Herzog: Maybe just a quick follow-up on this topic just in terms of phasing because I know you guys mentioned previously that you expected this fiscal year to be more second-half weighted given the timing of the Fikes acquisitions. So I'm just thinking about in the context, the strength in Q1. First, love to hear how the quarter came in maybe relative to your internal expectations? And then I guess if it was a little bit stronger, does it suggest maybe some conservatism to your guidance this year? Darren Rebelez: Well, Bonnie, what I'd tell you is I kind of reiterate what Steve said, we had a great first quarter. We think we're off to a good start from August results we just shared and we'll update everybody at the end of second quarter when we have a little bit more visibility into the balance of the year. Stephen Bramlage: I mean the one thing I would reiterate, Bonnie, is that the seasonality dynamic has not changed, I mean as far as I know in the business. I do think I'd reiterate for everybody the way the comping on a year-over-year basis, right, Fikes heavily influences that, right? So we're going to have big total changes in the first half of the year because we didn't have Fikes in the comparable period. But if you get to the second half of the year, we obviously have Fikes in that prior year period. And so the total change numbers will look a little bit different because it's just not quite as stark of a difference. And that has not changed from any of our guidance expectations either. Bonnie Herzog: Okay. And then just one other quick question on promos. You did mention that, that really helped drive traffic and strength inside the store in the quarter. So could you maybe quantify your spend levels this quarter versus the prior quarter and then maybe year-over-year? I guess I'm just hoping to understand maybe how much your promo spend has increased either sequentially or year-over-year? Stephen Bramlage: Yes. Well, I guess the first thing I would point out is a large amount of the promotional activity that you see in a store from us is in conjunction with our vendor partners, right? And so BOGOs and that sort of thing are very often funded completely or at least partially certainly within the grocery category by our vendor partners. And so that spend per se doesn't show up directly in our financials. The absolute level of promotion, for sure, has continued to increase as the absolute level of business and the number of stores that we have has increased. But the majority of the promotional spending is really not directly being funded by the company. Operator: Our next question comes from Kelly Bania with BMO Capital Markets. Kelly Bania: Just wanted to go back to CEFCO now coming up almost on a year, I guess, 10 months. And just curious if there's any more learnings that you can share or even refinements to that original plan for the $45 million in synergies. It sounds like there's some very basic changes that you've been able to make on the inside of the store that's helping margins. But just as you kind of step back big picture, can you give us a little more color about how CEFCO stores are comping and the competitive environment that they're facing? Darren Rebelez: Yes. I would say that broadly speaking, Kelly, that the CEFCO integration is on track with what we expected. And I think we've described earlier, in the early stages of really any integration and this one's no different, we expect to get more synergy early on from fuel and in this case, some G&A synergies because we acquired the entire business for the back office and that sort of thing. And that is tracking as we would have expected. But the biggest synergies come from putting our prepared foods in, and to get that done, we have to remodel stores and put kitchens in. And so there's a longer lead time on that. We really having gotten that work started in earnest yet, but the team is fully engaged on developing those plans and getting those permits executed so that we can begin that work. But I would say, generally speaking, that it's on track. In terms of how we're comping with, there's a lot of noise in those numbers. There are some changes in behavior have occurred as we've taken over the operation, particularly on the fuel side, you may recall that they had one person pricing fuel for the entire company, that was our CEO, and so we're probably taking a little different approach on that. And so we're seeing some different results, both on the volume and margin side. So there's puts and takes to that. But I think overall, it's working as we would expect. And as we start the actual integrations and conversions, we're confident that, that performance will accelerate. Steve, do you have anything you want to add to that? Stephen Bramlage: No, I think we're sitting here today, we're ahead on fuel for the reasons Darren said, expectations were ahead on SG&A from what we had originally set out. I think 45 is still a good number. But I think we feel very good that the prospects once we remodel the kitchens, we probably will land the plane above that. But because the bulk of the synergies are coming from kitchens, we really haven't started too soon to provide a different number. Operator: Our next question comes from Jacob Aiken-Phillips with Melius Research. Jacob Aiken-Phillips: So I wanted to start with thinking about store growth like in the outer years past the 3-year target and especially in the context of there's some larger public competitors making some bigger acquisitions as well as some private players with good, prepared food offerings, kind of aggressively expanding geographically. Stephen Bramlage: So is there -- sorry, Jacob, was there a question in there? Jacob Aiken-Phillips: How should we think about store growth in like outer years in the context of the competition and like where you'll expand geographically? Darren Rebelez: Yes. With respect to store growth broadly, I mean, we haven't obviously issued our next 3-year plan, which we will do in June of next year, and so we'll share those numbers. But if I step back, our fundamental growth algorithm is trying to drive 8% to 10% EBITDA growth. And to get to that 8%, we typically get half of that from growing the base business through all of our merchandising and operational initiatives, and then half of that through store growth, so think about 4% to 5% unit growth per year. About half of that will come from NTIs that we build and source the real estate for, and the other half directionally comes from M&A, typically small-deal M&A. We don't typically build in any sort of assumptions on larger scale M&A because those are more opportunistic as sellers become sellers. So that's how I would think about it more broadly. Our geography that we operate in today can support a large number of new stores in it. There's a lot of towns and a lot of white space that do not have Casey's that would benefit from one. So we see a really unlimited runway for unit development, just within our geography, let alone in the adjacent states to that. Jacob Aiken-Phillips: Got it. And then -- so you've been pretty explicit in benchmarking Casey's against QSRs, so both on valuation and on just like innovation. So how do you measure success on the front? And then what KPIs should we be looking at to track or gauge the progress there? Darren Rebelez: To me, success would be looking at how our same-store sales performance measures up to theirs. And I would say, even more specifically on prepared food and defense beverage and if you look at this quarter as an example, we were up 5.6% same-store or a little over 10% 2-year stack, I think that compares really favorably and that's in prepared foods. That compares really favorably to just about any QSR or pizza concept that's out there that we have visibility to. So I would say that the consistency of our results and the absolute magnitude of them would put us in pretty good shape right now relative to those peers. Operator: And our last question comes from Corey Tarlowe with Jefferies. Corey Tarlowe: And I guess, Darren and Steve, I wanted to ask about the grocery and general merchandise category. What's driving the growth? I'm assuming energy drinks is helping. And then second, on the margin for the category, I think this is the best gross margin that you've had for the category in a really long time in the first quarter. Could you talk a little bit about the drivers of that? And maybe what helped, what -- as we think about what's ahead, maybe what stays in and what comes out? Any color you could provide there would be really helpful. Darren Rebelez: Yes, Corey. Yes, I would say growth driver in grocery and general merchandise has clearly been nonalcoholic beverages. That's been the strongest growth area, a little over 8%. There's some puts and takes on the rest, modest increases here and there. But I would say that is the big driver. And as you mentioned, energy drinks being the strongest contributor to that grocery or to the nonalcoholic beverage growth. Really from a margin standpoint, there's 2 things going on. I think our team has done a great job in terms of joint business planning and keeping cost of goods in check and managing retail pricing. And so we've had good margin management there. But you also have a mix dynamic. It's really having an impact. And so if you think about what's going on, the tobacco category or nicotine overall, that mix is dropping. It's about 130 basis points lower this year than it was last year from a mix perspective. But the margin is increasing as the share of combustible cigarettes goes down and the share of nic alternatives goes up. So you're seeing a little bit higher margin, although on a lower mix. Then you go to nonalcoholic beverages, which is the highest margin subcategory inside of grocery and general merchandise that about -- had about 120 basis point improvement in margin rate, but it's also growing in share by about 120 basis points. So you combine those 2 and you're just seeing a natural inflation of the margin just via the mix. So that's really what's going on there. Corey Tarlowe: Got it. That's really helpful. Is there any way to put into context maybe what that could look like more going forward for the gross margin for that category? Should we expect something close to 36%. I mean the category has historically been in the low 30s. So I'm just curious how do you think about the trajectory there? Stephen Bramlage: Yes, I'd be careful of doing that, right? I'd remind you what we're -- we're not trying to optimize the margin of either grocery or prepared food. We're trying to deliver the best inside the store gross profit velocity outcome that we can. And so we -- at times we'll lean into grocery to help provide something in prepared foods or vice versa. And it may make a lot more sense for us to reinvest excess margin, as an example, from a grocery momentum into something that drives more prepared food units because that's the highest margin stuff we have in the store. And so I'd just be real cautious about trying to define kind of the end point of where margins are because we're trying to manage the whole thing and improve inside margin and inside gross profit velocity in total. Operator: Thank you. There are no further questions at this time. I'd like to turn the call back over to Mr. Rebelez for closing remarks. Darren Rebelez: Okay. Thank you for taking time today to join us on our call. Before we go, I want to once again express my gratitude to our team members for all their hard work this quarter. Have a great rest of the week. Operator: Thank you for your participation. You may now disconnect. Good day.
Operator: Welcome to the North West Company Inc. Second Quarter Results Conference Call. I would now like to turn the meeting over to Mr. Dan McConnell, President and Chief Executive Officer. Mr. McConnell, please go ahead. Daniel McConnell: Thank you. Thank you, and good morning, everyone. Welcome to the North West Company Second Quarter conference Call. I'm joined here today by John King, our Chief Financial Officer; and Alexis Cloutier, our VP, Legal and Corporate Secretary. I'm going to start off the meeting by asking Alexis to read our disclosure statement. Alexis Cloutier: Thank you, Dan. Before we begin today, I remind you that certain information presented may constitute forward-looking statements. Such statements reflect North West's current expectations, estimates, projections and assumptions. These forward-looking statements are not guarantees of future performance and are subject to certain risks, which could cause actual performance and financial results in the future to vary materially from those contemplated in the forward-looking statements. Any forward-looking statements are current only as of the date they're made, and the company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future results or otherwise other than what's required by law. For additional information on these risks, please see North West's annual information form and its MD&A under the heading Risk Factors. Daniel McConnell: All right. So thank you, Alexis. I'll begin by providing an overview of our results for the quarter, followed by a brief commentary on North Star Air and wrap up with a few comments on our outlook and the Next 100 program. All right. So let's begin. Overall, I would summarize the quarter this way. It was a flat quarter at the top line, which was negatively impacted by headwinds from community evacuations due to the wildfires and a decrease in child and family service funding for children in our Canadian operations and a weaker economic environment, particularly in our international operations. With the flat Sales performance, there was a bit more torque on the bottom line due to some overall expense savings and a lower effective tax rate, which resulted in a 1.9% increase in net earnings in the quarter compared to last period. Now let me expand on the consolidated results starting with sales. Consolidated sales for the quarter were up slightly compared to last year, but were flat to last year, excluding foreign exchange. Same-store sales were down 1.1% in the quarter compared to a 4.3% increase last year due to the headwinds in our Canadian operations and having to comp very strong sales in the second quarter of last year. Canadian same-store sales decreased 1.8% compared to exceptionally strong same-store sales last year of 6.8%. There were 2 factors that had a significant impact on same-store sales performance. First, obviously, the wildfires we talked about, and this is affecting certain communities that we serve; and second was the decrease in the distribution of funding to individuals from child and family services, including the Jordan's Principle and Intuit Child First Initiative or ICFI programs. Let me unpack these starting with the wildfires. There were 16 stores impacted by wildfires during the quarter, with the communities either fully evacuated in which case our stores were closed or partially evacuated due to smoke and poor air quality, which resulted in significantly reduced customer traffic. Our thoughts are with those who are impacted. I want to thank the firefighters, community leaders and all those working tirelessly to protect residents and ensure their safety. I also want to recognize and thank our store managers and teams who remained in the community to keep stores open and ensure food and supplies are available for emergency personnel and others who remain in the communities. Thankfully, all of our staff are safe and none of our stores or warehouses were significantly impacted. That said, we did feel the impact on our top line as the evacuations negatively impacted same-store sales. When excluding stores impacted by wildfire-related evacuations, adjusted Canadian same-store sales increased 1% compared to last year. As an update, the wildfires in Northern Canada have continued into the third quarter, but the impact has moderated in late August. At this time, there are 3 communities that remain evacuated due to the destruction of hydro transmission lines, which are not expected to be repaired until later in the third quarter, while partially evacuated communities are starting to return. While the impact of the wildfires has moderated, several wildfires are still active and accordingly, conditions could change. The second factor affecting Canadian sales is a reduction in the distribution of funding to individuals through the Jordan's Principle and Inuit Child First initiative programs when compared to last year. I touched on this as part of our outlook discussion on our first quarter call. Let me provide you some further context. Funding for certain Jordan's Principle programs in 2025 has decreased to 2024 pending the finalization of an agreement between First Nations, Inuit and the Government of Canada. This change in funding has negatively impacted a number of Jordan's Principle programs. For individuals in the communities, the community services and in particular, the ICFI food voucher program have started to ramp up in the second quarter last year. The government of Canada announced that the ICFI program would be extended to March 31, 2026, while Canada and Inuit Partners work together on the development of a long-term approach for supporting Intuit children to get greater access to nutritious food. However, starting in late April 2025, the funding under the ICFI program was limited to individual child specific claims, which has significantly reduced the amount distributed compared to the ICFI food voucher program in 2024, which did provide broad access to nutritious foods for Inuit children. Looking ahead, there is uncertainty on how long this change in funding will last, or if and when the ICFI food voucher program that was available in 2024 will resume. Overall, the wildfire community evacuations and changes in child and family services funding were the key factors contributing to a 1.9% decrease in food sales. On a more positive note, general merchandise and other sales increased 5.6% compared to last year as higher third-party airline cargo and passenger revenue and an increase in pharmacy sales more than offset softer general merchandise same-store sales, which were down 3.5% for the quarter. All right. Let me switch gears and briefly comment on international sales. During the quarter, sales in our international operations decreased 0.8% as flat same-store sales results were more than offset by lower wholesale sales. Weaker macroeconomic conditions in commercial fishing and tourism-dependent communities in certain Alaskan markets, combined with the reduction in seasonal workers and construction activity were the main factors impacting sales. Softer economic conditions in the South Pacific were also a factor. As a result, General merchandise sales decreased 11.5% and were down 11.2% on a same-store sales basis compared to last year as consumers reduced spending on discretionary general merchandise and shifted more of their spending on food which contributed to a 0.6% increase in food sales. Okay. With that deeper dive on sales, I'll briefly comment on consolidated gross profit and expenses. Gross profit dollars were up 0.1% for the quarter, with the gross profit rate flat compared to last year. The positive impacts from our Next 100 work and promotions and category management were offset by changes in sales blend and higher markdowns and inventory shrink. Expenses were down 0.1% for the quarter or 3 basis points as a rate to sales, largely due to lower share-based compensation costs, primarily related to changes in the company's share price. This decrease was partially offset by investments in higher staff and technology costs to support the Next 100 work, combined with an increase in depreciation and new store expenses. We also incurred $1.7 million in onetime costs related to the execution of our Next 100 program. These onetime costs were offset by the benefits from our Next 100 initiatives, including more effective promotions, a reduction in print media and other cost-saving initiatives, which I'll touch on later. In addition, similar to last quarter, we continue to see store labor productivity gains, which is resulting in lower store staff costs as a percentage of sales. The net impact of all these factors, combined with a lower effective tax rate resulted in a 1.9% increase in net earnings in the quarter, which is good considering the significant headwinds from wildfires and a decrease in government program funding for children. Before moving on to the outlook, I wanted to briefly comment on our airline operations. As I highlighted previously, the airline revenues during the quarter were solid in both the cargo and passenger businesses. And consistent with our previous calls, we continue to have high utilization of the cargo and passenger fleet. As noted in our report to shareholders, late in the quarter, we acquired a PC-12 Pilates aircraft to provide some additional capacity in our scheduled and chartered passenger business and to help maintain our service levels during planned maintenance cycles. I'd also like to take a moment to acknowledge the addition of Gregg Saretsky, a new member of our Board of Directors, which was announced in early August. Gregg brings deep aviation experience and industry knowledge in addition to a C-suite executive and Board experience, and I look forward to his contributions as a Board member. Okay. Let me now briefly talk about our outlook and provide a few comments on the Next 100 program. Since we have provided commentary on the key factors we expect to impact on our near and long-term outlook in the report to shareholders as well as throughout this call, the only other comment I would add is on tariffs where we continue to see cost increases, but the overall impact to date has not been significant. However, this is a very fluid situation, and there continues to be uncertainty related to the economy and the impact of tariffs on the cost of merchandise and inflation in the countries in which we operate. With respect to the Next 100 program, we remain fully focused on continuing to drive operational excellence and cost efficiencies across our business while delivering further value for our customers, our employees and our shareholders throughout the program. We continue to refine our product assortment and are rolling out our expanded private label offering in our Canadian and international operations. While it's still early in the rollout, the initial feedback from customers has been positive. Similarly, the implementation of store-based inventory forecasting and replenishment technology is also underway. This technology is expected to improve on-shelf availability for our customers and streamline merchandise ordering processes for our store teams. Recognizing we still have a lot of work to do, the feedback from our store teams on the process improvements has been positive. We are pleased with the progress and results to date. However, as I said, there's a lot of work to do as we embed operational excellence in every aspect of our business. To wrap up, we had some external headwinds that impacted our results this quarter. We were focused on what we can control, ensuring that we continue to provide the goods and services that meet our customers' needs and deliver value to our customers, shareholders and employees through the Next 100. With that, I will now open up the call for any questions. Operator: [Operator Instructions] The first question is from Stephen MacLeod from BMO Capital Markets. Stephen MacLeod: Just a couple of questions here. Just with respect to the outlook and specifically around the lower child and family services payments as it relates to -- or funding as it relates to Jordan's Principle. Just thinking back to the last quarter, I don't recall you calling this one out. So I'm just curious, is this new and/or unexpected? And how do you expect it to sort of unfold as you move through the balance of the year and into fiscal 2026? Daniel McConnell: Yes. I mean it is new to us as far as seeing how it looks like. It's really uncertain. I mean there's a lot of things still at play, obviously, the budget being one and just some of the negotiations and discussions going on between, I would say, First Nations, Inuit leaders in the Canadian government. So it's -- I would expect there's going to be some resolution, but I -- at this point, Stephen, for me to tell you when or what it's going to be is, I'm not really clear on what it looks like at this point. Stephen MacLeod: Right. Okay. Okay. And I mean is there any way to quantify kind of what the impact of it might be? Just if you thought about, I guess, what kind of growth it gave you up until this point? Just kind of -- is there a way to understand what the impact would be to same-store sales growth or anything like that? Daniel McConnell: Well, I mean, look, we've kind of outlined some of the puts and takes. And I know it's a tough quarter probably for you guys to forecast, although you guys did pretty well in the sales forecast. But I would say that it's -- at this point, I mean, no, because it's -- there's still things that are going on. Some of the infrastructure has, again, slowed down as a result of the Jordan's Principle dispute with Canada and a majority of the First Nation leaders outside of Ontario and then obviously, as we indicated some of the Inuit Child First program being sailed back as a result of maybe an overcorrection in how they administer the funds. So I think it's pretty fluid right now, Stephen. And I think we're obviously going to learn more as time goes on here. But right now, it's really tough for us to forecast that. Stephen MacLeod: Yes. No, I understand. Okay. And then maybe just turning to the Next 100 program. Did you -- in the quarter, did you more than offset the Next 100 costs? Or was it a pretty even offset? And then maybe the second part of the question is, are you in a position to be able to quantify kind of what you talked about the annualized incremental EBIT ramping up through this year or next year. Are you able to quantify sort of what that impact could look like? Daniel McConnell: We've, I would say, a little bit more than offset it, Stephen, as far as for your first question. And as far as quantifying the forward-looking EBIT, the program is definitely, as I indicated, it's in its execution mode. There's a lot of puts and takes, and we're obviously, I would say, solving some of the opportunities as they come forward. But when we do solidify the earnings on a sustainable basis, then we'll definitely attribute some of the growth and the portion of growth that we have experienced to the Next 100 and allow you to kind of forecast that or create a