transcript

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Date

Friday, Oct. 17, 2025, at 8 a.m. ET

Call participants

• President & Chief Executive Officer — Mikael Bratt
• Chief Financial Officer — Fredrik Westin
• Vice President, Investor Relations — Anders Trapp

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Risks

• Regional Production Mix — Adjusted operating margin was negatively impacted by a 20 basis point dilution in Q3 2025, due to not-yet-recovered tariffs and the partial recovery of tariff compensations.
• Engineering Income Decline — “We expect higher depreciation costs due to new manufacturing capacity to meet demand in the key regions, and that the temporary decline in engineering income will persist, driven by the timing of specific customer development projects,” said CEO Mikael Bratt.
• European OEM Production Stoppages — “We continue to see downside risks for Europe’s light vehicle production, driven by announced production stoppage at several key customers,” explained Bratt.

Takeaways

• Net Sales — $2.7 billion, up 6% year-over-year, with organic sales growth of 4% excluding currency effects and including tariff compensation.
• Adjusted Operating Income — $271 million, up 14% year-over-year, with a 10.0% adjusted operating margin, 70 basis points above last year.
• Gross Margin — 19.3%, an increase of 130 basis points year-over-year, primarily driven by improved direct labor efficiency, headcount reductions, and supplier compensation.
• Operating Cash Flow — $258 million in operating cash flow, representing a 46% increase, supported by higher net income and a net $53 million negative impact from working capital.
• Free Operating Cash Flow — $153 million in Q3 2025 compared to $32 million in Q3 2024, due to higher operating cash flow and a $40 million reduction in net capital expenditures.
• Adjusted EPS — Diluted adjusted earnings per share increased 26% or $0.48, mainly from $0.29 higher operating income, $0.09 taxes, and $0.08 lower share count.
• Shareholder Returns — Dividend raised to $0.85 per share; $100 million in share repurchases completed, with 0.8 million shares retired.
• China Performance — Sales to Chinese domestic OEMs grew by nearly 23%, outpacing their light vehicle production growth by 8%.
• India Performance — India contributed one-third of global organic growth, now representing 5% of total sales, with content per vehicle rising from $120 in 2024 to $140 in 2025.
• Tariff Compensation — 75% of tariff costs recovered; remainder expected to be compensated by year-end.
• Capital Expenditures — CapEx net was 3.9% of sales, down from 5.7% in Q3 2024, with company guidance now at 4.5% for the full year 2025.
• Leverage Ratio — Net leverage at 1.3 times, maintained below the 1.5 times target.
• Strategic Initiatives — New second R&D center in China, partnership with CATARC, and a joint venture with HSAE to produce advanced safety electronics announced.
• Outlook and Guidance — Organic sales projected to increase by ~3% and adjusted operating margin expected at 10%-10.5% for full-year 2025; operating cash flow guidance of ~$1.2 billion; tax rate forecasted at ~28%.

Summary

Autoliv (ALV -2.72%) delivered record net sales and adjusted operating income in Q3 2025, reflecting successful execution of efficiency initiatives. Management confirmed transactions to deepen presence in China and cited the joint venture with HSAE as an entry into advanced automotive safety electronics. Working capital increased by $197 million in Q3 2025 compared to Q3 2024, mainly due to higher accounts receivable from strong sales and delayed tariff reimbursements, which management described as temporary effects. The company achieved a 94% coil-off accuracy rate in Q3 2025, highlighting this improvement as a significant contributor to its operational targets. Light vehicle production outperformed the market, driven by strong organic momentum in India and among Chinese OEMs, although negative regional and customer mixes offset some gains in Q3 2025.

• Chief Financial Officer Fredrik Westin said, “The $50 million there is a one-time, and it is compensation from a supplier for historical costs that we had versus our customers there. It is one time in the quarter here, for previous costs that we have had.”
• Management noted, “we expect to be in the middle of the range” for full-year 2025 adjusted operating margin guidance, after citing headwinds from lower out-of-period inflation compensation, higher depreciation, and temporary engineering income declines heading into the fourth quarter.
• CEO Mikael Bratt stated, “Expanding in China is key to strengthening Autoliv’s innovation, global competitiveness, and long-term growth,” underlining China as a principal driver of strategy and resource allocation.
• The shift toward normalized capital expenditures follows the completion of large-scale, multi-region footprint investments over recent years, enabling lower capital intensity moving forward.

Industry glossary

• Coil-off Accuracy: Percentage metric tracking adherence of parts inventory depletion to schedule, reflecting production planning effectiveness and supply chain reliability.
• OEM: Original Equipment Manufacturer; refers here to carmakers that buy Autoliv’s safety products for installation in new vehicles.
• ECU: Electronic Control Unit, a core component in automotive electronics, governing safety features like active seatbelts and detection systems.
• RD&E: Research, Development & Engineering expenses, comprising spending on new products, process improvement, and engineering-driven customer projects.
• CapEx: Capital expenditures, defined as spending on property, plant, and equipment.

Full Conference Call Transcript

Operator: Good day, and thank you for standing by. Welcome to the Autoliv, Inc. third quarter 2025 financial results conference call and webcast. (Operator Instructions) Please note that today’s conference is being recorded. I would now like to turn the conference over to your first speaker, Anders Trapp, Vice President of Investor Relations.

Please go ahead.

Anders Trapp: Thank you, Lars. Welcome, everyone, to our third quarter 2025 earnings call. On this call, we have our President and Chief Executive Officer, Mikael Bratt; our Chief Financial Officer, Fredrik Westin; and me Anders Trapp, VP, Investor Relations. During today’s earnings call, we will highlight several key areas, including our record-breaking third quarter sales and earnings, as well as our continued strategic investments to drive long-term success with Chinese OEMs. We also provide an update on market developments and the evolving tariff landscape impacting the automotive industry.

Finally, our robust balance sheet and strong asset returns reinforce our financial resilience and support sustained high levels of shareholder returns. Following the presentation, we will be available to answer your questions. And as usual, the slides are available at autoliv.com.

Turning to the next slide, we have the Safe Harbor Statement, which is an integrated part of this presentation and includes the Q&A that follows. During the presentation, we will reference some non-U.S. GAAP measures. The reconciliations of historical U.S. GAAP and non-U.S. GAAP measures are disclosed in our quarterly earnings release available on autoliv.com and in the 10-Q that will be filed with the SEC or at the end of this presentation. Lastly, I should mention that this call is intended to conclude with a reach CET, so please wait for your questions in person. I now hand it over to our CEO, Mikael Bratt.

Mikael Bratt: Thank you, Anders. Looking on the next slide, I am pleased to share yet another record-breaking quarter, underscoring our strong market position. This success is a testament to the strength of our customer relationships and our commitment to continuous improvement as we navigate the complexities of tariffs and other challenging economic factors. We saw a significant sales growth driven by higher-than-expected light vehicle production across multiple regions, especially in China and North America. Our high growth in India continues, accounting for one-third of our global organic growth. I am pleased to highlight that our sales growth with Chinese OEMs has returned to outperformance, driven by recent product launches and encouraging development.

Looking ahead, we anticipate to significantly outperform light vehicle production in China during the fourth quarter. We improved our operating profit and operating margin compared to a year ago. This strong performance was primarily driven by well-executed activities to improve efficiency, higher sales, and a supplier compensation for an earlier recall. We successfully recovered approximately 75% of the tariff costs incurred during the third quarter and expect to recover most of the remaining portions of existing tariffs later this year. The combination of not-yet-recovered tariffs and the dilutive effects of the recovered portion resulted in a negative impact of approximately 20 basis points on our operating margin in the quarter.

We also achieved record earnings per share for the third quarter. Over the past five years, we have more than tripled our earnings per share, mainly driven by strong net profit growth but also supported by a reduced share count. Our cash flow remained robust despite higher receivables driven by higher sales and tariff compensations later in the quarter. Our solid performance, combined with a healthy debt level ratio, supports continuous strong shareholder returns. We remain committed to our ambition of achieving $300 to $500 million annual in stock repurchases, as outlined during our Capital Markets Day in June.

Additionally, we have increased our quarter dividend to $0.85 per share, reflecting our confidence in our continued financial strength and long-term value creation. Expanding in China is key to strengthening Autoliv’s innovation, global competitiveness, and long-term growth. To support our growing partnerships with Chinese OEMs, we are investing in a second R&D center in China. In October, we announced a new important collaboration in China, as illustrated on the next slide. We have signed a strategic agreement with CATARC, the leading research institution setting standards in the Chinese automotive sector. This partnership marks a new chapter in our commitment to shaping the future of automotive safety.

Together with CATARC, we aim to define the next generation of safety standards and enhance the safety on the roads in China and globally. We are also broadening our reach in automotive safety electronics, as shown on the next slide. We recently announced our plans to form a joint venture with HSAE, a leading Chinese automotive electronics developer, to develop and manufacture advanced safety electronics. The joint venture will concentrate on high-growth areas in advanced safety electronics, including ECUs for active seatbelts, hands-on detection systems for steering wheels, and the development and production of steering wheel switches.

Through this new joint venture, we intend to capture more value from steering wheels and active seatbelts while minimizing CapEx and competence expansions, enabling faster market entry with lower technology and execution risks. Looking now on financials in more detail on the next slide. Third quarter sales increased by 6% year-over-year, driven by strong outperformance relative to light vehicle production in Asia and South America, along with favorable currency effects and tariff-related compensations. This growth was partly offset by an unfavorable regional and customer mix. The adjusted operating income for Q3 increased by 14% to $271 million, from $237 million last year. The adjusted operating margin was 10%, 70 basis points better than in the same quarter last year.

Operating cash flow was a solid $258 million, an increase of $81 million, or 46% compared to last year. Looking now on the next slide, we continue to deliver broad-based improvements, with particularly strong progress in direct costs and SG&A expenses. Our positive direct labor productivity trend continues as we reduced our direct production personnel by 1,900 year-over-year. This is supported by the implementation of our strategic initiatives, including automation and digitalization. Our gross margin was 19.3%, an increase of 130 basis points year-over-year. The improvement was mainly the result of direct labor efficiency, headcount reductions, and compensation from a supplier.

Our G&E net costs rose both sequentially and year-over-year, primarily due to lower engineering income due to timing of specific customer development projects. Thanks to our cost-saving initiatives, SG&A expenses decreased from the first half-year level. Combined with the increased gross margin, this led to 70 basis points improvement in adjusted operating margin. Looking now on the market developments in the third quarter on the next slide. According to S&P Global data from October, global light vehicle production for the third quarter increased 4.6%, exceeding the expectations from the beginning of the quarter by 4 percentage points. Supported by the scrapping and replacement subsidy policy, we continue to see strong growth for domestic OEMs in China.

Light vehicle demand and production in North America have proven significantly more resilient than previously anticipated. In contrast, light vehicle production in other high-content-per-vehicle markets, namely Western Europe and Japan, declined by approximately 2% to 3%, respectively. The global regional light vehicle production mix was approximately 1 percentage point unfavorable during the quarter, despite the important North American market showing a positive trend. In the quarter, we did see coil-off volatility continue to improve year-over-year and sequentially from the first half-year. The industry may experience increased volatility in the fourth quarter, stemming from a recent fire incident at an aluminum production plant in North America and production adjustments by a key European customer in response to shifting demand.

We will talk about the market development more in detail later in the presentation. Looking now on sales growth in more detail on the next slide. Our consolidated net sales were over $2.7 billion, the highest for the third quarter so far. This was around $150 million higher than last year, driven by price volume, positive currency translation effects, and $14 million from tariff-related compensations. Excluding currencies, our organic sales growth by 4%, including tariff costs and compensations. China accounted for 90% of our group sales. Asia, excluding China, accounted for 20%. Americas for 33%, and Europe for around 28%. We outline our organic sales growth compared to light vehicle production on the next slide.

Our quarterly sales were robust and exceeded our expectations, driven by strong performance across most regions, particularly in the Americas, West Asia, and China. Based on light vehicle production data from October, we underperformed light vehicle production by 0.7% globally, as a result of a negative regional mix of 1.3%. We underperformed slightly in Europe, primarily due to an unfavorable model and customer mix. In the rest of Asia, we outperformed the market with 8%, driven primarily by strong sales growth in India and, to a lesser extent, in South Korea.

While the organic light vehicle production mix shifts continued to impact our overall performance in China, our sales to domestic OEMs grew by almost 23%, 8% more than their light vehicle production growth. Our sales development with the global customers in China was 5% lower than their light vehicle production development, as our sales declined to some key customers, such as Volkswagen, Toyota, and Mercedes. On the next slide, we show some key model launches. The third quarter of 2025 went through a high number of new launches, primarily in Asia, including China. Although some of these new launches in China remained undisclosed here due to confidentiality, the new launches reflect a strong momentum for Autoliv in these important markets.

The models displayed here feature Autoliv content per vehicle from $150 to close to $400. We’re also pleased to have launched airbags and seatbelts on another small Japanese vehicle, A-Cars. This is a meaningful forward step because Autoliv has historically had limited exposure to this segment in Japan. In terms of Autoliv’s sales potential, the Onvo L90 is the most significant. Higher content per vehicle is driven by front center airbags on five of these vehicles. Now looking at the next slide, I will now hand it over to Fredrik Westin.

Fredrik Westin: Thank you, Mikael. I will talk about the financials more in detail now on the slides, so turn to the next slide. This slide highlights our key figures for the third quarter of 2025 compared to the third quarter of 2024. The net sales were approximately $2.7 billion, representing a 6% increase. The gross profit increased by $63 million, and the gross margin increased by 130 basis points. The drivers behind the gross profit improvement were mainly lower material costs, positive effects from the higher sales, and improved operational efficiency. This was partly offset by negative effects from recalls and warranty, depreciation, and unrecovered tariff costs.

The adjusted operating income increased from $237 million to $271 million, and the adjusted operating margin increased by 70 basis points to 10.0%. The reported operating income of $267 million was $4 million lower than the adjusted operating income.

Adjusted earnings per share diluted increased 26% or by $0.48, where the main drivers were $0.29 from higher operating income, $0.09 from taxes, and $0.08 from a lower number of shares. This marks our ninth consecutive quarter of growth in adjusted earnings per share, underscoring the strength of our ongoing operational improvements and further bolstered by a reduced share count from our share buyback program. Our adjusted return on capital employed was a solid 25.5%, and our adjusted return on equity was 28.3%. We paid a dividend of $0.85 per share in the quarter, and we repurchased shares for $100 million and retired 0.8 million shares. Looking now on the adjusted operating income bridge on the next slide.

In the third quarter of 2025, our adjusted operating income increased by $34 million.

Operations contributed with $43 million, mainly from high organic sales and from the execution of operational improvement plans supported by better coil-off volatility. The out-of-period cost compensation was $8 million lower than last year. Costs for RD&E net and SG&A increased by $30 million, mainly due to lower engineering income. The net currency effect was $6 million positive, mainly from translation effects. Last year’s supplier settlement and this year’s supplier compensation combined had a $29 million positive impact. The combination of unrecovered tariffs and the dilutive effect of the recovered portion resulted in a negative impact of approximately 20 basis points on our operating margin in the quarter. Looking now at the cash flow on the next slide.

The operating cash flow for the third quarter of 2025 totaled $258 million, an increase of $81 million compared to the same period last year, mainly as a result of higher net income, partly offset by $53 million negative working capital effects. The negative working capital was primarily driven by higher receivables, reflecting strong sales and delayed tariff compensations toward the end of the quarter. Capital expenditures net decreased by $40 million. Capital expenditures net in relation to sales was 3.9% versus 5.7% a year earlier. The lower level of capital expenditures net is mainly related to lower footprint CapEx in Europe and Americas and less capacity expansion in Asia.

The free operating cash flow was $153 million compared to $32 million in the same period the prior year from higher operating cash flow and the lower CapEx net.

The cash conversion in the quarter, defined as free operating cash flow in relation to the net income, was around 87%, in line with our target of at least 80%. Now looking at our trade working capital development on the next slide. The trade working capital increased by $197 million compared to the prior year, where the main drivers were $165 million in higher accounts receivables, $8 million in higher accounts payables, and $40 million in higher inventories. The increase in trade working capital is mainly due to increased sales and temporarily higher inventories. In relation to sales, the trade working capital increased from 12.8% to 13.9%.

We view the increase in trade working capital as temporary, as our multi-year improvement program continues to deliver results. Additionally, enhanced customer coil-off accuracy should enable a more efficient inventory management. Now looking at our debt leverage ratio development on the next slide.

Autoliv’s balanced leverage strategy reflects our prudent financial management, enabling resilience, innovation, and sustained stakeholder value over time. The leverage ratio remains low at 1.3 times, below our target limit of 1.5 times, and has remained stable compared to both the end of the second quarter and the same period last year. This comes despite returning $530 million to shareholders over the past 12 months. Our net debt increased by $20 million, and the 12 months trailing adjusted EBITDA was $41 million higher in the quarter. With that, I hand it back to you, Mikael.

Mikael Bratt: Thank you, Fredrik. On to the next slide. The outlook for the global auto industry has improved, particularly for North America and China.

While the industry continues to navigate the trade volatility and other regional dynamics, S&P now forecasts global light vehicle production to grow by 2% in 2025, following growth of over 4% in the first nine months of the year. Their outlook for the fourth quarter has significantly improved. Nevertheless, they still anticipate a decline in light vehicle production of approximately 2.7% in the quarter. In North America, the outlook for light vehicle production has been significantly upgraded, driven by resilient demand and low new vehicle inventories. However, a recent fire incident at an aluminum production plant in North America may impact our customers.

For Europe, S&P forecasts a 1.8% decline in light vehicle production for the fourth quarter, despite some easing of U.S. import tariffs. We continue to see downside risks for Europe’s light vehicle production, driven by announced production stoppage at several key customers.

In China, light vehicle production is expected to decline by 5%, primarily due to an exceptionally strong Q4 in 2024. Nevertheless, S&P anticipates sustained growth in Chinese LVP over the medium term, supported by favorable government policies for new energy vehicles, more relaxed auto loan regulations, and increasing export volumes. The outlook for Japan’s light vehicle production has improved, as car makers are increasingly shifting exports to markets outside the U.S., aiming to mitigate reduced export volumes to the U.S. In South Korea, domestic demand has been steadily recovering, while exports have also risen, driven by increased shipments to other regions, compensating for the decline in exports to the U.S. Now looking on our way forward on the next slide.

We expect the fourth quarter of 2025 to be challenging for the automotive industry, with lower light vehicle production and geopolitical challenges.

However, our continued focus on efficiency should help offset some of these headwinds. Consistent with typical seasonal patterns, the fourth quarter is expected to be the strongest of the year. Despite the expected decline in global light vehicle production year-over-year, we foresee higher sales and continued outperformance, particularly in China. Unfortunately, we are also facing some year-over-year headwinds. Unlike the past three years, we do not expect out-of-period inflation compensation in the fourth quarter, given the shift in the inflationary environment. We expect higher depreciation costs due to new manufacturing capacity to meet demand in the key regions, and that the temporary decline in engineering income will persist, driven by the timing of specific customer development projects.

These factors combine in the reason for why we currently expect the full-year adjusted operating margin to come in at the midpoint of the guided range.

However, our solid cash conversion and balance sheet provide fast expansions and a robust foundation for maintaining high shareholder returns. Turning to the next slide. This slide shows our full-year 2025 guidance, which excludes effects from capacity alignment and antitrust-related matters. It is based on no material changes to tariffs or trade restrictions that are in effect as part of 2025, as well as no significant changes in the macroeconomic environment or changes in customer coil-off volatility or significant supply chain disruptions. Our organic sales are expected to increase by around 3%. The guidance for adjusted operating margin is around 10% to 10.5%.

With only one quarter remaining of the year, we expect to be in the middle of the range. Operating cash flow is expected to be around $1.2 billion. We now expect CapEx to be around 4.5% of sales, revised from the previous guidance of around 5%.

Our positive cash flow and strong balance sheet support our continued commitment to a high level of shareholder return. Our full-year guidance is based on a global light vehicle production growth of around 1.5% and a tax rate of around 28%. The net currency translation effect on sales will be around 1% positive. Looking on the next slide. This concludes our formal comments for today’s earnings call, and we would like to open the line for questions from analysts and investors. I now hand it back to Ras.

Operator: Thank you, Sir. As a reminder to ask a question, please press star 1 and 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 and 1 again. Once again, please press star 1 and 1 and wait for your name to be announced. To withdraw your question, please press star 1 and 1 again. We are now going to proceed with our first question. The questions come from the line of Colin Langan from Wells Fargo Securities. Please ask your question.

Colin Langan: Oh, great. Thanks for taking my questions. You raised your light vehicle production forecast, you know, from down a half to up 1.5%, but organic sales didn’t change. Why aren’t you seeing any benefit from the stronger production environment on your organic?

Fredrik Westin: Yeah. Thanks for your question. There are a couple of components here. I mean, the first one is that some of these adjustments that we also now take into account are for past quarters. Some of the volumes have been raised also in the first half, whereas we had already recorded our sales for that. That doesn’t, yeah. We had a different outdoor underperformance in the first half of the year. That’s one part of the explanation. We also see a larger negative mix now after nine months and also expect that for the full year.

That is close to 2 percentage points, this negative market mix, which is also one of the reasons, and that’s, say, even less unfavorable now than we saw a quarter ago. Those are some explanations.

On top of that, we see that some of the launches in China have been a bit delayed, and that they are not coming through fully in line with our expectations that we had here about a quarter ago. Those are the main reasons why you don’t see that LVP estimate increase come through on our organic sales guidance.

Colin Langan: Got it. The margin in the quarter was very strong. I thought Q3 is typically one of your weaker margins. Anything unusual in the quarter? I noticed you flagged supplier settlements. I kind of get the non-repeat of bad news last year. Is the $15 million of supplier compensation additional good news? Is that one-time in nature? How should we think of that? Anything else that’s maybe possibly one-time in nature in the quarter that drove the strong margin?

Fredrik Westin: Yeah. The $50 million there is a one-time, and it is compensation from a supplier for historical costs that we had versus our customers there. It is one time in the quarter here, for previous costs that we have had. I would say here also that, I think what you saw in the quarter here was that we had slightly higher sales than expected. That was an important component, of course. I think most importantly here is that we continue to see a very strong delivery of the internal improvement work that we are so focused on and that we have been focused on for a while, leading to our targets here.

Good work done by the whole Autoliv team here across the whole value chain.

Colin Langan: Got it. All right. Thanks for taking my questions.

Operator: Thank you. We are now going to proceed with our next question. The questions come from the line of Björn Inoson from Danske Bank. Please ask your question.

Björn Inoson: Hi. Thanks for taking my question. On your implied guidance for Q4 and also on your a little bit cautious comments on Q4, it looks like there are a little bit of temporary negative effects that you are talking about. Should we extrapolate the Q4 trends looking into 2026? Are you quite happy with the productivity work and also that coil-offs look again a little bit better? Should we have as a base assumption that you should progress again towards the midterm target of 12%? How should we look upon that? Thank you.

Fredrik Westin: Yeah. I think, first of all, that we feel confident when it comes to our ability to eventually get to our 12% target. No doubt about that. What you see here in the Q3, Q4 movement is nothing if you read into that. I think, as I said before, we see very good progress in terms of the activities that we control ourselves. We see really good traction when it comes to the strategic initiatives that we have outlined some time back. Good progress there. I think when you look at Q4 over Q4, it’s, I would say, more of, first of all, a normalization of the quarters. Q4 is still the strongest quarter in the year.

Of course, in the previous last two, three years, it has been more pronounced since we had this out-of-period compensation that we referred to earlier, which you will not see in the same way now in this quarter in Q4 2025. There is a difference there. I would say also, you have seen a little bit stronger Q3 when it comes to sales. There is a timing effect between Q3 and Q4 compared to when we looked into the second half. There is also a part of the explanation. The bottom line, we feel comfortable with our own progress towards the targets that we have. Maybe just to build on that, just one more detail on the fourth quarter.

We do expect that we will have a slightly lower engineering income also in the fourth quarter, as you saw now in the third quarter.

This is temporary, and it’s very dependent on how the engineering activities are with certain customers. This should then also recover in 2026.