trajectory or put that into your algorithm for a moving forward growth item. Operator: The next question is from Ty Collin from CIBC. I'm sorry, his line just dropped. I will go to the next one, which is Michael Van Aeist from TD Cowen. Michael Van Aelst: I'd like to start off with the $23 billion child settlement payments that are in the process, I guess, of being processed and distributed and -- there was an article that quoted, I think it was the AFN that said that -- in mid-August, it said the payments were expected the following week -- to start the following week. And when I tried to line that up with what your outlook statement was, it wasn't -- yours wasn't quite as definitive, let's call it. So have you seen some of these payments start to come in yet? Daniel McConnell: Not one. No, I mean, there's -- I guess, it's -- there's a bit of a line between their end, I would say, in the administration or the receipt and the approval of some of these and when it gets to market. So right now, Mike, we haven't seen one. But we know they're coming obviously, but it's just a matter of... Michael Van Aelst: Yes. It's just a matter of time. It's just interesting that they said that the payments were starting in several different places it was quoted. So okay, I guess we'll have to wait to see on that. Secondly, the water settlement payments. At one point in your press release, it sounds like it was lower this year. And then another [ spot ] in Canada, you actually say that it was slightly higher. What are you expecting for the back half of the year? I know it's a crystal ball a little bit, but are you expecting flat water settlement payments? Or do you expect it to come down? Daniel McConnell: Yes, it was slightly higher. I would say for the forward-looking quarter, we're projecting flat. Michael Van Aelst: Okay. And then when we look at the wildfire impact going into Q3, so it sounds like it was still a meaningful issue into mid or late August. But at some point, when you get -- if you're down to 3 communities now or 3 stores that are impacted, and you have people coming back in, and I'd assume there has to be some form of a restocking benefit when they first come back. Do you see the wildfires being a net negative still in Q3. Daniel McConnell: Yes, I think they will be, Michael. Because I mean, at the same time, we see people are starting to migrate back, but they're -- it's not one big swoop. To your point, I think there will be a stock up shop once people get back to community. But I do believe that the fires will be a net negative or a headwind on sales for Q3. Michael Van Aelst: Yes. And then just finally, on the -- the gross margin was the one area where we were surprised it was a little low. You offset it with better OpEx. But on the gross margin side, you talked about markdowns and shrink. I'm wondering, was that a onetime event? I mean I know some of it's tied to the wildfires I assume that has been taken in Canada, correct me if I'm wrong. Daniel McConnell: No, that's correct. Michael Van Aelst: Okay. And then and as far as your international markets, where you talk about markdowns because of -- more because of the economic environment in Alaska -- parts of Alaska. Is that something that you think is just due to the season that you're in, and you'll adjust and we won't see those in the coming quarters? Daniel McConnell: That's our intent, absolutely. Operator: The next question is from Ryland Conrad from RBC Capital Markets. Ryland Conrad: I guess just to start off, you called out higher third-party airline revenue in the quarter. Is that related in any way to the wildfires? Or is that more so just stronger performance with the expanded facility in Thunder Bay. Daniel McConnell: Well, the prior for sure. We definitely saw an increase as a result of the wildfires. That's -- I would attribute a lot of it to that. Ryland Conrad: Okay. Got it. And then just on the private label initiatives, could you just provide a bit of an update there on how the rollout is progressing? And maybe just how the initial uptake has been in the stores where that's now being stocked? Daniel McConnell: Yes, definitely. We're still quite early, but I was in stores over the last month. And like I said, the customers are receptive. The cost -- and the price differential between the private label and the national brands, I think, is meaningful. So I'm anticipating that customers are going to take advantage of it. There's going to be a trial period, obviously, as a lot of the products are new to some of the consumers. So we have to prove to them that the quality and value is worth it. But I definitely anticipate that given the economics in some of the communities that we serve that it's going to be a benefit to our consumers, and I think it will get some good traction over the next number of months. We expect to be in strong operation. Like I would say, our plan is to be up and operating with a full complement in late October. So that's our goal and that's our plan right now. And we're on a good track to get to that. Ryland Conrad: Awesome. That's helpful. And just on inventories, up quite a bit year-over-year and sequentially. Is there anything to call out there? And then related to that, I guess, as this kind of $23 billion settlement, the payments begin to be dispersed, like how are you feeling about your ability to meet that demand just from an inventory perspective? Daniel McConnell: We're feeling good about our ability to meet that demand for sure. It's something we've put a lot of planning into. We've been kind of down this road before. And it's -- I wouldn't say that we've left any pages unturned as far as just our planning and some of the speculation that we have around when the money is coming and what the built-up demand would be on behalf of our customers. So yes, we're managing and monitoring our inventory levels. We know that they are high, but we definitely feel that when the money comes that we'll be ready. Ryland Conrad: Okay. Great. And then just the last one for me, I guess, it would be good to get your latest thoughts on the capital allocation with the NCIB utilized this quarter. I guess was that more opportunistic? Or should we kind of expect you to remain active there? Daniel McConnell: It was opportunistic, yes. Operator: [Operator Instructions] The next question is from Ty Collin from CIBC. Ty Collin: Apologies my line got dropped earlier. So apologies if I missed anything. Let me know if any of my questions have already been asked and answered. But my first one, just on the Canadian communities that are being repatriated. Can you just help us understand maybe from some of your experience so far how long it's taking for those stores to kind of ramp back up to 100% once those communities have had their evacuation orders lifted? Daniel McConnell: It's -- it can be fairly long, unfortunately and that's what we've experienced so far. It is a bit of a long drive, especially at the time of the year being the summer. There's a -- it just hasn't happened as quickly and I think there's more things to do so maybe some more distractions and some more opportunities for people to catch up on some of their activities within the urban cities that they're currently in. So it hasn't happened as quickly as we would like to put that way, Ty. Ty Collin: Okay. Great. That's helpful. And then in terms of some of the headwinds within Alaska. So I know you guys have called out some of the macro headwinds in previous quarters related to the fisheries. It does sound like tourism might have been a bit of an incremental issue now. I guess I just want to understand what changed this quarter compared to previous quarters to drive the deceleration there? And maybe you could speak to how dependent your stores and your communities are on tourism specifically? Daniel McConnell: Well, they are on both tourism. The economy overall, they have an impact with fishing, obviously, just given the remoteness and it's really government -- there's government employees, there's tourism, fishing, which are the drivers behind the economics of our communities. So it is substantial. I mean the Alaskan economy, I think even seeing other places within the United States, they're definitely feeling a pinch and it's just trickled on into our operation. So it's even some of the SNAP decline, I know that's happened in the past, but it's -- the people are still feeling it. It's at a lower baseline rate. We're comping it off last year, but it just continues to be an issue. You see it in our general merchandise sales as they -- people are moving their preferences over to food, and it's definitely going to a, call it, a less expensive food choice in the past. People are making more critical decisions on how they spend their money. Ty Collin: Right. And on tourism, yes, I mean, you alluded to that being an issue sort of throughout the U.S. Do you get the sense that some of the more recent headwinds in Alaska are related to lower tourism from Canada specifically, given some of the noise around tariffs? And if that's the case, would you be inclined to characterize that as a bit more of a transitory issue? Is that sort of moves into the rearview mirror, hopefully. Daniel McConnell: I mean, look we -- definitely, that's a consideration. And we think -- we don't know how long that's going to last. I think you've probably heard some of the commentary behind some of the Canadians that are moving their travel from the U.S. to other places. But at the same time, I think it's probably just a macroeconomic impact from -- yes, tourism is one of the points but I think it's just an overall pinch. Looking at hopefully some of the dollars that are going to be coming back to the state of Alaska through some of the military spend and some of the other programs that are going to be -- sorry, driving a bit of a catalyst behind that economy, we're optimistic around that. But right now, I think it's a number of factors that are just having a negative impact on the macroeconomics scene in Alaska. But tourism is definitely one. And the reason, what you identified is the Canadians going over to Alaska is definitely a contributor. But I think there's a lot of factors at play right now and the macroeconomic environment that is. Ty Collin: Okay. Got it. And then just last 1 for me. I think you -- in one of your previous answers, you mentioned that SNAP or changes to SNAP has already sort of been a headwind in Alaska. I mean my understanding was that the more recent changes came into effect after this quarter. So are you expecting incremental headwinds from SNAP? Or are some of your consumers sort of prepositioning for those changes and already dialing back before those decreases actually came into effect? Daniel McConnell: Well, it's -- yes, so I would say probably the latter. I mean, look, people are more nervous about the economy. So the fact that the SNAP -- the changes are coming into play, some of the commentary around -- the President's comments around SNAP, I think that Alaska will be excluded from some of the impacts or changes that are going to be occurring maybe in the lower 48. But, yes, I definitely think it's just the -- some of the pessimistic outlook on the economy is rippling through just to my previous comment, and it all contributes to the macroeconomic picture in Alaska. Just people are a lot tighter on their pocketbooks, making more frugal decisions, shying away from general merchandise, moving away from some of the, call it, more luxury food and just more into an essential mindset as far as what they're procuring for their homes. Did we lose you, again, Ty? Ty Collin: Sorry, I think I'm having technical difficulties all day. I just said thanks for the questions. I appreciate it. Daniel McConnell: That's funny, Ty, because we're the ones that are remote right now. We're out in [indiscernible] out in a remote community. Operator: The next question is from Michael Van Aeist from TD Cowen. Michael Van Aelst: Just a couple of quick follow-ups. First of all, on the higher SG&A spending tied to your investment in staff resources and IT to support your Next 100 initiatives. When do we kind of cycle the higher run rate of spending? Daniel McConnell: Q4, Q1? I was going to -- Michael, I'd say Q4 is probably more conservative, probably Q1, but I'd say Q4. Michael Van Aelst: Okay. So you just -- so in other words, you kept spending at a higher level through the first half -- I guess through the end of last year and then starting into this year? Daniel McConnell: Correct. Michael Van Aelst: Okay. And then the tax rate, John, it's moved around a little bit. I know you have the global minimum tax, but last year was a -- just over 25%. Where should we expect it for the full year? John King: Mike, it's really at this point now that we're comp on the global minimum tax and that came in, in Q2 last year. And just a reminder that, that was a year-to-date true-up in Q2 last year. So that's the reason for the tax rate differential in the second quarter. But we should be comp on that now heading into the back half of the year. So it really comes down to the earnings across the various jurisdictions. And so going off of -- you'll come up with your run rate tax rate, but more in line with, I would think, where we ended up last year as overall blended rate, somewhere in that range. But I don't think there is -- should be too much other noise like the global minimum tax rate. It should be more normal course, just blend of operations. Michael Van Aelst: Okay. And then just actually one more question. You mentioned that you purchased another or leased another -- did you lease or purchased the PC-12 aircraft and is this something? Daniel McConnell: Purchased. Michael Van Aelst: Oh, you purchased it. So I think in the past, you said you wouldn't add more capacity unless you're confident you could fill it. So this doesn't have to do with just a higher demand during the wildfires or anything like that. You're actually seeing a higher level of third-party demand, I suppose. John King: Yes, that's correct. Yes, this was contemplated obviously and planned and actually executed well before the wildfires. Michael Van Aelst: Okay. So we should expect this to contribute pretty quickly. John King: Correct. Operator: Thank you. There are no further questions registered at this time. I will turn the call back to Mr. Dan McConnell. Daniel McConnell: All right. Thank you, operator. And thanks, everybody, for attending, and we look forward to speaking with you for Q3. Operator: Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation. Daniel McConnell: Perfect. Thank you.
Operator: Your program will begin momentarily. Operator: Good afternoon, everyone. Welcome to today's Lands' End, Inc. Second Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during our question and answer session. Register to ask a question at any time by pressing star 1 on your telephone. Also, today's call is being recorded. Now at this time, I would like to turn things over to Mr. Tom Altholz, Senior Director of Financial Planning and Analysis. Please go ahead, sir. Tom Altholz: Good evening, and thank you for joining the 2025 results, which we released this afternoon and can be found on our website, landsend.com. I am Tom Altholz, Lands' End, Inc. Senior Director of Financial Planning and Analysis, and I am pleased to join you today with Andrew McLean, our Chief Executive Officer, and Bernie McCracken, our Chief Financial Officer. After the prepared remarks, we will conduct a question and answer session. Please also note that the information we are about to discuss includes forward-looking statements. Such statements involve risks and uncertainties. The company's actual results could differ materially from those discussed on this call. Factors that could contribute to such differences include, but are not limited to, those items noted and included in the company's SEC filings, including our annual report on Form 10-Ks and quarterly reports on Form 10-Q. The forward-looking information that is provided by the company on this call represents the company's outlook as of today. We do not undertake any obligation to update forward-looking statements made by us. Subsequent events and developments may cause the company's outlook to change. During the call, we will be referring to non-GAAP measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures can be found in our earnings release issued earlier today. A copy of which is posted in the Investor Relations section of our website at landsend.com. With that, I will turn the call over to Andrew. Andrew McLean: Thanks, Tom. Good evening, and thank you for joining us. To begin today's call, I want to spend a moment talking about a key theme we have seen over the past several months, including over the course of the second quarter and importantly, continuing into the third quarter. That theme is a noticeable increase in momentum across our business. Across our key product categories, channels, and engagement, we are seeing improvements that give us confidence that our strategy to serve our customers' every journey is working. Our weatherproof assortment that prioritizes newness and speed to market continues to resonate with customers, enables more high-quality sales, and deepens customer loyalty. Turning to the second quarter, we continued to reach new and existing customers across a broad base of channels as we have done in previous quarters. We are engaging with them where and when they want to shop and providing considered merchandise stories that resonate individually and create leverage as we reposition the brand via a sophisticated distributed commerce model. Our increasing shift towards an asset-light, low capital intensity model allows us to rapidly deploy newness to optimize customer engagement. And with GMV holding steady year on year, we are beginning to see the benefits of that work. In the B2B channel, our team built on their successes by deepening relationships in the travel and banking sectors, extending a number of our long-term enterprise contracts. Critically, we continue to invest in our brand. Our deliberate strategy to weatherproof our assortment with solutions for life's every journey and deliver for our customers in any environment while also enhancing speed across our supply chain has enabled us to be nimble and react quickly. Especially as we see buying patterns shifting to more wear and out items. In the second quarter, the B2C businesses were dominated by our licensing and third-party marketplaces, we continue to see vastly expanded reach resulting in a more balanced model that importantly, delivers over half of our new customer growth on virtually no capital investment. With regard to sourcing, as you have heard us talk about over the past several quarters, we have been intentionally repositioning our sourcing network to better serve the business we are building leading to a more balanced supply chain that enables us to bring new solutions to customers with more speed and frequency throughout the year. For example, our license partners are becoming part of our sourcing network. Allowing us low lift access to their vendor networks while also providing those same partners with leverage from the Lands' End, Inc. sourcing footprint. Another consequential outcome of our updated sourcing strategy has been the ability to navigate tariffs. By tapping into the full breadth of our sourcing matrix, we are able to swiftly and strategically reposition fabric and manufacturing as tariff conditions evolve. The resilience is there to see as we continue to deliver gross margin rates above last year in the quarter, even as we felt initial tariff headwinds. We feel confident that we have mitigated the near-term impact of tariffs for the remainder of fiscal 2025. Especially with the majority of our fall holiday items already shipped. As Bernie will detail, this is reflected in our guidance. Turning to product. We had notable wins, We launched a focused Lands' End Essentials line on Amazon, consisting of approximately 40 styles providing access points to new and existing customers. The product key item basics across women's, men's, and swim, is priced at the good end of our merchandising pyramid. If the taste of the solutions Lands' End, Inc. is famous for, invites the customer to find the better, best assortment on our brand site. This Essentials product line is a perfect segue from our licensing product to our brand and is attracting new customers. In the brand channels, credit to the tote bag, where our ongoing efforts to collaborate and innovate ranging in size from Meade to Maxi and in construction from canvas to straw have allowed us to expand the assortment. We also added a customization package that is unique in the industry. As seasonal buying habits are changing, we are benefiting from the work we have done to weatherproof our assortment. Allowing us to deliver customers what they want when they want it, be it swim for summer recreation or outerwear to battle the elements. Following a colder spring and slower start for swim, saw momentum build throughout the summer. As weather improved and experienced a strong August, both swim and outerwear were top five items over Labor Day weekend, reflecting changing consumer tastes around weatherproofing. As a nod to Q3, our customers are responding positively to our on-trend assortments. Embroidered jeans are our best seller. Without the need to discount. And we have expanded our popular barrel leg fit. We are pleased to report that these trends with our wear now full product are resonating strongly with customers laying the foundation for a strong third quarter in these important franchise categories. Turning to the performance of our various businesses. Beginning with our B2B business. Our B2B business continues to set us apart from competitors and had a terrific quarter with growth in both top and bottom line performance. On the commercial uniform side, our focus on building scale and contract duration with our enterprise customers yielded significant results. This year, we have won and are extending contracts with several large clients. Marking our highest growth in contract durations that we have recorded during the second quarter. This side of the company's spin has been 2014. As we dial up this strategy, we expect to add other household names in our key industry sectors over the coming year. Our school uniform business had another strong quarter. With revenue up high single digits fueled by new customer wins. We are continuing to win by leveraging the strength of our brand, our steadfast focus on quality, our market-leading embroidery and personalization capabilities, and our great customer service. Turning to our B2C business. Our asset-light licensing business remains a significant growth vehicle for the Lands' End, Inc. brand. We saw particularly strong performance in the club stores with continued wins across men's, women's, and kids categories, and the expected introduction of footwear in that channel later in the year. Lands' End, Inc. remains a highly desirable brand, with licensed partners reporting new interest from a number of distributors in both the department store and club channels. Our third-party marketplace business delivered strong top-line results, driven by performance in Macy's and a record-setting prime week on Amazon. Where we launched the Lands' End Essentials line I mentioned earlier. This targeted approach continues to enhance discoverability, conversion, and drive brand equity across platforms. Marketplaces are relatively low lift, capital light, and fit neatly into our distributed commerce go-to-market model. Along with licensing, we see marketplaces as a compelling driver of continued growth in the reach and brand value of Lands' End, Inc. And importantly, it is where our consumer is shopping where we are meeting those new to our iconic brands. Our U.S. E-commerce business continues its evolutionary journey as the central hub of our commerce strategy. Representing the most fashion-forward collection-oriented manifestation of the brand, we continue to elevate the site. Creating a more immersive and experiential look and feel that best presents our collection to customers. Existing and new. Our recent momentum put a strong start to the third quarter. Is positioning Lands' End, Inc. as a trusted, high-quality brand with broad consumer appeal especially among the all-important thirty-five to fifty-year-old demographic. The website in both mobile and desktop showcases ever greater levels of personalization. Our deployment of our new AI-driven recommendation and outfitting engine makes it easier for customers to mix and match products. Additionally, we are driving more segmented and personalized campaigns leveraging our SMS and email platforms while expanding communications with AI agents a rapidly evolving search sector. Social commerce, is the final part of our distributed commerce platform. While we do not break out this segment and include it within our U.S. E-commerce results, had a wonderful quarter. With our Instagram followers growing by over 100% since last year. Our total social traffic increased nearly 19% versus last year, and nearly 60% in June and July versus last year. Reaching a new and younger customer we created bespoke campaigns. For example, our toad crawl summer campaign, offering our iconic pocket tote with personalization options and a series of pop-up shops, in popular summer destinations we continue to attract new customers at a rapid clip and the Tote remains our number one new to brand acquisition product. Europe showed improvement during the second quarter. With revenue declines beginning to moderate as we became more effective sellers and positioned the brand to build on the distributed commerce success that we are seeing in The U.S. Specifically, we launched the French language website with limited discounting and a more evolved look and feel. In addition, we began to elevate the look and feel of the German and UK sites collaborating with more premium partners like Shearlux and Secret Escapes. For fall holiday, we plan to launch several designer collaborations as part of that reposition. As with The U.S, we look to asset-light low lift launches to broaden our reach, including opening on Amazon, Devon, and NeXT, with results significantly ahead of expectations. Europe will continue to be a test bed for us. And while each market has its own dynamics, we are committed to building a global brand and view the halo that these markets can provide Lands' End, Inc. as invaluable. I will now turn it over to Bernie to discuss our second quarter performance in more detail. Bernie McCracken: Thank you, Andrew. For the