Björn Inoson: Okay. Yeah. I saw that comment. Did you say it’s likely to be recovered in early next year then?

Fredrik Westin: In next year overall, yes.

Björn Inoson: Overall. Okay.

Fredrik Westin: You should see a recovery ratio that is more in line with or a bit higher now than what you see in the second half of this year. That’s, again, very dependent on engineering activities with certain customers and how they reimburse us.

Björn Inoson: Okay. Got it.

Fredrik Westin: Yeah. In some cases, it’s built in the piece price. In some cases, it’s paid like engineering income specifically. Depending on how that mix looks over time, of course, you have some smaller fluctuation. That is really what we refer to here.

Björn Inoson: Okay. Very clear. Thank you.

Operator: Thank you. We are now going to proceed with our next question. The questions come from the line of Gautam Narayan from RBC Capital Markets. Please ask your question.

Gautam Narayan: Hi. Thanks for taking the question. Maybe a follow-up to that last one, the Q4 guidance. You call out three headwinds: the less compensation on inflation, I guess the higher depreciation, and then this engineering income. Just wondering if you could dimensionalize those three in terms of order of magnitude for Q4. I mean, we know the engineering income is temporary. The other two, you know, I guess, depends on certain factors. Just trying to dimensionalize those three in terms of what is temporary and what continues. I have a follow-up.

Fredrik Westin: Yeah. I think the engineering income, you can look at Q3 on a year-by-year basis and how that as a % of sales. That, I think, is a pretty good indication also for how that could be in the fourth quarter. That’s the largest headwind we will have. The next one is the fact that we had this out-of-period compensation from our customers related to inflation compensation last year. That falls away this year. That’s the second largest. The third largest is the depreciation expense increase.

Gautam Narayan: Okay. On the China commentary, we did see that BYD is losing share in China due to some government initiatives and whatnot. I would have thought that alone would maybe benefit you guys more. I know macro in China, the domestics are doing better than the globals. I see that. I understand that. Just wondering if the share loss that BYD is seeing—I know you’re under-indexed to them—is benefiting you guys. Thanks.

Fredrik Westin: Yeah. I mean, in the overall mix, of course, since we are only selling components to them, and you see their portion of the total market, you know, flattening out, of course, it’s supportive in the sense of measuring our outperformance relative to the COEMs, LVP as such. Mathematically, yes, you have that effect there.

Gautam Narayan: Great, thanks a lot. I’ll turn it over.

Operator: Thank you. We are now going to proceed with our next question. Our next questions come from the line of Michael Aspinall from Jefferies. Please ask your question.

Michael Aspinall: Thanks, Sam. Good day, Mikael, Fredrik, and Anders. One first on India. It was one-third of the organic growth. Can you just remind us where we are in the shift in content per vehicle in India, and how large India is in terms of sales now?

Fredrik Westin: Yeah. I think we are. See the strong development in India there. As I said, one-third of the growth in the quarter. It’s today around 5% of our turnover is coming from India. It’s not long ago, it was around 2%. A significant increase of importance there. We have a very strong market share in India, 60%. Of course, we are benefiting well from the volume growth you see there. We are expecting India to continue to grow. We have also invested in our investment footprint there to be able to defend our market share and to capture the growth here.

Content-wise, we expect it to go from, you know, it went from $120 in 2024 to roughly $140 this year. You have both content and light vehicle production growth in India to look forward to.

We expect it to go further up to around $160 to $170 in the next couple of years.

Michael Aspinall: Great. Excellent. Thank you. One more. Just on the JV with Hang Cheng, who were you purchasing these items from before? Were you purchasing from Hang Cheng and now to JV, or have you formed a JV with them and were purchasing from someone else previously?

Fredrik Westin: I mean, they have been an important supplier to us in the past as well. Of course, we have worked with them and established a very good relationship there. I couldn’t say it has been exclusively with them. We have a global supplier base here, but we see great opportunity here to not only produce but also develop components for our future models and programs here as we work together here, both on development and manufacturing.

Michael Aspinall: Okay. They’re moving, I guess, from a supplier, and now you guys are going to be working together?

Fredrik Westin: Yeah, yeah, exactly.

Michael Aspinall: Okay. Great. Thank you.

Fredrik Westin: Thank you.

Operator: Thank you. We are now going to proceed with our next question. The questions come from the line of Vijay Rakesh from Mizuho. Please ask your question.

Vijay Rakesh: Yeah. Hi, Mikael. Just quickly on the China side, I know you mentioned subsidies. When you look at the NEV and the scrapping subsidy, I believe it is down like 50% this year. Do you expect that to be extended to 2026, or is there going to be another step down? Then follow up.

Mikael Bratt: Yeah. I would say we are not speculating in that. I guess it’s anybody’s guess here. I think overall, we definitely look very positively on China. As we have mentioned here before, we are growing our share with the Chinese OEMs here and had good developments in the quarter here. We are also investing in China as well here. As I mentioned in the presentation here earlier, I mean, we are investing in a second R&D center in Wuhan to make sure that we also continue to work closer with the broader base of customers there, so adding capacity. We talked about JV just now here. The partnership with CATARC here is an important step here.

All in all, looking positively on China going forward here for sure. Subsidies or not, we will see, but overall, it’s pointing in the right direction here.

Vijay Rakesh: Got it. As you look at the European market, a lot of talk about price competition and imports coming in from Asia and tariffs, etc. How do you see the European auto market play out for 2026? Thanks.

Mikael Bratt: Yeah. I think we wait to comment on ’26 for the next quarterly earnings here when it’s time for it. As we have said here for the remainder of the year, we are cautious about the European market more from a demand point of view than anything else. I think that’s really the main question mark around the market than anything else in terms of OEM reshuffling or anything like that. I mean, it’s really the end consumer question here.

Vijay Rakesh: Got it.

Mikael Bratt: When it comes to Europe.

Vijay Rakesh: Yeah.

Operator: Thank you. We are now going to proceed with our next question. The questions come from the line of Emmanuel Rosner from Wolfe Research. Please ask your question.

Emmanuel Rosner: Oh, great. Thank you so much. My first question is actually a follow-up. I think on Colin’s question around the organic growth outlook, which is unchanged despite the better LVP. I’m not sure that I understood all the factors, but if we wanted to frame it as like growth above market, initially, you were going to grow 3% despite a shrinking market. Now you’re growing 3% in a market that would be growing 1.5%. Can you maybe just go back over the factors that are driving this different expectations for outperformance?

Fredrik Westin: Yeah. In that sense, the largest change over the capital quarters here since we started the year is the negative market mix. As I said, we now see a negative market mix for the full year of around 2%. That has deteriorated over the course of the year. That’s the largest part. We have also seen here in the third quarter the negatives in customer mix for us, mostly in North America and Europe. That’s also a deviation to what we expected going into the year. The last one that I already mentioned before is that we see some delays on the new launches, in particular in China.

They’re not coming through at the same pace that we had expected originally.

Emmanuel Rosner: Understood. Thank you. If I go back to your framework and your midterm margin targets, can you just maybe remind us the drivers that will get you from the 10 to 10.5% this year to towards the 12%? Where are we tracking on some of those? I did notice that you mentioned improved coil-off accuracy, both sequentially and year-over-year. Is that something that you expect to continue in and that will be helpful for that?

Fredrik Westin: Yeah. I mean, the framework has not changed as you would probably expect. It’s still, if we take 2024 as the base point with 9.7% adjusted operating margin, we still expect 80 basis points improvement from the indirect headcount reduction. In the reported numbers here now, you don’t see a movement in that, but we had about 260 employees from a labor law change in Tunisia that we now have to account for headcount. That distorts that number. If you adjust for that, we would also have shown further progress on the indirect headcount reduction. That is well on track. We said 60 basis points from normalization of coil-offs. That is developing well.

We saw 94% coil-off accuracy here and also in the third quarter, which is an improvement on a year-over-year basis.

We also talked about that we have decreased our direct headcount by 1,900 people despite that organic growth was at 4% on a year-over-year basis. That’s tracking very well. The remaining 90 basis points would be from growth component, where we are maybe a little bit behind now this year as we laid, or as you talked about before, and from automation digitalization. There again, you can see, I think, on the gross margin, even if you exclude the settlement here with a supplier, you can also see there that we are progressing well on that component.

Emmanuel Rosner: Thank you.

Operator: Thank you. We are now going to proceed with our next question. The questions come from the line of Jairam Nathan from Daiwa Capital Markets America. Please ask your question.

Jairam Nathan: Hi. Thanks for taking my question. I just wanted to kind of go back to the announcement out of China. I just wanted to understand better the timing. It seems it kind of coincided with also the announcement of Adient, the zero-gravity product. Just one, is this timing related to some new business win or more opportunities there?

Fredrik Westin: You’re talking about JV or?

Jairam Nathan: The JV, the CATARC partnership, as well as the kind of announced you kind of finalized the Adient zero-gravity product. Yeah.

Fredrik Westin: I was going to say they’re not connected at all as such. The JV here is really to vertically integrate in an effective way together with a partner to gain a broader product offering here to say that we offer also, yeah, more to our end customer, basically. CATARC is, of course, a development collaboration to make safer vehicles, safer roads for everyone. It’s including light vehicles, commercial vehicles, and vulnerable road users, meaning two-wheelers, etc. It is a broad-based research collaboration there. The Adient, of course, is connected to the zero-gravity. I mean, yeah, to some extent, of course, they are all about safety products as such, but they are not connected in any way.

Jairam Nathan: Okay. Thanks. Just to follow up, I wanted to understand the lower CapEx. Is that something that can be maintained as a % of sales into the future?

Fredrik Westin: Yeah. I think, I mean, we have been talking about this in the past also that our ambition is to bring down the CapEx levels in relation to sales compared to where we have been. We have been through a cycle here where we have invested a lot in our facilities around the world, Europe, where we have consolidated and upgraded a number of plants, India investments we talked about before, expanding capacity in China. We also upgraded in Japan, etc. In the last couple of years, we have invested heavily in upgrading our industrial footprint. We are coming out now into a more normalized phase here. That is why we can bring it down here.

We are not expecting to see CapEx jump up back in the near term here.

Jairam Nathan: Okay, thank you. That’s fine.

Operator: Thank you. We are now going to proceed with our next question. The questions come from the line of Hampus Engellau from Handelsbanken. Please ask your question.

Hampus Engellau: Thank you very much. A quick question from my side. Maybe a bit of a nitty-gritty question, but if I remember correctly, you covered about 80% of the tariff cost in the second quarter, and the remaining 20% came in Q3. Now you’re moving around 20% for Q3 you will get in Q4. Is the net effect like 100% compensation if you account for the things that came from second quarter to Q3, or are you still a net negative there on the margin?

Fredrik Westin: Yeah, please go ahead. …  Oh, please go ahead. … Okay. Yeah. Sorry. Let’s take this first, so we’re done with that one. We are still net negative here. As we said, we have received some of the outstanding $20 million in the second quarter in Q3, but most of it remains still. In the third quarter here, we got $75 million. We have accumulated more outstandings from Q2 to Q3. As we have indicated here, we still expect to get full compensation and catch up on this in the fourth quarter close. I think we are fully compensated. That’s our expectations here. Of course, the work is ongoing here as we speak with that, but that’s the net result right now.

Hampus Engellau: Fair enough. The last question was more related to from what you see today in terms of launches for 2026, and you maybe compare that to 2025 if you could share some light on that.

Fredrik Westin: I have no figure yet for 2026 to share with you here, but I think in general terms, I mean, we have a good order intake here to support our overall market position here. We see, however, some mixed, especially on the EV side, planned programs or launches being delayed or canceled here. There are some reshuffling there. What kind of impact that will have in 2026 compared to 2025, we are not ready to communicate that yet. As I said, we have good order intake here to support our market position.

Hampus Engellau: Thank you very much.

Operator: Thank you. We are now going to proceed with our next question. The questions come from the line of Edison Yu from Deutsche Bank. Please ask your question.

Edison Yu: Hi. This is Winnie on for Edison. Thanks for taking the call. My first question is on the supplier contract news that came out of GM, indicating maybe like a more less favorable contract terms for suppliers on a go-forward basis. I’m just curious if this is something that’s more isolated and more depends on like the OEM, or do you see like heading into 2026 maybe a broader trend that can pose potentially as a headwind heading into next year? I have a follow-up.

Fredrik Westin: No, I don’t want to comment specific customer contracts or conditions here. Of course, it’s a constantly ongoing development here in terms of what the OEMs want to put into their contract. I would say that I see a good ability to manage those clauses and contracts that are put in front of us here. I must say I don’t feel any major concerns around a more difficult situation. I think we are quite successful in negotiating and settling contracts with our customers here. Nothing exceptional there from our point of view, I would say.

Edison Yu: Got it. Thank you. On the Ford supplier impact, you did mention some potential impacts into Ford Q. I was just curious if you can help us delineate that. Is that something to be concerned about, or is it more of a negligible impact for you guys?

Fredrik Westin: Yeah. I think, I mean, every car that is not produced is not a good thing, of course, especially for the customer in question here. You have seen the announcements made by the OEMs here. Just as a reference, the Ford 150 is around 1% of our global sales. It’s not good, but it’s manageable, I would say, from our point of view. Just as a reference.

Edison Yu: Thank you so much.

Operator: Thank you. We are now going to proceed with our next question. The questions come from the line of Dan Levy from Barclays Bank. Please ask your question.

Dan Levy: Hi. Great. Thank you for taking the question. I just wanted to follow up on that prior question. You know, the headlines on Xperia yesterday causing some potential supply issues. Just how much of that of a potential risk have you seen or heard on that in the fourth quarter for European production?

Fredrik Westin: For the European production, no, I think it’s too early to comment on that. I mean, it’s just a few days, hours, or almost into the situation here. I think, first of all, we have a very good supply chain team that are on alert here and are managing through the situation here. We have been here before with supply chain constraints. I would say the last couple of years, there’s been many topics here. The team is well prepared to maneuver through this. We’ll see and come back on that. I would say it’s too early to be too granular or too detailed around that. As I said, it’s early days here.

We don’t see too much yet from the customers.

Dan Levy: Thank you. Just as a follow-up, I wanted to double-click on the China performance. You did very well outperformance with the domestic OEMs. In spite of that, the total China performance was negative 3 points, even though the domestics are the clear majority. I think we were all a bit surprised. I know you sort of unpacked this a bit before in one of the prior questions. Can you maybe just explain the dynamics of why, even though you outperformed the domestics, the overall China performance was negative? What can you explain what flips going forward that is leading you to say that your China growth going forward should outperform?

Fredrik Westin: Yeah. I mean, we still, for us, as we said before here, we believe that we will see improvements here in the quarter to come. I think it is a really important milestone here, what we reported on the COEM outperformance, which was really strong here in the quarter. Still, the global OEMs is a bigger majority of our total sales, and some of our customers here that are significant had a negative mix impact on us this quarter, unfortunately. That was on the negative side here. We don’t see this as a major trend shift here. It’s a mixed effect that we see from quarter to quarter here.

I think the important takeaway here is that we see this strong growth development with the Chinese OEMs that is also growing their share of the total market.

Fredrik Westin: That sets us up for, I would say, good development in China over time.

Dan Levy: Okay. Thank you.

Operator: Given the time constraint, this concludes the question and answer session. I will now hand back to Mr. Mikael Bratt for closing remarks.

Mikael Bratt: Thank you very much, Ras. Before we conclude today’s call, I want to reaffirm our commitment to meeting our financial targets. We remain focused on cost efficiency, innovation, quality, sustainability, and mitigating tariffs. With ongoing market headwinds, we anticipate strong fourth quarter performance. Our fourth quarter call is scheduled for Friday, January 30, 2026. Thank you for your attention. Until next time, stay safe.

Operator: This concludes today’s conference call. Thank you all for participating. You may now disconnect your lines. Thank you.

Image source: The Motley Fool.

Date

Thursday, Oct. 16, 2025 at 9:00 a.m. ET

Call participants

Chairman and Chief Executive Officer — Alan Schnitzer

Chief Financial Officer — Dan Frey

President, Business Insurance — Greg Toczydlowski

President, Bond & Specialty Insurance — Jeffrey Klenk

President, Personal Insurance — Michael Klein

Senior Vice President, Investor Relations — Abbe Goldstein

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Takeaways

Core Income — $1.9 billion in core income, or $8.14 per diluted share, driven by underwriting gains and increased investment income.

Return on Equity — Core return on equity was 22.6% for the quarter; trailing twelve-month core return on equity at 18.7%.

Underwriting Income — $1.4 billion pretax, doubling compared to the prior-year quarter, aided by reduced catastrophe losses and a 1.7-point improvement in the underlying combined ratio to 83.9%.

Net Investment Income (After Tax) — $850 million, a 15% year-over-year increase, driven by fixed income portfolio growth and higher yields.

Net Written Premiums — $11.5 billion in net written premiums, with Business Insurance at $5.7 billion (up 3%), Bond & Specialty at $1.1 billion, and Personal Insurance at $4.7 billion.

Segment Combined Ratios — Business Insurance: 92.9% (88.3% underlying); Bond & Specialty: 81.6% (85.8% underlying); Personal Insurance: 81.3% (77.7% underlying).

Shareholder Capital Return — $878 million returned, with $628 million in share repurchases and $250 million in dividends.

Adjusted Book Value Per Share — Adjusted book value per share was $150.55 at quarter end, up 15% from a year earlier.

Expense Ratio — 28.6% (year-to-date 28.5%), with management maintaining a 28% target for both 2025 and 2026.

Catastrophe Losses — $42 million pretax, described as “benign,” driven largely by tornado and hail events in the Central U.S.

Net Favorable Prior Year Reserve Development (PYD) — $22 million pretax (includes $277 million asbestos charge in Business Insurance, offset by favorable PYD in other lines).

Operating Cash Flow — Record $4.2 billion, with holding company liquidity of $2.8 billion at quarter end.

Share Repurchase Outlook — Management expects Q4 repurchases to reach about $1.3 billion, with a total of approximately $3.5 billion projected over Q3 2025 through Q1 2026, equating to a 5% reduction in share count.

Business Insurance Pricing Metrics — Renewal premium change (RPC) of 7.1% segment-wide, increasing to 9% ex-property; renewal rate change of 6.7%; retention at 85%.

Bond & Specialty Insurance — Segment retention of 87% in management liability, renewal premium change of 3.7% in domestic management liability, and a 40% increase in new lines of business sold to existing customers (private and nonprofit).

Personal Insurance Homeowners Metrics — Renewal premium change at 18%, expected to decrease to single digits in early 2026 as insured values align with replacement costs; retention at 84%.

Personal Insurance Auto Metrics — Combined ratio of 84.9%, underlying combined ratio of 88.3%, auto new business premium up year-over-year for the fourth consecutive quarter; retention at 82%.

Investment Portfolio Update — Portfolio grew by approximately $4 billion; more than 90% in fixed income with an average credit rating of AA; net unrealized investment loss narrowed from $3 billion to $2 billion after tax.

Debt Issuance — $1.25 billion issued (split between $500 million ten-year and $750 million thirty-year notes) for ordinary capital management.

Technology Investment — $13 billion invested since 2016 in technology, enabling a 300-basis-point reduction in expense ratio and access to over 65 billion clean data points to power AI and analytics initiatives, as disclosed by management.

Summary

Travelers (TRV -3.30%) reported substantial earnings growth, citing record profitability driven by improved underwriting and investment performance. Management highlighted excess capital and liquidity, with plans to accelerate share repurchases through Q1 2026 and indicated additional buybacks linked to the Canadian operations sale, specifically referencing a three-quarter period. The call outlined targeted underwriting strategies, with disciplined risk selection in property and actions to optimize exposure in high-catastrophe geographies. The company emphasized advancements in technology and AI, quantifying its scale, data advantage, and focus on sustainable cost improvements and operating leverage. Leadership reaffirmed a measured approach to capital deployment, prioritizing technology and potential M&A before returning excess to shareholders.

Chairman Schnitzer said, “we anticipate a higher level of share repurchase over the next couple of quarters,” underscoring shareholder return as a key use of surplus capital.

CFO Frey stated, “Our outlook for fixed income NII, including earnings from short-term securities, has increased from the outlook we provided a quarter ago,” signaling rising yield expectations for the investment portfolio.

President Klein provided forward guidance: We expect RPC to remain elevated and then drop into single digits beginning in early 2026.

President Toczydlowski disclosed middle market new business of $391 million—its highest third-quarter result—up 7% from the prior year, despite selective property underwriting and competitive market dynamics.

Industry glossary

Renewal Premium Change (RPC): The percentage change in premium for renewed policies, reflecting both pricing actions and changes in exposure or insured value.

Combined Ratio: A measure of underwriting profitability, calculated by summing incurred losses and expenses as a percentage of earned premiums; a ratio below 100% indicates underwriting profit.

PYC/PYD (Prior Year Reserve Development): The adjustment (favorable or unfavorable) to reserves set aside in prior periods for claims, as new information becomes available.

Retention: The proportion of policies or premium renewed with the company, stated as a percentage.

Middle Market: The business segment serving mid-sized commercial insurance customers, distinct from small businesses (“Select”) and large national accounts.

Travis: Travelers’ proprietary digital experience platform for distribution partners.

Full Conference Call Transcript

Alan Schnitzer chairman and CEO Dan Frey CFO and our three segment presidents. Greg Toczydlowski of Business Insurance, Jeff Klenk of Bond and Specialty Insurance, and Michael Klein of Personal Insurance. They will discuss the financial results of our business and the current market environment. They will refer to the webcast presentation as they go through prepared remarks, and then we will take questions before I turn the call over to Alan, I’d like to draw your attention to the explanatory note included at the end of the webcast presentation. Our presentation today includes forward looking statements. The company cautions investors that any forward looking statement involves risks and uncertainties and is not a guarantee of future performance.

Actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of factors. These factors are described under forward-looking statements in our earnings press release and in our most recent 10-Q and 10-Ks filed with the SEC. We do not undertake any obligation to update forward-looking statements. Also, in our remarks or responses to questions, we may mention some non-GAAP financial measures. Reconciliations are included in our recent earnings press release, financial supplement, and other materials available in the Investors section on our website. And now I’d like to turn the call over to Alan Schnitzer.

Alan Schnitzer: Thank you, Abby. Good morning, everyone, and thank you for joining us today. We are pleased to report excellent third-quarter results. We earned core income of $1.9 billion or $8.14 per diluted share. Our return on equity for the quarter was 22.6%, bringing our core return on equity for the trailing twelve months to 18.7%. Very strong underwriting results and higher investment income drove the bottom line. Underwriting income of $1.4 billion pretax more than doubled compared to the prior year quarter, benefiting from both the lower level of catastrophe losses and higher underlying underwriting income. The underlying result was driven by higher net earned premiums and an underlying combined ratio that improved 1.7 points to an exceptional 83.9%.

Underwriting income was higher in all three segments. Our high-quality investment portfolio also continued to perform well, generating after-tax net investment income of $850 million for the quarter, up 15%, driven by strong and reliable returns from our growing fixed income portfolio. Our underwriting and investment results, together with our strong balance sheet, enabled us to return almost $900 million of capital to shareholders during the quarter, including $628 million of share repurchases. At the same time, we continue to make strategic investments in our business. Even after this deployment of capital, adjusted book value per share was up 15% compared to a year ago.

With strong results over the past year and a particularly light cat quarter, we have a higher than usual level of excess capital and liquidity. Consequently, we anticipate a higher level of share repurchase over the next couple of quarters. Dan will have more to say about that in a minute. Turning to the top line, we grew net written premiums to $11.5 billion in the quarter. In business insurance, we grew net written premiums by 3% to $5.7 billion, led by 4% growth in our domestic business. Excluding the property line, we grew domestic net written premiums in the segment by more than 6%. The declining premium volume in property continues to be a large account dynamic.

In fact, we grew property in both middle market and small commercial. We’ve seen this dynamic in the large property market before, and we won’t compromise our underwriting discipline. Over time, particularly as catastrophic events inevitably unfold, the value of that discipline and the cost to those who abandon it will become unmistakable. Renewal premium and change in business insurance was 7.1%, driven by continued historically high RPC in our middle market and select business businesses. Excluding the property line, renewal premium change in the segment was a very strong 9%, and renewal rate change was a very strong 6.7%. Greg will share additional detail by line. Retention in the segment was 85%.

Given the high quality of the book, we were very pleased with that result. In Bond and Specialty Insurance, we grew net written premiums to $1.1 billion with higher renewal premium change and continued strong retention of 87% in our high-quality management liability business. Net written premiums in our market-leading surety business remained strong. In personal insurance, written premiums were $4.7 billion with strong renewal premium change in our homeowners business. You’ll hear more shortly from Greg, Jeff, and Michael about our segment results. As we head toward the end of the year, our planning for 2026 is well underway. As always, that process involves assessing the environment ahead.

There are uncertainties out there: economic, political, geopolitical, not to mention the loss environment. We are very confident that we’re built and very well positioned for whatever lies ahead. We’re operating from a position of considerable strength. Profitability is strong, reflecting our leading underwriting expertise and the operating leverage we’ve built through a sustained focus on productivity and efficiency. Our competitive advantages have never been stronger or more relevant. Strong underwriting is the flywheel that sets everything in motion. Our premium growth at attractive margins has generated strong cash flow, which enables us to make strategic investments in our business, return excess capital to shareholders, and grow our investment portfolio.

Since 2016, we have successfully invested $13 billion in technology, returned more than $20 billion of excess capital to our shareholders, and grown our investment portfolio by nearly 50% to more than $100 billion. Scale matters, increasingly so. We have the scale to win in an environment where technology and AI will continue to segment the marketplace. We have a track record of identifying the right strategic priorities and driving value from them. You can see that in the 300 basis point reduction we’ve achieved in our expense ratio since 2016, even while we were significantly increasing our overall technology spend.

Importantly, our size gives us the data to power AI, creating a virtuous cycle: better insights, better decisions, better outcomes, more resources to invest. For example, our long-time focus on organizing and curating data has given us access to more than 65 billion clean data points from decades of history across multiple business lines. We leverage that to sharpen our underwriting and shape our claim strategies. With the vast majority of our business in North America, we hold a leading position in the largest and most stable insurance market in the world, an advantage that insulates us from much of the risk arising from the economic instability and geopolitical uncertainty around the globe.

Our fortress balance sheet and exceptional cash flow provide us with the financial strength to invest consistently in the business regardless of the external conditions. Our financial strength also enables us to manage comfortably through large loss events like the January California wildfires. When it comes to the loss environment, from weather volatility to the impact of social inflation on casualty lines, no one is better positioned. Diversification provides powerful protection. In fact, our business mix produces a consolidated loss ratio that’s actually less volatile than the loss ratio of our least volatile segment. That’s the power of a balanced and diversified portfolio. Equally important is our demonstrated ability to confront the loss environment head-on.

We have the data, the analytics, and the discipline to establish reserves and loss picks appropriately and generally ahead of the market. That matters because until you have an accurate view of the loss environment, your risk selection, underwriting, and claim strategies are all operating with the wrong inputs. Since our early identification of the acceleration of social inflation in 2019, we’ve grown the business and delivered significantly improved margins. Getting an accurate and timely view of the loss environment isn’t just about the balance sheet. It’s foundational to running the business effectively. Our internally managed investment portfolio was another source of strength.

Our disciplined focus on achieving appropriate risk-adjusted returns has served us exceptionally well through various markets, especially during periods of market turmoil. More than 90% of our portfolio is in fixed income with an average credit rating of AA. We’re highly selective. We don’t reach for yield. We hold the vast majority of our fixed income securities to maturity. And we carefully coordinate the duration of our assets and liabilities. The track record speaks for itself. Our default rates during the most challenging environments over the past two decades were a fraction of industry averages. This consistency comes from a world-class investment team, with extraordinary tenure and a shared long-term perspective.

In short, the franchise we’ve built, the capabilities we’ve developed, and our depth of expertise create advantages that are durable across operating environments. Before I wrap up, I’ll share that we’re just back from one of the industry’s premier conferences, where we had the opportunity to meet with dozens of our key agents and brokers, who collectively represent a substantial amount of our business. We left as convinced as ever that our position with the independent distribution channel is an unmatched strategic advantage. We heard clearly that our strategic investments are resonating and that looking ahead, we’re focused on the right priorities to extend that advantage. I want to acknowledge and thank all of our distribution partners.

I also want to reiterate our unwavering commitment to being an indispensable partner for them and the undeniable choice for their customers. To sum it up, we’re very well positioned and very optimistic about the road ahead. And with that, I’m pleased to turn the call over to Dan.

Dan Frey: Thank you, Alan. In the third quarter, we once again delivered excellent financial results on a consolidated basis and in each of our three segments. Core income for the quarter of $1.9 billion resulted in core return on equity of 22.6%, reflecting both excellent underwriting results and strong investment income. We generated higher levels of written premium and earned premium while delivering excellent combined ratios on both a reported and underlying basis. At 83.9%, the underlying combined ratio marked its fourth consecutive quarter below 85. The combination of higher premiums and the excellent underlying combined ratio led to an 18% increase in after-tax underlying underwriting income, which surpassed $1 billion for the fifth consecutive quarter.

The expense ratio for the third quarter was 28.6%, bringing the year-to-date expense ratio to 28.5%. We continue to expect an expense ratio of around 28% for the full year 2025 and expect to manage to that level again in 2026. Catastrophe losses in the quarter were fairly benign at $42 million pretax, consisting mainly of tornado hail events in the Central United States. Turning to prior year reserve development, we had total net favorable development of $22 million pretax. In Business Insurance, the annual asbestos review resulted in a charge of $277 million. Excluding asbestos, business insurance had net favorable PYD of $152 million driven by continued favorability in workers’ comp.

In Bond and Specialty, net favorable PYD was $43 million pretax with favorability in Fidelity and Surety. Personal insurance had net favorable PYD of $104 million pretax driven by favorability in auto. After-tax net investment income of $850 million increased by 15% from the prior year quarter. Fixed maturity NII was again the driver of the increase, reflecting both the benefit of higher invested assets and higher average yields. Returns in the non-fixed income portfolio were also up from the prior year quarter. During the quarter, we grew our investment portfolio by approximately $4 billion. Our outlook for fixed income NII, including earnings from short-term securities, has increased from the outlook we provided a quarter ago.

And we now expect approximately $810 million after tax in the fourth quarter. For 2026, we expect more than $3.3 billion, with quarterly figures starting at around $810 million in Q1 and growing to around $885 million in Q4. New money rates as of September 30 are roughly 70 to 75 basis points above the yield embedded in the portfolio. Turning to capital management. Operating cash flows for the quarter were a new record at $4.2 billion, and we ended the quarter with holding company liquidity of approximately $2.8 billion.

Interest rates decreased during the quarter, and as a result, our net unrealized investment loss decreased from $3 billion after tax at June 30 to $2 billion after tax at September 30. Adjusted book value per share, which excludes net unrealized investment gains and losses, was $150.55 at quarter end, up 8% from year end and up 15% from a year ago. Also of note for Q3, we issued $1.25 billion of debt back in July, with $500 million of ten-year notes and $750 million of thirty-year notes. This was simply ordinary course capital management, maintaining a debt-to-capital ratio in our target range as we continue to grow the business.

Sticking with the theme of capital management, we returned $878 million of our capital to shareholders this quarter, comprising share repurchases of $628 million and dividends of $250 million. As Alan shared, our very strong earnings over the past year have provided us with an elevated level of capital and liquidity well in excess of what we had planned to use for investment and to support continued growth. As a result, we expect to increase the level of share repurchases in the fourth quarter to roughly $1.3 billion.

Also, keep in mind that we previously shared our plan to deploy about $700 million from the sale of our Canadian operations, expected to close in early 2026, for additional share repurchases as well. So if we look across the three-quarter period from Q3 2025 through Q1 2026, our repurchases in Q3 combined with our current outlook for the next two quarters has us repurchasing a total of somewhere around $3.5 billion worth of our stock. Using the average share price over the past thirty days for purchases during the next two quarters, that would result in a reduction of our outstanding share count of about 5% in the nine-month period.

Of course, the actual amount and timing of repurchases will depend on a number of factors, including the timing of the closing of the transaction in Canada, actual quarterly earnings, and other factors we disclose in our SEC filings. Recapping our results, Q3 was another quarter of excellent underwriting profitability on both an underlying and as-reported basis, and another quarter of rising net investment income. These strong fundamentals delivered core return on equity of 22.6% for the quarter and 18.7% on a trailing twelve-month basis, and position us very well to continue delivering strong results in the future. And now for a discussion of results in Business Insurance, I’ll turn the call over to Greg.

Greg Toczydlowski: Thanks, Dan. Business Insurance had a very strong quarter, delivering a record third-quarter segment income of $907 million and an all-in combined ratio of 92.9%. The quarter reflected relatively benign catastrophes and the continued strong contribution from our exceptional underlying underwriting results. This quarter’s underlying combined ratio of 88.3% marked the twelfth consecutive quarter where we’ve produced an underlying combined ratio below 90%. We’re pleased that our ongoing strategic investments have contributed to this sustained level of profitability. In particular, through meaningful advancements in data and analytics, we continue to advance our underwriting tools.

One specific highlight is the development and utilization of sophisticated models that derive risk characteristics, refine technical pricing, and summarize historical and modeled loss experience, all of which is provided to our underwriters at the point of sale. Moving to the top line, our net written premiums increased to an all-time third-quarter high of $5.7 billion. We grew our leading middle market and select businesses by 7% and 4%, respectively. These two markets make up 70% of the net written premiums in business insurance. We saw a decline in net written premiums in National Property and Other, which, as you heard from Alan, reflects our disciplined execution in terms of risk selection, pricing, and terms and conditions.

As for production across the segment, pricing remained attractive with renewal premium change just over 7%. Renewal premium change remains strong in select and middle market. From a line of business perspective, renewal premium change was positive in all lines, double digits in umbrella, CMP, and auto, and up from the second quarter or stable in all lines other than property. As you heard from Alan, excluding the property line, renewal premium change in this segment was 9%. Retention remained excellent at 85%, and new business of $673 million was about flat to a very strong prior year level. We’re very pleased with these production results and particularly our field’s execution for our proven segmentation strategy.

Across the book, pricing and retention results this quarter reflect excellent execution, aligning price, terms, and conditions with environmental trends for each lot. As for the individual businesses, in select, renewal premium change of 10.8% was about flat with the second quarter. Retention ticked up as expected as we near completion of our targeted CMP risk return optimization efforts. And lastly, for Select, we generated new business of $134 million, up 3% over the prior year. As we’ve mentioned previously, we’ve made meaningful strategic investments in this market in both product and user experience.

Our new BOP and auto products have been well received in the market, and we’re pleased that the industry-leading segmentation contained in both products is contributing to profitable growth. We’re also very pleased with the success of Travis, our digital experience platform for our distribution partners. As we continue our strategic rollout, Travis is already producing over 1 million transactions annually. In our core middle market business, renewal premium change of 8.3% was also about flat sequentially from the second quarter. Price increases remain broad-based as we achieved higher prices on more than three-quarters of our middle market accounts. And at the same time, the granular execution was excellent, with meaningful spread from our best-performing accounts to our lower-performing accounts.

We’re pleased that retention of 88% remained exceptional given the level of price increases we achieved. And finally, new business of $391 million was our highest ever third-quarter result and up 7% over the prior year. We’re pleased with the new business risk selection and strength of pricing and overall with the combination of strong returns and customer growth in middle market. On a strategic note for middle market, we continue to enhance our industry-leading underwriting workstation with models that assess new business opportunities for risk characteristics with the propensity to produce the highest level of lifetime profitability.

This information helps our field organization focus on the highest priority opportunities, resulting in a greater likelihood of success in winning more accounts that contribute to strong margins. To sum up, Business Insurance had another terrific quarter. We’re pleased with our execution in driving strong financial and production results while continuing to invest in the business for long-term profitable growth. With that, I’ll turn the call over to Jeff.

Jeffrey Klenk: Thanks, Greg. Bond and Specialty delivered very strong third-quarter results. We generated segment income of $250 million and an outstanding combined ratio of 81.6%, nearly one point better than the prior year quarter. The strong underlying combined ratio of 85.8% drove very attractive returns in the segment. Turning to the top line, we grew net written premiums in the quarter to $1.1 billion. In our high-quality domestic management liability business, renewal premium change improved to 3.7% while retention remained strong at 87%. These results reflect our intentional and segmented initiatives to improve pricing in certain lines, with a focus on employment practices liability, cyber, and public company D&O.

We’re pleased with the strong underlying pricing segmentation achieved by our outstanding field organization on both renewal and new business, enabled by our advanced analytics and sophisticated pricing models. New business was lower than in 2024, as Corvus production was reflected as new business in the prior year quarter and is now mostly reflected as renewal premium. Comparisons to prior year new business levels will be similarly impacted for the remainder of the year. Outside of the Corvus impact, we’re pleased with early returns on multiple tech and operational investments we’ve made to drive account growth. For example, in our private and nonprofit business, we’re leveraging predictive analytics and AI to enhance our customer segmentation and sales effectiveness.

We’re pleased that these initiatives drove a 40% increase in new lines of business sold to existing customers as compared to the prior year quarter. Turning to our market-leading surety business, where production can be lumpy based on the timing of bonded construction projects, net written premiums remain strong relative to the record high quarter in the prior year. This reflects our customers’ continued confidence in our industry-leading surety expertise and value-added service offerings, as well as benefits from digital investments we’ve made to enhance distribution experiences in our small commercial surety business.

So we’re pleased to have once again delivered strong results this quarter, driven by our continued underwriting and risk management diligence, excellent execution by our field organization, and the benefits of our market-leading competitive advantages. And with that, I’ll turn the call over to Mike.

Michael Klein: Thanks, Jeff, and good morning, everyone. In Personal Insurance, we delivered third-quarter segment income of $807 million, an excellent result that reflects the continued impact of our disciplined approach to selecting, pricing, and managing risks. The combined ratio of 81.3% improved 11 points relative to the prior year quarter, driven primarily by lower catastrophe losses and a lower underlying combined ratio. The underlying combined ratio of 77.7% was five points better compared to the prior year quarter, driven by continued improvement in both homeowners and other and auto.

Net written premiums of $4.7 billion in the third quarter reflect our continued focus on improving profitability in homeowners while seeking growth in auto as we execute our strategies to deliver appropriate risk-adjusted returns across the portfolio. The ceded premium impact of the enhanced personal insurance excess of loss reinsurance program we announced last quarter reduced net written premium growth in the quarter by one point as the full year’s worth of ceded premium was booked in the third quarter. In auto, the third-quarter combined ratio was very strong at 84.9%, reflecting lower catastrophe losses, a strong underlying combined ratio, and favorable net prior year development.

The underlying combined ratio of 88.3% improved by 2.9 points compared to the prior year quarter. The improvement was driven by favorable loss experience in bodily injury and, to a lesser extent, vehicle coverages. Similar to last year’s third-quarter result, this quarter’s underlying combined ratio included a two-point benefit related to the re-estimation of prior quarters and the current year. The year-to-date underlying combined ratio was also 88.3%, reflecting sustained profitability in an auto book that is larger than it was five years ago, both in terms of premium dollars and policy count.

Looking ahead to 2025, it’s important to remember that the fourth-quarter auto underlying loss ratio has historically been six to seven points above the average for the first three quarters because of winter weather and holiday driving. In Homeowners and Other, the third-quarter combined ratio of 78% improved by 13.5 points compared to the prior year quarter, primarily because of lower catastrophe losses and improvement in the underlying combined ratio. Net prior year development was favorable but lower compared to the prior year. The underlying combined ratio of 68% improved by almost 6.5 points compared to the prior year quarter. The year-over-year favorability in homeowners was primarily related to the benefit of earned pricing, as well as favorable non-catastrophe weather.

Overall, these outstanding results reflect favorable weather conditions throughout the third quarter, along with our actions to manage exposures in high catastrophe risk geographies to help optimize risk and reward. Turning to production, we’re making progress in positioning our diversified portfolio to deliver long-term profitable growth. While our production results don’t quite show it yet, we’re confident that the actions we’re taking will build momentum toward this objective. In domestic auto, retention of 82% remained consistent with recent quarters. Renewal premium change of 3.9% continued to moderate and will continue to decline in the fourth quarter, reflective of improved profitability and our focus on generating growth.

Auto new business premium was up year over year for the fourth consecutive quarter, as new business momentum continued in states less impacted by our property actions. In Homeowners and Other, retention of 84% remained relatively consistent with recent quarters. Renewal premium change remained strong at 18%, as we continue to align replacement costs with insured values. We expect RPC to remain elevated in the fourth quarter and then drop into single digits beginning in early 2026 as values will have largely aligned with replacement costs. We continued to execute actions to reduce exposure and manage volatility in high-risk catastrophe geographies in the quarter, causing further declines in property new business premium and policies in force.

Most of our property actions will be completed by the end of the year, at which point the downward pressure on both property and auto growth should begin to moderate. As we conclude this year and head into 2026, we’re focused on building momentum toward generating profitable growth.

To that end, we have a range of actions currently or soon to be in market, including the following: adjusting pricing, appetite, terms, and conditions to better reflect improved profitability in both Auto and Home; removing temporary binding restrictions and winding down some of our property new non-renewal actions in certain geographies; appointing new agents and partnering with existing agents to consolidate books of business; continuing to modernize our specialty products and platforms; and investing in artificial intelligence and digitization to deliver better experiences for our agents and customers. These messages resonate as we share them in the marketplace, reinforcing our commitment to being the undeniable choice for consumers and an indispensable partner for our agents.

To sum up, we delivered terrific segment income as our team continued to invest in capabilities and deliver value to customers and agents. These results position us well to build on a long track of profitably growing our business over time. Now I’ll turn the call back over to Abby.

Abbe Goldstein: Thanks, Michael. And with that, we’re ready to open up for Q&A.

Operator: Thank you. We will now begin the question and answer session. Your first question today comes from the line of Gregory Peters from Raymond James.

Gregory Peters: Well, good morning, everyone. Boy, you’re producing great bottom line results. Kind of surprising the stock’s down as much as it is on the open. I think it’s probably a reflection of the top line. And I know you spoke in detail about the different headwinds that you’re facing, whether it’s in business insurance, the property, Corvus and Bond and Specialty, or the underwriting actions in personal insurance that have affected your top line. When you go beyond the balance of this year and you start thinking at 26%, 27%, what does the Travelers business model look like in terms of top line growth on a consolidated basis? And how are you thinking about them?

Alan Schnitzer: Hey, good morning, Greg. It’s Alan. Thanks for the thoughts and the question. So we’re not going to give outlook on the top line, as you can imagine. But clearly, we understand that in order to meet our objective of delivering industry-leading return on equity over time, we need to grow over time. So it’s a priority for us. And if you look back over the last couple of years, we’ve been very successful with that. In our, you know, we, as you noted by segment, we’ve talked about what’s driving the results this quarter. But I guess what I would say is we are very confident that we’ve got the right value proposition.

We’re investing in the right capabilities to make sure we’re positioned to grow this business. So we feel very good about the execution in the quarter. We feel very good about what we’ve accomplished in recent periods, and we feel very good about the outlook.

Gregory Peters: Okay. The other I seem to ask this like every other quarter on the technology front, but you keep bringing it up, talked about the digital initiative you have going on in business insurance. Talk about some of the stuff going on in personal insurance. I think one of your peers came out earlier in the third quarter and talked about the potential of artificial intelligence to deliver human resource savings and headcount reductions over time of maybe up to 20%.

I’m just curious if we can just go back to, I know you’ve got best use case on technology and AI, but go back to how you’re thinking about this in the three to five-year period in terms of what it might mean to your expense ratio?

Alan Schnitzer: Yes. So Greg, I’ll tell you, we are very bullish on AI, and we’re leaning into it. You know, we’re spending, you know, more than a billion dollars a year on technology. A lot of that is focused on AI. We expect significant benefits from it. And I think we’ve got a long track record, as I said in my prepared remarks, of identifying the right strategic initiatives and driving value from them. We’re not going to tell you what our plan is for the expense ratio beyond next year, but I’ll also tell you that more than our focus is on the expense ratio, it’s on creating operating leverage.

And that’s what gives us the flexibility to deploy those gains however we want to deploy them. And so maybe it’ll be efficiency, maybe it’ll be productivity, but we are very bullish about the opportunity for investments that we have underway. We’re very bullish about the data we have to fuel the AI. And think that it’ll make a big difference in the years to come.

Gregory Peters: Got it. Thanks for the answers.

Operator: Thank you. Your next question comes from the line of David Motemaden from Evercore. Your line is open.

David Motemaden: Hey, thanks. Good morning. I had a question. You gave the RPC and rate ex property. I was wondering, that’s a new disclosure. Wondering if you can just talk about what that was last quarter versus this quarter and then maybe zooming in specifically in business insurance. What do you guys see in property pricing outside of national property this quarter?

Greg Toczydlowski: Yes, certainly. Well, on the first one, David, it is a metric that we’re not going to give every quarter, and we’re not going to go back and give that. We offered it up this quarter just to give you some color and let you know how much property the leverage it had on the pricing for this particular quarter. As we’ve shared with you, the large property has definitely been a market where typically leads in terms of when softening may happen, and it certainly has been the case over the last couple of quarters. In the select and middle market, to directly answer your question, we continue to get positive price increases there.

But it’s certainly, we’re feeling some deceleration. But again, certainly still seeing positive increases.

David Motemaden: Got it. Thank you. And then maybe this is just sort of related to your answer there. But on business insurance premium growth by market. So it’s good to see the tick up in select year over year and national accounts, you know, sort of we know the story there. But I’m surprised we saw the deceleration in growth in middle market. I was hoping you could just impact that a little bit. Is that just sort of the property dynamics you just mentioned?

Greg Toczydlowski: Yes. And if you’re looking at overall quarter of middle market, I think you’re reading that wrong. The quarter alone was up for middle market 7% relative to year to date of five.

David Motemaden: Got it. Yeah. No, I was just looking at the because I know 1Q had the reinsurance dynamic. So I was just comparing it to 2Q, the 10 decelerating to seven. That’s what I was looking at there. But, no, appreciate the answer.

Operator: Your next question comes from the line of Mike Zaremski from BMO. Your line is open.

Michael Zaremski: Great. My first question is on the loss cost trend line. I know it’s not easy pinning a broad brush, but if we look at kind of your reserve release trend line, loss ratio trend line, we’re also adding IBNR. But a lot of good things going on. Curious if your view on loss cost inflation has changed at all or directionally, is it the I feel like you’ve only raised it over recent years. Over long periods of time. It flattening out? Thanks.

Dan Frey: Hey, Mike, it’s Dan. So another quarter of net favorable PYD despite the asbestos charge. I don’t really think you can put a trend on PYD. Really what matters for us is in aggregate across the enterprise is that favorable or unfavorable, and we’ve got now a very long track record of generally having that favorable. As it relates to loss trend, we haven’t explicitly commented on loss trend for a while because we think it’s just too narrow a way to look at the business in terms of what’s pure rate versus what’s some blended number of loss trend, but it hasn’t moved dramatically in recent periods. Alan’s talked about that in prior quarters.

We do take a look at it every quarter. Some lines do move up a little bit. Some lines do move down a little bit over time. But it’s been pretty stable for a while now. Mike, there was nothing in the quarter that particularly surprised us when it comes to loss activity.

Michael Zaremski: Okay, great. And my follow-up is honing in on the home segment. Maybe you need a comment on auto too since there’s a lot of bundle in there. But if we look at the RPC trends, they remain very high on I’m assuming there’s terms and conditions changes that you’re incorporating in kind of those double-digit RPC increases. But the last few years haven’t been great for you all in the industry. Consensus kind of has you guys pegged at a 95 combined ratio for the foreseeable future in home. If you can kind of remind us what do we expect RPC to eventually fall? Are those terms and conditions changes going to help?

Is 95% the right combined ratio that you guys are targeting given how profitable auto is? Thanks.