second quarter, total revenue performance was $294 million, a decrease of 7% compared to the second quarter last year and GMV was approximately flat year over year. Licensing and our presence across our third-party marketplace partners continue to help the business diversify. And reduce risk from any one business unit product or partner. Our U.S. E-commerce business saw sales decrease 11% compared to 2024. The decrease was largely driven by the slow start to the swim season. And as Andrew discussed, we saw strong swim results through Labor Day which we have incorporated into our third-quarter forecast. Our third-party marketplace business grew approximately 14% with year-over-year growth across our marketplace. We are very pleased with our performance in Macy's and Amazon and we believe improved performance at Kohl's has positioned the marketplace business well for the back half of the year. Sales from Lands' End Outfitters increased 5% from 2024. Sales from our school uniform channel increased high single digits. Driven by our acquisition of new school accounts. Revenues from the business uniform channel were up year over year driven by our enterprise accounts. Sales in Europe decreased 15% year over year. Primarily due to supply chain challenges on key seasonal products and broader macroeconomic pressures. However, we are encouraged by the early progress from adding additional channels and expect this business to improve in the back half of the year. Revenue from our licensing business grew 19% year over year, reflecting the continued momentum of our licensing program. This growth was fueled by increased brand visibility from existing licensees, further expanding our reach and impact. Gross profit decreased by 6% compared to last year. Gross margin in the second quarter was 49%. Approximately 90 basis point improvement from 2024. The margin improvement was driven by continued strength in full price selling across key categories expansion of our licensing business. SG&A expenses decreased by $6 million year over year. As a percentage of net revenue, SG&A increased 130 basis points primarily driven by deleverage from lower revenues. For the second quarter, we had an adjusted net loss of $1.9 million or $0.06 per share. We delivered adjusted EBITDA of $14 million in the second quarter. Representing a year-over-year decrease of 18%. The decrease was driven by initial tariff headwinds, Europe e-commerce performance, and the slow start to the swim season. Partially offset by marketplaces, licensing outfitters. Moving to our balance sheet. Inventories at the end of the second quarter were $302 million, down 3% compared to last year. Reflecting disciplined inventory management and proactive measures to mitigate tariff impacts. In terms of our debt, at the end of the second quarter, our term loan balance was $241 million and our ABL had $35 million of borrowings outstanding. Total long-term debt was flat to last year. During the second quarter, we repurchased $2 million of shares under our $25 million share repurchase authorization announced in March. Bringing the balance of the remaining authorization to $9 million as of the end of the quarter. Now moving to guidance. Our guidance includes the impact of tariffs at the current implemented rates, We are implementing mitigation measures to effectively manage tariff headwinds at current levels for the remainder of fiscal 2025. For the third quarter, we expect net revenue to be between $320 million to $350 million while GMV is expected to be mid to high single-digit growth. Adjusted net income of $3 million to $7 million and adjusted diluted earnings per share of $0.10 to $0.02 and our adjusted EBITDA to be in the range of $24 million to $28 million. Turning to full year. We now expect net revenue to be between $1.33 billion to $1.4 billion while GMV is expected to be low to mid single-digit growth. Adjusted net income of $19 million to $27 million and adjusted diluted earnings per share of $0.62 to $0.88 and our adjusted EBITDA to be in the range of $98 million to $107 million. Our guidance for the full year incorporates Operator: $25 million in capital expenditures. With that, I will turn the call back over to Andrew. Andrew McLean: Thanks, Bernie. I want to thank Lands' End, Inc.'s employees for their hard work and dedication during the quarter. With their support, we have created a truly distributed commerce retailer, with the reach to deliver for customers existing and new across channels, geographies, and categories. Looking ahead to the third quarter, we are seeing broad strength across all categories in our U.S. Business, building on our positive momentum and the trends we saw develop over the course of the second quarter. Our sales and margin over Labor Day weekend was the best we have had in the last decade. Bringing significant use to file sign up. As I mentioned earlier, this reflects the intentional work we have done to weatherproof our business and ensure our customers have what they want when they want it. It also underscores the strength of our strategy to be promotional around holidays while maintaining full price selling. In between. Finally, the Board's previously announced process to explore strategic alternatives remains ongoing. We will not be commenting further on it at this time. And we will provide an update once appropriate. With that, we look forward to your questions. Operator: We will go first this afternoon to Dana Telsey of The Telsey Group. Dana Telsey: Hi, good afternoon everyone and nice to hear about the progress. Andrew, the acceleration in momentum on the top line that you are talking about frankly, into the third quarter now, What are you seeing by product category? How much of it is lower promotions? And given the tariff environment, have you taken price? And then also, it sounds like the Lands' End Essentials is a new opportunity. What are you seeing that is driving the business? How is the margin and price points relative to the rest of the mix? Thank you. Andrew McLean: Hey, thanks, Dana. It is nice to hear from you. Really been progressing the business towards a distributed commerce model over the last twelve months. In fact, we saw this with our customers' shopping habits as we sort of like moved from our very traditional customer, our resolver to our revolver. And I know I have talked Operator: about that on previous calls. We started to Andrew McLean: actually look at where that customer was shopping. And quite a lot of the work we did around working with AI agents. So took it down this path where we started to see these customer habits are changing, customers are migrating to different channels. There are new customers to tap into. And so it became clear to us that we had opportunities that lay beyond just a traditional brand site. The brand site will always be the to us. It is going to be the most fashion-forward version of the brand. It is going to be the most complete version. But we know that those customers are shopping. And we see within our Operator: top marketplaces the distributed model, We see that there is an Amazon customer who wants a price point. And by really focusing in on a couple of handfuls of SKUs, we put ourselves in a position that we can really lean in, put the marketing behind those SKUs and reach them at price points that matter. And we think we can build a significant business. Our Q3 numbers have been absolutely astonishing actually. As we have lent further into this. And in fact, what we are seeing is a tremendous amount of those customers then migrate to see the full assortment on landsend.com. So we think that there is a flywheel effect that is going to be happening and that will continue. To accelerate and spin the business forward as we see that momentum continue. Operator: I would just note that at the top end of that, we have Macy's. Andrew McLean: And Nordstrom where we sell some of the highest price points that we have. In the company and our AOVs have been somewhat astonishing. We see that as we are reaching the top of our merchandise pyramid. So again, we are putting the product we see a certain customer and we are matching that product to the customer all the better. And now we are able to manage promotions differently against each of those. In fact, one thing I want to call out, I think the team has done a great job on this is we built an AI engine that Operator: basically creates product display pages, PVPs, and it will build language that is appropriate to each page. So Andrew McLean: if you see a product that is on landsend.com, how the page materializes the time you get to Amazon, it will read differently. It will read more appropriate Operator: to the Amazon bots and AI search tools, and it will read differently Andrew McLean: and probably more elevated in all candor to a Nordstrom's customer. So we are starting we are being much more thoughtful about how we address each of these Operator: segments. In terms of the category conversation that is out there, Andrew McLean: we have seen strength across all categories. And it was Operator: the second quarter was definitely there was momentum all the way through it. Slower May with SWIM, which is really important to us. One-third of the business in May. What we saw was that Andrew McLean: build in June, it built in July. And then interestingly, it built into August. And what I am starting to see is that the strategy that designers and merchants put in place around weatherproofing has been incredible for us. Because we are able to sell to the customer when they want it, not just where they want it. And so it was Operator: something I had not seen in the company's history before. Andrew McLean: Over Labor Day weekend, where we had both swim and outerwear as Operator: top five categories, which was new to us Andrew McLean: and that was relatively full price selling. Because, again, we are trying to meet more of the discounting in different channels. Like having the customer on landsend.com with something more premium. We were able to manage markdown around that. Operator: You asked me about Andrew McLean: tariffs and are we handing anything on to the customer. I am going to be honest, yes, we are. As little as we possibly can, we look at our tariff and the view we took for 2025, which is in the guidance and into 2026 is that we are making a number of changes. We have made a number of changes in our sourcing network. Operator: They have been very successful for us, and they have given us the nimbleness to move in and out of markets. As tariffs come. And we have also worked with our vendors and narrowed the number of vendors. And that has given us the ability to share some of the Andrew McLean: burden with them. So we think about them for half of the tariff rise that we are seeing. Of the remainder, we are Operator: splitting that fairly evenly between internal changes that we are making as we Andrew McLean: get after below margin and then the rest of it is going through to what I would say is a relatively small increase to the customer. And we will endeavor to make that the smallest number it can be. But I do not want to sugarcoat it that we can absorb the whole thing. So I think I got everything in there. I am happy to go back to it if you have got more. Operator: David, the only thing I would add on product categories would be that you know, one of the exciting things for us is as people are shifting their timing on purchases whilst we noted that '2, but it has actually been a nice tailwind to start Q3 as that swim kicks in. And when Andrew was talking about essentials, it is a smaller part of our business, but it has been really a big lift in its early days in both Amazon and the other places that we are putting in. Dana Telsey: Thank you. Andrew McLean: Thank you. We go next now to Eric Beder of SCC Research. Eric Beder: Good afternoon. Operator: Right. Hey, Eric. Could you talk a little bit about the flow of licensing here? I know that the first half had kind of a little bit of puts and takes because you were shifting. Licensing to from all categories you previously had into a licensing category. What are we going to see in the back half in terms of potentially now becoming expanding the categories beyond what you have done before with the licensing mechanism? Andrew McLean: Hey, Eric. I am going to take the I am going to take the front half, and then I will let Bernie take the back half. We are up 36% on our licensing revenues, then a number you will see in the Q, but I really wanted to call that out. We continue to look at how we will drive the business forward in the back half with that. And in the back half, we think that there is upside to it because there are new licenses. And then on top of that, we get into the holiday season. And it is like we were really still sort of in our infancy last year on this. So we see tremendous upside opportunity. And actually, the sky is the limit in terms of the licenses we can go after. We have been a little slower for reasons. For some reasons this year. And I think as we get into the future, we see opportunity to accelerate those number of licenses. Operator: Yes. And what I would add to that, we started the year you know, the the licensees started the business in early last year, there is a ramp up for those. So what we are starting to see as we hit the back half of this year is them accelerating. Our current licensees are accelerating to their full potential. And we will get that benefit in the back half of this year while we also have the new licensees starting to build their program, and then we will get the benefit next year of them building up to full potential. One of the leverage points that I have Andrew McLean: found really interesting is as we sort of like go down this path and I have done this before in my career, which is to pull the licensees to get the licenses together. And go to a big customer, a big department store customer and really have them all present as a complete house of Lands' End, Inc. And in doing that, it is very powerful to have that leverage. And as we negotiate into that, we see that as an amplification of licenses that was not originally anticipated and what we how we were laying out the business model, but it is now it became very obvious as we went further into this. So we see upside here. Operator: Great. When you look in outerwear, last year, you shifted the continued to shift the outerwear to more wear now and thinner and kind of not as heavy product. And that was a big success. What should we be thinking about how you are going to handle outerwear this year? Obviously, it seems like it started out pretty well in Labor Day. Andrew McLean: Eric, I was in product meetings all morning, and you should see like the outerwear that is to come. It was it is absolutely darling. And actually, in as much as in as much as I want to give you the full answer, and I will, I mean, I would point you to some of the new products that we have out there around squall in particular. And that we will send you the the PDP of the rain jacket and it is it is you will see a couple of things. You will see Operator: new product. Andrew McLean: New innovation and you will see new PDPs that really speak to how the customer wants to shop and the PDP almost in its own way acts as a landing page for the brand. So there is incredible use of imagery. There is incredible use of storyline in there. And actually, we lean heavily into customer reviews. And part of why I was loving the product so much this morning is the team was showing me early reviews on it. Operator: Which Andrew McLean: are many of them are five star and we see it from our resolver and our revolver customer and we know when Operator: both of those Andrew McLean: are loving the product that it is going to be a home run. So I do not think you are necessarily going to see new new franchises being added, but I think you will see those franchises being ened. I am not going to give you the whole story. You are going to have to wait to see some of it because we have got some astonishing product coming up. Operator: Great. Last question. So when you look at the catalogs, there has been an increasing focus on events and lifestyle and driving kind of multiple purchases for that. When you look at your customer base, that thirty-five to fifty-year-old customer is your focus. How has been their response to that versus kind of the prior core? And are you seeing those customers continue to increase Andrew McLean: on the price in terms of percentage of buying all pieces? Thank you. Operator: Yes. We continue to see the evolve. Think thirty-five to fifty-year-old new to file customer is is coming to the brand and they are Andrew McLean: buying across product categories. And buy a bigger basket. And it has been an incredibly successful strategy for us to lean into that versus the more traditional Resolver customer who tends to come back and buy something that is worn out or to stick with the one in one particular category. They just may be a swim customer and that is who they are going to be. Operator: We are starting to see behavior of new cohorts, resolvers with Andrew McLean: evolver tendencies. And so we are starting to break down that barrier. What we have done with catalogs, and in particular, as we came into Q3, Operator: we were extremely thoughtful about this. We really leaned in with the Andrew McLean: our data scientists and began to Operator: be thoughtful about the particular kind of catalog that goes to Andrew McLean: a 5x shopper, which is effectively a resolver for us at this point. Versus a customer we are trying to encourage to a second purchase because we know recency is very important to us. And actually, we began to segment the file more to chase that after lapsed customers. We know there is tremendous amount of value in there. And we have begun actually with the catalog to prospect to gain that for a number of years. Of not using the catalog to prospect and relying probably a little too much on performance marketing because I think performance marketing is under pressure in any case from AI agents. But I think it has a tendency to be more transactional. Versus emotional. And we find that we can handle transactional better on, say, Amazon. That is a better place to be with that kind of with that kind of customer purchase decision. So for us, the catalog is Operator: I think it is fair to say we have taken the catalog on the offensive Andrew McLean: this quarter, and I think you are going to see more and more of that from us. And actually, you just might get different catalogs sent to you. And I will give you a very good example. Operator: Our traditional customer, that resolver, Andrew McLean: she likes to see red lines. What do I mean by that? She wants to see a was his pricing. Our revolver does not want to see that. So you might find that you get a different catalog depending on how we have evaluated you as a customer. And we will continue to lean into this. The data science behind this is fascinating. And hopefully, we can spend some time walking you through it when you visit next. Operator: Okay. Good. Look forward to it. Thank you. Andrew McLean: Thank you. We will go next now to Steve Silver of Argus Research. Operator: Thanks, operator, and thanks for taking my questions. It is great to hear the progress in the outfitters business. It sounds like there might be some new opportunities to be announced over the course of the rest of the year. Just curious as to your view of this state of the pipeline in outfitters broadly. And then maybe if you can just put in some context how many prospects may be in in more advanced stages of conversation at any point in time. Andrew McLean: Yeah. Thanks. How is it going, Steve? It is nice to hear from you as well. Operator: So we break it up into we break out figures out into several buckets. I am just going to start school. We are very deliberately targeting growth in school. Andrew McLean: We have found that the product that we bring to market is OCATEC certified and that means that there is absolutely nothing bad in it. And we find it to be very competitively priced. And if something none of our competitors can do. So we have a competitive advantage that we can lean in and go after progressively more schools from large to small. And so we have really tasked our team to grow that business. And I would say not just because one of our competitors fell out last year, but because of our own doubling down and having more having a better go to market strategy, where we see opportunities to pick those schools. And I tend to think about Operator: adding schools in Andrew McLean: anywhere from about $5 million to $3 million buckets. Given the size of those. So opportunity in there with multiple customers. I think when it gets into the commercial uniforms business, I am going to split it into just to simplify over here all night. I think there is the smaller customers. We have completely rebuilt our experience for smaller customers. And it is paying starting to pay dividends for us. The site which in my opinion had become extremely sort of B2C focused and was more cat category driven is now about the emphasis of differentiation. Of what we can bring to your business. And I think the other part is we have done we changed our IT philosophy to be more about sprints rather than sort of like longer projects, and we are delivering continual upgrades. And that is allowing us to be much more focused on getting turnaround for the customer in there. I would say that it does not stop there because what we tend to find is many Operator: big companies who may well become the second group, which is our enterprise accounts tend to start off by shopping as small. And so we can use that to prospect quite heavily. In terms of the enterprise accounts, Andrew McLean: I have got so much good news in there, but I am really not in the position to share it. Obviously, the last call, we talked about winning Delta back and we are extremely proud about that. Our team just got back from Italy where they had been with Delta assessing uniforms for the future. And it is like it is there is a lot of goodness to come from that. I would say that the of bringing a a delta back is not lost on other airlines out there. I am going to leave it at that. And in financial services, we continue to dominate. The big play for us Operator: is going to be now building adjacent categories. And one of the adjacent categories we really like is in the healthcare industry. And I think you will see us start to add that category more consistently and carefully. I just want to Andrew McLean: like blanket everyone everywhere Lands' End, Inc. does better when it focuses on something and decides to win. And that is how we work as a team. Operator: That is helpful. Thank you so much. And one last one, if I may. You cited some progress in Europe with the narrowing of the declines there. Also the implementation of new websites in some key European markets. I am curious if you could put some context around, the expectations for completing the turnaround of the European business? And moving just towards something more of a contribution to the overall business? Yes, it is a great question. Andrew McLean: Usually, I am in Europe testing out ideas. Operator: Good, bad or indifferent. One idea that we are taking from Andrew McLean: The U.S. That is really important to us is this distributed commerce model. So Operator: just so we are on the same page and it really allows the customer to purchase directly from where they are browsing. So we are meeting customers Andrew McLean: where they are rather than waiting for them to come to the brand site. So that might be social media, it might be from online articles. It might be from smart devices, and it could be from marketplaces. And so we are working our way into social media. We are working our way into marketplaces. And I think I want to put emphasis on the marketplaces because Europe's retail has always been more marketplace driven. Than in North America. And that is an area of growth for us. So we opened NeXT. We opened Devenham's. We opened Amazon. And we have seen terrific Operator: starts to each of those. And I think you will see us continue to grow those Andrew McLean: and take from the strategy that has been already really successful. In The U.S. I think that is focusing around product that is appropriate. To that channel and product that is Operator: that is priced appropriately and narrow assortments Andrew McLean: that then encourage you to be curious about coming back to see other landsend.co.uk or the German site or actually the French site. So Operator: that is the first part of it. In terms of the Andrew McLean: In terms of the sort of brand sites themselves, Operator: The UK is in pretty good shape. I think we have turned the corner there. We understood The UK consumer. And we have made inroads with them. Andrew McLean: I think we have got the product assortment right. Right now, the area we are working on, and again, there is a meeting I was in earlier today, is to get focused around our German resolver. Customer. The Evolver customer we have got nailed. It is about now Operator: working on the Resolver customer, and that arguably is going to come through catalog. So we are spending time working out Andrew McLean: taking excuse the pun, a page out of what we have done in The U.S. And then working at how we can use the catalog as an effective tool to engage with that resolver German customer and then that will bring us fully back. To where the brand is contributing from Europe. Because again, I am absolutely committed to it because the halo that we will get from Europe is key. And the last point I will make on this Operator: particularly to reach our revolver customers, watch for a couple of really powerful collabs. Coming. The collab model that we have had Andrew McLean: from the really, this is the success of the tote bag in The U.S. Has created a halo for the brand everywhere. We are that on the road Operator: and we are now going to be doing that in Europe. And again, I would love to Andrew McLean: would love to share who those co labs are for. But I think my team in Europe would be really, really upset with me. So I am going to keep I am going stay quiet. And watch this space. Steve Silver: Great. Thank you so much for the color and best of luck in the second half. Andrew McLean: Thank you. Take care. Thank you. And gentlemen, that was our final question for today. So that will bring us to the conclusion of today's Lands' End, Inc. earnings conference call. Again, everyone, we would like to thank you all so much for joining us this afternoon and wish you all a great remainder of your day. Goodbye.