Michael Klein: Sure. Thanks, Mike. It’s Michael. So just to unpack the RPC part of your question for starters, as I mentioned in my prepared remarks, RPC remains elevated. Again, it’s rate and exposure, right? So RPC remains elevated largely because we’re raising insured limits to keep up with rising replacement costs. And my point about RPC dropping to single digits in 2026 is we’ll have largely caught up in getting replacement costs in line with insured values. And so the change in RPC as we head into 2026 will really be those the premium impact from increasing coverage A, the dwelling limits on property coming back to more normal levels.

Yes, baked into RPC is also a reflection of a number of the other actions we’re taking on the book. I think increasing deductibles, particularly across the Midwest, think different strategies around targeted limits on how big a coverage A we’re going to write in some hail-prone geographies, other things like that are all rolled into that figure. And again, I think it’s just reflective of the actions that we’re taking to improve the profitability of that book. As respect to target combined ratio, we’re not going to really disclose the target combined ratio by line. We are certainly encouraged by the progress we’ve made, particularly in improving the underlying combined ratio in property.

It’s down period to period, quarter over quarter for something like the last ten or eleven quarters in a row. So it’s demonstrative of the progress that we’re making there. And again, continue to be pleased with our progress there.

Operator: Your next question comes from the line of Meyer Shields from KBW. Your line is open.

Meyer Shields: Great, thanks. Good morning. I don’t know if this is a question for Alan or Greg, but is there really a disentangling the how much of a property premium decline in BI is from nonrenewed business as opposed to accepting lower rates because you still have adequacy?

Alan Schnitzer: Meyer, I don’t think we’re gonna unpack that. Certainly not right here right now. I don’t think we’re gonna get into that level of detail. And I honestly, we don’t have that level of data at our fingertips right now.

Meyer Shields: Okay. Fair enough. Also, to talk a little bit, Michael talked about, I guess, book rolls in personal lines. Does that involve any changes to agency commissions? Or what other tools are you using to encourage that?

Michael Klein: Sure, Meyer. Thanks for the question. Yes. So typically, and again, book growth consolidations in the personal lines space are pretty much standard operating procedure. We had stepped away from them. The reason I mentioned it is because we had stepped away from them as we were working to improve profitability. And I think it’s an important point to recognize that we’re back actively engaged in the marketplace in those conversations with agents looking for situations where their book of business may be disrupted for one reason or another. It is fairly typical in a book consolidation scenario to offer enhanced commission on that book roll for the first term as that business comes over.

Operator: Your next question comes from the line of Tracey Banque from Wolfe Research. Your line is open.

Tracey Banque: Good morning. My first question is for Mike. I’m curious what you’re seeing that’s driving favorable loss experience in bodily injury. And, to a lesser extent, vehicle coverages?

Michael Klein: Tracy. Thanks for the question. I mean, really is a combination of favorable frequency in both bodily injury and physical damage losses, as well as continued moderation in severity again really across coverages.

Tracey Banque: Got it. And a follow-up on Dan’s comment about elevated level of capital liquidity. Driven by your earnings that’s well in excess of your investment needed to growth. As you know, capital is a big focus for me. And I’ve really not seen so much excess capital for the entire sector. Is it fair to assume that your excess capital position surpasses the buyback targets you shared and could we expect concurrent deployment of capital on the technology side and or M and A.

Dan Frey: Yes, Tracy, it’s Dan. So I think I understand the question. So I guess I’d start by saying, look, there’s no change at all to what has been now our long-standing capital management philosophy, which is we’ve got a business that’s generating terrific margins. We generate a lot of capital. We generate more than we need just to support the growth of the business. First objective for that excess capital is going to be to find a way to deploy it and generate a return. And so we’ll make all the technology investments that we think we can and should make. Always be open to M and A, open to any opportunity to generate returns on an excess capital.

Once we’ve exhausted all those opportunities, then it’s not our capital, it’s the shareholders we’re going to give it back through dividends and buybacks.

Tracey Banque: Got it. Thank you.

Operator: Your next question comes from the line of Robert Cox from Goldman Sachs. Your line is open.

Robert Cox: Hey, thanks. Good morning. Yes, just wanted to go back to the removal of the growth restrictions. It looks like a couple of parts of the business, CMP, within Select and then also in homeowners you give us a sense of how much business is being unlocked for growth here? And if easing those can result in a noticeable uplift in growth?

Greg Toczydlowski: Robert, this is Greg. I’ll start off and then Michael can talk about the PI. We’ve been talking about the select mix optimization for some time now. And as we begin to finalize some of those actions, you saw a slight tick up in our retention. We’re not really going to quantify what that means for overall growth, but that was the reason that we pointed out the slight pickup in retention.

Michael Klein: Yeah. And Robert, Michael, up here on the personal lines side. I think the important point to note in terms of the impact on growth in personal insurance as we relax those property restrictions as our goal is to leverage that property capacity to write package business. And so if you my suggestion, if you want to sort of dimensionalize it, is just look back historically at retention in new business levels in property and in auto. You can see that retention remains depressed right now given the actions we’re taking. Again, the property actions depressed retention in both lines.

And you can see particularly in property the new business levels are pretty significantly depressed relative to what they’ve run historically. And so those levers, I think, would give you a way to kind of dimensionalize it.

Robert Cox: Okay, great. Thanks for the color there. And then I just wanted to follow-up on the business insurance underlying loss ratio. When you think about the margin improvements during this year, are we seeing improved picks in casualty at all? Or is the improvement year to date largely been a shift lower in some of the shorter tail exposures?

Dan Frey: Hey, Rob, it’s Dan. Look, I think if you look at the improvement in you’re talking about business insurance specifically, right?

Robert Cox: Yes. Is that correct?

Dan Frey: Yes. I think the single biggest factor we’d say in terms of that sort of 50 basis point improvement on a year-to-date basis has been the continued benefit of earned price. So in the casualty lines especially, and we’ve talked about this a couple of times, we’re continuing to include some provision for a level of uncertainty in those lines that we think is going to serve us well in the long term as opposed to taking those picks down the improvement in the loss ratio. You have other things that impact every quarter too. Mix will change a little bit.

But headline number the main driver of the improvement year over year has been the continued benefit of earned price.

Robert Cox: Thank you.

Operator: Your next question comes from the line of Elyse Greenspan from Wells Fargo. Your line is open.

Elyse Greenspan: Hi, good morning. I guess I want to stick there with business insurance. So if we look I guess, just specifically at the underlying loss ratio that was stable year over year in the Q3. So I’m not sure if there were certain pushes and pulls that you want to point out specific to the third quarter or if maybe this quarter rate you know, earned rate, you know, got close to trend and that’s kind of what we’re seeing in the numbers. And just how do we think from here, you know, just given, you know, slowing pricing, which I know is mostly driven by fiber property, do we think about just the underlying loss ratio and BI?

Should we think about that starting to deteriorate as rate gets closer to trend?

Dan Frey: Yeah. Good morning, Elyse. Let’s just start with where the margins are in business. I mean, they are pretty spectacular margins. And I don’t think we’re to parse out that level of detail. We’re certainly not going to get into what the outlook for margins is. But I’ll tell you at these margins, we really like the margins and we really like the business that we’re putting on the books at these margins.

Elyse Greenspan: Okay. And then I guess, you know, my second question would be, I guess, maybe shifting to personal auto. Have you guys did you guys see any impact of tariffs at all in the quarter, whether it was September relative to July and August? And how are you guys currently thinking about a potential impact of tariffs on the margins in that business?

Michael Klein: Sure Elyse, it’s Michael. Thanks for the question. I would say we haven’t seen a ton of impact to date from tariffs. But our results for the third quarter do include a small impact from tariffs. That said, it’s well below the single-digit severity numbers that we discussed a couple of quarters ago. There certainly is the potential for that impact to grow the longer tariffs remain in effect. As you know, it’s a very fluid situation. Tariff changes weekly, daily, fairly frequently. So predicting is challenging, but we are keeping a very close eye on it. To your point, there are some external industries that show some moderate increases. Others look largely unaffected.

So we’re going to continue to closely monitor it. But there is a little bit of a provision in the third quarter results for tariff increases, but it’s not yet at the level that we had potentially forecast. And just to be clear, Michael, correct me if I’m wrong, we’ve got a provision in there because we expected that we might see it. We’re not really seeing it in any meaningful way.

Michael Klein: Yes. It’s significant. Again, we’re seeing it on the margins, and so we booked the provision for it. But again, well below the mid-single-digit level that we had described before.

Elyse Greenspan: Thank you.

Operator: Your next question comes from the line of Paul Newsome from Piper Sandler. Your line is open.

Paul Newsome: Good morning. Yesterday, Progressive gave us a little unpleasant news about their poor charge. Just curious if that is something that you’ve looked at yourself and I’m also curious about the accounting related to these kinds of things. I know that orders not unique. There are other states that have restrictions on proper on profitability. Just curious about how you account for that as well.

Michael Klein: Sure, Paul. It’s Michael. I’ll start with sort of response on the overall situation. Maybe Dan can chime in on accounting. The Florida excess profit provision and the statute isn’t actually a new thing. It’s sort of standard operating procedure in Florida. It’s actually fairly infrequent that people have to return premiums given the statute. What I would say about our business in Florida is we’re pleased with our auto business in Florida. But we don’t expect to need to make a return of premium to policyholders in Florida due to excess profits for the 2023 to 2025 accident year period for which we would make the filing in 2026.

The other thing I would say is given the size of our business in Florida, think of our Florida auto business less than 10% of our PI auto business. Think of the Florida PI auto business 1.5% of Travelers’ overall premium. I mean, it’s just not going to be a significant issue for the organization even if we were to need to make a return of premium, which we don’t anticipate.

Dan Frey: Then Paul, it’s Dan. With regard to the accounting, I guess I’m going to not give a definitive answer. And one of the reasons I won’t give a definitive answer is if you go back to COVID, when we and some of our peer companies returned premium because frequency and losses declined so rapidly, so quickly, not every company accounted for that the same way. So we had a view of how that should be accounting for. That’s what we reflected in our results. Other peer companies had slightly different view of how that should be accounted for.

And reflected it differently in their results, by which I mean some companies took that as an expense, some companies took that as a return to premium. And as Michael said, since we’ve not had to deal with the Florida excess profit issue, we haven’t done a real deep dive on how we think it would come through the P and L. But most importantly, I think as Michael said, we ever had it, we wouldn’t expect it to be much of an impact on our consolidated results in any event.

Paul Newsome: Great. That’s super helpful. That’s all I had. Appreciate it.

Operator: Your next question comes from the line of Josh Shanker from Bank of America. Your line is open.

Josh Shanker: Yes. Very much for taking my question here at the end. I was trying to understand a little bit about the retention effective retention numbers that you give in the back of the supplement about auto and home. Your retention bottomed, I guess, about three quarters ago. And it’s ticked up, but you’re still losing more of cars or more policies than you were before. Is that a projected retention based on where you’re pricing the business today, or have you already seen retention bottom and it’s improving here?

Dan Frey: Josh, it’s Dan. So retention is a way that we try to give you color relative to what’s the change in net written premium. So a couple of things we know definitively. We know definitively at any point in time how many policies are enforced. We give you that number. We know definitively at any point in time how much premium made it into the ledger. We give you that number. Production statistics like retention, renewal premium change, new business, are all in the disclosure say. They’re all subject to actuarial estimate of what do we think the ultimate retention is going to be.

Because you could start on day one of a policy and look like you’d retained all of them, but we know that there’s some peer period of those that are going to cancel early in the term and either go somewhere else or drop their insurance. So it’s very challenging to do, I think, you’re trying to do at a very specific level and go A plus B equals C. Production statistics are really color around what’s happening with the top line. And I’m sorry, can’t give you a more helpful answer than that.

Josh Shanker: If I look back at 3Q 2024, is that a more because now you have all that data. Is that a more accurate representation of what you know to have happened over the past year?

Dan Frey: Production statistics do get updated. So if you went back in true in business insurance, true in personal insurance, if you looked at historical quarters, you could almost do a triangle of what was retention as originally reported because it’s an estimate. We true those up as time goes on.

Josh Shanker: And can you confidently say, and I’ll leave it at this, that retention has improved from where it was a year ago, or it’s still not certain?

Dan Frey: I think we’re pretty confident in saying that retention has improved from where it was a year ago.

Josh Shanker: Okay. Thank you.

Operator: Your next question comes from the line of Alex Scott from Barclays. Your line is open.

Alex Scott: Hey, thanks. First one I have is on commercial auto and general liability. Just noticing, you know, those are, you know, sort of the lines where net written premium is growing more and was just interested in if that’s more a reflection of, you know, the rate’s obviously different there than maybe some of the other lines where there’s pressure. But, you know, is there anything about the commercial auto product launch and some of the things you’re doing that are actually causing you to lean into businesses a little more?

Greg Toczydlowski: Hey, Alex. This is Greg. You know, just to get the second part of your question, we did roll out a new automobile product across all business insurance that includes select and middle market that would roll up into the aggregate commercial auto numbers. So we do think that’s our most sophisticated product in auto that we brought into the marketplace. So that helps us from a segmentation point of view. But we’ve been very thoughtful around our growth in commercial auto. The thrust of what you’re seeing there in premium deltas really is based on renewal premium change. And that’s why I gave you some of that color in my prepared comments at a product line level.

Alex Scott: Got it. Okay. That’s helpful. And over in personal lines, I mean, the appetite you’ve been pretty clear on in that should help on the growth front. Is there anything from just a marketing spend kind of standpoint and thinking through the expense ratio that we should be aware of is you think through ramping up growth?

Michael Klein: Sure, Alex. It’s Michael. I would say that on the margins, we have increased our marketing spend in personal insurance largely in support of our direct-to-consumer business. But it’s a very different ballgame for us than marketing spend other places. Our direct-to-consumer business is less than 10% of our overall business. So we are on the margin increasing marketing spend there to drive more growth. But it doesn’t have a dramatic impact on the overall financial results of the business.

Alex Scott: Got it. Thank you.

Operator: And we have time for one more question. And that question comes from the line of Ryan Tunis from Cantor. Your line is open.

Ryan Tunis: I just had a question, just one on in business insurance, just on incurred loss. But I guess it’s, in national property, we don’t trend losses like we do or property for that matter. We trend losses like we do with other stuff, but certainly are still attritional losses on that line. I guess I’m just curious if those attritional losses have run better or worse or in line with your expectations so far this year? Thanks.

Dan Frey: Hey, Ryan, it’s Dan. I think the quarter results are really strong. Weather was generally leaning towards favorable, including in business insurance. If you’re wondering about whether it’s so significant that we would say this isn’t really a clean jump-off point for business insurance and you’d make some big adjustment, we would say no sort of inside of the normal realm of variability from quarter to quarter, but leaning towards the favorable.

Operator: And we have reached the end of our question and answer session. I will now turn the call back over to Abby Goldstein for closing remarks.

Abbe Goldstein: Thanks, everyone, for joining us today. And as always, please follow up with Investor Relations if you have any other questions. Have a good day.

Operator: This concludes today’s conference call. Thank you for your participation. You may now disconnect.

Image source: The Motley Fool.

DATE

Wednesday, October 15, 2025 at 5:00 p.m. ET

CALL PARTICIPANTS

Chief Executive Officer — Shelley Simpson

Chief Financial Officer — Brad Delco

Executive Vice President, Commercial — Spencer Frazier

Chief Operating Officer — Nick Hobbs

President, Highway Services — Brad Hicks

President, Intermodal — Darren Field

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TAKEAWAYS

Revenue — Roughly flat year over year, indicating limited top-line growth in a soft freight demand environment.

Operating income — Operating income improved 8% compared to the prior year period, reflecting successful cost discipline and margin repair efforts.

Diluted earnings per share — Diluted earnings per share increased 18% compared to the prior year period, despite inflationary headwinds in insurance, wages, and equipment costs.

Share repurchases — Over $780 million used to buy back 5.4 million shares year to date, maintaining balance sheet leverage around one times trailing twelve-month EBITDA.

Cost reduction initiative — More than $20 million of structural costs eliminated, with the majority of the $100 million target expected to be realized in 2026.

Intermodal volume — Decreased 1% year over year, with monthly trends of -3% in July, -2% in August, and flat in September.

Dedicated Contract Services (DCS) sales — Approximately 280 trucks sold, with ongoing visibility to fleet losses resulting in a truck count decline of about 85 units sequentially.

DCS margins — Maintained double-digit margins despite mature location losses and startup costs for new business.

ICS (Brokerage) rates — Reflecting improved new customer wins during the bid season.

Net Promoter Score (NPS) — Achieved a score of 53 in Intermodal.

Final Mile Services — Ongoing demand weakness for furniture, exercise equipment, and appliances, with challenged market conditions expected through year-end and anticipated legacy appliance business losses in 2026.

Safety performance — Achieved record-low DOT preventable accidents per million miles for the third consecutive year, improving further through the current period.

Regulatory impact — Recent U.S. regulations, such as English language proficiency and non-domiciled CDL, are reducing industry capacity but are not materially affecting the company’s own operations.

Technology & automation — Deployed 50 AI agents, automated 60% of third-party check calls, more than 73% of orders are auto-accepted, automated 80% of paper invoice payments, and saved about 100,000 hours annually across highway, dedicated, and CE teams.

Capital allocation priorities — Investment in the business is prioritized over buybacks and dividends, with an emphasis on maintaining investment-grade leverage.

SUMMARY

Management of J.B. Hunt Transport Services (JBHT -0.53%) reiterated strategic clarity on long-term operational excellence, pursuing aggressive cost reductions and process automation to strengthen margins in challenging market conditions. Executive commentary directly addressed the implications of rail industry consolidation, emphasizing the company’s experience in prior mergers and robust long-term agreements with key rail providers. Sequential volume trends in Intermodal highlighted ongoing softness offset by service-driven share gains. Technology deployment and automation initiatives were positioned as critical levers for future efficiency gains and margin sustainability. Near-term expectations for DCS and Final Mile Services included persistent end-market headwinds but pointed to a return to modest fleet growth and targeted business mix shifts in 2025 and 2026. The company explicitly reaffirmed its balanced capital allocation strategy focused on core investment.

Simpson stated, “we are making good progress towards reaching our $100 million savings goal and advancing towards our long-term margin target.”

Delco highlighted, “productivity and cost management efforts more than offset those headwinds to drive our improved results.”

Frazier noted, “truckload capacity continued to exit the market, and the pace of exits is accelerating,” though soft demand is limiting immediate pricing effects.

Spencer Frazier explained that intermodal volumes benefited from conversions “primarily because more customers are converting freight to intermodal from the highway as they see our commitment to operational excellence differentiating J.B. Hunt Transport Services, Inc.”

Brad Delco directly attributed recent improvements to “service efficiencies, balancing our networks, dynamically serving customers to meet their needs, focusing even more on discretionary spending, and driving greater asset utilization.”

Hicks indicated DCS expects “operating income to be approximately flat compared to 2024,” with potential for further growth in 2026 driven by new business startups.

Simpson emphasized strategic adaptability to rail consolidation: “our scale and influence allow us to coordinate complex intermodal moves and deliver unique solutions for our customers.”

INDUSTRY GLOSSARY

Drayage: The movement of freight over a short distance, typically as part of an intermodal shipment within a port or between rail terminals and customer locations.

DOT preventable accident rate: A safety performance measure calculated as the number of Department of Transportation (DOT)-recordable, preventable accidents per million miles driven.

Steel wheel interchange: The movement of an intermodal rail container car between two railroads without unloading the cargo, typically using physical rail routing connections.

Headhaul/Backhaul: ‘Headhaul’ refers to high-demand freight moves in a preferred direction, often at higher rates; ‘Backhaul’ refers to return moves that typically have lower rates or less freight volume.

IMC: Intermodal Marketing Company — a non-asset third-party intermediary arranging intermodal freight movement between shippers and railroads/trucking firms.

Full Conference Call Transcript

Shelley Simpson: Thank you, Andrew, and good afternoon. Throughout the year, our focus has been on three clear priorities: operational excellence, scaling into our investments, and continuing to repair our margins to drive stronger financial performance. We are executing these priorities with discipline and determination, guided by a strategy designed to strengthen our competitive position and unlock long-term value for our shareholders. I am highly confident that our approach is building a stronger company, one that is fully equipped to capitalize on meaningful growth opportunities ahead while driving stronger financial performance. Across our businesses, service levels remain excellent. We have systemically elevated our service standards to drive disciplined profitable growth with both new and existing customers.

Even as overall freight demand softened during the quarter, our unwavering commitment to service enabled our intermodal and highway businesses to capture additional volume and outperform the market. Operational excellence is now synonymous with J.B. Hunt Transport Services, Inc., and we are leveraging this reputation to drive strategic growth and maximize returns on our investments to match the unique value and strong service levels we provide for customers. We remain focused on controlling what we can, optimizing costs in the near term without sacrificing our future earnings power potential. In addition, we are placing a heightened emphasis on operational efficiency throughout the organization.

By streamlining processes, adopting best practices, and leveraging technology, we aim to utilize every resource as effectively as possible to maximize productivity and performance. Our initiative to lower our cost to serve, announced last quarter, is focused on removing structural costs from our business. The organization’s collaborative efforts continue to gain momentum, and Brad will share more details on our progress. This initiative marks our latest evolution in expense discipline, and we are making good progress towards reaching our $100 million savings goal and advancing towards our long-term margin target. Now, let me address the elephant in the room: rail consolidation. J.B.

Hunt Transport Services, Inc.’s position is rooted in our commitment to delivering exceptional intermodal service and creating long-term value for our customers and shareholders. We recognize both the opportunities and risks that consolidation presents. But our decades of experience, including navigating seven prior Class I railroad mergers, and our thoughtfully developed long-term agreements and strong relationships with NS, CSX, and BNSF should provide the basis for us to adapt to any changes in the industry. As the largest domestic intermodal provider, our scale and influence allow us to coordinate complex intermodal moves and deliver unique solutions for our customers. We are consistently rated best in class by third-party industry surveys of intermodal customers.

And our ability to deliver seamless, differentiated service across the entire North American intermodal network is a key competitive advantage. Our focus remains on providing reliable, efficient, and innovative service that benefits our customers now and into the future. As the rail industry evolves, we expect our proven adaptability and unwavering dedication to service will not only safeguard our leadership position but should also continuously set higher standards of excellence for our customers. I want to close by recognizing the entire organization for their hard work and progress across many areas of focus. The third quarter is extra special at J.B. Hunt Transport Services, Inc. as it includes National Truck Driver and National Technician Appreciation Week.

Our professional drivers and maintenance teams are the backbone of our success. And their record-breaking safety performance is a testament to their skill, dedication, and attention to safety every day. We appreciate all they do to keep our company, our customers, and our communities safe. With that, I’d like to turn the call over to our newly appointed CFO, Brad Delco.

Brad Delco: Thanks, Shelley, and good afternoon. I will hit on some highlights of the quarter, review our capital allocation plan, and give an update on the lowering our cost to serve initiative. Let me start with the quarter. As you have already seen from our release, revenue was roughly flat year over year while operating income improved 8% and diluted earnings per share improved 18% versus the prior year period. While inflation in insurance, wages, and employee benefits and equipment costs were all up, our productivity and cost management efforts more than offset those headwinds to drive our improved results.

Over the years, you have heard us talk about investing in our long-term growth, maintaining cost discipline without jeopardizing our future earnings power, and creating operating leverage when the market returns. Well, it’s no secret the market hasn’t returned yet, but the notable improvement in our financial performance this quarter should serve as a true testament to the talent and capabilities of the people throughout our organization and the execution of our strategy towards operational excellence in safety, service, and lowering our cost to serve. On capital allocation, our balance sheet remains healthy, maintaining leverage around our target of one times trailing twelve-month EBITDA while purchasing over $780 million or 5.4 million shares of our stock year to date.

This aligns with our messaging around prefunding our long-term future growth during the downturn and having the flexibility with the strong cash flow generation of the business to be opportunistic with share repurchases as a way to return value to our shareholders. We will be disciplined in our capital allocation approach with investing in the business as priority number one, sustaining our investment-grade balance sheet, supporting future dividend growth, and finally continuing our opportunistic repurchases. Last quarter, we outlined our lowering our cost serve initiative to remove $100 million of structural costs from the business. I’m happy to share we are off to a good start, having eliminated greater than $20 million in the quarter.