Operator: Thank you for standing by, and welcome to the InnovAge Fourth Quarter 2025 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 11 on your telephone. Star 11 again. And now, as a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Ryan Kubota, Director of Investor Relations. Please go ahead, sir. Ryan Kubota: Thank you, operator. Good afternoon, and thank you all for joining the InnovAge 2025 Fourth Quarter and Fiscal Year End Earnings Call. With me today is Patrick Blair, CEO, and Ben Adams, CFO. Michael Scarbrough, President and COO, will also be joining the Q&A portion of the call. Today, after the market closed, we issued an earnings press release containing detailed information on our 2025 fiscal fourth quarter and year-end results. You may access the release on the Investor Relations section of our company website, InnovAge.com. For those listening to the rebroadcast of this call, we remind you that the remarks made herein are as of today, Tuesday, September 9, 2025, and have not been updated subsequent to this call. During our call, we will refer to certain non-GAAP measures. A reconciliation of these measures to the most directly comparable GAAP measures can be found in our earnings press release posted on our website. We may also make statements that are considered forward-looking, including those related to our 2026 fiscal year projections and guidance, future growth prospects and growth strategy, our clinical and operational value initiatives, Medicare and Medicaid rate increases, the effects of recent legislation and federal budget cuts, enrollment processing delays, the status of current and future regulatory actions, and other expectations. Listeners are cautioned that all of our forward-looking statements involve certain assumptions that are inherently subject to risks and uncertainties that can cause our actual results to differ materially from our current expectations. We advise listeners to review the risk factors discussed in our annual report on Form 10-K for fiscal year 2025 and any subsequent reports filed with the SEC. After the completion of our prepared remarks, we will open the call for questions. I will now turn the call over to our CEO, Patrick Blair. Patrick Blair: Thank you, Ryan, and good afternoon, everyone. I'll begin with gratitude to our colleagues across InnovAge, to our participants and families, to our state and federal partners, and to our investors. Thank you for your continued support and trust. Fiscal 2025 was a year of delivery. We made clear commitments, and we followed through. In many cases, we exceeded both our internal goals and external expectations. And importantly, we finished the year with strong momentum heading into fiscal 2026. Today, I'll cover fourth quarter and full-year results, fiscal 2025 guidance for fiscal 2026, and progress we're making to position InnovAge for long-term success. Our fourth quarter capped a strong year of consistent execution. Revenue was $221.4 million, up 11% from Q4 last year. Center-level contribution margin was $41.3 million, representing an 18.6% contribution margin. Adjusted EBITDA more than doubled year over year to $11.3 million, representing a 5.1% margin. We ended the year with a census of approximately 7,740 participants. These results reflect disciplined cost management, strong medical utilization performance, and continued sense of growth. Now turning to the full year. Total revenue was $853.7 million, up nearly 12% year over year. Center-level contribution was $153.6 million, with contribution margin expanding to approximately 18%, up 70 basis points from FY '24. Adjusted EBITDA was $34.5 million, above the high end of our FY '25 guidance of $31 million. Adjusted EBITDA margin nearly doubled from 2.2% in FY '24 to approximately 4% in FY '25. These numbers matter not just in isolation but in the context of what we committed at our Investor Day in February 2024. We committed to expanding margins, and we delivered. Center-level contribution margin improved from 17.3% in FY '24 to 18% in FY '25, with further progress expected in FY '26. We committed to improving clinical outcomes, and we delivered. Key internal utilization measures such as inpatient admissions, ER visits, and short-stay nursing facility visits all improved through execution of our clinical value initiatives. We committed to driving revenue growth, and delivered. Revenue grew at greater than a 10% compound annual growth rate from FY '23 to FY '25. We committed to improving operating leverage, delivered. G&A as a percentage of revenue declined steadily from FY '23 to FY '25. We committed to return sustained positive adjusted EBITDA and delivered with year-over-year improvements and results above expectations. And, critically, we closed the year with no material compliance deficiencies. This combination of responsible growth, financial discipline, clinical performance, and compliance execution is what gives us confidence in the durability of our progress. We're operating in a complex environment. Recent legislation has created uncertainty for many value-based care models, particularly Medicare Advantage and Medicaid long-term care programs. State partners are facing fiscal pressures, which can translate into budgetary and operational strain. PACE is different. The strength of our model lies in the integration and coordination of care. Our interdisciplinary teams personalize care for every participant. Today, approximately 40% of our total cost of care is delivered directly in our centers by our employees under one roof. Through regular center attendance, we seek to maintain an active line of sight into each participant's health status, allowing us to intervene earlier and prevent avoidable hospitalizations and ER visits. For the remaining 60%, our providers individually order or prescribe virtually all other non-emergent care. This integrated, high-touch model gives us a real advantage in managing costs and utilization, and we believe this sets InnovAge apart in an inflationary medical cost trend environment. Looking ahead, we're advocating with the new administration and legislators to broaden the role PACE can play in addressing America's senior care challenges. While today PACE primarily serves a subset of dual-eligible seniors, we see meaningful opportunity to expand access to those who could benefit earlier in their care journey. We're advocating for new pathways, such as a Medicare-only option, that would give more seniors access to the coordination and support services that make PACE unique. With more than five decades of public investment in PACE centers across the country, we believe this is the right time to leverage that infrastructure more fully. Done right, this could both improve quality of life for seniors and generate savings by delaying Medicaid enrollment and prolonging nursing home placement. Importantly, it can also create a natural growth channel for the company as participants' needs increase and they transition into full PACE eligibility. Looking ahead, our guidance for FY '26 reflects both continued momentum and the realities of our environment. We project a census of 7,900 to 8,100, member months of 91,600 to 94,400, total revenue of $900 to $950 million, adjusted EBITDA of $56 to $65 million, and de novo losses of $13.4 to $15.4 million. We expect profitability to build through the year, exiting FY '26 with a higher run rate, and we remain on track to achieve adjusted EBITDA margins of 8% to 9% over the next few years. Ben will take you through the details of this shortly. On growth, census increased 10% year over year in FY '25. We strengthened the foundations of our enrollment strategies and processes while also testing and scaling new channels that are beginning to pay off. We're also building strong partnerships. Last year, we formed a joint venture with Orlando Health, and this past quarter, we announced a similar partnership with Tampa General Hospital. These partnerships extend our reach, strengthen our provider networks, and create new pathways to connect eligible seniors with PACE. We continue to work closely with our state partners on enrollment processing. While we have experienced delays in some states and are monitoring the impact of budget constraints and Medicaid eligibility determinations, these dynamics are incorporated into our FY '26 guidance. Demand for PACE remains robust, and we expect healthy top-line growth as we move through the year. Beyond the numbers, we're advancing our transformation agenda. We're investing in talent, technology, and tools to make InnovAge a more disciplined, efficient, and scalable organization. Approximately 40% of our total cost of care occurs within our four walls of our centers, where we are uniquely positioned as both a payer and a provider to capture efficiencies and improve outcomes. This transformation is not just about tightening operations; it's about reimagining the model for the future, positioning InnovAge as the partner of choice for states, payers, providers, and communities looking to create a more sustainable, continuous senior care. In closing, fiscal 2025 was a strong year. We delivered on our commitments, exceeded expectations, and ended the year with momentum. Fiscal 2026 will be another important step forward, one that we expect to further advance our financial performance, strengthen our model, and bring us closer to achieving our long-term ambitions. I want to thank all our colleagues who make this possible. Every day, they bring both a caregiver's heart and an owner's mindset to serving our participants. They are the reason we've been able to execute consistently, and they will be critical to our success in the years ahead. With that, I'll turn it over to Ben for more detail on the financials. Ben Adams: Thank you, Patrick. Today, I will provide some highlights from our fourth quarter and fiscal year-end 2025 financial performance, followed by our fiscal year 2026 guidance. I am pleased with our overall performance and strong finish to the year. As Patrick mentioned, we really started to feel the impact of our clinical value initiatives throughout this year, and we expect those to carry through into fiscal 2026. We are also pleased with the progress of our new operational improvement initiatives this year and expect them to continue building throughout the next fiscal year. Starting off our fiscal 2025 highlights with Census, we served approximately 7,740 participants across 20 centers as of June 30, 2025, which represents annual growth of 10.3% and sequential quarter growth of 2.8%. We reported 23,000 member months in the fourth quarter, an increase of approximately 10.5% compared to 2024 and an increase of approximately 2% over 2025. Total revenues increased by 11.8% to $853.7 million for fiscal year 2025. The increase was primarily driven by an increase in member months coupled with an increase in capitation rates. The increase in capitation rates includes rate increases for both Medicare and Medicaid, partially offset by revenue reserves and an out-of-cycle risk or true-up payment received in fiscal 2024. Compared to the third quarter, total revenues increased by 1.5% to $221.4 million in the fourth quarter, primarily due to a sequential increase in member months partially offset by a decrease in Medicare rates associated with decreasing risk scores as new participants are entering PACE with lower risk scores and disenrolling participants are leaving PACE with higher risk scores. We incurred $431.2 million of external provider costs during the fiscal year, a 7% increase compared to fiscal year 2024. The increase was primarily driven by an increase in member months, partially offset by a decrease in cost per participant. The decrease in cost per participant was primarily driven by a decrease in inpatient, assisted living, permanent nursing facility, and short-stay nursing facility utilization, a decrease in external hospice care associated with the transition of this function to internal clinical resources, and a decrease in pharmacy expenses due to the transition to in-house pharmacy services. The decrease in external provider cost per participant was partially offset by an increase in inpatient unit cost and an annual increase in assisted living and permanent nursing facility unit cost. During the fourth quarter, we incurred $108.2 million of external provider costs. And when compared to 2025, external provider costs were essentially flat. The stable costs were the result of higher costs associated with an increase in member months offset by a decrease in cost per participant. The decrease in external cost per participant was primarily driven by a decrease in inpatient and permanent nursing facility utilization and a decrease in pharmacy expense associated with the transition to in-house pharmacy services, partially offset by an increase in short-stay nursing facility and assisted living facility utilization. Cost of care, excluding depreciation and amortization, was $268.9 million, an increase of 17.5% compared to fiscal year 2024. The increase was due to an increase in member months coupled with an increase in cost per participant. The overall increase was driven by higher salaries, wages, and benefits associated with increased headcount and higher wage rates, an increase in software license fees, an increase in de novo occupancy and administrative expenses associated with opening centers in Florida and the acquisition of the Crenshaw Center, an increase in contract provider expenses in California associated with growth, consulting fees and shipping costs associated with in-house pharmacy services, and fleet costs inclusive of contract transportation. For the fourth quarter, cost of care, excluding depreciation and amortization, increased 3.5% compared to the third quarter. The increase was primarily due to an increase in consultant fees and shipping costs associated with increased volume of in-house pharmacy services. Center-level contribution margin, which we define as total revenues less external provider costs and cost of care, excluding depreciation and amortization, which includes all medical and pharmacy costs, was $153.6 million for fiscal year 2025 compared to $132.1 million, a 16.3% increase for fiscal year 2024. As a percentage of revenue, center-level contribution margin of 18% increased approximately 70 basis points compared to 17.3% in fiscal year 2024. For the fourth quarter, center-level contribution margin was $41.3 million compared to $40.7 million for 2025, an increase of 1.3%. As a percentage of revenue, center-level contribution margin of 18.6% decreased by approximately 10 basis points compared to 18.7% in 2025. Sales and marketing expenses of $28.2 million increased 13.1% compared to fiscal year 2024, primarily due to increased headcount and wage rates to support growth. For the fourth quarter, sales and marketing expenses increased by 2.6% compared to 2025, as a result of additional marketing support and project timing in the fourth quarter. Corporate, general, and administrative expenses increased 9.6% to $122.1 million compared to fiscal year 2024. The increase was primarily due to the $10.1 million accrual of the potential settlement of the securities class action lawsuit and an increase in employee compensation and benefits as a result of greater headcount and increased wage rates to support compliance and bolster organizational capabilities. These increases were partially offset by a reduction in consulting and insurance expenses. For the fourth quarter, corporate general and administrative expenses decreased 27.9% to $27.8 million compared to 2025. The decrease was primarily due to the potential settlement of the securities class action lawsuit referenced earlier that was recorded in the third quarter. Net loss was $35.3 million compared to a net loss of $23.2 million in fiscal year 2024. We reported a net loss per share of 22¢ compared to a net loss per share of 16¢, each on both a basic and diluted basis. Our weighted average share count was approximately 135.4 million shares for the fiscal year, on both a basic and fully diluted basis. For the fourth quarter, we reported a net loss of $5 million compared to a net loss of $11.1 million in the third quarter and a net loss per share of 1¢ each on both a basic and diluted basis. Adjusted EBITDA was $34.5 million for fiscal year 2025, compared to $16.5 million in fiscal year 2024 and $11.3 million for the quarter compared to $10.8 million in 2025. Our adjusted EBITDA margin was 4.0% for fiscal year 2025, and 5.1% for the fourth quarter. We do not add back losses incurred by our de novo centers in the calculation of adjusted EBITDA. We define de novo center losses as net losses related to preopening and startup ramp through the first 24 months of de novo operation. We incurred $15.4 million of de novo losses in fiscal year 2025. This compares to $12 million in fiscal year 2024. For the fourth quarter, de novo losses were $3.9 million, primarily related to our Tampa and Orlando centers in Florida. This compares to $3.5 million of de novo losses in 2025. Turning to our balance sheet. We ended the quarter with $64.1 million in cash and equivalents, plus $41.8 million in short-term investments. We had $72.8 million in total debt on the balance sheet, representing debt under our senior secured term loan and finance lease obligations. We also refinanced our term loan facility in the fourth quarter with a $50.7 million term loan, renewed our revolving credit facility commitments, and extended the maturity of both to August 8, 2028, from March 8, 2026. For the fourth quarter, we reported positive cash flow from operations of $9 million and had minimal cash capital expenditures of $200,000, primarily due to timing. We completed the share repurchase program that we launched back in June 2024, acquiring approximately 1,426,000 shares of common stock for an aggregate of $7.3 million during the entirety of the program. During the fourth quarter, we acquired approximately 101,800 shares of our common stock for an aggregate of approximately $300,000. Turning to fiscal 2026 guidance, which we included in today's press release, and based on information as of today, we expect our ending census for fiscal year 2026 to be between 7,900 and 8,100 participants. In member months, to be in the range of 91,600 to 94,400. We are projecting total revenue in the range of $900 million to $950 million and adjusted EBITDA in the range of $56 million to $65 million. And we anticipate that de novo losses for fiscal 2026 will be in the $13.4 to $15.4 million range. I will also provide some additional color on a few of the components that comprise our guidance assumptions. Our census and member months reflect the redesign of our eligibility enrollment system due to state Medicaid redetermination. We expect that this will result in more rapid disenrollments in the first half of the fiscal year for those participants who have lost Medicaid coverage and have not been able to regain eligibility. Regarding revenue, we are expecting a low single-digit Medicare rate increase and a mid-single-digit increase for Medicaid. As a reminder, our Medicare rates are based on county-specific rates that are adjusted by CMS in January, coupled with prospective risk score adjustments in January and July. Effective January 1, CMS will begin to transition PACE organizations onto the V28 Medicare Advantage payment model from our current V22 payment model. The process is scheduled to begin on January 1, 2026, and be phased in annually through 2029, starting with a 90/10 split of V22 and V28, respectively, and has been factored into our guidance. Regarding cost of care, external provider costs, and overall center-level contribution margins, we have continued to make measurable progress since we returned to issuing guidance in September 2023. In 2024, we introduced clinical value initiatives, followed by operational value initiatives in 2025. This upcoming fiscal year, while we continue our focus on quality, we are also pushing ourselves to stretch operationally by continuing to reimagine and further refine what we do and how we do it in order to continue growing our adjusted EBITDA margin. As an example, the ramp-up of our new internal pharmacy initiative is going well and is expected to give us more control over pharmaceutical fulfillment, allow us to improve medication adherence, enhance participant outcomes, and streamline logistics. We are also excited to see that the business is reducing costs and is expected to continue generating overall cost savings into the future. In closing, we are pleased with our 2025 results. We continue to push ourselves toward improving and optimizing the business as we strive to be the provider of choice for participants as well as our federal and state partners. We remain focused on quality, and we believe in the value that the PACE program can bring to eligible seniors with complex needs. We look forward to the trajectory of the business and toward the year ahead. Operator, that concludes our prepared remarks. Please open the call for questions. Operator: Certainly. And our first question for today comes from the line of Matthew Gillmor from KeyBanc. Your question, please. Matthew Gillmor: Hey, guys. Thanks for the question. I wanted to ask about member mix and how that's impacting margins and cost trends. If I recall, I think the acuity of the membership is in the process of normalizing with your census growth that had been resuming starting last fiscal year. How far along are you on that process? Is there still more room to go in terms of acuity normalizing? And is there any way to think about the impact that that's been having on margins or some of the utilization metrics you've been sharing? Patrick Blair: Hey, Matt. It's Patrick. Great question. I'd say largely, we've sort of seen the mix rebalancing that we would expect since the sanctions were lifted. We've grown well. We've kept a very balanced pool of enrollments as it relates to people living in the community, people living in assisted living facilities, and I think we've done a really nice job of ensuring that we're a solution to keep people in the community rather than to go into nursing homes. As a result, the mix of our population, the age, the acuity has, I think, progressed much as we anticipated. I'd say we're largely at a point where we feel like achieving our targets. All of our work going forward is about continuing to grow and maintaining an appropriate mix. It does negatively impact our risk score, so we have to be mindful of that shift, which can come with some revenue impacts. But generally, we've got the right mix of healthier folks, and with the right clinical model wrapped around them, they can be a contributing factor to the company's growth and margin expansion. Ben, anything to add? Ben Adams: No. I think you really covered it. If you think about the average tenure of a PACE participant, it's three and a half years or so. We've been going through a normal enrollment process for about two years now, so the mix is pretty much normalized if things have washed through the system. Matthew Gillmor: Okay. Great. That's helpful. And then as a follow-up, I wanted to ask about V28. I heard Ben's comments about the phase-in starting next year. Should we think about that as being a slight headwind to your revenue growth, or is that a slight tailwind? Just wanted to sort of understand how that might play out both in 2026 and then, of course, beyond that as well. Patrick Blair: Well, as I think Ben said in his remarks, we're just sort of entering into this phase where we're starting to see a phase-in of the V28 relative to the V22. It's going to take multiple years for that to play out. As you probably know, there are a lot of variables with the PACE population and how all this will work out. It is included in our guidance, and I just want to make sure that's clear. Ben Adams: No. I think you pretty much hit it. We expect it to be a headwind over the next couple of years. We only provide one year of guidance, so it's all factored in for this year. But obviously, it's something we're spending a lot of time thinking about for future years. Matthew Gillmor: Got it. I appreciate it. Thank you. Operator: Thank you. And our next question comes from the line of Jared Haase from William Blair. Your question, please. Jared Haase: Yeah. Hey, guys. Thanks for taking the questions. Maybe I'll ask on the outlook for EBITDA margins. Congrats on all the progress that you've made there. I know you kind of reinforced the expectation that you're on track for the 8% to 9% target over the next few years. I think the guidance implies about 250 basis points of margin expansion. I guess, number one, should we think of that as a reasonable cadence in terms of margin expansion continuing for the next few years on that pathway to the high single-digit target? And then I'd also be curious if you could just unpack, given all the initiatives and progress you've made, where you think the balance is in terms of the bigger opportunities for leverage between center-level margin and then operating leverage. Patrick Blair: I'll let Ben pick up, but I would just start with I do think a lot of our margin improvement over the last couple of years has been a combination of factors. Being able to reinstitute growth for the company and growing that in double digits. We've had a variety of transformation efforts that focus on a lot of clinical value initiatives. We've done our best to predict when that value will flow through. We've talked about the latency between execution of an initiative and when we start to see the impact flow through the P&L. We're doing our best to predict that, but it's kind of hard to hit on a quarter-by-quarter basis. But I'll say we're very pleased with the work by our clinical teams to address medical costs. I think that is a nice driver of this. As I said in my opening remarks, one of the things that I think we're really developing a strong appreciation for, especially since we've brought pharmacy in-house, is that over 40% of the total cost of care we're delivering with our team, our employees, in our centers. And then this notion that for the remaining 60%, we're ordering that care. We're ordering the specialist visits and specialist services, and that gives us a lot of control. So I do think medical costs are an area we've been very successful in. We've got a great team, and we continue to move there. And then the operating leverage, as we grow our centers, we're getting operating leverage at the center level. Pharmacy insourcing is an area where the real value to that is the medical-pharmacy integration. That's given us more control over the total cost of care when we have pharmacy integrated more closely with our medical. So overall, I think we're pretty pleased with margin growth. And I think it is fair to say that over the next couple of years, the growth we've seen in the last two probably translates over the next couple. Ben, what would you say? Ben Adams: Yeah. I mean, I think Patrick pretty much covered it. I would say that the guidance we put out about the long-term margin opportunity when we met with everybody back in two years ago in February, I think that sort of outlook we put out there probably holds true today. And I think probably today more than ever, we've always been convinced that we'd get to the right margin structure. It was always just a question of when we would get there. So it wasn't an if, it was a when. And I think we feel very confident with the vision we put out a couple of years ago. And I think this year shows us that we're kind of halfway there. Jared Haase: Got it. That's helpful. I appreciate that. And then maybe as a follow-up, I'll switch gears a little bit. But I'm curious, you obviously have the partnership with Epic, your electronic health record, and they've been in the news recently rolling out a number of new AI or automation-related features. I'm not sure if you're able to benefit from any of that at all. I know you probably had some specific modules and implementations related to PACE. But just curious, anything specific to Epic or, I guess, even more broadly, areas where you might see opportunities for automation and continue to take cost out of the cost structure. Patrick Blair: I'm going to flip that to Michael, but I'll say it's a great question. It's something we're spending a lot of time on, really trying to figure out how do we leverage the latest AI-driven tools just to make us a better company and help us with cost efficiencies and quality of care and outcomes, etc. I think, given the size of our company, we certainly don't have the capability or the ambitions of a much larger managed care organization as an example. So to that point, you're correct in that we're working very closely with a broad range of technology partners that we have within the company today. That, of course, includes Epic, and I'll let Michael say a little bit about some of the work there. But then whether it's a medical partner, or it's a claim system partner, or some of our clinical programs, each of those companies has a really robust AI agenda. And ours is really trying to figure out how do we leverage what our partners are developing and then connect that to how we operate as a PACE program. And I think we're off to a good start, but it's certainly early days. Michael, please say more. Michael Scarbrough: Yeah. Thanks, Patrick. And so I would just add, I think as we have continued to invest in our technology capabilities, we've really gone with a kind of a best-in-class strategy and doing so. Tools like Epic and others provide us a number of out-of-the-box capabilities and out-of-the-box solutions that we're finding a lot of applicability with within our business. Everything from how we provide clinical care, inform our clinicians, highlight for them information about our participants, which might not be otherwise easily discernible from all of the information in Epic, through our Oracle implementation and the ability to use tools like that. Just continue to look for opportunities with our business where we have processes that could be optimized and generate not just efficiency, but also greater accuracy of the work that we do. And so I think we're very much working as the whole industry is around just looking for opportunities where AI could be a lever to improve the output of our business. Patrick Blair: I'd probably highlight Salesforce as another partner who we're doing some really interesting work with. More focused on sort of efficiency and accuracy of business processes both in compliance as well as in sort of the enrollment processing space. So Salesforce has been a great partner as we sort of dip our toe in the AI space. Jared Haase: Got it. That's really great to hear. I appreciate all the color. Operator: Thank you. And as a reminder, our next question comes from the line of Jamie Perse from Goldman Sachs. Your question, please. Jamie Perse: Hey, thank you. Good afternoon. I wanted to start with one quick clarification which relates to my first question. I know you talked about the Medicaid redeterminations and that being a headwind to census and member progression through the year. You mentioned that being a headwind in the first part of the year. Is that a January type of headwind? Or are you referring more to the start of the fiscal year, so impacting the first quarter? Ben Adams: Well, I think if you think about redeterminations, they go on obviously throughout the course of the year. And I think what you've seen with us is we've changed a lot of our internal processes. Because as we've tried to partner with the states and make that whole eligibility enrollment redetermination process more efficient, we basically put in new processes that made it easier for us to identify people who are going to lose Medicaid coverage potentially. And if we think they're going to lose it and it's not recoverable, we can get them disenrolled more quickly, right? So as those new processes roll in and we begin to disenroll people who will never regain Medicaid eligibility more quickly, it'll put a little bit of a headwind on growth both in terms of census and in terms of member months. And you'll see that really happening in 2026. And then we think it will wash through the system by the time we hit January. And the other thing I would say is it's not really changing the rate of growth for us. Our trends around gross enrollment growth per month are really going to be the same. So it's not changing the slope of the line. It's really just shifting the line down slightly as we work through the implementation of this new eligibility process. Jamie Perse: Okay. That's helpful. And I think you partially answered my first question here, but just want to make sure I'm clear. Obviously, you had really strong census growth in fiscal '25. The guidance is kind of call it, low, maybe mid-single-digit growth this year on a net basis. I hear your comments on the redetermination piece. Are you assuming that the gross enrollment trajectory that you had in fiscal '25 continues? And maybe just any updates from a capacity standpoint, anything that might change that enrollment trajectory? Ben Adams: Yeah. You're right. The gross enrollment trends are going to remain the same, we think, this year. What you're seeing in terms of slightly lower census and member months growth is basically the work through the new eligibility process. And we kind of went through an intentional strategic decision this year where we said, look, there were people that we were probably carrying too long to try to reestablish Medicaid eligibility. As opposed to moving them off of our system into a more appropriate place for them once we knew that they weren't going to get their Medicaid eligibility renewed. By moving people out of the system more efficiently when we know they no longer qualify for PACE, it slows us down on the top line. But it actually gives us a big boost on the EBITDA line. Right? So you think of this as kind of a year where we're using the enrollment mechanism to strategically reposition the business. We're going to give up a little census growth, but not the growth in gross enrollment trends. But we're going to get a big pickup in EBITDA from it. Jamie Perse: Okay. Alright. That's really helpful. My second question, I know there were some earlier ones on just kind of connecting your guidance to the long-term targets you've laid out. Looking back at those targets, you're kind of a little bit ahead on external provider costs. There's maybe some room to continue seeing some progression on cost of care and then certainly on G&A. There's more room relative to the prior financial targets you laid out. Are those two buckets, just the cost of care and G&A operating leverage, the primary areas we should expect continued margin performance or improvement in fiscal 2026 specifically? Ben Adams: Yes, it's a good question. When you think about when I think about when you go back and you look at the presentation we gave back in February '23 about '24. Sorry. Had the year wrong. Anyhow, we gave that presentation about what the long-term margin potential is. You probably remember we went through sort of breaking out the different components. There was sort of the third-party provider care where we get some efficiencies. But then there was the cost of care, which was provided in our centers. And we get a lot of efficiency out of that number. Not only because we can, as Patrick spoke about before, we can control and coordinate that care more closely. But there's also an administrative component in there as well. Where we get some margin lift as the business scales. So we get some out of that line item. Then when you think about the G&A, obviously, we had some activities in the past related to compliance and other things. That we've been able to scale down going forward. So where we're investing in G&A really today is around improving operations. And if we start to look at that G&A line item as a percentage of revenue or even on a PMPM basis, we think you'll continue to see improvements in the next couple of years in that line item. So again, really focus more on the EBITDA percentage target than anything else. But those are probably the two line items where we'll get the biggest lift. Jamie Perse: Got it. Thank you. Operator: And this does conclude the question and answer session of today's program as well as today's program. Thank you, ladies and gentlemen, for your participation. You may now disconnect. Good day.