Examples of our success are in service efficiencies, balancing our networks, dynamically serving customers to meet their needs, focusing even more on discretionary spending, and driving greater asset utilization. We remain committed to updating you on our progress going forward. But our intent is to demonstrate our progress in our reported results rather than just speak to them. As we noted last quarter, we will realize a portion of these benefits this year, with the majority of the impact realized in 2026. Let me close with this and what I hope you take away from our quarter. First, our company continues to execute from a position of strength.

We have been transparent with our strategy, our investments to be best prepared to service our customers’ future capacity needs. Second, we also continue to remove structural costs from the business. We are off to a good start and have more work to do. Third, our business continues to generate a significant amount of cash, and we remain focused on generating strong returns with our deployed capital. We have been opportunistic with our share repurchases, all while maintaining modest leverage on our balance sheet. That concludes my remarks. Now I’d like to turn it over to Spencer.

Spencer Frazier: Thank you, Brad, and good afternoon. I’ll provide an update on our view of the market and some feedback we are hearing from our customers. Overall demand trended below normal seasonality for much of the quarter outside of the seasonal lift we saw at quarter-end. On the supply side, truckload capacity continued to exit the market, and the pace of exits is accelerating. But the soft demand environment is likely muting the market impact of capacity attrition. Outside of recent weeks, truckload spot rates remained under pressure in the quarter. More recent regulatory developments and, more importantly, regulatory enforcement is having an impact on capacity.

While this industry may have a chicken little reputation when it comes to predicting capacity changes, the capacity bubble may be deflating as we speak. In the near term, customers will remain skeptical of any predicted change, only believing it when they experience it. Shifting to intermodal, volumes declined 1% year over year. We believe our volumes held up better relative to the broader truckload market decline, primarily because more customers are converting freight to intermodal from the highway as they see our commitment to operational excellence differentiating J.B. Hunt Transport Services, Inc. Intermodal from the competition.

The service we provide ranks us at the top of our customer scorecards, and we continue to be ranked at the top of industry surveys as well, with a Net Promoter Score of 53. When we go to market, we work with customers to dynamically solve their supply chain needs by designing and executing our operations to meet their requirements. For example, in our intermodal business, customers trust us to select the most efficient service regardless of the rail provider to seamlessly move their freight throughout North America. Today, roughly half of our interchange volume on transcontinental shipments occurs through a steel wheel interchange.

This ratio can change dynamically and demonstrates our ability to be agile at scale to execute and meet our customer expectations. Regardless of how the rail landscape and operating scenarios might change over the next couple of years, we remain committed to delivering exceptional service and growing with our customers. Regarding the current peak season, the strong container volume into the West Coast in July generated headlines regarding a potential pull forward. Ocean peak season came early. That said, it is important to disconnect the timing of peak season on the water from the peak season of the inland supply chain. Our customers are still expecting a peak season, although the magnitude and duration of peak volumes will vary.

Our conversations indicate there is a large amount of freight that was imported early that hasn’t moved through the inland supply chain yet. No one has canceled Christmas. I’ll close with some customer feedback. Our customers realize the financial health of the transportation industry is not great. And as a result, they are choosing to do more with the best carriers and more with fewer carriers. Shippers are focused on creating efficiencies in their supply chains by working with providers who are safe and financially sound and who execute with agility and predictability. Our scroll of services continues to operate from a position of strength, creating value as the go-to transportation provider for our customers.

I would now like to turn the call over to Nick.

Nick Hobbs: Thanks, Spencer, and good afternoon. I’ll provide an update on our areas of focus across our operations, followed by an update on our Final Mile, truckload, and brokerage businesses. I’ll start on our safety performance. Safety is a core piece of our culture and a key differentiator of our value proposition in the market. We are coming off of two consecutive years of record performance measured by DOT preventable accidents per million miles, and our safety results through the third quarter are performing even better than these record performances. This performance is a testament to our people and the attention to detail they bring to the job every day, as well as our focus on proper training and technology.

Our safety performance is a key piece of driving out cost and will continue to be an area of focus. While the ultimate impact on industry capacity is hard to pinpoint, we believe the recent developments on regulations and enforcement, when taken together, could have a noticeable impact on available industry capacity. These include new regulations around English language proficiency, B1 Visas, FMCSA, biometric ID verification, and non-domiciled CDLs. Importantly, for J.B. Hunt Transport Services, Inc., we do not expect to see any material impact on our capacity. There have been some signs based on what we are seeing in our truck and brokerage operations that it could have a broader industry impact.

Moving to the business, let’s start with the final mile. As we said last quarter, business conditions in our end markets remain challenged with soft demand for furniture, exercise equipment, and appliances. We continue to see positive demand in our fulfillment network driven by off-price retail. Going forward, we expect market conditions to remain challenged through at least year-end. Our focus remains on providing the highest service levels, being safe and secure, ensuring that the value we provide in the market is realized to drive appropriate returns. In 2026, we do anticipate losing some legacy appliance-related business, but we will be working diligently on backfilling with other brands and service offerings in this segment of our business.

Moving to JBT, our focus in this business hasn’t changed, and we are winning business with strong service from both new and existing customers, leading to our highest quarterly volume in over a decade. We are remaining disciplined with our growth to ensure our network remains balanced in order to drive the best utilization of our trailing assets. Going forward, we are pleased with the direction of this business in this soft demand environment and the progress we are making on lowering our cost to serve. We see an opportunity for further efficiency and automation gains in the future as we continue to leverage our 360 platform.

That said, meaningful improvements in our profitability in this business will be driven by greater levels of rate improvement and overall demand for truckload drop trailing solutions. I’ll close with ICS. During the third quarter, volumes modestly improved sequentially as new volume from recent bid wins was partially offset by soft demand in the overall truckload market. Truckload spot rates remained depressed throughout the quarter, but we saw gross margins remain healthy. We are almost through bid season and are pleased with the awards we have received, with rates up low to mid-single digits, winning volume with new customers. Our focus here remains on profitable growth with the right customers where we can differentiate ourselves with service.

Going forward, we will remain focused on scaling into our while continuing to make improvements to our cost structure and leveraging our 360 platform to drive greater efficiency and automation, which will help lower our cost to serve. With that, I’d now like to turn the call over to Brad.

Brad Hicks: Thanks, Nick, and good afternoon everybody. I’ll provide an update on our dedicated results. Starting with the quarter, at a high level, our third quarter results were very strong, particularly in light of this challenging freight environment. We believe our results are a testament to the strength and diversification of our model, the value we create for our customers, and how we drive accountability at each site and customer location. As a result, we continue to see good demand for our professional outsourced private fleet solutions. During the third quarter, we sold approximately 280 trucks of new deals.

As a reminder, our annual net sales target is for 800 to 1,000 new trucks per year, and we would be on pace with this target absent the known losses disclosed almost two years ago. Encouragingly, our overall sales pipeline remains strong as our value proposition in the market remains differentiated. Our sales cycle in dedicated is typically eighteen months from start to finish, and our pipeline includes both large and small fleets at various stages of completion, all underwritten to our return targets. Overall, I remain pleased with the momentum and activity in the pipeline.

As I just mentioned and as we have communicated over the past eighteen months, we have had visibility to fleet losses that wrapped up in early July, which negatively impacted our third quarter ’25 truck count by about 85 trucks versus our second quarter results. Navigating through these losses, in addition to call outs we’ve had related to some customer bankruptcies and the overall market dynamics, demonstrates our discipline and strong execution. While we were losing locations that had historically delivered mature margins, we were simultaneously absorbing startup costs from onboarding new business. Despite facing these two margin pressures, we still maintain double-digit margins during this period. I am extremely proud of all of our teams for their effort.

Hope going forward, knowing that most of our fleet losses are behind us, is that we are back on track with our net fleet growth plan moving forward. We believe the performance of our dedicated business has been a standout not only for our company but also the industry. We have great visibility into the financial performance of each account, which provides a high level of accountability at each location and a diversified customer base with our managers on-site with our customers, which we believe creates unique value that is a differentiator for us. Going forward, with our known losses behind us, our expectation for modest fleet growth in 2025 has not changed.

As we have said previously, when we sell new truck deals, and that business starts up, we do incur some expenses as that business is onboarded. That said, this isn’t new for us. We are starting up new customer locations each quarter. Given our progress with respect to lowering our cost to serve, we expect our 2025 operating income to be approximately flat compared to 2024. The magnitude of any potential variance higher or lower to this outlook will be driven by the number of locations we start up during the quarter. We believe the setup is favorable for us to continue our growth trajectory in 2026 and beyond.

Our business model and value proposition are differentiated in the market and continue to attract new customers. We remain confident in our ability to compound our growth over many years to further penetrate our large addressable market. With that, I’d like to turn it over to Darren.

Darren Field: Thank you, Brad. Thank you to everyone for joining us this afternoon. I’d like to start by saying I feel really good about our performance and how our strategy and solid execution drove meaningful improvements in our results. I believe this is a true testament to our focus on operational excellence, cost discipline, and progress on lowering our cost serve initiative. Before we get into more detail on the results, I want to follow up on some of Shelley’s comments regarding the potential for Class I rail consolidation. First, there are still a lot of unknowns. But I am confident J.B.

Hunt Transport Services, Inc. should be a primary consideration and actively engaged in all discussions involving the future of the intermodal industry as well as the execution of all Class one’s desire to take share from the highway to grow their intermodal service offering. We have offered seamless transcontinental intermodal services for decades, connecting BNSF with both Eastern railroads, and believe that opportunity could exist well into the future regardless of the various outcomes we know are either announced or speculated in the market.

We continue to see a large opportunity to convert highway shipments to intermodal, and if the motivation for consolidation is to compete more with trucks, we believe this will present our industry-leading intermodal franchise additional growth opportunities. We are one of the largest purchasers of rail capacity in North America, and we will engage in discussions with all rail providers to execute on a strategy and plan that we think is in the best interest of our shareholders. Turning to the quarter, demand for our domestic intermodal service wasn’t all that strong, but nonetheless, we saw sequential improvement in volumes and executed some of the most efficient dray service in our history, particularly in September.

As Spencer mentioned, we still expect the peak season as lots of volume that moved on the water earlier this year will still need to advance in the inland supply chain ahead of the holidays. Volumes in the quarter were down 1% year over year and by month were down 3% in July, down 2% in August, and flat in September. After seeing unique strength off the West Coast last year due to the threat of the East Coast port labor disruption, TransCon volumes were down percent in the quarter, while Eastern loads were up 6%.

As we’ve communicated all year, we had a bid season strategy focused on getting better balance in our network to grow volumes and repair our margins with more price, particularly in our headhaul lanes. Last quarter, we talked about our success in the bid season, particularly around balance, and we think that success combined with our lowering our cost to serve initiatives were key contributors to our year-over-year and sequential performance improvement. Our service performance remains strong. Our primary rail providers BNSF, NS, and CSX continue to deliver excellent service, which we believe is taking share from Highway. I am confident our service offering is being recognized in the market.

Customers are reengaging with us with additional opportunities largely driven by our differentiated service and value compared to both highway and IMCs. As you all are keenly aware, we have the capacity and ability to execute on a meaningful growth plan over the coming years based on investments we’ve already made. In closing, we remain very confident in our intermodal franchise and the value we provide for our customers. We have shown the ability to grow and generate strong returns through many rail consolidation events over the past few decades and look forward to the opportunities we have in front of us. With that, I’d like to turn it back to the operator to open the call for questions.

Operator: Thank you. We will now begin the question and answer session. The first question comes from Chris Wetherbee with Wells Fargo. Please go ahead.

Chris Wetherbee: Hey, thanks. Good afternoon, guys. Hey, good afternoon. I guess maybe if we could start on the cost side and maybe unpack, I think you said $20 million in the quarter, I think $100 million is the total program. Can you give us a little sense maybe by segment how that played out? Any examples that you can provide in terms of detail would be great too. And then I guess as you think forward, is it sort of progressive from the 20 to the 100 over the several quarters? Any sort of insight there? And I guess in that context, boxes were down sequentially for the first time in quite some time.

So just kind of curious how that is sort of part of the plan if it is?

Brad Delco: Chris, I’ll try to address the first part and I’ll pass it over to Darren to address the second part. Really there’s progress across all areas of the business. And so when we think about, as we laid out last quarter, what are the three buckets that we were targeting for this initiative? It was around efficiency and productivity. That’s not just in the business, that’s also in back office and how all that gets allocated to businesses. Driving better asset utilization, I mean, saw that in intermodal. We certainly saw that and you heard some comments about almost record performance in our tractor utilization in our dray operations. You saw good improvement in productivity in Dedicated.

I wouldn’t want to say one segment versus the other, but I think you’ve seen it in the results across the board. In terms of how we’re going to progress going forward, I said in my comments, we’re going to give you an update each quarter. We said we think most of this will reveal itself next year. Listen, we’re off to a good start. We wanted to share that and I think you see it in the results. And while we do speak to it and we will speak to it each quarter, really the intent here is for you guys to see it in the results.

And I’m glad that you guys can see it in the results we printed this afternoon. So I’m going to pass it over to Darren and let him address maybe the container count question and appreciate the question, Chris.

Darren Field: Yes. I mean, the container count isn’t down. We have equipment that reaches useful life every quarter. It’s a small amount. Sometimes there’s a repair bill that may be greater than what the book value of that piece of equipment is, and we’ll retire it. The other component is we’ve worked closely with Dedicated in a few examples where we found what had been leased trailers in an account, we were able to use containers instead. It’s a pretty small number, but those would be the kind of moving pieces there. Nothing significant in terms of a real change in direction on container equipment.

Operator: The next question comes from Brian Ossenbeck with JPMorgan. Please go ahead.

Brian Ossenbeck: Hey, good evening. Thanks for taking the question. I think Mike was giving some commentary about pricing for next year. I think it was in ICS low to mid-single. So hoping you can kind of run through what you’re expecting across the different modes. And if I’m hearing you correctly, lowering the cost to serve, if rates do stay flat or don’t move a whole lot for next year, it sounds like the structural reductions here mean that the performance like this can be more durable and perhaps even better whenever we do get to that long-awaited upcycle? Thank you.

Nick Hobbs: Yes. Thank you. I was really talking about what we’ve seen in recent bids and the awards that we’ve seen, not really what we thought next year was going to be on rates. But we’ve seen in ICS in particular, we’ve seen some success and growth in the amount of loads and in our pricing as we kind of focus on the more difficult challenging business that’s not as commoditized, and so I think you see that in our gross margin. So it’s just the type of business that we’re working on that we saw that.

And then Brian, to the second part of your question, I mean, clearly, the rate environment has been challenged now for quite some time for our industry. This initiative, again, that we launched, you really dig in on the deep into all the details, we have a spreadsheet that has over 100 lines of things that we’re going to attack. And we’ve had very healthy debates around our executive table about what’s structural, what’s temporary, what we think are just cost avoidance versus are things that we’re removing. And the numbers we’re sharing, I mean, I think we said last quarter, our goal is and what we’ve identified as something far greater than $100 million.

We’ve always been, I believe we’ve always been a fairly conservative company. We have a very strong say-do culture. If we say something, we’re really setting out to do it. And so we’re comfortable sharing the $100 million. Again, we’re off to a good start. Our hope is while we’ve had tremendous headwinds in this industry, at some point headwinds will turn to tailwinds. And I think it will make it, it’ll make the work we’re doing look even stronger. Again, in my comments, you heard us say, we really are trying to set this business up to drive stronger incrementals when the market is more in our favor.

And I think some of the discipline we have around cost is setting us up very nicely for that.

Operator: The next question comes from Jonathan Chappell with Evercore ISI. Please go ahead.

Jonathan Chappell: Thank you. Good afternoon. Don’t know who wants to answer this, maybe Darren or Spencer or even Brad, but you’ve talked about the demand challenges. We all know about that. Pricing in the spot market doesn’t seem to have done very much from three months ago either. But if you look at revenue per load in both intermodal and you had a pretty nice sequential improvement. So I’m trying to understand is that a decision you have to make versus volume, volume versus pricing? Is that a mix situation? Is that surcharges? And is that now the starting point? You always talk about like the cake being baked into the next year.

Given that sequential increase down to 3Q, is this the starting point of which the cake is baked? Or is there a risk that could actually move backward closer to the 2Q levels?

Darren Field: Okay. This is Darren. I’ll try to tackle at least part of that. If Spencer has anything to add, he can certainly jump in. So we’ve often talked about we implement about 30% of prices in the first quarter, thirty percent second quarter, 30% third quarter, and call it 10% in the fourth quarter. I have long said the third quarter is the best time to see the results of the previous bid cycle. And I think that’s what we did just show in terms of the results is that’s a fully implemented bid season. What is washed in the results is there is some good pricing movement in the headhauls. There is some negative pricing in backhauls.

And when you combine them, it looks relatively muted in terms of price per load. We reported minus 1%. And so I don’t know that the sequential change did that come from some sort of a mix shift? It could have probably has some element of mix in there. I would say while our transcon volumes weren’t up year over year, I do believe our transcon volumes were up sequentially. And so that can play a role in terms of what happens sequentially from a revenue per load position.

Nick Hobbs: Yes. And Jonathan, this is Nick. I’ll talk about ICS. I would just say it’s really mix in ours and type of business from just think about team or hazmat, just various different things that we’re going after. It’s a little bit more difficult, multi-stop. So those carry a little higher rate. So it’s the type of business that we’re targeting in ICS.

Operator: The next question comes from Scott Group with Wolfe Research. Please go ahead.

Scott Group: Hey, thanks. Afternoon. So I want to follow-up maybe similar to that last question. So obviously, very good sequential margin improvement from Q2 to Q3 in intermodal. Like how much of that do you think is the cost side of what you’re talking about versus the yield side? I know we had earlier peak season surcharges this year. Ultimately, I’m trying to just figure out like the sustainability of this and as costs continue to ramp, should we be expecting further sort of sequential improvement off of this trough?

Q2 to Q3, further improvement in Q3 to Q4, or is it not necessarily going to play out that way given some of the puts and takes with timing of peak surcharges and things like that?

Darren Field: Well, clearly, peak season surcharges got a lot of press. We went early because a lot of customers had believed that they needed extra capacity. I wouldn’t say that the third quarter was a particularly strong peak season surcharge quarter. Frankly, we were disappointed in demand off the West Coast during the quarter and even adjusted our peak program in the middle of the quarter as an example. So I wouldn’t want our analysts to believe that’s driven largely by peak season charges. Really when we set out with our bid strategy a year ago, we wanted to grow clearly. We wanted to improve price and we wanted to improve balance.

And the improvement in balance, whether that be from growth westbound or an improvement in some price eastbound in the headhauls. I mean, of that result is driving improvements that we feel confident we can continue to sustain as we move forward. The cost side, we did, we were able to implement some small technology enhancements during the summer that really began at the end of the second quarter that helped define for our entire operations planning team some new flexibility that our customers had given us in some cases. And from that, we were able to drive real efficiency in our driver base. We were able to drive out some empty miles on the drayage system.

So these are areas that we feel are sustainable. And as we continue to look for opportunities to grow, what I don’t want anyone to hear is that growing in imbalanced lanes is a bad thing. It doesn’t have to be bad. It just ultimately the pricing on those loads has to cover the cost of positioning empties. And in a lot of cases, I think our customers are beginning to look hard at their supply chains, what’s happening with them, and can we look into the future and find a way to get back growing in markets that maybe are in balance that doesn’t have to be a bad thing for us.

But I believe the cost improvements that we made during the quarter, we must sustain those moving forward.

Operator: The next question comes from Brady Lares with Stephens. Please go ahead.

Brady Lares: Hey, great. Thanks. I wanted to touch on DCS for just a moment. Sales have continued to be pretty strong over the last few quarters despite trade uncertainty and a tough freight backdrop. Can you talk about what’s driving these wins at this point? Four years into a freight recession? And despite the strength in sales, you mentioned in your prepared remarks, you saw a pretty meaningful improvement in margins. Can you think of help us think about how much of that was just an improvement in your cost to serve versus kind of a maturation of these earlier sales?

Brad Hicks: Yes. Thanks, Brady. This is Brad. First, let me say just how remarkably proud I am of our entire team in DCS. The effort, the service, our drivers, maintenance teams, all the support personnel, our operators, just fantastic results in the quarter, both from an execution standpoint, from a safety standpoint, and certainly from a value creation and value delivery to our customers. And I think that the reason I say that is, I think that is one of the differentiations for J.B. Hunt Transport Services, Inc. is really our CVD program, customer value delivery.

And so when I think about the value that we can create for our customers, both through creative solutions, but also just our density and our ability to leverage and share our resources across multiple customers and multiple business types to really drive and create valuable solutions. The second part of that is, yes, we have worked hard and similar to Darren, there’s a variety of initiatives that we’ve kicked off. Some earlier in the year, some more recent. There’s been great work done by our maintenance teams helping lower our cost to serve, both by creating more uptime for our equipment and also lowering the cost of the actual maintenance program that we have.

And then lastly, risk is a critical component of private fleet, and the environment we’re in and what insurance has done the last several years that we’ve talked about often. And we’re doing a fantastic job there, as Shelley mentioned and Nick did as well in the prepared comments. And so can’t really say it’s one thing. It’s all those things together that makes our program different, we believe. And I think that’s why we’ve continued to have success even though the backdrop of this market has been pretty terrible as we all know.

Operator: The next question comes from Ken Hoexter with Bank of America. Please go ahead.

Ken Hoexter: Great. Good afternoon. Nick, you mentioned kind of seeing signs of impacts of ELP and the P1 visas. Is that what’s driving kind of spot rates up the last few weeks? Is that capacity removal already being seen in the market? Not the demand side, but the supply side? And then Shelley or Darren, I think you mentioned about the state of the potential rail mergers, but have you had conversations with UNP or Norfolk on sustaining your access or anything? Is that a discussion you’ve had at this point? Ahead of their filing?

Nick Hobbs: Yes. Well, Ken, I’ll start with one and let Darren get over to question two here in a second. So question one, yes, that’s the reason you’ve seen spot rates up in the last couple of weeks. It’s been because of enforcement activity and when you see the pockets, I would say it’s been able to cover freight, it’s just tightened it up and so we’ve seen a little tightness in probably eight to 10 markets and I think you can kind of follow the news around and see where ICE is active and in big metropolitan areas. And so it’s a combination of non-domicile. It’s also some cabotage. It’s also some fear factors.

But we’re prepared for that for whatever happens. We’re set up with intermodal, dedicated, our brokerage, just like when we went through COVID. We will be able to get the capacity no matter what happens in the market. So but we are seeing it in some spots, just a little notice, nothing extreme.

Darren Field: And for your second question there, Ken, clearly got two questions in there, very different subject. I don’t know how that slipped by the new IR guy. So I’m not going to talk through any kind of rail conversations. I think it is important that all of our shareholders and all of our customers hear any future merger that would be approved for whatever reason has been perceived that J.B. Hunt Transport Services, Inc. would have to move our traffic to CSX. And that’s not accurate at all. There’s nothing about a future state new railroad that would mean our current Norfolk Southern footprint that we have today would be required to change.

I think we referenced that we would intend to speak to all of the railroads to make sure that we can solve for our customers’ networks and continue to be what we’ve been to the market for decades now. And that’s just drive home the ability to take a customer’s needs, translate that into what the railroad capacity and capabilities are, combine it with our world-class drayage system, and provide intermodal solutions for those customers using the best solution available. And that will be our approach for as long as I’m here.

Operator: The next question comes from Jordan Alliger with Goldman Sachs. Please go ahead.

Jordan Alliger: Yes, hi. So given sort of the color and commentary on customers still expect peak season and load still to advance inland against the pull forward, is there any way you could sort of put that together a little bit and think through sort of loads and volumes for you guys relative to what we just saw in the third quarter as we look out the next quarter or so? Just from a high-level perspective, thanks.