Operator: Greetings, and welcome to Limoneira's Third Quarter 2025 Financial Results Conference Call. [Operator Instructions] It is now my pleasure to introduce your host, Deirdre Thomson with ICR. Thank you. You may begin. Deirdre Thomson: Good afternoon, everyone, and thank you for joining us for Limoneira's Third Quarter Fiscal Year 2025 Conference Call. On the call today are Harold Edwards, President and Chief Executive Officer; and Mark Palamountain, Executive Vice President and Chief Financial Officer. By now, everyone should have access to the third quarter fiscal year 2025 earnings release, which went out today at approximately 4:05 p.m. Eastern Time. If you've not had the chance to review the release, it's available on the Investor Relations portion of the company's website at limoneira.com. This call is being webcast, and a replay will be available on Limoneira's website. Before we begin, we'd like to remind everyone that prepared remarks contain forward-looking statements, and management may make additional forward-looking statements in response to your questions. Such statements involve a number of known and unknown risks and uncertainties, many of which are outside the company's control and could cause its future results, performance or achievements to differ significantly from the results, performance or achievements expressed or implied by such forward-looking statements. Important factors that could cause or contribute to such differences include risk details in the company's Form 10-Qs and 10-Ks filed with the SEC and those mentioned in the earnings release. Except as required by law, we undertake no obligation to update any forward-looking or other statements herein, whether a result of new information, future events or otherwise. Please note that during today's call, we will be discussing non-GAAP financial measures including results on an adjusted basis. We believe these adjusted financial measures can facilitate a more complete analysis and greater understanding of Limoneira's ongoing results of operations, particularly when comparing underlying results from period to period. We have provided as much detail as possible on any items that are discussed on an adjusted basis. Also, within the company's earnings release and in today's prepared remarks, we include adjusted EBITDA and adjusted diluted EPS, which are non-GAAP financial measures. A reconciliation of adjusted EBITDA and adjusted diluted EPS to the most directly comparable GAAP financial measures are included in the company's press release, which has been posted to its website. And with that, it is my pleasure to turn the call over to the company's President and CEO, Mr. Harold Edwards. Harold Edwards: Thank you, Deirdre, and good afternoon, everyone. During the third quarter, we made significant strides in unlocking long-term value through our two-part value creation strategy: agriculture production optimization, and land and water value creation. As we enter the fourth quarter and turn our attention to fiscal year 2026, we're excited about the profitable growth opportunities ahead. In the third quarter, we continued to navigate challenging lemon market conditions with pricing pressures in the first 2 months, though we saw improvement in the final months as we captured higher prices for fruit held in storage. Our fresh utilization was lower due to the strategic timing, but we remain confident in achieving our volume goals for both lemons and avocados in fiscal year 2025. In addition, we expect pricing to improve in fiscal 2026 due to anticipated shortages in several international areas. Our strategic partnership with Sunkist for citrus sales and marketing remains on track to drive $5 million in annual cost savings and EBITDA enhancements starting in fiscal year 2026. This partnership will unlock access to new high-quality customers while creating the operational efficiencies we've discussed. We expect lemons to return to profitability with more normalized pricing and fresh utilization levels in fiscal year 2026. Our avocado business continues to expand, with pricing and volume on plan during the quarter. We anticipate a significant increase in avocado production as our newly planted acreage begins maturing in fiscal year 2027 and beyond. We have 700 acres of nonbearing avocados estimated to become full-bearing over the next 2 to 4 years, enabling strong organic growth. This will be a near 100% increase in avocado producing acreage. Our Real Estate Development continues to exceed expectations. Harvest at Limoneira is selling homes ahead of schedule, and we continue to expect future distributions from our real estate projects to total approximately $155 million over the next 5 fiscal years. Today, I'm also excited to announce our exploration of development options for our Limco Del Mar property. This 221-acre agricultural infill property bordered by developed areas in the city of Ventura presents an opportunity for residential development that directly addresses Ventura County's critical housing shortage. As a historically local company, Limoneira is dedicated to helping solve this housing crisis. We believe that a strong community needs homes for everyone, and we're ready to do our part. The Limco Del Mar Ranch is ideally suited for efficient, well-planned infill development that may stimulate economic growth, create jobs and contribute to vibrant livable communities. We're committed to conducting a comprehensive community-based planning process, including complete CEQA, which is the California Environmental Quality Act review, City of Ventura City Council Review, a SOAR, Save Open-space and Agricultural Resources vote and the LAFCO, Local Agency Formation Commission, review process for annexation to the City of Ventura. Our goal is to create a pathway to design, permit and develop new homes that will meet the needs of Ventura County's residents. We continue to advance our water monetization efforts. In January 2025, we sold water pumping rights in the Santa Paula Basin for $30,000 per acre foot across three transactions, generating $1.7 million in proceeds and recording $1.5 million of gains. In summary, we're executing a comprehensive strategy that positions us for long-term growth. Our citrus operational enhancements through the Sunkist partnership, expanding avocado production, accelerating real estate development, adding new housing development opportunities and ongoing water value creation, all contribute to building sustainable long-term shareholder value. And with that, I'll now turn the call over to Mark to discuss our third quarter results. Mark Palamountain: Thank you, Harold, and good afternoon, everyone. Before I begin, I would remind you it is best to view our business on an annual, not quarterly basis due to the seasonal nature of our business. Historically, our first and fourth quarters are the seasonally softer quarters, while our second and third quarters are stronger. For the third quarter of fiscal year 2025, total net revenue was $47.5 million compared to total net revenue of $63.3 million in the third quarter of the previous fiscal year. Agribusiness revenue was $45.9 million compared to $61.8 million in the third quarter last year. Other operations revenue was $1.5 million for the third quarter of fiscal year -- fiscal years 2025 and 2024. The decline in Agribusiness revenue stems primarily from continued pricing pressure in the lemon market during the first 2 months of the quarter, though we saw improvement in July. Additionally, our fresh utilization was lower as we held lemons longer in storage to capture higher prices during the final month of the quarter. Looking beyond this year, the citrus sales and marketing plan we announced with Sunkist is anticipated to enhance our resilience to market volatility by creating a more efficient cost structure, leading to an expected $5 million in EBITDA improvement during fiscal year 2026. Agribusiness revenue for the third quarter of fiscal year 2025 includes $23.8 million in fresh packed lemon sales compared to $25.8 million during the same period of fiscal year 2024. Approximately 1.4 million cartons of U.S. packed fresh lemons were sold during the third quarter of fiscal year 2025 at a $17.02 average price per carton compared to 1.4 million cartons sold at an $18.43 average price per carton during the third quarter of fiscal year 2024. Brokered lemons and other lemon sales were $3.8 million and $9.8 million in the third quarter of fiscal years 2025 and 2024, respectively. The company recognized $8.5 million of avocado revenue in the third quarter of fiscal year 2025 compared to $13.9 million of avocado revenue in the same period of fiscal year 2024. Approximately 5.7 million pounds of avocados were sold in aggregate during the third quarter of fiscal year 2025 at a $1.50 average price per pound compared to approximately 8.9 million pounds sold at a $1.57 average price per pound during the third quarter of fiscal year 2024. The California avocado crop typically experiences alternating years of high and low production due to plant physiology and was the primary reason for lower volume this year compared to last year. Both avocado pricing and volume were on plan, and we achieved our volume goals for fiscal year 2025. The company recognized $1.7 million of orange revenue in the third quarter of fiscal year 2025 compared to $1.2 million in the third quarter of fiscal year 2024. Approximately 94,000 cartons of oranges were sold during the third quarter of fiscal year 2025 at an $18 average price per carton compared to approximately 43,000 cartons sold at a $26.98 average price per carton during the third quarter of fiscal year 2024. Specialty citrus and wine grape revenue were $600,000 for the third quarter of fiscal years '25 and '24. Farm management revenues were $100,000 in the third quarter of fiscal year 2025 compared to $3.2 million in the same period of fiscal year 2024. The decline was due to the termination of our farm management agreement effective March 31, 2025. Total costs and expenses for the third quarter of fiscal year 2025 decreased to $48.1 million compared to $54.3 million in the third quarter of last year. Operating loss for the third quarter of fiscal year 2025 was $600,000 compared to operating income of $9 million in the third quarter of the previous fiscal year. Net loss applicable to common stock after preferred dividends for the third quarter of fiscal year 2025 was $1 million compared to net income applicable to common stock of $6.5 million in the third quarter of fiscal year 2024. Net loss per diluted share for the third quarter of fiscal year 2025 was $0.06 compared to net income per diluted share of $0.35 for the same period of fiscal year 2024. Adjusted net loss for diluted EPS for the third quarter of fiscal year 2025 was $400,000 or $0.02 per diluted share compared to adjusted net income per diluted EPS of $7.8 million or $0.42 per diluted share in the same period of fiscal year 2024. A reconciliation of net income or loss attributable to Limoneira Company to adjusted net income or loss for diluted EPS is provided at the end of our earnings release. Non-GAAP adjusted EBITDA for the third quarter of fiscal year 2025 was $3 million compared to $13.8 million in the same period of fiscal year 2024. A reconciliation of net income or loss attributable to Limoneira Company to adjusted EBITDA is also provided at the end of our earnings release. Turning now to our balance sheet and liquidity. Long-term debt as of July 31, 2025, was $63.3 million compared to $40 million at the end of fiscal year 2024. Debt levels as of July 31, 2025, less the $2.1 million of cash on hand resulted in a net debt position of $61.3 million at quarter end. In April of 2025, we received $10 million of our share of a $20 million cash distribution from our 50-50 real estate development joint venture with The Lewis Group of Companies. The distribution came from the joint venture's available cash and cash equivalents, which as of July 31, 2025, totaled $36.4 million. Now I'd like to turn the call back to Harold to discuss our fiscal year 2025 outlook and longer-term growth pipeline. Harold Edwards: Thanks, Mark. We continue to expect fresh lemon volumes to be in the range of 4.5 million to 5 million cartons for fiscal year 2025, and avocado volume is approximately 7 million pounds for fiscal year 2025. Fiscal year 2025 avocado volume is lower than fiscal year 2024, primarily due to the alternate bearing nature of avocado trees. Looking beyond fiscal year 2025, we have strong visibility on multiple value drivers. First, we believe we are in a good position to divest additional real estate assets in fiscal year 2026. Second, we expect to receive an additional $155 million from our real estate projects over the next 5 fiscal years. Third, we have 700 acres of nonbearing avocados estimated to become full-bearing over the next 2 to 4 years, which we expect will enable strong organic growth in avocado production. Additionally, we plan to continue expanding our plantings of avocados over the next 2 fiscal years. Fourth, we expect lemons to return to profitability with more normalized lemon prices and fresh utilization levels in fiscal year 2026 in which we continue to estimate 4 million to 4.5 million cartons. Our partnership with Sunkist fundamentally strengthens our citrus business model, unlocking availability to new high-quality customers and driving an anticipated $5 million in annual cost savings beginning in fiscal year 2026. This partnership positions us for sustainable EBITDA growth and creates a strong foundation for long-term value creation. And fifth, the exploration of our Limco Del Mar property represents another significant value creation opportunity, addressing critical community needs with anticipated substantial returns for shareholders. In summary, we're executing on a comprehensive strategy across agricultural production optimization and asset monetization that positions us for both near-term resilience and long-term growth. We believe we have the asset base, strategic partnerships and operational improvements in place to deliver sustainable value creation while maintaining flexibility to capitalize on additional opportunities as they arise. Operator, we will now open the call to questions. Operator: [Operator Instructions] Our first question comes from the line of Ben Klieve with Lake Street Capital Markets. Benjamin Klieve: First, a couple of questions on the Limco Del Mar opportunity here. It's great to hear that, that's progressing. One very specific question on, is there any kind of expectations of costs flowing through the income statement on this, say, through '26, maybe associated with regulatory costs or consulting costs, anything of that nature? And then second, on a higher level, what's your vision for how this will get developed over the long term in terms of what Limoneira's role will be? I mean, are you going to be looking for kind of a Lewis Group type 50-50 partner? Do you want to maybe offload more of the kind of developmental burden on a partner? Kind of how are you thinking about that on a -- from a big picture perspective? Mark Palamountain: Great question, Ben. Thank you. So multiple pieces to that. So we'll start with the cost and the income statement. So as you know, we recently tendered from our position, we had 28% as the general partner and achieved up to 55%. It's good to know we have a bunch of local still involved in this. And so we've got support from all around. From a cost perspective, it will be similar to how we developed Harvest and the entitlement period. We're trying to be conservative, thinking 3 years on a minimum, 5 years out and $3 million to $5 million depending on that time frame. But the majority of those costs will be capitalized and will not run through the income statement and then as we develop the project. Now Limoneira being the community player behind all this, and Lewis has been a great partner and we'd love to have them involved at that point. Right now, it's just Limoneira running with the ball, and we've put together a great team of legal experts and development experts and county experts to really figure out what the community benefit is going to be and how we make this a benefit for everybody so we can move it across the line. And so at the end of the day, I think the $3 million to $5 million is a good number to hold on to. And we're working really hard. We've already started and had some good progress and good support as well. Harold Edwards: So Ben, I would also just add that there'll be two value triggers that happen along this journey. The first real value-creating opportunity will become evident upon entitlement. And so as mentioned in the description earlier, we'll go through a comprehensive CEQA review, a comprehensive SOAR vote. And then assuming that we are successful in winning a SOAR vote, and that vote will be comprised of the City of Ventura citizens voting to support the project. Assuming a majority of the citizens vote yes, then we'll work with the Local Agency Formation Commission to annex the 220 acres into the City of Ventura. And at that point, it would become entitled. At that point, the value creation will be significant. But then the second chapter of that value creation will be in the actual development of the project. And as Mark pointed out, we've had a great relationship with the Lewis Group. The way that we've developed Harvest at Limoneira and Santa Paula has been extremely successful. But I would say when we get to the point of development, we'll assess what the best options are for the community of Ventura, but also for the Limoneira Company and decide at that point. Benjamin Klieve: Got it. That makes plenty of sense. Very good. We'll stay tuned for updates on that in quarters to come. I've got a question on the lemon side. Great to see fresh lemon prices rebound sequentially from a difficult second quarter. You guys talked about kind of a normalization of pricing going into next year as there's maybe some industry supply constraints that should be supportive. Given the reset that lemons -- the lemon market has had over the past few years, how do you kind of think about what normalized pricing is in this business today? And then kind of what are the different kind of sources of supply constraints that you see out there that are going to be helpful as you look into next year? Mark Palamountain: Yes. So Ben, we were pleasantly surprised into August into the lemon pricing. So as we mentioned, it lasted a little longer. Our average price in the quarter was -- in Q3 was just over $17. August, we saw prices in the low 20s, so almost a $4 to $5 jump. There was a bit of a shortage around on the East Coast. A lot of the imports that usually came to the U.S. went to Europe. And you mentioned some of those issues. And Turkey had a really challenging freeze, which it's always hard to get the best assessment, but could have gone all the way down to damaging trees, which would be 2 years of crop. And so -- and then also Spain had their own set of weather issues. So next year, we see Spain and Turkey being short, call it, 20% to 30%, which then, again, will allow some of our Southern Hemisphere friends to move fruit there. And all of our market is about balance, right? And so when us -- Limoneira coming back into the Sunkist, there's a lot more contracted business. And we've got those new customers in the quick-serve restaurant business, along with our existing customer base, we see a lot more potential for stability. And I think you'll see a price with a two in front of it. Right now, as I said, August was in the low 20s, call it, $23. And if you keep a higher price, and this has been historical since as long as I've been here, coming into the fall, you always have a dip into that winter. But if you have a higher entry point, obviously, you're going to have a lower low theoretically. And so that's sort of what is setting up. And we're at year 7 going into year 8 of a really challenging lemon environment. And usually, those cycles last that long. Will we have a mother nature event? We're not sure about that. But for the most part, that's what gives us confidence is the balance around the world, the lemons we've seen come out, including our own at a higher starting point going into next year. Benjamin Klieve: Got it. That would be great to see. Very good. One more for me, and I'll get back in queue. And it might be a little premature on the '26 outlook for avocados. But given the kind of biannual nature of the crop and the California harvest complete at this point, do you have any kind of rough ideas of what your expectations are for avocado volumes here looking into '26? Harold Edwards: So it's a little premature, but we're looking up into the trees right now. You're seeing a set. I would say that as this -- as we're counting pieces and assuming we hold on to the fruit, I would expect it to not be greater than this year. It looks like it's going to be similar to this year to less, but it's too early to really know that. So I wouldn't count on a big rebound in production. It's why we made our forward-looking comments that we believe our first big breakout year with volume improvement will be 2027. But more to come. Let's see what we come up with. And when we talk in the next call, we'll have a much better idea of what we're looking at for 2026 with avocados. Operator: [Operator Instructions] And we have reached the end of the question-and-answer session. I would like to turn the floor back over to CEO, Harold Edwards, for closing remarks. Harold Edwards: Thank you. I'd like to point out that as of this afternoon, we have updated our investor deck and it is now available on our website at limoneira.com. I'd like to thank you all for your questions and your interest in Limoneira. Have a great day. Operator: And ladies and gentlemen, this concludes today's conference, and you may disconnect your line at this time. We thank you for your participation. Have a great day.
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.