Spencer Frazier: Yes. Hey, John, this is Spencer. Thanks for the question. The main point that I really wanted to make there, there’s been quite a few headlines that come out and say, hey, peak is over. There’s not going to be a peak. And I totally agree with that from an ocean perspective. But we always have to remember that domestic, that inland supply chain, the timing of that is really driven by actual consumer and customer demand. And that’s going to take place at the same time it does every year, associated with the holidays. So that was kind of point number one. And then back to our customers are expecting a peak season.

I think even the NRS came out with their retail sales number or retail sales for September being up 5.7%. Our customers are working to keep their consumers, to keep all of us engaged and make sure that they can hit their sales targets and goals for the holiday season. And that they’re expecting to do that. Now for us, definitely the deals and agreements and support that we have for our customers is unique. And each one of our customers is unique on how they’re executing their peak volume.

But the big thing when you think about going forward to your question, you look at last year, last year was artificially inflated due to the East Coast strike concerns and other issues. And that really started in the ‘4. And carried through to really where West Coast port volumes were up 20% significantly all the way through the year. I expect the comps associated with that change and really the current import volumes to really be challenged all the way through March ‘6. So I think that where we’re at today and what we’ve done and what we’re going to do to help our customers through peak, we’re looking forward to doing that.

And working with those customers that have provided us with the forecast and what their needs are.

Operator: The next question comes from Ravi Shanker with Morgan Stanley. Please go ahead.

Ravi Shanker: Great, thanks. I’m going to throw in a long-term question here and maybe sharing this topic close to your heart. Just kind of given you guys probably led peers on JV360 and all the tech investments kind of many years ago, can you talk about kind of what you guys are working on right now? What that technology capital envelope looks like? Key initiatives there and kind of how the ICS business would look like from a tech and automation perspective maybe three, four years from now? Thank you.

Shelley Simpson: Thank you, Ravi. And love to talk about technology. Our strategy is rooted in how we transform our logistics. We want to be smarter, more predictive, and automated through JBM360. And if you just think about what our platform does, it supports $2 billion in carrier freight transactions, and that gives us scale to innovate. And we could do that quickly and effectively. As I think about what we’re working on, we’ve deployed 50 AI agents. That’s across the business. We’re trying to automate tasks, streamline our operations. And maybe just a few examples. Today, 60% of our third-party care check calls, those are automated.

More than 73% of our orders are auto accepted, 80% of our paper invoices are paid without a manual touch. Our dynamic quote API responds to 2 million quotes a year. And we’ve automated about 100,000 or a little more than one hundred thousand hours annually across our highway, dedicated, and CE teams. And so it’s not just about AI for us, it is about how we think about technology, but how does it empower our people. And so whether that’s engineering better processes or using robotic automation, leveraging AI, we’re focused on helping our teams work smarter and become more efficient. And that’s going to improve our operational performance and enhance our customers’ visibility and their experience.

So as we continue to refine our technology strategy, our goal remains very clear to us. We’re going to deliver measurable gains in cost savings, we’re going to increase our customer satisfaction, and we want to gain market share as a result. Now as I think about ICS, they have a great opportunity to do even more work when it comes to automation because the nature of the new customers they’re onboarding are less sophisticated from a technology perspective. So it’s really a new for them. If you think about our overall company, our company and the percentage of customers that we have that are large shippers, we’re heavily distorted to.

And so I would say that’s our opportunity to really grow with those small to midsized customers and that’s where automation will help significantly. We’ve got a clear path of things that we’re working on. And then I want to make sure that I do mention we did talk about Up Labs, which is a company that we’ve partnered with and really having them attack two of our areas that we believe need rewritten from a process and even more importantly technology where they’re integrating AI into those processes. Those two areas I would say, we’re in the middle of, really investigating and determining next path forward. But for us, all of this is about efficiency across our entire system.

And so that’s part of our lowering our cost to serve. It’s part of our transformation work. And I don’t think it just has to be AI that makes that happen. It could be a combination of processes, robotics, and AI.

Operator: The next question comes from Bascome Majors with SIG. Please go ahead.

Bascome Majors: Brad, as you get into the planning period for next year, can you talk a little bit about some of the higher visibility big-ticket cost items in the budget, be it health and welfare or insurance? Just what is the inflationary backdrop you’re continuing with now? And how do you think shifts into next year? And you put it on the blender with the $50 million plus incremental cost savings, how much do you really need to get from pricing and growth to offset that? Thank you.

Brad Delco: Well, Bascome, the way you started with that question, I was just going to say yes, yes, yes, and yes. I would say the big areas where we’re seeing inflationary pressure always on our people and wages but in particular around benefits. Group medical healthcare costs are, I don’t think it’s unique to J.B. Hunt Transport Services, Inc. I think it’s a challenge for any and all businesses. So that’s certainly an area that I think is a hot topic as we’re thinking about planning for 2026. Insurance, yes, we’re in the renewal process now. It’s probably too early to comment on that.

But particularly as you get into certain layers or areas of coverage, we’re seeing greater cost and largely because of how and how these claims are settling. And I think it’s again, it’s not that’s not unique to J.B. Hunt Transport Services, Inc. The thing that I’m really proud of is, and you heard Shelley and Nick both talk to it and our whole company should be proud of, is our safety performance. I mean, we’re coming off of a very strong year last year, which was best, which bested the prior year.

And year to date, I’ll knock on wood here, our performance is better than last year and the best way to reduce our cost on claims and insurance items is to really to avoid any incidents. And so that’s the goal. The goal is zero and we got a long ways to go to get there. In terms of what do we need, our customers I know are going to push hard unless there is a meaningful change or a change in the supply-demand balance. I think Nick alluded to the fact that there are maybe some things that are starting to pop up that might be reasons for more concern about what the capacity situation looks like going forward.

But we got to at least get above inflation. And if inflation is running 3%, I feel like our industry needs something better than that to get into a healthier spot. And our industry is not in a healthy spot. And I think most of you who have covered this for a long time know that. So our goal and we had a lot of follow-up conversations after our last earnings call about is $100 million net or gross, and I jokingly will say this here, I’ve asked each of those investors to define it for me and they all gave me a different example.

At the end of the day, lowering our cost to serve of $100 million, we want that to show up and be very visible to our owners. And we want to be obviously visible to you as well. But I would say we need something mid-single digits next year for our to at least get back on a healthier path to margin recovery and particularly for some of these transportation providers to reinvest or be at reinvestable levels. So that’s a long answer. I know I didn’t answer it specifically because I don’t want to give guidance as to what our rate expectations might be next year.

But I would hope the value that we’re providing customers will allow us to earn an appropriate return on the investments and the risk we’re taking serving those customers.

Operator: The next question comes from Tom Wadewitz with UBS. Please go ahead.

Tom Wadewitz: Yes, good afternoon. Want to give Shelley a shot at a question here if she wants to take it or I guess could pass along certainly. But when I think about coming out of a downturn in the industry, it seems like there we look for kind of a catalyst to change the shipper mindset. And I know you’ve got tons of experience working with shippers over time. So do you think this the DOT efforts that you listed a number of them, I think there’s a lot of focus on the non-domiciled CDL issue right now. But do you think that those DOT efforts are really causing a lot of concern in the mindset?

And there’s potentially a shift in that mindset that seems important to pricing. And then I guess within that is the 200,000 number DOT talked about, is that you think that sounds right? Or does that not sound right? Thank you.

Shelley Simpson: Yes. Thank you, Tom. And let me start and I’ll have the team kind of jump in here. Overall. When I think about how our shippers are viewing the market, it has been a surprise to all of us. So to J.B. Hunt Transport Services, Inc. and our shippers, how this market still is in the same place it’s been over the more than three years. And so I would tell you, our customers a year ago they were prepared and understood the why. That we would need more price.

It’s not that our customers are unsympathetic to our position, but they’re managing their costs based on what they see from a bid perspective and what they see from a cost perspective. And so, I think it’s incumbent on us. One of the things I think is important is we are a growth company, but we’re a disciplined growth company. We can’t just grow. We have to be disciplined in our growth strategy. And making sure we articulate that.

I’ll tell you this Tom, as much as Darren’s talked about our pricing change, although that might seem really simple to do, in this environment, those were very difficult discussions, but they were really fueled by our operational excellence and being able to talk to our customers about what great work we’re doing and they saw value in that. I’ve not seen us have to fight so hard for 12% before. When you know inflation is so much more than that overall. So I would tell you, I think customers want to help us. We need the market to change in order to do that. Do I think that non-domicile CDL could be a catalyst? Sure.

It would at least make a little more sense to me why there’s so much capacity in the market versus just our statistics say today. But I would tell you things have to change from here. If that’s one of the things that happens, then does that happen in the next twelve months? Does that take twenty-four months for it to happen? But let me just take a pause there and let Nick maybe you want to jump in on the non-doms.

Nick Hobbs: No, yes. And I might just add a couple of quick things here, Shelley. I totally agree. Our customers really the last two years have been planning for changes in cost that really didn’t materialize because they didn’t have to. I think some of the things that we’re seeing right now with a little bit of a disconnect in spot price rates going up versus volumes going down, the first time we’ve seen that. Maybe in the history of some of the data. Our customers look at macro data and spot pricing and volumes. Let me go back to until they actually experience it or feel it at the dock level, until freight is not picked up.

They won’t make a meaningful change. So that’s the area where we’ve got to give them confidence and predictability of our capacity and service, which we’ve done through operational excellence. That as this thing does change, whether it’s near term or over time, they can count on us to take care of their business. Nick?

Nick Hobbs: I’ll just add a couple of things. On the non-dom, I think the $200,000 is fairly legit. But I think there’s a lot of other factors of drivers that’s coming across the border, call it, cabotage. It should only be in the border zone. Is some good data out there. From a couple of sources that’s come out recently to talk about that. And so I just think there’s other factors that’s going to continue to impact that. But really to see any impact in the speed, it’s going to take the economic side along with the regulation side and that’s what’s going to drive the timing is those two. In my opinion.

Operator: The last question comes from Brandon Oglenski with Barclays. Please go ahead.

Eric Morgan: Hey, good afternoon. This is Eric Morgan on for Brandon actually. Thanks for taking the question. Just a quick one on intermodal growth in the East. I think you referenced in the prepared remarks having the labor port issue kind of playing in there. So I’m just wondering how sustainable that level of growth is moving forward and maybe in the context of some of this different seasonality you’re seeing this year would be helpful. Thanks.

Darren Field: Sure. So I think in reference to the labor situation, that had more to do with last year’s comps on the West Coast. Volumes being strong. Our Eastern network volume really doesn’t have a lot of interaction with the import economy a ton. I think that the Eastern network continues to be where we see the best highway to rail conversion opportunity. Our East network also includes Mexico as an example. And so we have really nice solid growth coming northbound out of Mexico as part of that. We think that the vast majority of the millions of loads that remain to be converted from highway to intermodal are in the East.

So we’re encouraged by our growth in the East, and we expect and anticipate we can continue to grow in the East for years to come.

Operator: This concludes the question and answer session. I would like to turn the conference back over to Mrs. Shelley Simpson for any closing remarks. Please go ahead.

Shelley Simpson: Hey, thanks everyone for joining. Hey, we’re pleased with our results in the short term, especially considering this environment. But we have more work to do and we’re not satisfied. We’re going to continue to remain focused on our priorities of operational excellence in both service and safety. We’re going to scale into our investments through disciplined growth, and then we’re going to keep repairing our margins, and that will drive stronger financial performance. We’re a growth company. It’s important, and we have the highest service across all five of our business units. I think the highest since I’ve been with the company from a consistency across the segments.

We see that metric as a key enabler to execute on our strategy and maintain our say-do culture on delivering what we say and what we expect from ourselves. Thanks for your interest, and we’ll see you next quarter.

Operator: The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

Image source: The Motley Fool.

DATE

Thursday, Oct. 9, 2025, at 5:00 p.m. ET

CALL PARTICIPANTS

• President and Chief Executive Officer — Michelle Gass
• Chief Financial and Growth Officer — Harmit Singh
• Head of Investor Relations — Aida Orphan

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RISKS

• Tariff impact — Harmit Singh stated, “Our updated guidance reflects the latest tariff rate, which includes 30% for China and an increase to approximately 20% for the rest of the world, compared to 50 basis points previously,” and quantified a resulting 20 basis point impact on gross margin and a 2 to 3¢ reduction in adjusted diluted EPS.
• Gross margin headwind in fiscal fourth quarter — Management forecasts a roughly 100 basis point contraction in gross margin for the fiscal fourth quarter ended Nov. 30, 2025, driven by tariffs and the absence of a fifty-third week.

TAKEAWAYS

• Net revenue growth — Net revenue increased 7% in the fiscal third quarter ended Aug. 31, 2025, with international markets contributing approximately 75% of the growth and the US accounting for the rest.
• Direct-to-consumer (DTC) channel — DTC sales rose 9%, with e-commerce up 16% and store comps delivering high single-digit growth in the fiscal third quarter; DTC now accounts for over 40% of the US business as of the fiscal third quarter.
• Gross margin — Gross margin reached a record 61.7%, up 110 basis points, more than offsetting an 80 basis point tariff headwind in the fiscal third quarter; approximately 50 basis points of margin uplift came from foreign exchange in the same period.
• Adjusted EBIT margin and EPS — Adjusted EBIT margin reached 11.8%, and adjusted diluted EPS was 34¢, both “ahead of our expectation” in the fiscal third quarter, according to Harmit Singh.
• Wholesale channel — Global wholesale net revenues grew 5% on an organic, continuing operations basis in the fiscal third quarter, with signature business up double digits and women’s outperforming across key partners, while US wholesale rose 2%.
• Regional trends — Asia net revenues accelerated 12% with double-digit DTC and wholesale gains; the Americas rose 7%, and Europe rose 3%, with UK performance described as “very strong,” based on organic net revenues in the fiscal third quarter.
• Women’s and tops segments — Levi Strauss women’s business grew 9%, men’s grew 5%, and tops increased 9%, with men’s tops up 10% and women’s tops up 8%, all on an organic basis in the fiscal third quarter.
• Shareholder returns — Returned $151 million to shareholders in the fiscal third quarter (up 118%), bringing year-to-date returns to $283 million and exceeding the annual payout target.
• Inventory — Inventory dollars grew 12% and units increased 8% in the fiscal third quarter, driven by build-up ahead of the holiday season and higher product costs from tariffs; as of the fiscal third quarter, 70% of US holiday inventory was in place.
• Guidance raised — Management now expects full-year reported net revenue growth of approximately 3% and organic net revenue growth of approximately 6%, with gross margin projected to expand 100 basis points and adjusted EBIT margin targeted at 11.4%-11.6% for the fiscal year ending Nov. 30, 2025.
• Beyond Yoga — Beyond Yoga is expected to end the year up low teens versus the prior year, with new stores opening in Boston, Houston, and two more in Northern California, bringing the total store count to 14.
• SKU productivity — The company reduced SKUs by about 15% compared to last year, achieved a 20% increase in productivity per SKU, and raised the proportion of globally common SKUs to 40% as of the 2025 season.

SUMMARY

Management reported four consecutive quarters of high single-digit organic revenue growth on a continuing operations basis, attributing broad-based performance to both DTC and wholesale channels, as well as geographic and gender diversification. Levi Strauss (LEVI -10.60%) maintained category leadership across men’s and women’s globally, with market share gains in youth premium and strong unit-driven growth. Pricing actions and reduced promotions were cited as gross margin drivers, while higher performance-based compensation and ongoing distribution center transitions weighed on SG&A in the fiscal third quarter. Upcoming tariff increases and the absence of a fifty-third week presented headwinds for the remainder of the year, although operational efficiencies and supply chain mitigation strategies were set to help offset pressures.

• Harmit Singh indicated, “gross profit dollars are up $220 million, and SG&A is up $126 million” year-to-date, reflecting operational leverage.
• Michelle Gass detailed that “tops grew 9% overall for the quarter, 10% year-to-date,” on an organic, continuing operations basis in the fiscal third quarter, with a strategic goal to move the tops-to-bottoms sales ratio closer to 1:1.
• The company invested purposefully in inventory to support the holiday season and cited 70% readiness of required US inventory as of the fiscal third quarter call.
• Harmit Singh confirmed customer and consumer demand remained resilient in the face of selective pricing increases, with no observable pullback thus far.
• Growth in DTC and e-commerce channels is expected to continue, with the aim of expanding e-commerce to 15% of total business from the current 9% (as referenced in the company’s fiscal third quarter earnings call).

INDUSTRY GLOSSARY

• DTC (Direct-to-consumer): Sales strategy where the company sells products directly to end customers through owned stores or digital channels, bypassing wholesale intermediaries.
• UPT (Units per transaction): Operational metric tracking the average number of items sold per customer transaction.
• AUR (Average unit retail): Average selling price per unit over a given period, excluding markdowns and promotions unless otherwise stated.
• SKU (Stock keeping unit): Unique identifier for a specific product variant, used for inventory and productivity management.
• Sell-in/Sell-through: ‘Sell-in’ refers to goods sold by Levi Strauss to its wholesale retail partners; ‘sell-through’ measures the rate at which those goods are sold by partners to end consumers.
• ASR (Accelerated share repurchase): A program in which a company repurchases a large block of its own shares swiftly, often structured via agreement with a financial intermediary.
• Red Tab / Blue Tab / Signature: Levi Strauss brand segmentation: Red Tab denotes Levi’s core denim, Blue Tab reflects the premium collection, and Signature targets value-focused consumers.

Full Conference Call Transcript

Aida Orphan: For our 2025. Joining me on today’s call are Michelle Gass, our President and CEO, and Harmit Singh, our Chief Financial and Growth Officer. We’d like to remind you that we will be making forward-looking statements based on current expectations, and those statements are subject to certain risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties are detailed in our reports filed with the SEC. We assume no obligation to update any of these forward-looking statements. Additionally, during this call, we will discuss certain non-GAAP financial measures that are not intended to be a substitute for our GAAP results.

Definitions of these measures and reconciliations to their most comparable GAAP measure are included in our earnings release available on the IR section of our website, investors.levistrauss.com. Note that Michelle and Harmit will be referencing organic net revenues or constant currency numbers unless otherwise noted, and the information provided is based on continuing operations. Finally, this call is being webcast on our IR web, and a replay of this call will be available on the website shortly. Today’s call is scheduled for one hour, so please limit yourself to one question at a time to give others the opportunity to have their questions addressed. And now I’d like to turn the call over to Michelle.

Michelle Gass: Thank you, and welcome, everyone. What I’ll share today builds on the themes I’ve been emphasizing this year as we pivot to become a DTC-first, head-to-toe denim lifestyle retailer. The consistent execution of our strategic priorities is driving a meaningful inflection in our financial performance. And today, I’m pleased to share that we delivered another very strong quarter with upside across the P&L, giving us the confidence to raise our full-year revenue and EPS guidance. In Q3, we delivered our fourth consecutive quarter of high single-digit organic revenue growth. Strength was once again broad-based across our business, including DTC and wholesale, international and domestic, women’s and men’s, and tops and bottoms.

Our growth was led by continued strong sales and profitability in our direct-to-consumer channel, up 9%, fueled by strong comp growth as well as solid performance in global wholesale. Our largest market, the US, grew 3%, and our international business was up 9%, led by an acceleration in Asia. And we continue to see robust performance in our core as well as outsized growth in our key focus areas like women’s and tops. The results we’ve delivered this quarter against an increasingly complex backdrop are yet another proof point that our strategies are working. Looking ahead, there are several factors that give me even more conviction that our momentum will continue.

First, our narrowed focus enables us to maximize the full potential of the Levi’s brand. We will continue to build momentum through impactful marketing campaigns, strategic partnerships, and innovative collaborations, ensuring that the brand remains firmly at the center of culture. Second, the total addressable market for denim is large and growing, as consumer preferences continue to shift towards casualization. As the definitive market leader, we are well-positioned to take advantage and drive growth. Third, our denim leadership puts us in a prime position to define and own head-to-toe denim lifestyle, further expanding our addressable market. As we drive this momentum forward, we’ll continue to deliver an innovative and robust product pipeline across genders and categories.

Fourth, our DTC-first strategy is bringing us closer to the consumer and generating consistent and significant growth, while we have also stabilized and grown our wholesale business. Both channels are seeing strong improvements in profitability. Fifth, while international already comprises nearly 60% of our total business, there are still untapped opportunities for us to grow, particularly in Asia, where our business has momentum, and the opportunity for continued expansion is considerable. Underpinning all of this is our culture of performance, with a sharpened focus on operating with rigor and executing with excellence, from go-to-market efficiencies and more productive store operations to end-to-end supply chain improvement.

I will now turn to highlights from the third quarter in the context of our strategies. All numbers that Harmit and I will reference are on an organic, continuing operations basis. Let’s start with our first strategy, being brand-led. Levi’s had another strong quarter of growth. In the quarter, we launched the final chapter of the reimagined campaign with Beyoncé. This campaign delivered as intended, fueling momentum across the business, specifically driving growth in our Levi’s women’s business, up 12% year-to-date. In August, we debuted our new global campaign starring Shabu, underscoring our relevancy and authenticity with men. The campaign showcases our most iconic products, the 501, the trucker jacket, and the western shirt.

And we’re pleased with how this campaign is being received by our fans. In addition, we also cultivated enthusiasm for the brand through a broad range of collaborations, including a joint collection with Nike, fusing Levi’s heritage denim craftsmanship with Nike’s athletic sneaker culture. Our collaborations generate brand heat and introduce Levi’s to new consumers. And just this week, we launched a special collection with Toy Story, in celebration of their thirtieth anniversary. Turning to product, our evolution to a head-to-toe denim lifestyle retailer continues to gain momentum, all while strengthening our position as the global authority in denim.

Our Levi’s women’s business continues to deliver outsized growth, up 9% in Q3, while our leading Levi’s men’s business grew a solid 5%. Driven by our diversified fit, we saw strong growth in our bottoms business, which was up 6%. We’re continuing to inject newness into the looser fit trend, with the new baggy utility silhouettes for him, and the launch of our baggy dad barrel for her. And we’re driving a revival in low rise with our low and super low collection of fits, which are delivering strong growth. As we evolve into denim lifestyle, we’re making meaningful progress on our seasonally relevant assortments as consumers look for more buy now, wear now products.

Following last year’s reset, tops continue to drive notable growth, up 9% with strength across women’s and men’s. For the quarter, our shorts business delivered strong growth across genders. We continue to infuse newness into the assortment through fit and fabric innovation, from our linen blend styles to the launch of the 501 curve. And with respect to our premiumization efforts, we began to roll out our elevated Blue Tab collection to Europe in early September, following a successful launch in Asia and the US earlier this year. Blue Tab merges Levi’s iconic aesthetic with a refined quality and thoughtful Japanese craftsmanship. Looking to the holiday season, we are well-positioned with the right merchandise assortment and the right marketing campaign.

We’re expanding the range of occasions and amplifying the many ways that fans can embrace our denim lifestyle assortment through elevated fabric, textures, and embellishments. We’re excited to showcase Levi’s through a fresh lens that reflects the season’s full spectrum of style. Now shifting to our strategy to be DTC-first. Global direct-to-consumer sales were up 9%, driven by strong performance in both our stores and online. We generated high single-digit comp growth fueled by higher UPT, AUR, and full-price selling as our expanded denim lifestyle assortment continues to resonate with our consumers around the world.

And as we continue to grow our DTC channel, we remain focused on doing so profitably, with our productivity initiatives resulting in more than 400 basis points of margin expansion in the quarter. We’re pleased with the strong results from our store optimization initiative, which have improved both the consumer experience and store productivity. We’ve enhanced our in-store lifestyle merchandising to make the environment more inspiring and shoppable, highlighting our broader assortment of head-to-toe looks. We’ve also been focused on improving our assortment planning and life cycle management, resulting in lower promotions and higher full-price selling. Additionally, we’re in the process of rolling out a new global selling model for our store team.

Which, coupled with our enhanced labor scheduling system, improving the consumer experience and delivering operational efficiencies. We had another quarter of very strong growth in e-commerce, up 16%, driven by an increase in traffic across all segments. We expect e-commerce to continue to be our fastest-growing channel on the path to comprising 15% of our total business, up from just 9% today. In our wholesale channel, net revenues were up 5%, reflecting growth across all segments. In the US, the Levi’s brands were up 2% as we continue to invest in top doors and expand and elevate our assortment.