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: 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: 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: Greetings, and welcome to the Diversified Energy Company acquisition of Canvas Energy Webcast and Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to turn the call over to Douglas Kris, Senior Vice President, Investor Relations and Corporate Communications. Please go ahead, sir. Douglas Kris: Good morning, Kevin, and thank you, everyone, for joining us today for the special conference call to discuss Diversified's acquisition of Canvas Energy. Joining me today on the call are Diversified's Founder and CEO, Rusty Hutson; and President and CFO, Brad Gray. We have also posted a slide deck to accompany our remarks today, and we will reference the slide numbers during our discussion. We will open the line for questions after our prepared remarks. Following the conclusion of today's call, we are happy to follow up with any specific modeling questions. Before we get started, I will remind everyone that the remarks on this call reflect the financial and operational outlook as of today, September 9, 2025. These outlooks entail assumptions and expectations that involve risks and uncertainties. A discussion of these risks can be found in our regulatory filings. During this call, we also referenced certain non-GAAP and non-IFRS financial measures. All of our disclosures around those items and additional forward-looking disclosures are found in our materials released today on our website or in regulatory filings. I will now turn the call over to Rusty. Robert Hutson: Thank you, Doug, and thank you all for joining the call today. On our call today, we are providing further context about the acquisition of Canvas Energy and the assets we are acquiring, how their operations and assets fit within our broader financial and operational model and the significant sources of value we expect to deliver from this transaction. We are excited to announce the acquisition of Canvas Energy, a privately held company headquartered in Oklahoma City. We believe this acquisition will add accretive size and scale advantages and further align with our strategy of building a portfolio of high-quality cash-generating energy assets. We believe that our team of professionals are experts at optimizing the existing long life and undervalued U.S. assets, and there continues to be a great growth opportunity to consolidate these assets under the diversified vertically integrated infrastructure. Our focus remains firmly on executing on our unique growth strategy that creates value-based, resilient and consistent cash flow from our growing portfolio of cash generating energy assets. We intend to utilize our experienced employees' institutional knowledge and commercial relationships to extend our position as a dominant force in the Oklahoma market. In my view, what we are building at Diversified is a battleship, a corporate and financial structure that is strong, durable, agile, resilient and in the best position to serve its shareholders while protecting and delivering cash generation to provide a tangible return to our shareholders. And much like a battleship, our competitive edge, strength and power comes from the importance of every component and the coordination of every team and task no matter how large or small. The addition of Canvas enhances the size and scale of our company, furthering our progress in our strategy and providing investors with a unique opportunity for value accretion that further bolsters our promise to deliver reliable, long-term shareholder returns. Starting on Slide 3. This acquisition has the potential to create significant value over and above the purchase price through the combination of high-quality assets with our proven competitive operating model, which leverages operational focus and expertise, scale, vertical integration and technology. We are acquiring additional liquids-rich exposure to premium markets that will help drive top line revenue, adding Canvas' production, which is approximately 147 million cubic feet or approximately 24,000 barrels of oil equivalent per day, with a commodity split between 57% liquids and 43% natural gas, further expanding our exposure to both premium oil and LNG opportunities. The combined company will continue to maintain an enviable peer-leading low decline production profile with the added resource of total proved reserves on a PV-10 basis of approximately $1.4 billion. Canvas adds approximately 240,000 net acres with the assets creating significant operational overlap where we can apply our proven consolidation and operating model. Canvas also offers immediate financial accretion through its strong, stable financial profile, which is anticipated to generate approximately $155 million in the next 12 months EBITDA, or an increase of approximately 18% to our current base. Additionally, we are meaningfully growing our free cash flow by 29%. It's worth noting that these financial metrics do not include any synergies, margin enhancements and our time-tested smarter asset management optimization programs, which we believe provide meaningful uplift in value and bottom line cash flow. This bolt-on acquisition in Oklahoma offers a tremendous opportunity, adding contiguous acreage and the optionality for portfolio optimization either through partnership development or via divestiture. By remaining disciplined, we are growing our company by acquiring value-accretive reliable PDP assets and consistent cash flow at an approximate 3.5x next 12 months multiple. This transaction brings us solid assets at an accretive value. Turning to Slide 4. Let me now spend a few minutes talking about the specifics of this deal. We are acquiring Canvas Energy for approximately $550 million. The purchase price will be funded through the issuance of up to $400 million of asset-backed securitization funding originated by Carlyle and approximately 3.4 million shares of Diversified cash on hand and current liquidity. Following the closing of the transaction, Canvas unitholders will own approximately 4% of Diversified shares outstanding. Importantly, with a small dilution, we are delivering a leverage-neutral transaction that generates a significant 29% increase in free cash flow. It's worth noting that this acquisition marks a significant milestone as it is the initial transaction that utilizes the Carlyle Strategic Funding partnership. We have a historically established Carlyle relationship through their previous purchases of ABS notes, and they remain investors in 2 of our ABS notes. Since then, we have grown their confidence in our acquisition evaluation, management experience, operational capabilities and stewardship focus. We are excited to further leverage our strategic partnership to continue to fund high-quality PDP assets and to grow our combined portfolio. We expect the transaction to close during the fourth quarter of 2025 after we receive customary approval and regulatory clearance. Turning to Slide 5. This acquisition creates significant asset density in Oklahoma, and we are very excited about this aspect. The impact on our Sooner State operations will include a combined acreage footprint in Oklahoma of approximately 1.6 million acres, including the largest in the Western Anadarko Basin. Combined Oklahoma production at approximately 78,000 barrels of oil equivalent per day that consists of a high liquids cut, additional exposure to the emerging Cherokee play and other high-quality acreage creating organic growth opportunities for asset optimization or potential development partnerships. Turning to Slide 6. This slide further illustrates the combined position in Oklahoma and the Western Anadarko Basin. The map shown on this page creates a powerful picture of the significant acreage position resulting from this acquisition. We have a proven approach and ability to identify and achieve synergies in our acquisitions. Our stewardship operating model, supported by our smarter asset management practices is all about optimizing the assets we acquire through production optimization and expense efficiency. We use every lever at our disposal to free cash flow from our investments. With this acquisition, we will accelerate synergies as a result of increasing asset density and field operations, integrating processes and systems into our One DEC platforms and consolidating applicable corporate functions. In addition to the high-quality developed assets we are adding to our portfolio, there is also room for attractive asset optimization opportunities, which include a variety of options with our expanded acreage position. As we have demonstrated over the past few years, our talented land and legal teams have proven experience to help us optimize cash generation from our acreage positions. Turning to Slide 7, Diversified has again delivered meaningful growth in important operational and financial metrics that are improving its position among peers and allowing the company to benefit from further trading multiple expansion. The relative performance and significant increase in cash generation have now allowed us to compete with peers with market capitalization and production profiles that are larger. Specifically, with this acquisition, we have a step change in free cash flow generation increasing by almost 30%, notably without any increase in leverage. Importantly, Diversified provides investors, especially those focused in the small to mid-cap arena, the opportunity to own a company with a high free cash flow yield and long duration exposure to the improving natural gas macro environment. Turning to Slide 8. Diversified has developed a disciplined acquisition framework, which we utilize to analyze and evaluate all the deals we review. Because we operate with size and scale in multiple basins, we believe the company has the opportunity to participate in significantly more acquisition opportunities while also allowing us to profitably leverage our scale, vertical integration and technology. By using low cost of capital to finance attractive returns based on purchase price multiples and discounted cash flow percentages, we are able to successfully capture that spread to increase shareholder value. It's worth noting that there are immediate transaction benefits with the Canvas acquisition before giving any value to multiple avenues for upside, including strategically monetizing undeveloped acreage, implementing targeted synergies and potentially entering into joint development agreements to accelerate additional value creation. This acquisition is accretive on several metrics, and it will allow us to continue to deliver and unlock additional shareholder value while providing our investors with peer-leading shareholder returns anchored by a quarterly dividend that we intend to maintain at $0.29 per share. We will also provide the option to return additional capital to shareholders through continued deleveraging and share repurchases. Finally, moving to Slide 9. Our acquisition of Canvas continues to reinforce our leadership in the industry as the right company to manage resilient cash flow generating assets now and into the future. The strategic acquisition of Canvas Energy allows us to grow our Diversified low-risk business model while also being financially accretive on many key metrics and notably grows our EBITDA by 18% and free cash flow by 29%. We also gain best-in-class operational efficiencies with an expanded geographic footprint in one of our favorite operating areas, the Sooner State. With enhanced cash flow, achievable synergies and an increase in liquids weighting that strengthens our margins, we create a must-own energy asset manager with substantial equity upside through a multiple rerate. The bottom line is we have created a highly scalable and highly investable platform that generates significant free cash flow and is well positioned for future growth. Thank you for your continued interest in our company and in this transaction. We believe this acquisition is a win for our employees, our customers, our shareholders and our partners, notably our initial partnership funding with Carlyle. I'm excited to work with our teams to integrate the Canvas assets into our great company. With that, I'll now open the floor to questions. Operator, please open the line for questions. Operator: [Operator Instructions] Our first question is coming from Tim Rezvan from KeyBanc Capital Markets. Timothy Rezvan: Congrats on the deal. Rusty, I see the acquisition grows your production by 13%, but we also see that 16% 5-year PDP decline which I guess would imply years 1 and 2 maybe closer to 20%. So do you expect to need to sort of increase your D&C CapEx much to sort of offset that a little steeper decline? Or do you think your Mewbourne JV or something else in the mix can address that? Robert Hutson: Yes, I think that's exactly right, Tim. I mean we -- some of these wells were drilled -- that canvas had drilled in the last few years, obviously, have a little steeper decline rate on them. But with what we're doing at Mewbourne with our Mewbourne JV, and also with the upside that's potentially in this portfolio with some JV opportunities, we're more than able to moderate that and not really affect our overall decline rate as a company. Keep in mind, it's only 13% of our total production as it sits here today. So even with a little steeper decline on that with our other organic mechanisms within the portfolio, we'll be able to maintain and moderate that pretty well. Bradley Gray: And Tim, this is Brad. I'll just add the fact that in modeling this transaction for us and building it into our existing portfolio, we've not looked at intentionally increasing CapEx as a result of this deal. Timothy Rezvan: Okay. That's great context. And then as a follow-up, it's been now 2.5 months since you announced the JV with the Carlyle funds, and you have a deal with about 20% of that capital committed. Can you talk about maybe the quality and quantity of asset packages that you're evaluating and what a potential capital deployment time line could be like? Could this fully be deployed by the middle of 2026? Do you have any sort of line of sight on how to do that? Robert Hutson: Yes. I think it's -- we obviously evaluate a lot of things. And we don't do very many of them. I mean, I know that sounds funny because we do so many transactions, but we do pass on a lot of stuff. And we're looking for the right deals. We're looking for the ones that have the most synergies attached to them in good locations where we feel like we like the production. We like the production profiles, we like the assets. We like where they're located. And so we're not just grabbing everything that's out there in the market. So we're trying to be very focused on what we like and what we think is going to add to the long-term success of the company. And we want to buy it right. As it relates to the Carlyle partnership, yes, this was 20% in essence of the commitment. But I would say that commitment, as we continue to evaluate and look at things, I'm sure they'll be willing to invest right alongside of us as much as we can possibly look at and acquire. And so I can't tell you how quickly we're going to fill up that $2 billion original commitment. But I wouldn't be shocked if we did by the middle of 2026. And so we'll continue to focus and they're going to be focused with us alongside larger transactions. And so we're going to be very focused on getting the right things, and we're going to work with them. We have very common ways of evaluating assets and the value of the deals. And so it's a very efficient process with them, let's put it that way. Bradley Gray: And Tim, if you just look back over the last 18 months, with the inclusion of this acquisition, we're at close to $2.5 billion of acquisitions. So yes, I'm just supporting Rusty's comment there that at that pace, if that pace were to replicate, then we could achieve that pace. Timothy Rezvan: Okay. Okay. I appreciate that. If I could sneak one final one in. I know primary drilling is not your business. But looking at Canvas, most of their wells looks like about 60% are in the Meramec over the last few years. Can you talk about what undrilled horizon sort of you're most excited about on this acquired acreage? And I'll leave it there. Robert Hutson: Yes, I think it's -- some of the stuff that was -- had been recently drilled down in the SCOOP/STACK area. I think that some of those well results down there were pretty appealing. So we'll probably focus on those first in terms of trying to determine how we want to drive value from that, whether that be through a JV similar to what we've done with Mewbourne or whatever. So -- but that seemed to be the ones that we really thought had the greatest upside and the best returns through the experience that we saw from them. Operator: Next question is coming from Charles Meade from Johnson Rice. Charles Meade: Rusty and Brad, I want to pick up kind of right where you left off with Tim there. So -- and my question is around if you could kind of -- a little bit more characterization of these assets. I think you have in your press release that 23 of these wells are -- have been brought online in the last 12 months. And so it seems to me that's probably going to be, I don't know, half of the total production that you're getting with these assets. And if that's the case, it seems like there's actually both a lot of concentration to these relatively recent vintage wells, but also that there's a lot of acreage out there that probably doesn't have much production. So I wonder if you could just elaborate on that and kind of give us a sense of the concentration and where some of the undeveloped potential for divestiture farmout is? Robert Hutson: Yes. Well, the 23 wells that were drilled in the last 12 months, those do not represent 50% of the production. That's -- it's much less than that. I'd say it's probably 25% to 30% of the overall production in the -- you got about 500 wells in this package. Some of it's very -- is much more mature and much lower decline. So from that perspective, yes, these are newer wells. We do have good data on them now where they have been performing. So we have good ideas of kind of how those would play out if you continue to develop that acreage position where these wells are located. I think that, as I said with Tim, I think the SCOOP/STACK area where those 23 wells were kind of drilled over the last 12 to 18 months, that's really our high -- as we sit here today, that's our high-value area. And so we think that there's a great opportunity there to look at some organic type growth mechanism, whether it be through a JV, like I said, like we did with Mewbourne and Cherokee or someone else. We're not going to stand up a drilling expense -- in our existing assets or in our existing operations, we're not going to set up a drilling program ourselves, but we do like to do and like the way that these JVs work out for us. And so I would say that, that's probably our top priority in terms of that organic growth that you're mentioning is to look at that area down there. And we have several, what I would consider to be undrilled locations that could be JV-ed or -- look, and if somebody comes in and offers you enough money and it's going to be worth more than the JV itself, then you would all -- by all means, you take the cash and get the returns that way also. So it's one of many ways that we can benefit from undeveloped acreage that we didn't pay for. Charles Meade: Got it. That's helpful -- go ahead. Bradley Gray: Well, Charles, I was just going to add. This is a -- this transaction is right in one of our existing operators where we have an outstanding team. We're excited about our Canvas employees that will be joining us as well. So in addition to some of the optionality that we will acquire when we close this transaction, we also will have our Smarter Asset Management playbook and margin enhancement opportunities that we will start working on actually today. So it's not just about the wells that were drilled or the optionality we have with new development partnerships. It's about the existing PDP, adding to our portfolio of assets in an existing operating area and driving improved margins once we consolidate. Charles Meade: Got it. That is helpful. And then as a follow-up, since we're still in the early days of this Carlyle relationship you have, can you walk us through the mechanics of how this -- of how and when this ABS is going to be placed? And just a couple of things I'm thinking that may be relevant are, is it going to close before the acquisition? Or does it close right after the acquisition? And also, I know there's been some -- there was some talk before whether these -- whether -- the accounting treatment of these, whether they're going to be consolidated on your financial statements or whether it's going to come through in a different manner. So can you just talk about some of the mechanics of how this is going to work and eventually appear? Bradley Gray: Sure. I'll hit a couple of those points, Charles. Thanks for the question. So the transaction will close simultaneously with the closing of the acquisition. So that will -- it will be contingent upon the closing of the acquisition. So it will be simultaneous. We will go through a process -- well, let me talk about the off-balance sheet treatment that has been referred to in the past. This transaction, the debt will remain on our balance sheet. Carlyle is going to be providing financing at the debt level for this transaction. The SPV that will be established to support the ABS, the equity of that SPV will be 100% owned by Diversified. So this will be just -- this will look just like our other ABSs that we have on our balance sheet. We have talked to Carlyle about participating at the SPV equity level, and they are willing and would like to do that for the right transaction. This transaction primarily for tax-related challenges, just was not a good fit for that. So they're providing the debt only for this one. And then this will be really a straightforward process, very similar to our other ABSs. This will be a rated piece of paper. We'll go through that process with the rating agencies. The primary difference from our other ABSs is that we will not go through a syndication process with investors. Carlyle will be the primary and -- will be the investor in this ABS. Charles Meade: Got it. That is helpful detail. Operator: [Operator Instructions] Our next question is coming from Tim Hurst-Brown from Tennyson Securities. Tim Hurst-Brown: Congrats on the deal. A couple of questions from me. Just wondering whether you could give a sense of the scale of the synergies on this acquisition. So if we look at the Maverick deal, I mean, I think we're talking about $60 million of annualized synergies, which is around 15% of the acquired EBITDA. Would we be looking at something similar here or less? So that's the first question. Robert Hutson: Yes. Tim, I -- we don't really know exactly what the synergy dollars are yet. Obviously, once we get in there, operate the asset for a period of time, we'll be able to communicate that back to the market in more detail. Of course, the G&A structure will be the main focus. Obviously, we will -- for a transaction this size and for the number of wells and such, the G&A structure that we currently have, our existing platform will be more than sufficient to consolidate and integrate. So you can kind of get some sense around that. Field synergies, we just don't know until we get in there and operate the assets, but we do feel really, really good that there are going to be significant areas to recognize those synergies. Bradley Gray: Yes. And Tim, I would anticipate that upon closing of the transaction in the fourth quarter, we'll have some updated information related to that. Tim Hurst-Brown: Great. That would be useful. And just in terms of the corporate G&A at the Canvas level, are you able to let us know what that is or was last year? Bradley Gray: It's roughly $25 million to $30 million of G&A. Tim Hurst-Brown: That's useful. And then just a quick follow-on. The vendor shares, I think roughly $55 million worth is a relatively sort of small component of the overall consideration, just wondering what the rationale was to include that in the consideration and not entirely with existing cash and debt? Robert Hutson: Well, we just wanted to -- really, the main focus is to get some -- to make sure that we're keeping leverage neutral to going down, which is always very important to us. In this situation, with the Carlyle deal just being debt-only and not an equity position in our SPV, then we wanted to make sure that we kept that leverage at a level that's consistent with our stated desire to stay in that 2 to 2.5x. So mainly that, it's 4% of our total shares. And for us, any time we can utilize our -- 4% of our shares to pick up 29% of free cash flow accretion, we look at that as being pretty positive. Tim Hurst-Brown: Great. I appreciate it. Robert Hutson: Thanks, Tim. Operator: Next question is coming from Sam Wahab from Peel Hunt. Sam Wahab: Congrats on a very accretive deal here. Just a couple of follow-on questions from me. The first around the ABS. I mean this looks like one of your historic deals, given that they're not going to use the SPV structure on this occasion. And just on that basis, could you give a bit more info on the expected interest rate and maturity terms of this ABS? And then there's just one more after. Bradley Gray: Yes. So just one quick clarification, Sam, look we are going to have an SPV that the assets will be placed into. My comments earlier was that, that Carlyle will not be purchasing a portion of the equity of this SPV so that will be -- so that's the similarity with our other structures and ABS notes that we have. In regards to the interest rates, I think that we've seen a decline here in the treasuries, which is positive for us because the majority of the debt will be priced off of the 5-year treasury so that's been positive. And I think you'll see us have a similar type of spread on top of that with Carlyle. So I think our ABS X note that we printed earlier in the year, I would expect we would see similar type results to that, if not better. Sam Wahab: Okay, brilliant. And yes, just a small point on the lockup. It might be in the small print, but is there a timing on that lockup? Is it 6 months or so? That's on the business and the shares... Bradley Gray: The lockup is 6 months. Yes. Sam Wahab: Okay, brilliant. Bradley Gray: Post close. Robert Hutson: Post closing. Bradley Gray: Post close. Robert Hutson: Post closing, Sam. So if we close at the end of... Bradley Gray: End of fourth quarter. Robert Hutson: End of the fourth quarter, it would be 6 months from then. If we -- whatever month we close in, it will be 6 months from that point. Sam Wahab: Perfect, brilliant. Operator: We reached the end of our question-and-answer session. I'd like to turn the floor back over for any further or closing comments. Robert Hutson: Yes. Thank you all for joining today. We're really excited about the transaction and we look forward to sharing additional information with you as we -- once we close the transaction and start to recognize all the benefits that we discussed today. Thank you all very much. 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.
Operator: Greetings, and welcome to the Diversified Energy Company acquisition of Canvas Energy Webcast and Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to turn the call over to Douglas Kris, Senior Vice President, Investor Relations and Corporate Communications. Please go ahead, sir. Douglas Kris: Good morning, Kevin, and thank you, everyone, for joining us today for the special conference call to discuss Diversified's acquisition of Canvas Energy. Joining me today on the call are Diversified's Founder and CEO, Rusty Hutson; and President and CFO, Brad Gray. We have also posted a slide deck to accompany our remarks today, and we will reference the slide numbers during our discussion. We will open the line for questions after our prepared remarks. Following the conclusion of today's call, we are happy to follow up with any specific modeling questions. Before we get started, I will remind everyone that the remarks on this call reflect the financial and operational outlook as of today, September 9, 2025. These outlooks entail assumptions and expectations that involve risks and uncertainties. A discussion of these risks can be found in our regulatory filings. During this call, we also referenced certain non-GAAP and non-IFRS financial measures. All of our disclosures around those items and additional forward-looking disclosures are found in our materials released today on our website or in regulatory filings. I will now turn the call over to Rusty. Robert Hutson: Thank you, Doug, and thank you all for joining the call today. On our call today, we are providing further context about the acquisition of Canvas Energy and the assets we are acquiring, how their operations and assets fit within our broader financial and operational model and the significant sources of value we expect to deliver from this transaction. We are excited to announce the acquisition of Canvas Energy, a privately held company headquartered in Oklahoma City. We believe this acquisition will add accretive size and scale advantages and further align with our strategy of building a portfolio of high-quality cash-generating energy assets. We believe that our team of professionals are experts at optimizing the existing long life and undervalued U.S. assets, and there continues to be a great growth opportunity to consolidate these assets under the diversified vertically integrated infrastructure. Our focus remains firmly on executing on our unique growth strategy that creates value-based, resilient and consistent cash flow from our growing portfolio of cash generating energy assets. We intend to utilize our experienced employees' institutional knowledge and commercial relationships to extend our position as a dominant force in the Oklahoma market. In my view, what we are building at Diversified is a battleship, a corporate and financial structure that is strong, durable, agile, resilient and in the best position to serve its shareholders while protecting and delivering cash generation to provide a tangible return to our shareholders. And much like a battleship, our competitive edge, strength and power comes from the importance of every component and the coordination of every team and task no matter how large or small. The addition of Canvas enhances the size and scale of our company, furthering our progress in our strategy and providing investors with a unique opportunity for value accretion that further bolsters our promise to deliver reliable, long-term shareholder returns. Starting on Slide 3. This acquisition has the potential to create significant value over and above the purchase price through the combination of high-quality assets with our proven competitive operating model, which leverages operational focus and expertise, scale, vertical integration and technology. We are acquiring additional liquids-rich exposure to premium markets that will help drive top line revenue, adding Canvas' production, which is approximately 147 million cubic feet or approximately 24,000 barrels of oil equivalent per day, with a commodity split between 57% liquids and 43% natural gas, further expanding our exposure to both premium oil and LNG opportunities. The combined company will continue to maintain an enviable peer-leading low decline production profile with the added resource of total proved reserves on a PV-10 basis of approximately $1.4 billion. Canvas adds approximately 240,000 net acres with the assets creating significant operational overlap where we can apply our proven consolidation and operating model. Canvas also offers immediate financial accretion through its strong, stable financial profile, which is anticipated to generate approximately $155 million in the next 12 months EBITDA, or an increase of approximately 18% to our current base. Additionally, we are meaningfully growing our free cash flow by 29%. It's worth noting that these financial metrics do not include any synergies, margin enhancements and our time-tested smarter asset management optimization programs, which we believe provide meaningful uplift in value and bottom line cash flow. This bolt-on acquisition in Oklahoma offers a tremendous opportunity, adding contiguous acreage and the optionality for portfolio optimization either through partnership development or via divestiture. By remaining disciplined, we are growing our company by acquiring value-accretive reliable PDP assets and consistent cash flow at an approximate 3.5x next 12 months multiple. This transaction brings us solid assets at an accretive value. Turning to Slide 4. Let me now spend a few minutes talking about the specifics of this deal. We are acquiring Canvas Energy for approximately $550 million. The purchase price will be funded through the issuance of up to $400 million of asset-backed securitization funding originated by Carlyle and approximately 3.4 million shares of Diversified cash on hand and current liquidity. Following the closing of the transaction, Canvas unitholders will own approximately 4% of Diversified shares outstanding. Importantly, with a small dilution, we are delivering a leverage-neutral transaction that generates a significant 29% increase in free cash flow. It's worth noting that this acquisition marks a significant milestone as it is the initial transaction that utilizes the Carlyle Strategic Funding partnership. We have a historically established Carlyle relationship through their previous purchases of ABS notes, and they remain investors in 2 of our ABS notes. Since then, we have grown their confidence in our acquisition evaluation, management experience, operational capabilities and stewardship focus. We are excited to further leverage our strategic partnership to continue to fund high-quality PDP assets and to grow our combined portfolio. We expect the transaction to close during the fourth quarter of 2025 after we receive customary approval and regulatory clearance. Turning to Slide 5. This acquisition creates significant asset density in Oklahoma, and we are very excited about this aspect. The impact on our Sooner State operations will include a combined acreage footprint in Oklahoma of approximately 1.6 million acres, including the largest in the Western Anadarko Basin. Combined Oklahoma production at approximately 78,000 barrels of oil equivalent per day that consists of a high liquids cut, additional exposure to the emerging Cherokee play and other high-quality acreage creating organic growth opportunities for asset optimization or potential development partnerships. Turning to Slide 6. This slide further illustrates the combined position in Oklahoma and the Western Anadarko Basin. The map shown on this page creates a powerful picture of the significant acreage position resulting from this acquisition. We have a proven approach and ability to identify and achieve synergies in our acquisitions. Our stewardship operating model, supported by our smarter asset management practices is all about optimizing the assets we acquire through production optimization and expense efficiency. We use every lever at our disposal to free cash flow from our investments. With this acquisition, we will accelerate synergies as a result of increasing asset density and field operations, integrating processes and systems into our One DEC platforms and consolidating applicable corporate functions. In addition to the high-quality developed assets we are adding to our portfolio, there is also room for attractive asset optimization opportunities, which include a variety of options with our expanded acreage position. As we have demonstrated over the past few years, our talented land and legal teams have proven experience to help us optimize cash generation from our acreage positions. Turning to Slide 7, Diversified has again delivered meaningful growth in important operational and financial metrics that are improving its position among peers and allowing the company to benefit from further trading multiple expansion. The relative performance and significant increase in cash generation have now allowed us to compete with peers with market capitalization and production profiles that are larger. Specifically, with this acquisition, we have a step change in free cash flow generation increasing by almost 30%, notably without any increase in leverage. Importantly, Diversified provides investors, especially those focused in the small to mid-cap arena, the opportunity to own a company with a high free cash flow yield and long duration exposure to the improving natural gas macro environment. Turning to Slide 8. Diversified has developed a disciplined acquisition framework, which we utilize to analyze and evaluate all the deals we review. Because we operate with size and scale in multiple basins, we believe the company has the opportunity to participate in significantly more acquisition opportunities while also allowing us to profitably leverage our scale, vertical integration and technology. By using low cost of capital to finance attractive returns based on purchase price multiples and discounted cash flow percentages, we are able to successfully capture that spread to increase shareholder value. It's worth noting that there are immediate transaction benefits with the Canvas acquisition before giving any value to multiple avenues for upside, including strategically monetizing undeveloped acreage, implementing targeted synergies and potentially entering into joint development agreements to accelerate additional value creation. This acquisition is accretive on several metrics, and it will allow us to continue to deliver and unlock additional shareholder value while providing our investors with peer-leading shareholder returns anchored by a quarterly dividend that we intend to maintain at $0.29 per share. We will also provide the option to return additional capital to shareholders through continued deleveraging and share repurchases. Finally, moving to Slide 9. Our acquisition of Canvas continues to reinforce our leadership in the industry as the right company to manage resilient cash flow generating assets now and into the future. The strategic acquisition of Canvas Energy allows us to grow our Diversified low-risk business model while also being financially accretive on many key metrics and notably grows our EBITDA by 18% and free cash flow by 29%. We also gain best-in-class operational efficiencies with an expanded geographic footprint in one of our favorite operating areas, the Sooner State. With enhanced cash flow, achievable synergies and an increase in liquids weighting that strengthens our margins, we create a must-own energy asset manager with substantial equity upside through a multiple rerate. The bottom line is we have created a highly scalable and highly investable platform that generates significant free cash flow and is well positioned for future growth. Thank you for your continued interest in our company and in this transaction. We believe this acquisition is a win for our employees, our customers, our shareholders and our partners, notably our initial partnership funding with Carlyle. I'm excited to work with our teams to integrate the Canvas assets into our great company. With that, I'll now open the floor to questions. Operator, please open the line for questions. Operator: [Operator Instructions] Our first question is coming from Tim Rezvan from KeyBanc Capital Markets. Timothy Rezvan: Congrats on the deal. Rusty, I see the acquisition grows your production by 13%, but we also see that 16% 5-year PDP decline which I guess would imply years 1 and 2 maybe closer to 20%. So do you expect to need to sort of increase your D&C CapEx much to sort of offset that a little steeper decline? Or do you think your Mewbourne JV or something else in the mix can address that? Robert Hutson: Yes, I think that's exactly right, Tim. I mean we -- some of these wells were drilled -- that canvas had drilled in the last few years, obviously, have a little steeper decline rate on them. But with what we're doing at Mewbourne with our Mewbourne JV, and also with the upside that's potentially in this portfolio with some JV opportunities, we're more than able to moderate that and not really affect our overall decline rate as a company. Keep in mind, it's only 13% of our total production as it sits here today. So even with a little steeper decline on that with our other organic mechanisms within the portfolio, we'll be able to maintain and moderate that pretty well. Bradley Gray: And Tim, this is Brad. I'll just add the fact that in modeling this transaction for us and building it into our existing portfolio, we've not looked at intentionally increasing CapEx as a result of this deal. Timothy Rezvan: Okay. That's great context. And then as a follow-up, it's been now 2.5 months since you announced the JV with the Carlyle funds, and you have a deal with about 20% of that capital committed. Can you talk about maybe the quality and quantity of asset packages that you're evaluating and what a potential capital deployment time line could be like? Could this fully be deployed by the middle of 2026? Do you have any sort of line of sight on how to do that? Robert Hutson: Yes. I think it's -- we obviously evaluate a lot of things. And we don't do very many of them. I mean, I know that sounds funny because we do so many transactions, but we do pass on a lot of stuff. And we're looking for the right deals. We're looking for the ones that have the most synergies attached to them in good locations where we feel like we like the production. We like the production profiles, we like the assets. We like where they're located. And so we're not just grabbing everything that's out there in the market. So we're trying to be very focused on what we like and what we think is going to add to the long-term success of the company. And we want to buy it right. As it relates to the Carlyle partnership, yes, this was 20% in essence of the commitment. But I would say that commitment, as we continue to evaluate and look at things, I'm sure they'll be willing to invest right alongside of us as much as we can possibly look at and acquire. And so I can't tell you how quickly we're going to fill up that $2 billion original commitment. But I wouldn't be shocked if we did by the middle of 2026. And so we'll continue to focus and they're going to be focused with us alongside larger transactions. And so we're going to be very focused on getting the right things, and we're going to work with them. We have very common ways of evaluating assets and the value of the deals. And so it's a very efficient process with them, let's put it that way. Bradley Gray: And Tim, if you just look back over the last 18 months, with the inclusion of this acquisition, we're at close to $2.5 billion of acquisitions. So yes, I'm just supporting Rusty's comment there that at that pace, if that pace were to replicate, then we could achieve that pace. Timothy Rezvan: Okay. Okay. I appreciate that. If I could sneak one final one in. I know primary drilling is not your business. But looking at Canvas, most of their wells looks like about 60% are in the Meramec over the last few years. Can you talk about what undrilled horizon sort of you're most excited about on this acquired acreage? And I'll leave it there. Robert Hutson: Yes, I think it's -- some of the stuff that was -- had been recently drilled down in the SCOOP/STACK area. I think that some of those well results down there were pretty appealing. So we'll probably focus on those first in terms of trying to determine how we want to drive value from that, whether that be through a JV similar to what we've done with Mewbourne or whatever. So -- but that seemed to be the ones that we really thought had the greatest upside and the best returns through the experience that we saw from them. Operator: Next question is coming from Charles Meade from Johnson Rice. Charles Meade: Rusty and Brad, I want to pick up kind of right where you left off with Tim there. So -- and my question is around if you could kind of -- a little bit more characterization of these assets. I think you have in your press release that 23 of these wells are -- have been brought online in the last 12 months. And so it seems to me that's probably going to be, I don't know, half of the total production that you're getting with these assets. And if that's the case, it seems like there's actually both a lot of concentration to these relatively recent vintage wells, but also that there's a lot of acreage out there that probably doesn't have much production. So I wonder if you could just elaborate on that and kind of give us a sense of the concentration and where some of the undeveloped potential for divestiture farmout is? Robert Hutson: Yes. Well, the 23 wells that were drilled in the last 12 months, those do not represent 50% of the production. That's -- it's much less than that. I'd say it's probably 25% to 30% of the overall production in the -- you got about 500 wells in this package. Some of it's very -- is much more mature and much lower decline. So from that perspective, yes, these are newer wells. We do have good data on them now where they have been performing. So we have good ideas of kind of how those would play out if you continue to develop that acreage position where these wells are located. I think that, as I said with Tim, I think the SCOOP/STACK area where those 23 wells were kind of drilled over the last 12 to 18 months, that's really our high -- as we sit here today, that's our high-value area. And so we think that there's a great opportunity there to look at some organic type growth mechanism, whether it be through a JV, like I said, like we did with Mewbourne and Cherokee or someone else. We're not going to stand up a drilling expense -- in our existing assets or in our existing operations, we're not going to set up a drilling program ourselves, but we do like to do and like the way that these JVs work out for us. And so I would say that, that's probably our top priority in terms of that organic growth that you're mentioning is to look at that area down there. And we have several, what I would consider to be undrilled locations that could be JV-ed or -- look, and if somebody comes in and offers you enough money and it's going to be worth more than the JV itself, then you would all -- by all means, you take the cash and get the returns that way also. So it's one of many ways that we can benefit from undeveloped acreage that we didn't pay for. Charles Meade: Got it. That's helpful -- go ahead. Bradley Gray: Well, Charles, I was just going to add. This is a -- this transaction is right in one of our existing operators where we have an outstanding team. We're excited about our Canvas employees that will be joining us as well. So in addition to some of the optionality that we will acquire when we close this transaction, we also will have our Smarter Asset Management playbook and margin enhancement opportunities that we will start working on actually today. So it's not just about the wells that were drilled or the optionality we have with new development partnerships. It's about the existing PDP, adding to our portfolio of assets in an existing operating area and driving improved margins once we consolidate. Charles Meade: Got it. That is helpful. And then as a follow-up, since we're still in the early days of this Carlyle relationship you have, can you walk us through the mechanics of how this -- of how and when this ABS is going to be placed? And just a couple of things I'm thinking that may be relevant are, is it going to close before the acquisition? Or does it close right after the acquisition? And also, I know there's been some -- there was some talk before whether these -- whether -- the accounting treatment of these, whether they're going to be consolidated on your financial statements or whether it's going to come through in a different manner. So can you just talk about some of the mechanics of how this is going to work and eventually appear? Bradley Gray: Sure. I'll hit a couple of those points, Charles. Thanks for the question. So the transaction will close simultaneously with the closing of the acquisition. So that will -- it will be contingent upon the closing of the acquisition. So it will be simultaneous. We will go through a process -- well, let me talk about the off-balance sheet treatment that has been referred to in the past. This transaction, the debt will remain on our balance sheet. Carlyle is going to be providing financing at the debt level for this transaction. The SPV that will be established to support the ABS, the equity of that SPV will be 100% owned by Diversified. So this will be just -- this will look just like our other ABSs that we have on our balance sheet. We have talked to Carlyle about participating at the SPV equity level, and they are willing and would like to do that for the right transaction. This transaction primarily for tax-related challenges, just was not a good fit for that. So they're providing the debt only for this one. And then this will be really a straightforward process, very similar to our other ABSs. This will be a rated piece of paper. We'll go through that process with the rating agencies. The primary difference from our other ABSs is that we will not go through a syndication process with investors. Carlyle will be the primary and -- will be the investor in this ABS. Charles Meade: Got it. That is helpful detail. Operator: [Operator Instructions] Our next question is coming from Tim Hurst-Brown from Tennyson Securities. Tim Hurst-Brown: Congrats on the deal. A couple of questions from me. Just wondering whether you could give a sense of the scale of the synergies on this acquisition. So if we look at the Maverick deal, I mean, I think we're talking about $60 million of annualized synergies, which is around 15% of the acquired EBITDA. Would we be looking at something similar here or less? So that's the first question. Robert Hutson: Yes. Tim, I -- we don't really know exactly what the synergy dollars are yet. Obviously, once we get in there, operate the asset for a period of time, we'll be able to communicate that back to the market in more detail. Of course, the G&A structure will be the main focus. Obviously, we will -- for a transaction this size and for the number of wells and such, the G&A structure that we currently have, our existing platform will be more than sufficient to consolidate and integrate. So you can kind of get some sense around that. Field synergies, we just don't know until we get in there and operate the assets, but we do feel really, really good that there are going to be significant areas to recognize those synergies. Bradley Gray: Yes. And Tim, I would anticipate that upon closing of the transaction in the fourth quarter, we'll have some updated information related to that. Tim Hurst-Brown: Great. That would be useful. And just in terms of the corporate G&A at the Canvas level, are you able to let us know what that is or was last year? Bradley Gray: It's roughly $25 million to $30 million of G&A. Tim Hurst-Brown: That's useful. And then just a quick follow-on. The vendor shares, I think roughly $55 million worth is a relatively sort of small component of the overall consideration, just wondering what the rationale was to include that in the consideration and not entirely with existing cash and debt? Robert Hutson: Well, we just wanted to -- really, the main focus is to get some -- to make sure that we're keeping leverage neutral to going down, which is always very important to us. In this situation, with the Carlyle deal just being debt-only and not an equity position in our SPV, then we wanted to make sure that we kept that leverage at a level that's consistent with our stated desire to stay in that 2 to 2.5x. So mainly that, it's 4% of our total shares. And for us, any time we can utilize our -- 4% of our shares to pick up 29% of free cash flow accretion, we look at that as being pretty positive. Tim Hurst-Brown: Great. I appreciate it. Robert Hutson: Thanks, Tim. Operator: Next question is coming from Sam Wahab from Peel Hunt. Sam Wahab: Congrats on a very accretive deal here. Just a couple of follow-on questions from me. The first around the ABS. I mean this looks like one of your historic deals, given that they're not going to use the SPV structure on this occasion. And just on that basis, could you give a bit more info on the expected interest rate and maturity terms of this ABS? And then there's just one more after. Bradley Gray: Yes. So just one quick clarification, Sam, look we are going to have an SPV that the assets will be placed into. My comments earlier was that, that Carlyle will not be purchasing a portion of the equity of this SPV so that will be -- so that's the similarity with our other structures and ABS notes that we have. In regards to the interest rates, I think that we've seen a decline here in the treasuries, which is positive for us because the majority of the debt will be priced off of the 5-year treasury so that's been positive. And I think you'll see us have a similar type of spread on top of that with Carlyle. So I think our ABS X note that we printed earlier in the year, I would expect we would see similar type results to that, if not better. Sam Wahab: Okay, brilliant. And yes, just a small point on the lockup. It might be in the small print, but is there a timing on that lockup? Is it 6 months or so? That's on the business and the shares... Bradley Gray: The lockup is 6 months. Yes. Sam Wahab: Okay, brilliant. Bradley Gray: Post close. Robert Hutson: Post closing. Bradley Gray: Post close. Robert Hutson: Post closing, Sam. So if we close at the end of... Bradley Gray: End of fourth quarter. Robert Hutson: End of the fourth quarter, it would be 6 months from then. If we -- whatever month we close in, it will be 6 months from that point. Sam Wahab: Perfect, brilliant. Operator: We reached the end of our question-and-answer session. I'd like to turn the floor back over for any further or closing comments. Robert Hutson: Yes. Thank you all for joining today. We're really excited about the transaction and we look forward to sharing additional information with you as we -- once we close the transaction and start to recognize all the benefits that we discussed today. Thank you all very much. 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.