Western Wear is core to who we are, and we’re pleased to have recently expanded our product assortment with Boot Barn and gained new distribution at Cavender’s. We also see opportunities to increase our penetration with premium and specialty accounts as we broaden and elevate our lifestyle assortment. Now turning to our third strategy, powering the portfolio. Our international business grew 9% in Q3. Asia accelerated in the quarter, driven by double-digit growth in key markets like India, Japan, Korea, and Turkey. I recently visited several stores across India, Korea, and Japan, and it is clear that consumers are responding to the work we’ve done to ensure the best expression of our denim lifestyle assortment.

Japan, in particular, is a market with a very high bar for denim. We’ve been investing in Japan over the past decade, transitioning the market from primarily a wholesale business to now close to 75% DTC. Walking our stores in Nagoya, Shinjuku, and Harajuku, some of our highest volume stores in the world, you’ll see the fullest and most premium expression of the Levi’s brand. Up almost 50% since 2019, and continuing to gain momentum, we remain optimistic about future opportunities in Japan, and we will replicate our successful playbook in this market across the globe. Beyond Yoga was up 2%, and DTC was up 23%, driven by comps, new doors, and e-commerce.

Growth in DTC was offset by a decline in wholesale as the team focuses on higher quality sales in the channel. Looking to Q4, we have additional stores opening in Boston, Houston, and two more stores in Northern California, bringing our total store count to 14. We expect Beyond Yoga to end the year up low teens versus prior year. In closing, we delivered another standout quarter with sales and earnings growth that positions us to increase our outlook for the year. We are fully prepared and well-positioned for holiday, as we enter the season with momentum despite an increasingly uncertain external backdrop.

We have several tailwinds that give me confidence in not only delivering a strong finish to 2025 but also another strong year in 2026. Finally, I’d like to thank our incredible, talented, and passionate team for driving our transformation into the world denim lifestyle leader and delivering outstanding service to our fans every day. And with that, I will turn it over to Harmit to provide a financial overview of the quarter and our expectations for the remainder of the year.

Harmit Singh: Thanks, Michelle. In quarter three, we delivered strong financial results, exceeding expectations across sales, gross margin, EBIT margin, and EPS. We remain focused on establishing a strong track record of consistent execution and results. The strategic transformation across our organization has enabled us to evolve into a higher-performing company with stronger revenue growth, expanded margin, improved cash flows, and higher returns on invested capital. Given the outperformance in quarter three and continued strong trend, we are also raising our revenue and EPS outlook for the year, despite incorporating higher tariffs than assumed in our previous guidance. Now turning to our quarter three results. Net revenue grew 7%, reflecting the power of our diversified business model.

International markets drove approximately 75% of our growth, and the US contributed 25%. This international strength reflects our continued expansion and brand resonance in key markets globally, while our US business maintains solid underlying momentum. By channel, growth was evenly balanced between wholesale and direct-to-consumer, each growing and contributing roughly 50% of our revenue increase. This balanced performance underscores the success of our DTC-first strategy while maintaining strong partnerships in wholesale. By gender, women’s contributed approximately 40% of our growth, with men’s accounting for the balance.

We continue to execute against our strategy to capture greater share in our underpenetrated, higher gross margin women’s segment, while a large men’s business continues to generate solid growth as we fuel momentum in the category. Turning to gross margin performance. We delivered another strong quarter with a quarter three record gross margin of 61.7% of net revenue, expanding 110 basis points versus the prior year, more than offsetting 80 basis points of tariff headwind. Three key drivers fuel the continued expansion. First, our structural business mix continues to evolve favorably with the accelerating shift towards higher margin DTC, international, and women’s category.

Second, targeted pricing actions we have taken across our assortment, as well as higher full-price selling and reduced promotional levels in our direct-to-consumer channel as consumers continue to gravitate towards newness. Third, approximately 50 basis points of the upside in gross margin was driven by foreign exchange. While we are judicially approaching pricing opportunities across our business, in quarter three, we saw a significant increase in units, demonstrating healthy underlying demand for our brand. I’m pleased to report that our adjusted SG&A performance came in line with our expectation, representing less than 50% of total revenue, over a 150 basis points improvement from our first half run rate.

The primary factors contributing to the increase in SG&A dollars include higher performance-based compensation, given the momentum in our business, costs associated with our store opening, as well as expenses associated with the transformation of our distribution network. The combination of robust gross margin and our disciplined approach to SG&A management delivered an adjusted EBIT margin of 11.8% and generated 34¢ of adjusted diluted EPS, both ahead of our expectation. Our focus on profitability as we accelerate growth has enabled us to grow both adjusted EBIT and adjusted diluted EPS up approximately 25% to prior on a year-to-date basis. Now let’s review the key highlights by segment. The Americas net revenues were up 7%.

Our US business was up 3%, delivering a fifth consecutive quarter of strong growth. DTC grew 6% and now represents over 40% of the US market. US wholesale net revenues were also up despite the challenges posed by the transition of our US distribution centers, driven by broad-based strength across the region. LatAm has seen several consecutive quarters of double-digit growth, including Q3, which was up 23%. America’s operating margin expanded 50 basis points, driven by gross margin and revenue leverage. Europe’s net revenues were up 3%. All key markets delivered growth, led by very strong performance in the UK.

While weather impacted footfall in June and July, we exited the quarter with strong performance in August, and we continue to expect mid-single-digit growth in Europe for the year. Operating margin grew 80 basis points versus the prior year from strong gross margin expansion. Asia’s net revenues accelerated to up 12%. The segment saw double-digit growth in both DTC and wholesale. Operating margin increased 50 basis points to prior year, Asia is up 8% on a year-to-date basis, and operating margin for the year is up 40 basis points to prior year. Turning to our shareholder returns program and the balance sheet. In the quarter, we returned $151 million to shareholders, a 118% increase versus last year.

We’ve also closed the first phase of the docket sale. And with the proceeds, we have implemented a $120 million accelerated share repurchase program and retired approximately 5 million shares, with the remaining shares to be settled by 2026. We have returned $283 million to shareholders year-to-date, which is substantially higher than our annual cash payout target. And for Q4, we declared a dividend of 14¢ per share, which is up 8% to prior year. We ended the quarter with reported inventory dollars up 12%, driven by purposeful investment ahead of the holiday and higher product cost than a year ago due to tariffs. In unit terms, inventory was up 8% versus last year.

As of today, we have 70% of the product in the US needed for holiday. Before turning to guidance, let me briefly share our updated assumptions around tariffs. Our updated guidance reflects the latest tariff rate, which includes 30% for China and an increase to approximately 20% for the rest of the world, compared to 50 basis points previously. However, given the Q3 results, we continue to expect only a 20 basis points impact to gross margin. This translates to a 2 to 3¢ impact to adjusted diluted EPS.

Unchanged from last quarter’s guidance. As respects to quarter four, this equates to an 80 basis point headwind to gross margin and a 3¢ impact to adjusted diluted EPS. Looking to 2026, we are continuing to take actions to offset the impact of tariffs. As a reminder, these mitigation initiatives include promotion optimization, targeted pricing action, vendor negotiation, and further supply chain diversification. Now I will turn to our outlook for Q4 and then cover the full year.

While we are taking a prudent approach to our outlook, given the complex macro environment, and the absence of the fifty-third week, which contributed four points to the top line in 2024, we remain confident in the underlying strength and momentum of our business. In quarter four, we expect organic net revenue growth to be up approximately 1%. And on a two-year stack, this equates to 9% organic growth. Reported net revenues are expected to be down approximately 3% because of noncomparable items, including the fifty-third week, denizen, and footwear, which are no longer included in the revenue base.

Gross margin is expected to contract approximately 100 basis points in quarter four, driven by tariffs as well as the impact of the fifty-third week. And we expect adjusted EBIT margin to be in the range of 12.4 to 12.6%. We expect the tax rate to be in the low twenties, higher than a year ago. And adjusted diluted EPS to be in the range of 36¢ to 38¢. For the full year, we are taking our revenues up by approximately a percentage point and EPS by 2¢. We now expect reported net revenue growth of approximately 3% for the year. And we have increased our expectations for organic net revenues to approximately 6% up from prior year.

We now expect gross margin to expand 100 basis points for the full year, up from the 80 basis points stated in our prior guidance, including the incremental drag from tariffs. We continue to expect adjusted SG&A as a percentage of revenue and adjusted EBIT margin to be in the range of 11.4 to 11.6%. by 2¢ to a dollar 27 to a dollar 32 for the full year. In closing, our four consecutive quarters of high single-digit growth and raised revenue expectations underscore the strength and resilience of our business. As we accelerate profitable growth, we are transforming into a best-in-class DTC-first denim lifestyle retailer, unlocking new opportunities and delivering greater value for our shareholders.

Our disciplined execution and agility have enabled us to deliver 14 consecutive quarters of DTC comp sales, expand margin, drive cash flow, and return significant capital to our shareholders, including the recent ASR. I will now open up the line.

Operator: Due to time constraints, the company requests you ask only one question. If you have an additional question, please queue up again. If at any point your question has been answered, you may remove yourself from the queue by pressing star 11 again. Our first question comes from the line of Laurent Vasilescu of BNP Paribas. Please go ahead, Laurent.

Laurent Vasilescu: Oh, good afternoon, Michelle and Harmit. Thank you very much for taking my question. I wanted to ask about your European momentum. We had a major US brand caution about the European marketplace the other week, again, around increased promotionality. Curious to hear what you’re seeing in this important marketplace. How do you how are your European pre-books look for next spring? And then, Harmit, just on the Q4 guide, the gross margin down 100 basis points. Can you maybe just unpack that a little bit more, what the fifty-third week impact on the GM? And what are the positive offsets? Thank you very much.

Harmit Singh: Sure. Laurent, thanks for calling in. So Europe was up 3% for the quarter. You heard in my prepared remarks about the weather impact. But as soon as the weather cooled, we saw Europe accelerate to double-digit growth, especially as we exited the quarter. There was some shifting in July and August, but September remained strong. We’ve seen growth in the quarter across both channels. DTC was up four, Wholesale was up 2%. Some key markets really performed. UK was up, you know, high mid-teen. And high single-digit growth in Germany and Italy. If you think across men and women, women continues to be strong in Europe.

And the consumer is gravitating towards a broader assortment, looser fit, 501, tops, which is our fastest-growing category. So our view is unlike the other major brands, that you mentioned, we expect to end the year up mid-single-digit, and this is accelerated substantially relative to a year ago. September is off to a good start. Our pre-book for spring is up mid-single-digit. Having said all that, our operating margins were also up 80 basis points. So I think that is working its way through it. On your question, I can broadly talk Q4 guidance, and then I’ll talk gross margins in a minute. But on Q4, we expect the momentum of our business to continue.

We do have an incremental headwind on tariffs. It’s impacting gross margin first unmitigated by 130 basis points and mitigated by about 80 basis points. And EPS by three ten. Had it not been for tariffs, our gross margins in quarter four would have been up. I mean, it’s pretty fractured. And then we’re just taking a conservative approach to the quarter given the complex macros, you know, the status and maybe potential impact on demand. We are not seeing it as we close out September. And the continued transformation of our distribution center. The way to think about it, folks, is we’re raising our full-year top-line guidance to 6% organic.

And you think of the last three years, 23 organic growth was flat, 24 was about over close to 3%. And this year, 6%. So as I said in the prepared remarks, the solidly on track to be a mid-single-digit growth company. And EBIT margins should end the year in the mid-eleven percent nine in 2023. They’re close to nine. So we’ve steadily improved that. Higher gross margin efforts on SG&A and flow through onto EBIT margin.

Laurent Vasilescu: That’s great. Well, yeah, best of luck with the holiday season.

Harmit Singh: Thanks. Thank you. Thank you.

Operator: Our next question comes from the line of Matthew Boss of JPMorgan. Your line is open, Matthew.

Matthew Boss: Great. Thanks. So, Michelle, could you elaborate on the momentum that you cited entering the season? Maybe what are you seeing in the denim category or from the consumer broadly? And then Harmit, so have you seen any material change in demand trends in September or October globally? Or is it just prudent planning for the remainder of the quarter that’s driving the moderation that’s embedded in your fourth quarter organically? Revenue guidance?

Harmit Singh: I’ll answer your second first because I’m sure it’s top of mind for folks. No. It’s just being the prudent guidance is just being, you know, conservatism on the max. We’re not seeing any underlying change in trends as that reflected. I think we’re really well set for holidays. And Michelle can give you a perspective on the category and the consumer.

Michelle Gass: Sure. So, Matt, thanks for the question. First, let me talk about the category. We’re really excited. I mean, the denim category is accelerating. Both here in the US and globally. And as the definitive market leader, we are very well positioned to take advantage of that. And of course, as the leader, we help fuel the growth, and we’re seeing that happen. Just to remind everyone, we are the market share leader across men’s and women’s globally, and we continue to maintain our number one share of position in the US as well for both men and women. I’d say most recently, we’re really thrilled to see that we’re gaining share in youth premium, and with our signature business.

So when we think about our business from a segmentation standpoint, doing really well with Red Tab and for those consumers who are more value-oriented, we saw our signature business up double digits this quarter. What’s driving that for our business in terms of market share gains and again, as the leader, helping to fuel the momentum on the category overall, I mean, it starts with product. We’re bringing a lot of newness and innovation into our business through fits, fabrics, silhouettes. A lot of that’s still happening with boots and baggy. But we’re really seeing strength across the board.

And importantly, not only is it continuing to be the leader in denim bottoms, but we’re really expanding our addressable market as we think about going from denim bottoms to head-to-toe denim lifestyle. And, you know, we’re seeing that momentum in categories like tops. So when take a step back, I mean, we’ve been around many decades. We really built this business on denim, but we’re building our future on denim lifestyle. So feel good about the category, our position. Now more broadly, to your question on the consumer, I think kind of building on Harmit’s comments and mine, our consumer continues to be resilient, and we’re seeing that around the globe.

I mean, it starts with the business, our fourth consecutive quarter of high single-digit organic growth globally. And I think it’s important to make note that this for the quarter, this business was driven largely through unit growth. Right? So it’s unit growth that’s really fueling that momentum. And we saw broad-based strength across geographies, across categories, that’s both men’s and women’s tops and bottoms. And both DTC and wholesale. So consumers responding, our strategies are working. I mentioned the denim category accelerating. I mentioned really kind of being relevant across these various consumer cohorts. And we get that we’re operating in a complex environment here in the US. We’re staying close to it.

But when you think out about the Levi’s brand, in times of uncertainty, consumers turn to brands that they know and trust. And Levi’s certainly one of those brands. So we’re optimistic as we enter the fourth quarter. We expect the health and the momentum of our business to continue. We’ve been planning for holiday all year. And I would say we have our most robust lifestyle assortment we’ve ever brought to the consumer with lots of seasonally relevant product across really all categories. And again, we continue to make progress on this head-to-toe, so you’ll see lots of the fashion bottoms as well as tops and outerwear, third pieces.

And I think products that really go sort of from day to night at work to evening events, especially during that holiday season, but there’s a lot of newness and that will also be fueled by tremendous marketing. We’ve had a great year of marketing with Beyoncé. We got Shaboozy right now, and you can expect us to continue to connect in a relevant way during the holiday season.

Matthew Boss: That’s great color. Best of luck.

Michelle Gass: Thanks, Matt.

Operator: Thank you. Our next question comes from the line of Ike Boruchow of Wells Fargo. Please go ahead, Ike.

Ike Boruchow: Hey. Thanks. Let me add my congratulations. Maybe, Harmit, just to focus on margins specifically, can you comment on two things? One, within the SG&A cost line, you a little bit about it earlier, but the distribution line is running around 7% of sales right now. I know can you remind us the moving pieces on the warehousing and DCs? You have going on? A year ago, it was around 6%. I think historically, it’s been 5%. How quickly does that margin start to benefit you guys as you go into next year?

And then to that point, are you comfortable, beginning to lay out a timeline on the return to 15% margin you guys kind of put back on the table several quarters ago as the momentum picked up. Thank you.

Harmit Singh: Cool. So let me Ike, I’ll start with gross margin and give you some color about what happened in Q3. So people and yourself understand. Then I’ll go quickly into SG&A and distribution. Think of gross margin in quarter three, up 110 basis points, higher than what we had expected when we talked about this a quarter ago. Three basic factors. One is the structural mix, which is higher women’s DTC and international that we think continues for a long, long time. The second is we have taken moderate pricing, and we’re driving higher full-price sale. And the third is the FX benefit, which we had called at about 50 basis points.

This more than offset about 80 basis points of headwind from the tariffs. And so that’s why, you know, a, we were ahead of last year and the over-delivery was affected. Difficult to predict. We haven’t predicted FX for quarter four as an example. And full price, you know, it’s something we’re focused on. It’s difficult to forecast that. So those are that’s gross margin. Then you think about SG&A. Our SG&A, you know, for the quarter, was below 50%. If you think the first half of the year, it was higher than 50% of revenue. Higher than you know? So the run rate was lower than the first half of the year, which was higher.

The way we think of SG&A, I mean, there are two ways to look at it. A, our gross profit dollars at a, you know, growing at a fast pace than SG&A. So if you think of year-to-date, our gross profit dollars are up $220 million, and SG&A up is up $126 million. So clearly driving high flow through. If you look at it just as a revenue to SG&A, SG&A up 6%, and revenue up 8%, so clear leverage. As we think we end the year, you know, if 6% is the revenue guidance organically, SG&A is probably in the mid-single digits of this year leverage. On that.

And this quarter, our, you know, SG&A, being up relative to a year ago, there’s performance comp, which is a big piece. We’re having a good year. Distribution cost, which I’ll come to in a minute, so I’ll answer your question. You know, we opened on a gross basis 14 new stores. I mean, you know, and that’s really, you know, the trifecta factor in DTC. Is driving the result. Especially as we market expenses, marketing expenses moved a little bit between Q4 and Q3. Launched the Shibuzi campaign and some foreign exchange headwind. Your question, Ike, about distribution, overall, as you know, we are remapping our distribution network to more of a hybrid network built for omnichannel.

From a manual network that is built for wholesale. So there are clear benefits that we will see over time. In the short term and transformations obviously have a short-term impact. Over the short term, you know, we’ve in the US, we’ve been running parallel DCs as we ramp up the new DC that’s run by a third party. If you think of distribution cost about 7%, and they’ve increased from a year ago, I would say about half of that is the reclass and distribution expenses from selling to distribution for e-commerce. And the other half is equally split between volume, which is driving, you know, more distributed expenses and the cost of parallel running.

Our expectation is that parallel running of DC because good news is there’s demand is pretty robust. So as we make this transformation, we have to do it in a way that we not only fulfill the demand for customers and consumers but also ramp up and close this DC. So our view is and it’s, you know, it’s art and science. So we’re working through that. But I think by the end of quarter one twenty-six, is when we probably ramp down parallel running of the DC. So early twenty-six. And when we report results, for quarter four. In early twenty-six, we’ll give you a perspective on distributed expenses.

But over time, long term, we should reduce cost per unit and the cost of running parallel DC. Does that help, Ike, answer your question?

Ike Boruchow: Yes. And I’m just curious timeline on the 15%. If there’s anything you can share.

Harmit Singh: Yeah. I think, you know, you’re asking for a quick review on to Investor Day or preview on that. But I think the way to think about that, I is you know, our EBIT margin should end the year about in the mid-eleventh. Right? And, you know, and they’ve grown nicely over the last couple of years. I think the basic building blocks are the following. The gross margin expansion continues. I mean, our view is that the structural piece continues, say and, you know, if you take probably a five-year period, you can say that 200 basis point you know, that should help EBIT.

The SG&A leverage if you have you know, as we get to mid-single-digit growth company, I think the SG&A leverage is about 200 basis points. We may amp up advertising a little bit, you know, given the wonderful programs, our chief marketing officer, and these are invoking. I think that helped drive the brand, make the brand stronger. And importantly, drive revenue. I think that’s probably a 50 odd basis points of headwind, and that will come with revenue. So I think that’s your building blocks. So you think of gross margin expansion SG&A leverage, and a little bit of reinvestment in advertising gets you to 15%.

Ike Boruchow: Got it. Thank you.

Operator: Thank you. Our next question comes from the line of Paul Kearney of Barclays.

Paul Kearney: Thanks for taking my question. Within the wholesale business growth, can you speak to how much was driven by maybe new points of distribution or expanded assortment versus like for like on stronger sell-throughs? And how would you categorize inventory levels within the retail channel, setting in the holidays? Thank you.

Michelle Gass: Sure. Paul, thanks for the question. So as we said in our earlier remarks, we’re quite pleased with the continued growth that we’re seeing in the channel. This is now four consecutive quarters with this quarter at 5%. We do expect the year to be slightly positive in the wholesale channel for the entire year, which was actually up from our prior expectation, which we had said previously flat to slightly up. We saw positive growth in this channel across all segments. We saw particular strength in US Wholesale. We saw it in Asia, Latin America, and in the signature business, which is more for that value consumer.

The growth is largely being driven with existing accounts as their consumers are responding to our fashion fits, women’s especially is outperforming, and lifestyle. So while we, yes, we are bringing in some new accounts like Western Wear, got new distribution, and Cavender’s were expanding in Boot Barn. The growth is largely coming from our execution with our existing partners.

Paul Kearney: Great. Thank you. Best of luck.

Michelle Gass: Yeah. Thank you.

Harmit Singh: Thank you.

Operator: Our next question comes from the line of Oliver Chen of TD Securities. Please go ahead, Oliver.

Oliver Chen: Thanks. Hi, Michelle. Hi, Harmit. Regarding Americas, the low single-digit growth, is your expectation that’s continues in Q4? And on the wholesale side, it’s been a little more challenging channel, but do you think it’ll remain sustainably positive, or will that be potentially volatile? Second, there’s a lot of great initiatives and partnerships with part of the thesis is also, like, amplify to simplify with inventory management. And SKU rationalization. So how do we reconcile those two in terms of where you are in that journey?

Michelle Gass: Sure. Thanks, Oliver, for the question. You know, as it relates to The Americas, or I can speak to the biggest part of the business, which is The US, we’re really proud about how the team has been executing in that market. This is our fifth consecutive quarter of growth. And because you all know, it’s our largest, most mature, most competitive market. And both channels, DTC was up 6%, wholesale up 2%, and we continue to see long-term growth opportunities in both those channels. So I think about the DTC business here in The US, we have the potential to even double our store count and further accelerate e-commerce on the back of the momentum we have.

And on wholesale, which I was just talking about more broadly, global wholesale, but wholesale in The US remains strong. And our key partners are responding and their consumers are responding to our expanded product pipeline across men’s, especially women’s, where we continue to be under-indexed, in particular in the wholesale channel, and then that head-to-toe lifestyle. As we look forward, I’ll just say that we as we look Q4 in The US and in The Americas, we expect the business to remain healthy against executing the same strategies we’ve been talking about. Leaning into DTC, you know, driving units per transaction, driving conversion, driving greater full-price sell-through.

As I was mentioning earlier, though, a lot of our growth is coming off of units. So while we are seeing that enhanced AUR, we’re also driving a lot of volume growth. But I will say as it relates to US wholesale, while we expect continued positive growth in DTC, for the fourth quarter, we do expect in US wholesale to be down given that we’re lapping a very strong quarter last year, and we had that fifty-third week. So as we lap last quarter’s fourth quarter, strong results, the fifty-third week, and just frankly, be continuing to be prudent as we think about this channel given the complex macro environment we’re operating in The US.

So Oliver, does that fully answer? And then you had part two of the question. Let me answer that, and I’ll come back and make sure I’ve fully answered. But then part two, I’m glad you asked the question about SKU rationalization because we continue to make really good progress there. So while we talk about expanded assortment, lifestyle, we are also at the same time reducing SKUs. And we’ve decreased our SKUs by about 15% compared to last year, and this has been an ongoing journey over the last eighteen months or so. So we’re continuing to raise the bar there. And what’s really enabling us to do that is through a tighter globally common or globally directed assortment.