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 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: Thank you for standing by, and welcome to the InnovAge Fourth Quarter 2025 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 11 on your telephone. Star 11 again. And now, as a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Ryan Kubota, Director of Investor Relations. Please go ahead, sir. Ryan Kubota: Thank you, operator. Good afternoon, and thank you all for joining the InnovAge 2025 Fourth Quarter and Fiscal Year End Earnings Call. With me today is Patrick Blair, CEO, and Ben Adams, CFO. Michael Scarbrough, President and COO, will also be joining the Q&A portion of the call. Today, after the market closed, we issued an earnings press release containing detailed information on our 2025 fiscal fourth quarter and year-end results. You may access the release on the Investor Relations section of our company website, InnovAge.com. For those listening to the rebroadcast of this call, we remind you that the remarks made herein are as of today, Tuesday, September 9, 2025, and have not been updated subsequent to this call. During our call, we will refer to certain non-GAAP measures. A reconciliation of these measures to the most directly comparable GAAP measures can be found in our earnings press release posted on our website. We may also make statements that are considered forward-looking, including those related to our 2026 fiscal year projections and guidance, future growth prospects and growth strategy, our clinical and operational value initiatives, Medicare and Medicaid rate increases, the effects of recent legislation and federal budget cuts, enrollment processing delays, the status of current and future regulatory actions, and other expectations. Listeners are cautioned that all of our forward-looking statements involve certain assumptions that are inherently subject to risks and uncertainties that can cause our actual results to differ materially from our current expectations. We advise listeners to review the risk factors discussed in our annual report on Form 10-K for fiscal year 2025 and any subsequent reports filed with the SEC. After the completion of our prepared remarks, we will open the call for questions. I will now turn the call over to our CEO, Patrick Blair. Patrick Blair: Thank you, Ryan, and good afternoon, everyone. I'll begin with gratitude to our colleagues across InnovAge, to our participants and families, to our state and federal partners, and to our investors. Thank you for your continued support and trust. Fiscal 2025 was a year of delivery. We made clear commitments, and we followed through. In many cases, we exceeded both our internal goals and external expectations. And importantly, we finished the year with strong momentum heading into fiscal 2026. Today, I'll cover fourth quarter and full-year results, fiscal 2025 guidance for fiscal 2026, and progress we're making to position InnovAge for long-term success. Our fourth quarter capped a strong year of consistent execution. Revenue was $221.4 million, up 11% from Q4 last year. Center-level contribution margin was $41.3 million, representing an 18.6% contribution margin. Adjusted EBITDA more than doubled year over year to $11.3 million, representing a 5.1% margin. We ended the year with a census of approximately 7,740 participants. These results reflect disciplined cost management, strong medical utilization performance, and continued sense of growth. Now turning to the full year. Total revenue was $853.7 million, up nearly 12% year over year. Center-level contribution was $153.6 million, with contribution margin expanding to approximately 18%, up 70 basis points from FY '24. Adjusted EBITDA was $34.5 million, above the high end of our FY '25 guidance of $31 million. Adjusted EBITDA margin nearly doubled from 2.2% in FY '24 to approximately 4% in FY '25. These numbers matter not just in isolation but in the context of what we committed at our Investor Day in February 2024. We committed to expanding margins, and we delivered. Center-level contribution margin improved from 17.3% in FY '24 to 18% in FY '25, with further progress expected in FY '26. We committed to improving clinical outcomes, and we delivered. Key internal utilization measures such as inpatient admissions, ER visits, and short-stay nursing facility visits all improved through execution of our clinical value initiatives. We committed to driving revenue growth, and delivered. Revenue grew at greater than a 10% compound annual growth rate from FY '23 to FY '25. We committed to improving operating leverage, delivered. G&A as a percentage of revenue declined steadily from FY '23 to FY '25. We committed to return sustained positive adjusted EBITDA and delivered with year-over-year improvements and results above expectations. And, critically, we closed the year with no material compliance deficiencies. This combination of responsible growth, financial discipline, clinical performance, and compliance execution is what gives us confidence in the durability of our progress. We're operating in a complex environment. Recent legislation has created uncertainty for many value-based care models, particularly Medicare Advantage and Medicaid long-term care programs. State partners are facing fiscal pressures, which can translate into budgetary and operational strain. PACE is different. The strength of our model lies in the integration and coordination of care. Our interdisciplinary teams personalize care for every participant. Today, approximately 40% of our total cost of care is delivered directly in our centers by our employees under one roof. Through regular center attendance, we seek to maintain an active line of sight into each participant's health status, allowing us to intervene earlier and prevent avoidable hospitalizations and ER visits. For the remaining 60%, our providers individually order or prescribe virtually all other non-emergent care. This integrated, high-touch model gives us a real advantage in managing costs and utilization, and we believe this sets InnovAge apart in an inflationary medical cost trend environment. Looking ahead, we're advocating with the new administration and legislators to broaden the role PACE can play in addressing America's senior care challenges. While today PACE primarily serves a subset of dual-eligible seniors, we see meaningful opportunity to expand access to those who could benefit earlier in their care journey. We're advocating for new pathways, such as a Medicare-only option, that would give more seniors access to the coordination and support services that make PACE unique. With more than five decades of public investment in PACE centers across the country, we believe this is the right time to leverage that infrastructure more fully. Done right, this could both improve quality of life for seniors and generate savings by delaying Medicaid enrollment and prolonging nursing home placement. Importantly, it can also create a natural growth channel for the company as participants' needs increase and they transition into full PACE eligibility. Looking ahead, our guidance for FY '26 reflects both continued momentum and the realities of our environment. We project a census of 7,900 to 8,100, member months of 91,600 to 94,400, total revenue of $900 to $950 million, adjusted EBITDA of $56 to $65 million, and de novo losses of $13.4 to $15.4 million. We expect profitability to build through the year, exiting FY '26 with a higher run rate, and we remain on track to achieve adjusted EBITDA margins of 8% to 9% over the next few years. Ben will take you through the details of this shortly. On growth, census increased 10% year over year in FY '25. We strengthened the foundations of our enrollment strategies and processes while also testing and scaling new channels that are beginning to pay off. We're also building strong partnerships. Last year, we formed a joint venture with Orlando Health, and this past quarter, we announced a similar partnership with Tampa General Hospital. These partnerships extend our reach, strengthen our provider networks, and create new pathways to connect eligible seniors with PACE. We continue to work closely with our state partners on enrollment processing. While we have experienced delays in some states and are monitoring the impact of budget constraints and Medicaid eligibility determinations, these dynamics are incorporated into our FY '26 guidance. Demand for PACE remains robust, and we expect healthy top-line growth as we move through the year. Beyond the numbers, we're advancing our transformation agenda. We're investing in talent, technology, and tools to make InnovAge a more disciplined, efficient, and scalable organization. Approximately 40% of our total cost of care occurs within our four walls of our centers, where we are uniquely positioned as both a payer and a provider to capture efficiencies and improve outcomes. This transformation is not just about tightening operations; it's about reimagining the model for the future, positioning InnovAge as the partner of choice for states, payers, providers, and communities looking to create a more sustainable, continuous senior care. In closing, fiscal 2025 was a strong year. We delivered on our commitments, exceeded expectations, and ended the year with momentum. Fiscal 2026 will be another important step forward, one that we expect to further advance our financial performance, strengthen our model, and bring us closer to achieving our long-term ambitions. I want to thank all our colleagues who make this possible. Every day, they bring both a caregiver's heart and an owner's mindset to serving our participants. They are the reason we've been able to execute consistently, and they will be critical to our success in the years ahead. With that, I'll turn it over to Ben for more detail on the financials. Ben Adams: Thank you, Patrick. Today, I will provide some highlights from our fourth quarter and fiscal year-end 2025 financial performance, followed by our fiscal year 2026 guidance. I am pleased with our overall performance and strong finish to the year. As Patrick mentioned, we really started to feel the impact of our clinical value initiatives throughout this year, and we expect those to carry through into fiscal 2026. We are also pleased with the progress of our new operational improvement initiatives this year and expect them to continue building throughout the next fiscal year. Starting off our fiscal 2025 highlights with Census, we served approximately 7,740 participants across 20 centers as of June 30, 2025, which represents annual growth of 10.3% and sequential quarter growth of 2.8%. We reported 23,000 member months in the fourth quarter, an increase of approximately 10.5% compared to 2024 and an increase of approximately 2% over 2025. Total revenues increased by 11.8% to $853.7 million for fiscal year 2025. The increase was primarily driven by an increase in member months coupled with an increase in capitation rates. The increase in capitation rates includes rate increases for both Medicare and Medicaid, partially offset by revenue reserves and an out-of-cycle risk or true-up payment received in fiscal 2024. Compared to the third quarter, total revenues increased by 1.5% to $221.4 million in the fourth quarter, primarily due to a sequential increase in member months partially offset by a decrease in Medicare rates associated with decreasing risk scores as new participants are entering PACE with lower risk scores and disenrolling participants are leaving PACE with higher risk scores. We incurred $431.2 million of external provider costs during the fiscal year, a 7% increase compared to fiscal year 2024. The increase was primarily driven by an increase in member months, partially offset by a decrease in cost per participant. The decrease in cost per participant was primarily driven by a decrease in inpatient, assisted living, permanent nursing facility, and short-stay nursing facility utilization, a decrease in external hospice care associated with the transition of this function to internal clinical resources, and a decrease in pharmacy expenses due to the transition to in-house pharmacy services. The decrease in external provider cost per participant was partially offset by an increase in inpatient unit cost and an annual increase in assisted living and permanent nursing facility unit cost. During the fourth quarter, we incurred $108.2 million of external provider costs. And when compared to 2025, external provider costs were essentially flat. The stable costs were the result of higher costs associated with an increase in member months offset by a decrease in cost per participant. The decrease in external cost per participant was primarily driven by a decrease in inpatient and permanent nursing facility utilization and a decrease in pharmacy expense associated with the transition to in-house pharmacy services, partially offset by an increase in short-stay nursing facility and assisted living facility utilization. Cost of care, excluding depreciation and amortization, was $268.9 million, an increase of 17.5% compared to fiscal year 2024. The increase was due to an increase in member months coupled with an increase in cost per participant. The overall increase was driven by higher salaries, wages, and benefits associated with increased headcount and higher wage rates, an increase in software license fees, an increase in de novo occupancy and administrative expenses associated with opening centers in Florida and the acquisition of the Crenshaw Center, an increase in contract provider expenses in California associated with growth, consulting fees and shipping costs associated with in-house pharmacy services, and fleet costs inclusive of contract transportation. For the fourth quarter, cost of care, excluding depreciation and amortization, increased 3.5% compared to the third quarter. The increase was primarily due to an increase in consultant fees and shipping costs associated with increased volume of in-house pharmacy services. Center-level contribution margin, which we define as total revenues less external provider costs and cost of care, excluding depreciation and amortization, which includes all medical and pharmacy costs, was $153.6 million for fiscal year 2025 compared to $132.1 million, a 16.3% increase for fiscal year 2024. As a percentage of revenue, center-level contribution margin of 18% increased approximately 70 basis points compared to 17.3% in fiscal year 2024. For the fourth quarter, center-level contribution margin was $41.3 million compared to $40.7 million for 2025, an increase of 1.3%. As a percentage of revenue, center-level contribution margin of 18.6% decreased by approximately 10 basis points compared to 18.7% in 2025. Sales and marketing expenses of $28.2 million increased 13.1% compared to fiscal year 2024, primarily due to increased headcount and wage rates to support growth. For the fourth quarter, sales and marketing expenses increased by 2.6% compared to 2025, as a result of additional marketing support and project timing in the fourth quarter. Corporate, general, and administrative expenses increased 9.6% to $122.1 million compared to fiscal year 2024. The increase was primarily due to the $10.1 million accrual of the potential settlement of the securities class action lawsuit and an increase in employee compensation and benefits as a result of greater headcount and increased wage rates to support compliance and bolster organizational capabilities. These increases were partially offset by a reduction in consulting and insurance expenses. For the fourth quarter, corporate general and administrative expenses decreased 27.9% to $27.8 million compared to 2025. The decrease was primarily due to the potential settlement of the securities class action lawsuit referenced earlier that was recorded in the third quarter. Net loss was $35.3 million compared to a net loss of $23.2 million in fiscal year 2024. We reported a net loss per share of 22¢ compared to a net loss per share of 16¢, each on both a basic and diluted basis. Our weighted average share count was approximately 135.4 million shares for the fiscal year, on both a basic and fully diluted basis. For the fourth quarter, we reported a net loss of $5 million compared to a net loss of $11.1 million in the third quarter and a net loss per share of 1¢ each on both a basic and diluted basis. Adjusted EBITDA was $34.5 million for fiscal year 2025, compared to $16.5 million in fiscal year 2024 and $11.3 million for the quarter compared to $10.8 million in 2025. Our adjusted EBITDA margin was 4.0% for fiscal year 2025, and 5.1% for the fourth quarter. We do not add back losses incurred by our de novo centers in the calculation of adjusted EBITDA. We define de novo center losses as net losses related to preopening and startup ramp through the first 24 months of de novo operation. We incurred $15.4 million of de novo losses in fiscal year 2025. This compares to $12 million in fiscal year 2024. For the fourth quarter, de novo losses were $3.9 million, primarily related to our Tampa and Orlando centers in Florida. This compares to $3.5 million of de novo losses in 2025. Turning to our balance sheet. We ended the quarter with $64.1 million in cash and equivalents, plus $41.8 million in short-term investments. We had $72.8 million in total debt on the balance sheet, representing debt under our senior secured term loan and finance lease obligations. We also refinanced our term loan facility in the fourth quarter with a $50.7 million term loan, renewed our revolving credit facility commitments, and extended the maturity of both to August 8, 2028, from March 8, 2026. For the fourth quarter, we reported positive cash flow from operations of $9 million and had minimal cash capital expenditures of $200,000, primarily due to timing. We completed the share repurchase program that we launched back in June 2024, acquiring approximately 1,426,000 shares of common stock for an aggregate of $7.3 million during the entirety of the program. During the fourth quarter, we acquired approximately 101,800 shares of our common stock for an aggregate of approximately $300,000. Turning to fiscal 2026 guidance, which we included in today's press release, and based on information as of today, we expect our ending census for fiscal year 2026 to be between 7,900 and 8,100 participants. In member months, to be in the range of 91,600 to 94,400. We are projecting total revenue in the range of $900 million to $950 million and adjusted EBITDA in the range of $56 million to $65 million. And we anticipate that de novo losses for fiscal 2026 will be in the $13.4 to $15.4 million range. I will also provide some additional color on a few of the components that comprise our guidance assumptions. Our census and member months reflect the redesign of our eligibility enrollment system due to state Medicaid redetermination. We expect that this will result in more rapid disenrollments in the first half of the fiscal year for those participants who have lost Medicaid coverage and have not been able to regain eligibility. Regarding revenue, we are expecting a low single-digit Medicare rate increase and a mid-single-digit increase for Medicaid. As a reminder, our Medicare rates are based on county-specific rates that are adjusted by CMS in January, coupled with prospective risk score adjustments in January and July. Effective January 1, CMS will begin to transition PACE organizations onto the V28 Medicare Advantage payment model from our current V22 payment model. The process is scheduled to begin on January 1, 2026, and be phased in annually through 2029, starting with a 90/10 split of V22 and V28, respectively, and has been factored into our guidance. Regarding cost of care, external provider costs, and overall center-level contribution margins, we have continued to make measurable progress since we returned to issuing guidance in September 2023. In 2024, we introduced clinical value initiatives, followed by operational value initiatives in 2025. This upcoming fiscal year, while we continue our focus on quality, we are also pushing ourselves to stretch operationally by continuing to reimagine and further refine what we do and how we do it in order to continue growing our adjusted EBITDA margin. As an example, the ramp-up of our new internal pharmacy initiative is going well and is expected to give us more control over pharmaceutical fulfillment, allow us to improve medication adherence, enhance participant outcomes, and streamline logistics. We are also excited to see that the business is reducing costs and is expected to continue generating overall cost savings into the future. In closing, we are pleased with our 2025 results. We continue to push ourselves toward improving and optimizing the business as we strive to be the provider of choice for participants as well as our federal and state partners. We remain focused on quality, and we believe in the value that the PACE program can bring to eligible seniors with complex needs. We look forward to the trajectory of the business and toward the year ahead. Operator, that concludes our prepared remarks. Please open the call for questions. Operator: Certainly. And our first question for today comes from the line of Matthew Gillmor from KeyBanc. Your question, please. Matthew Gillmor: Hey, guys. Thanks for the question. I wanted to ask about member mix and how that's impacting margins and cost trends. If I recall, I think the acuity of the membership is in the process of normalizing with your census growth that had been resuming starting last fiscal year. How far along are you on that process? Is there still more room to go in terms of acuity normalizing? And is there any way to think about the impact that that's been having on margins or some of the utilization metrics you've been sharing? Patrick Blair: Hey, Matt. It's Patrick. Great question. I'd say largely, we've sort of seen the mix rebalancing that we would expect since the sanctions were lifted. We've grown well. We've kept a very balanced pool of enrollments as it relates to people living in the community, people living in assisted living facilities, and I think we've done a really nice job of ensuring that we're a solution to keep people in the community rather than to go into nursing homes. As a result, the mix of our population, the age, the acuity has, I think, progressed much as we anticipated. I'd say we're largely at a point where we feel like achieving our targets. All of our work going forward is about continuing to grow and maintaining an appropriate mix. It does negatively impact our risk score, so we have to be mindful of that shift, which can come with some revenue impacts. But generally, we've got the right mix of healthier folks, and with the right clinical model wrapped around them, they can be a contributing factor to the company's growth and margin expansion. Ben, anything to add? Ben Adams: No. I think you really covered it. If you think about the average tenure of a PACE participant, it's three and a half years or so. We've been going through a normal enrollment process for about two years now, so the mix is pretty much normalized if things have washed through the system. Matthew Gillmor: Okay. Great. That's helpful. And then as a follow-up, I wanted to ask about V28. I heard Ben's comments about the phase-in starting next year. Should we think about that as being a slight headwind to your revenue growth, or is that a slight tailwind? Just wanted to sort of understand how that might play out both in 2026 and then, of course, beyond that as well. Patrick Blair: Well, as I think Ben said in his remarks, we're just sort of entering into this phase where we're starting to see a phase-in of the V28 relative to the V22. It's going to take multiple years for that to play out. As you probably know, there are a lot of variables with the PACE population and how all this will work out. It is included in our guidance, and I just want to make sure that's clear. Ben Adams: No. I think you pretty much hit it. We expect it to be a headwind over the next couple of years. We only provide one year of guidance, so it's all factored in for this year. But obviously, it's something we're spending a lot of time thinking about for future years. Matthew Gillmor: Got it. I appreciate it. Thank you. Operator: Thank you. And our next question comes from the line of Jared Haase from William Blair. Your question, please. Jared Haase: Yeah. Hey, guys. Thanks for taking the questions. Maybe I'll ask on the outlook for EBITDA margins. Congrats on all the progress that you've made there. I know you kind of reinforced the expectation that you're on track for the 8% to 9% target over the next few years. I think the guidance implies about 250 basis points of margin expansion. I guess, number one, should we think of that as a reasonable cadence in terms of margin expansion continuing for the next few years on that pathway to the high single-digit target? And then I'd also be curious if you could just unpack, given all the initiatives and progress you've made, where you think the balance is in terms of the bigger opportunities for leverage between center-level margin and then operating leverage. Patrick Blair: I'll let Ben pick up, but I would just start with I do think a lot of our margin improvement over the last couple of years has been a combination of factors. Being able to reinstitute growth for the company and growing that in double digits. We've had a variety of transformation efforts that focus on a lot of clinical value initiatives. We've done our best to predict when that value will flow through. We've talked about the latency between execution of an initiative and when we start to see the impact flow through the P&L. We're doing our best to predict that, but it's kind of hard to hit on a quarter-by-quarter basis. But I'll say we're very pleased with the work by our clinical teams to address medical costs. I think that is a nice driver of this. As I said in my opening remarks, one of the things that I think we're really developing a strong appreciation for, especially since we've brought pharmacy in-house, is that over 40% of the total cost of care we're delivering with our team, our employees, in our centers. And then this notion that for the remaining 60%, we're ordering that care. We're ordering the specialist visits and specialist services, and that gives us a lot of control. So I do think medical costs are an area we've been very successful in. We've got a great team, and we continue to move there. And then the operating leverage, as we grow our centers, we're getting operating leverage at the center level. Pharmacy insourcing is an area where the real value to that is the medical-pharmacy integration. That's given us more control over the total cost of care when we have pharmacy integrated more closely with our medical. So overall, I think we're pretty pleased with margin growth. And I think it is fair to say that over the next couple of years, the growth we've seen in the last two probably translates over the next couple. Ben, what would you say? Ben Adams: Yeah. I mean, I think Patrick pretty much covered it. I would say that the guidance we put out about the long-term margin opportunity when we met with everybody back in two years ago in February, I think that sort of outlook we put out there probably holds true today. And I think probably today more than ever, we've always been convinced that we'd get to the right margin structure. It was always just a question of when we would get there. So it wasn't an if, it was a when. And I think we feel very confident with the vision we put out a couple of years ago. And I think this year shows us that we're kind of halfway there. Jared Haase: Got it. That's helpful. I appreciate that. And then maybe as a follow-up, I'll switch gears a little bit. But I'm curious, you obviously have the partnership with Epic, your electronic health record, and they've been in the news recently rolling out a number of new AI or automation-related features. I'm not sure if you're able to benefit from any of that at all. I know you probably had some specific modules and implementations related to PACE. But just curious, anything specific to Epic or, I guess, even more broadly, areas where you might see opportunities for automation and continue to take cost out of the cost structure. Patrick Blair: I'm going to flip that to Michael, but I'll say it's a great question. It's something we're spending a lot of time on, really trying to figure out how do we leverage the latest AI-driven tools just to make us a better company and help us with cost efficiencies and quality of care and outcomes, etc. I think, given the size of our company, we certainly don't have the capability or the ambitions of a much larger managed care organization as an example. So to that point, you're correct in that we're working very closely with a broad range of technology partners that we have within the company today. That, of course, includes Epic, and I'll let Michael say a little bit about some of the work there. But then whether it's a medical partner, or it's a claim system partner, or some of our clinical programs, each of those companies has a really robust AI agenda. And ours is really trying to figure out how do we leverage what our partners are developing and then connect that to how we operate as a PACE program. And I think we're off to a good start, but it's certainly early days. Michael, please say more. Michael Scarbrough: Yeah. Thanks, Patrick. And so I would just add, I think as we have continued to invest in our technology capabilities, we've really gone with a kind of a best-in-class strategy and doing so. Tools like Epic and others provide us a number of out-of-the-box capabilities and out-of-the-box solutions that we're finding a lot of applicability with within our business. Everything from how we provide clinical care, inform our clinicians, highlight for them information about our participants, which might not be otherwise easily discernible from all of the information in Epic, through our Oracle implementation and the ability to use tools like that. Just continue to look for opportunities with our business where we have processes that could be optimized and generate not just efficiency, but also greater accuracy of the work that we do. And so I think we're very much working as the whole industry is around just looking for opportunities where AI could be a lever to improve the output of our business. Patrick Blair: I'd probably highlight Salesforce as another partner who we're doing some really interesting work with. More focused on sort of efficiency and accuracy of business processes both in compliance as well as in sort of the enrollment processing space. So Salesforce has been a great partner as we sort of dip our toe in the AI space. Jared Haase: Got it. That's really great to hear. I appreciate all the color. Operator: Thank you. And as a reminder, our next question comes from the line of Jamie Perse from Goldman Sachs. Your question, please. Jamie Perse: Hey, thank you. Good afternoon. I wanted to start with one quick clarification which relates to my first question. I know you talked about the Medicaid redeterminations and that being a headwind to census and member progression through the year. You mentioned that being a headwind in the first part of the year. Is that a January type of headwind? Or are you referring more to the start of the fiscal year, so impacting the first quarter? Ben Adams: Well, I think if you think about redeterminations, they go on obviously throughout the course of the year. And I think what you've seen with us is we've changed a lot of our internal processes. Because as we've tried to partner with the states and make that whole eligibility enrollment redetermination process more efficient, we basically put in new processes that made it easier for us to identify people who are going to lose Medicaid coverage potentially. And if we think they're going to lose it and it's not recoverable, we can get them disenrolled more quickly, right? So as those new processes roll in and we begin to disenroll people who will never regain Medicaid eligibility more quickly, it'll put a little bit of a headwind on growth both in terms of census and in terms of member months. And you'll see that really happening in 2026. And then we think it will wash through the system by the time we hit January. And the other thing I would say is it's not really changing the rate of growth for us. Our trends around gross enrollment growth per month are really going to be the same. So it's not changing the slope of the line. It's really just shifting the line down slightly as we work through the implementation of this new eligibility process. Jamie Perse: Okay. That's helpful. And I think you partially answered my first question here, but just want to make sure I'm clear. Obviously, you had really strong census growth in fiscal '25. The guidance is kind of call it, low, maybe mid-single-digit growth this year on a net basis. I hear your comments on the redetermination piece. Are you assuming that the gross enrollment trajectory that you had in fiscal '25 continues? And maybe just any updates from a capacity standpoint, anything that might change that enrollment trajectory? Ben Adams: Yeah. You're right. The gross enrollment trends are going to remain the same, we think, this year. What you're seeing in terms of slightly lower census and member months growth is basically the work through the new eligibility process. And we kind of went through an intentional strategic decision this year where we said, look, there were people that we were probably carrying too long to try to reestablish Medicaid eligibility. As opposed to moving them off of our system into a more appropriate place for them once we knew that they weren't going to get their Medicaid eligibility renewed. By moving people out of the system more efficiently when we know they no longer qualify for PACE, it slows us down on the top line. But it actually gives us a big boost on the EBITDA line. Right? So you think of this as kind of a year where we're using the enrollment mechanism to strategically reposition the business. We're going to give up a little census growth, but not the growth in gross enrollment trends. But we're going to get a big pickup in EBITDA from it. Jamie Perse: Okay. Alright. That's really helpful. My second question, I know there were some earlier ones on just kind of connecting your guidance to the long-term targets you've laid out. Looking back at those targets, you're kind of a little bit ahead on external provider costs. There's maybe some room to continue seeing some progression on cost of care and then certainly on G&A. There's more room relative to the prior financial targets you laid out. Are those two buckets, just the cost of care and G&A operating leverage, the primary areas we should expect continued margin performance or improvement in fiscal 2026 specifically? Ben Adams: Yes, it's a good question. When you think about when I think about when you go back and you look at the presentation we gave back in February '23 about '24. Sorry. Had the year wrong. Anyhow, we gave that presentation about what the long-term margin potential is. You probably remember we went through sort of breaking out the different components. There was sort of the third-party provider care where we get some efficiencies. But then there was the cost of care, which was provided in our centers. And we get a lot of efficiency out of that number. Not only because we can, as Patrick spoke about before, we can control and coordinate that care more closely. But there's also an administrative component in there as well. Where we get some margin lift as the business scales. So we get some out of that line item. Then when you think about the G&A, obviously, we had some activities in the past related to compliance and other things. That we've been able to scale down going forward. So where we're investing in G&A really today is around improving operations. And if we start to look at that G&A line item as a percentage of revenue or even on a PMPM basis, we think you'll continue to see improvements in the next couple of years in that line item. So again, really focus more on the EBITDA percentage target than anything else. But those are probably the two line items where we'll get the biggest lift. Jamie Perse: Got it. Thank you. Operator: And this does conclude the question and answer session of today's program as well as today's program. Thank you, ladies and gentlemen, for your participation. You may now disconnect. Good day.