So just for perspective, if we think about the season we’re in right now, the 2025, 40% of our SKUs are globally common. That’s up from a couple of years ago. Where it was under 10%. So that allows us to make sure, again, that we can get the breadth and the lifestyle where we’re getting significantly higher productivity per SKU. And that metric just for fun is up 20% on a SKU productivity. So, it really speaks to how the team is leaning in with a much stronger merchant mentality and operating like a retailer. That’s helping us drive those tailwinds that we’re seeing in the business overall and especially in DTC.

Oliver Chen: Yeah. Thanks, Michelle. That’s really helpful. This is quick. Harmit, are there any gross margin comparisons we should be aware of as we anniversary, them this year and think about next year?

Harmit Singh: So last year was fifty-third week. This year, I think the only piece will be, you know, we probably see tariff impact in the second half of this year. Next year, and the first half. The way we think about gross margin and I think you’re asking for high-level framework. For ’26. And it’s a good question. Let me just talk about it because as we build up plans for next year, the tailwinds that we think probably help gross margin accretion. One is we’re looking at pricing opportunities, again, targeted not only in The US but globally given that 60% of the business is global. Is outside The US. Structured improvements of DTC international women’s continues.

We continue to focus on full-price selling, and it’s not anywhere close to 100%. So there’s clearly opportunity there. The other piece is as we think about product cost, you know, Michelle talked about the simplification of SKUs. We’re looking at a shorter go-to-market calendar. And cotton commodity is in a better spot today than it was a year ago. We’ve broadly locked in product costing for the first half. We’re in the process. By the time we report and guide Q twenty-six, we’ll probably have locked in the second half. So stay tuned. And the headwind is largely tariffs. And so you’ve seen some impact in the second half of this year.

You offset the first the quarter three working you know, to try and do what we can for quarter four, but I’ve guided you the appropriate numbers. And so those are the tailwinds and the headwinds that you think about. Gross margin.

Michelle Gass: Thank you very much.

Paul Kearney: Thank you.

Operator: Our next question comes from the line of Dana Telsey of Telsey Advisory Group. Please go ahead, Dana.

Dana Telsey: Hi. Good afternoon, everyone. As you think about the lifestyle offering, Michelle, with tops and with bottoms, and jackets outfits, what did you see in the growth rates of the different categories? And given the marketing that you’ve been doing in the collaborations, how do you think of the AUR opportunities going forward? Thank you.

Michelle Gass: Great. Thanks, Dana, for the question. You know, we’re really pleased with the progress and the acceleration in our TOP business overall. And I like to say, while we’re pleased we’re not satisfied, and there’s a ton of upside because tops represent just currently 22% of our business. But as we shared earlier, our tops grew 9% overall for the quarter, 10% year-to-date, and we’re really seeing the strength across channels and genders. So if you double click underneath that, men’s up 10%, and we’re really seeing popularity in things like western tops, button downs, polos, wovens. You know, as we think about our top strategy and denim lifestyle, we do start closer to our core.

So, you know, really injecting light into, like, the western shirt, which is being advertised in our campaign right now with 20%. Similarly, women’s tops up 8%, seeing it across both channels. Denim tops, they’ll start there, up 12%. Wovens, including things like blouses, fashion, button downs, up 37%. And then the category we’re really expanding in to expand her closet, dresses and jumpsuits up nearly 20%. I think importantly, as we drive all this newness and excitement, in head-to-toe dressing, we’re seeing both growth in newness and in our core, which is really important, to continue to support both.

Kind of back to the opportunity, if you think about our business today, again, while we’re making progress, there’s so much upside. Our ratio of bottoms to tops is three to one. Now that’s up significantly from years ago where it was seven to one or five to one. But our goal is to get to one to one, and I’m very confident we will. And as we drive TOPS, it’s a UPT driver. It can be a traffic driver, and it really kind of completes this mission we’re on to have Levi’s stand for head-to-toe denim lifestyle. So hopefully that addresses your question, Dana.

Dana Telsey: Yes. Thank you.

Michelle Gass: Great. Thanks.

Operator: Thank you. Our next question comes from the line of Aditya Kakani of UBS. Your line is open, Aditya.

Jay Sole: Hi. I think this is Jay Sole, and hopefully, you can hear me. But my question is that it sounds like you took some pricing in Q3. Harmit, I think you said one of the gross margin drivers Q3 was pricing. Was that in response to tariff in Q4? Sorry, before that, the consumer, it sounds like responded well to those price increases. Did you see any resistance in Q4? Do you plan on accelerating the price increases? And therefore, do you expect the consumer to react differently if you increase prices in the fourth quarter? Thank you.

Harmit Singh: So, Jay, we did. We took, you know, a little bit of pricing in Q3. It was not an MSRP because, you know, the goods are already been ticketed. This was in the sell-in to our customers. In The US. I’m talking about. And, you know, we do it thoughtfully. We have really great momentum, as you mentioned, driven by demand. But to answer your question, no impact on demand. We’re not seeing any impact on demand either from the customer or the consumer. The other piece that’s really working for us is our new products. Because and so as we think longer term, pricing through innovation is one lever.

We are also taking a hard look at our promotion, you know, and minimizing this as we focus on higher full-price selling. Will also, you know, be something that probably continues into ’26. So we’re thinking about pricing, it’s more important to think about what’s the price-value equation for our products relative, you know, to the marketplace, and that’s an important consideration set. The other piece that’s important, Jay, is the segmentation of a product. So if you think of the value consumer in The US, we offer signature product. It’s a great price point. It’s offered through Walmart. And it had a great quarter. It’s up double digits. We’ve just also introduced Blue Tab, which is a premium product.

It’s premium position. It’s one and a half times to two times the price of Red Tab product. And offers real value even when you benchmark that. It’s a limited offer. We hope to scale it. It’s doing really well. So that’s how one is thinking through it. And there’s a little bit of pricing in other parts of the world. But it’s not, you know, something that we’ve done globally. So when we talk about ’26 and guide ’26, we’ll give you a perspective on the pricing actions we have taken or our teams have taken around the world.

Jay Sole: Got it. Thank you so much.

Harmit Singh: Thanks.

Operator: Thank you. Our next question comes from the line of Paul Lejuez of Citi. Please go ahead, Paul.

Tracy Kogan: Thank you. This is Tracy Kogan filling in for Paul. I just had a follow-up on the last question. I think you said, from what I understood, that you only raised prices on sell-ins to your partners. So have you actually had time to see the consumer response to these higher prices, or were you only saying that your partners haven’t had any hesitancy to buy at these higher prices? And then just more broadly, I was hoping you could comment on The US Wholesale business, how sell-ins are comparing to sell-outs. Thank you.

Harmit Singh: Generally, Tracy, good question. I think it’s a combination of both, you know, because, you know, the pricing initiatives have been now there through the quarter. You know? A, the customers are not we don’t see any demand contraction, you know, given the marginal pricing that has been taken or consumer reaction. The consumer generally resilient, you know, so far. And that’s how we’re approaching the pricing plus the full-price selling has been there for a while. And given that the product is very relevant and hitting the mark, you know, we’re not seeing any consumer pullback. I think that was your first question. What was the second one, Tracy, again?

Tracy Kogan: I was hoping you could just comment more broadly on how the sell-in to your wholesale partners are comparing to the sell-outs. Are they being more cautious than maybe the end consumer might indicate or something like that?

Harmit Singh: No. The sell-throughs have been very consistent with the sell-in. And that’s why, you know, we are, you know, optimistic about ending the year strongly and then maintaining the momentum as we begin ’26.

Tracy Kogan: Gotcha. Thanks very much.

Harmit Singh: Thank you, Tracy.

Operator: Thank you. At this time, I’d like to turn the floor back over to Michelle Gass for any closing remarks. Madam?

Michelle Gass: Yes. Thank you, everyone, for joining the call, and we will look forward to talking to you at the end of Q4.

Operator: Thank you. This concludes today’s conference call. Please disconnect your lines at this time.

Image source: The Motley Fool.

DATE

Thursday, October 9, 2025 at 5 p.m. ET

CALL PARTICIPANTS

Chairman & Chief Executive Officer — Brian Shore

President & Chief Operating Officer — Mark Esquivel

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TAKEAWAYS

Sales — $16,003,810 in sales for fiscal Q2 2026, slightly above Park Aerospace (PKE 0.97%)‘s previous estimate of $15 million to $16 million.

Gross profit — $5,001,160 in gross profit for fiscal Q2 2026, with a gross margin of 31.2%, despite pressures from low-margin C2B fabric sales and ongoing new plant expenses.

Adjusted EBITDA — Adjusted EBITDA was $3,401,000, at the top end of Park Aerospace’s prior estimate of $3 million to $3.4 million, resulting in an adjusted EBITDA margin of 20.8%.

C2B fabric sales impact — $1.65 million in C2B fabric sold at a small markup weighed on gross margin; $415,000 in ablative materials manufactured with C2B fabric, which command much higher margins, partially offset this effect.

Production vs. sales — Sales closely matched production value during the quarter, resulting in no impact on the bottom line from inventory imbalances.

Customer requalification of C2B fabric — Requalification resumed normal production on 90% of specifications; the remaining 10% is under test, a process estimated to take another nine to twelve months.

Missed shipments — $510,000 attributed to customer certification, and testing delays.

Tariffs — Net tariff impact was minimal at $1,700, with costs passed through, and future exposure is expected to remain limited under current arrangements, as discussed on the fiscal Q2 2026 earnings call.

MRAS LTA price increase — 6.5% weighted average price hike became effective January 1 for the MRAS LTA as stipulated in the long-term agreement.

GE Aerospace sales forecast update — Park Aerospace now forecasts $27.5 million to $29 million in GE Aerospace program sales for fiscal 2026, down from a previous estimate of $28 million to $32 million, with current figures based on updated backlog and booking data.

Q3 outlook — Park Aerospace estimates sales of $16.5 million to $17.5 million for fiscal Q3 2026 and adjusted EBITDA of $3.7 million to $4.1 million.

Expansion capital budget increase — Estimated capital expenditure for new manufacturing facilities rose to $40 million to $45 million due to added line requirements.

Cash and balance sheet — $61.6 million in cash and marketable securities reported at quarter-end after a $4.9 million transition tax payment.

No share repurchases — No shares were bought back during the quarter or to date in fiscal Q3 under the current buyback authorization.

SUMMARY

Management disclosed that customer-driven stockpiling of C2B fabric continues to distort product mix, temporarily compressing margins but likely supporting future high-margin material sales as demand converts. Strategic clarity was provided around the critical role of Park Aerospace’s proprietary materials in missile defense and aerospace programs, including the company’s sole-source position on the Patriot missile system’s ablative materials. Park Aerospace signaled intent to further expand U.S. manufacturing capacity for C2B fabric, highlighting both existing and planned investments via partnerships and new plant expenditures. Unlike the previous year, management emphasized that industry OEMs are increasingly collaborating with suppliers and ramping up production to meet robust underlying demand. Long-term sales targets for fiscal 2026 were not formally issued, but management stated that total sales should exceed $70 million, driven by growth in both defense and commercial aerospace programs.

Mark Esquivel stated, “We have approval at about 90% of the specification,” regarding C2B customer requalification, with the remainder expected to take up to twelve more months to resolve.

CEO Shore asserted, “That represents very significant revenue with Park. We’re sole source qualified in that program,” citing sole-source qualification and sharply rising production requirements.

Management described the company’s operational approach as centered on flexibility, urgency, and responsiveness, emphasizing these as Park Aerospace’s core value drivers for customer relationships.

Park Aerospace’s expansion timetable was clarified, with objectives to have plans finalized and implementation underway by year-end to address surging defense and aerospace demand.

INDUSTRY GLOSSARY

C2B fabric: A specialized ablative composite material distributed exclusively by Park Aerospace in North America, primarily for missile defense applications such as the Patriot missile program.

MRAS LTA: Long-term agreement with Middle River Aerostructure Systems (MRAS), under which Park Aerospace is the sole-source provider of composite materials for a range of GE Aerospace jet engine programs.

AOG: Aircraft on Ground; an operational situation where an aircraft is grounded due to technical or maintenance issues, relevant for customer experience and supply chain urgency.

FAL: Final Assembly Line; a manufacturing line where the major components of an aircraft are brought together for assembly and delivery.

Full Conference Call Transcript

Brian Shore: Thank you very much, operator. This is Brian. Welcome everybody to the Park Aerospace Fiscal 2026 Second Quarter Investor Conference Call. I have with me as usual Mark Esquivel, our President and COO. We announced our earnings right after the close. In the earnings release, there are instructions as to how you can access the presentation we’re about to go through. Either via link, and you also can link information in the news release and also on our website. You want to pick that up because we’re gonna go through it. It’ll be a lot more meaningful to listen to us if you have the presentation in front of you. So we have quite a few new investors.

Last quarter, they’ve come on board. And out of consideration for them, I think we should go through some of the legacy items more carefully. I think in the past, legacy items, we just kind of skim over on the assumption that most people already know, are familiar with them. Veteran investors, just please be patient with that. Another item I want to cover with you is that on Tuesday, I had some unplanned oral surgery, and I’m not really feeling that great. So hope you can bear with me. And if I need Mark to take over, I’m sure he’ll be very willing and able to do that.

Questions at the end after we’re done with the presentation, we’ll take questions. And please do ask them. We love questions. Actually, sometimes linked to questions are more meaningful in the presentation. We go through a presentation. We don’t know whether you’re liking it, not liking it, interested, or half asleep. You know, the questions are always more helpful because we then know what people are really interested in, what they’re thinking about. So why don’t we go ahead and get started with the presentation? Slide two is our forward-looking disclaimer language. We’re not gonna go through that. But if you have any questions about it, please let us know. Slide three, table of contents.

Starting on slide one is our Q2 investor presentation, we’re about to go through now. In appendix one, we have supplementary financial information. We’re not gonna go through that during the call, but if you have any questions about it, please let us know. It’s become our practice now or pattern, I guess, to feature James the James Webb Space Telescope in our table of contents. So what we’re talking about here, James Webb Space Telescope discovered cosmic dust which shouldn’t exist outside its galaxy. You know, but shouldn’t exist in quotes. Because I think we’re developing a common theme here. There’s so much that we believed about the universe and its origin, which just isn’t true. Sorry, folks.

Not true. James Webb saying, well, you could believe whatever you want, but these are what’s really going on. So here’s another one of those. Thank you, James Webb Space Telescope. The James Webb Space Telescope was produced with 18 prior Park proprietary Sigma stretch. Let’s go on slide four. Kind of more nitty-gritty stuff here. So quarterly results, let’s look at the right-hand column of the second quarter that we just announced. Sales, $16,003,810. Gross profit, $5,001,160. Gross margin, 31.2%. So we’re happy about gross margins over 30 or maybe I should say we’re unhappy when they’re not over 30.

And it’s good that they’re over 30 because there are a couple of things we’ll talk about in a second that drag down our margins. Adjusted EBITDA, $3,401,000. And adjusted EBITDA margin, 20.8%. What do we say about Q2 during our Q1 call on July 15? Set our sales estimate was $15 to $16 million, so we came a little bit above that. EBITDA estimate, $3 million to $3.4 million. So we came in kind of the top of the range of the EBITDA. I just want to remind you, especially for some of our new investors that we don’t this is not guidance. We don’t do guidance.

We give an estimate we’re saying to you, this is what we think is gonna happen. Now we could be wrong, but this is what we think. There’s I don’t know. Let’s call it practice. We have different terms for it, but let’s call it practice where everybody does it almost where, you know, let’s say it’s gonna be a hundred, they think it’s gonna be a 100. They go out with 90, you know, that’s their guidance. So then when they come out when they come back with a 100, they come out with a 100, then they’re heroes. And I don’t know. We think that’s not worthy of our time.

When we give you an estimate, we’re saying this is what we think is gonna happen. We’re not giving you a number which we plan to beat. Okay? Let’s go on to slide five. Q2 considerations. We always talk, well, always in the last few quarters, Erinn Group is as impact on a lot of things, including the quarter. So we entered into this business partner agreement with Aaron Group. It’s a very large aerospace company in France. Great company and they’re a JV between Airbus and Safran, I believe. And in January 22, we were we’ve been actually working for twenty years. They appointed us exclusive distributor of their Raycarb c two b fabric.

That fabric is used to produce ablative composite materials for XHANCE missile systems programs. Now, sold $1.65 million of that fabric in Q2. As we previously explained, we saw that fabric to our defense industry customers for a small markup. What’s going on here is the defense industry customers are stockpiling the c two b. We’re the exclusive distributor though, so they buy it from us. We buy it from we’re distributor, not a rep. We buy from area. And then we sell it or sell it, I should say, to the OEM.

But it’s of a strange thing because we keep the c two b fabric in our plant because the OEM eventually will ask us to produce prefabric with it. So even though we sell to them and it’s their product, it’s kept on the plan. The markup is small, so we have a significant amount of c two b fabric sales that’s gonna push down our margins. And we sold $415,000 with blade materials manufactured with c two b fabric in Q2. Now the margins on the later materials that we produce those fabric, very, very good. Very good. So that’s the offset.

But it’s still the ratio of sales of fabric to ablative materials manufactured with the CTB fabric are still at a balance. Right? So more fabric than materials, prefrac, let’s call it, What’s the reason? I already said it because the OEMs are stockpiling this product. A more normal kind of ratio would be forty sixty. So 40% would be the materials, and 60% would be the fabric. That’s not always gonna be exactly it, but just to give you a sense, So you see that the ratio is much more than forty sixty here, and that’s gonna drive down our margins. So let’s talk about let’s go on to Slide six rather.

Oh, we’re still on the topic of c two b fabric requalification by one of Park’s key customers of c two b fabric. This was kind of a it’s been a big deal for the last few quarters. Adam, Mark, I like, always give Mark the hard stuff to talk about. Can you help us with what’s going on with that recall?

Mark Esquivel: Yeah. So we actually do have an update this time. I think the last couple calls we said we’re waiting for approval. So do we do have approval. We don’t have full approval. We have approval at about 90% of the specification. I have to get too technical. There’s you know, there’s a requirement within the spec that you have to lower and then upper range. They were somewhere in the middle. They moved down closer to the commercial specification as we call it. Which gets us back into production at, you know, 90 plus percent of everything we have.

So, what we’re doing now is they’re currently testing that last 10% which will probably take another nine to twelve months. So, you know, we’ll continue to talk about know, when we get that approval. But as far as the program’s concerned, we’re back in business. We’re back running. You know, and we’re back to, I would say, you know, normal typical rates that we were running you know, prior to, you know, this I won’t say, issue coming up, but this recall coming up. So and we actually expect to see, you know, some upside, you know, in coming quarters, you know, and Brian will talk about some of that piece as well.

But I guess the story here, the message here is we’re pretty much back in business with, you know, running at our normal level.

Brian Shore: Okay. Thanks, Mark. Good news. Let’s keep moving here. Production versus sales. You bring this up because this has been an issue. Issue in prior quarters in terms of the impact on the bottom line. But in our Q2, our sales value production, we call it SCP, that’s not inventory value. That’s the value production. It’s a sales price. It was well matched with our sales. And that’s a good thing. That means it’s not that’s really very no meaningful, not no impact on bottom line. When our sales exceed our production, that is by a significant amount. That is a negative impact on the bottom line. But no impact in Q2.

And then last thing we’ll talk about in terms of bottom line impacts, significant ongoing expenses. This is something we had in our presentation for several quarters now. It’s not going away anytime soon. We’re operating our new manufacturing facility in Q2, including all these other expenses. And this act this is significant. So that’s why I was saying that the gross margin being over 31%, I think, that’s actually not bad because there’s two factors that hold it down. One is this the expenses related to new plant, the other is the let’s call, excess c two b fabric compared to the c two b material sales.

Total miss shipments, a little bit of surprise here. $510,000, that number is way up. But, you know, last few quarters, we keep talking about international shipping issues. That’s not the issue this time. This time, it’s something different. It’s customer certification, testing delays, a little bit of a new story here. It happens sometimes. You know, it just happens. Not it’s nothing we can do about it. It’s not our fault. Or anything like that, but sometimes it just delays insurance and certification and engineering work and testing delays. So that had a meaningful impact upon our shipments in Q2. So let’s go on to Slide seven, impact of tariffs and tariff split costs. You know what?

I should say net impact. I’m saying that to Mark earlier. It should say net impact the tariff and tariff related cost because we have tariffs. It’s just that the net impact takes into account the pass through. So very minimal in Q2. Hardly anything, but that’s the net impact. That’s not the total tariff. That’s a net impact because of the fact that we passed the tariff cost on. And then the future impacts, I think we’ll get back to that later Mark will talk through that later on in the presentation. Why don’t we go on to slide eight? So this is a slide we do every quarter, as you know.

Some of you veterans are probably tired of the top five, and it’s kinda usual suspects also. Like, alright. GKN, Kratos, MRAS, Tech. And. Tech is not well, you know, has it’s kind of a little bit of a new name for us, but the rest are usually suspects. The 7,500 that refers to Nordium, the h three two one n with XLR, that’s an that’s an MRAS program. Kratos, obviously, is Kratos, and the seven eight seven Dreamliner, that’s GKN. That’s for the Gen X one b engine. So it’s a it’s a g engine, but it’s not part of the MRAS LTA, which we’ll go into that later. Let’s go on slide nine.

So here we have our estimated revenues by air aerospace market segments. We call them our pie charts. I know about you, but I like to use it. Think they tell a bit of a story. Fiscal twenty one, that was the pandemic year where commercial aircraft was remember, there were airplanes, pictures of, like, seven thirty sevens not falling at all. Like, two people on them and they were, you know, basically, they were being parked. And then after that, the pie charts, you know, seem to be fairly stable.

Interesting what will be interesting is to see what will happen in the future because the commercial is gonna be accelerating because the program’s are on as those programs ramp up, but military will be accelerating a lot. This is probably it could go down as a percentage. We’ll see about that. Let’s go on to slide 10. Park Plus, niche military state programs. So we have a little pie chart here Radomes, missile systems, unmanned aircraft, all niche markets for us, some markets. But even aircraft structures are niche markets for us. So we actually changed we used to call it what, rocket nozzles, I think.

We changed the missile systems because the missile systems, we supply it to more than just the rock and nozzle other aspects of missiles that we supply it to. I think we used call unmanned aircraft drones, but I think more politically correct term is unmanned aircraft, but there’s no change in there. You know what? And other than nice pictures and you could see what the programs are, we really are not gonna talk about these programs anymore. It’s just not really appropriate. For us to say very much about the programs except understand, please, any picture we show you, that means it’s a program we’re on, not a program we like or a cool picture or something. Okay.

You got it. Let’s go on to slide 11. GE Aerospace and Engine programs. Again, a slide every quarter. But for the benefit of some of our new investors, let me try to explain quickly. So we have a firm LTA requirements contract for nineteen to twenty nine with MRAS Middle River Aerostructure Systems, a sub of ST Engineering Aerospace, You see we’re sole source for, you know, for composite materials. For all these programs, which are all GE programs. So what’s going on here? If you look at all the checked items below, they’re all GE engine programs.

And then what’s going on here is that even we got on these programs with GE Aviation, even before 2019 when Ameres was owned by GE Aviation. Now GE Aerospace. We got on these programs even before that. They were predecessor LTAs before this nineteen to twenty nine LTA. And then I think about five years ago, GE sold MRAS to ST Engineering, which is a large Singapore aerospace company. So that’s the explanation there. I’ve done a factory, you know about that. You know, when I guess around 02/2019, g said to us, look. You know, Park we’re gonna put we’ll give you this ten year agreement for sole solar source and all this stuff.

All these great programs, wonderful programs, but, you know, we really are concerned about redundancy. So would you please build on the factory? And we said, yes. We checked that box. That’s been done. I’m not gonna go through the individual program, maybe except to get didn’t know to talk about the first five are really all eight through 20 neo family aircraft programs. Alright. Do you have any questions about the specific programs? Just let us know. Let’s go on to slide 12 just to keep moving along here. Item the first item on slide 12, we’re just continuing here.

It’s this is a little bit of a nuance here because this is this program is was mentioned in the prior slide, but this is a different component. This and this also is part of our GE Aerospace LTA not necessarily the not the MRAS LTA. So I’m probably gonna hang only the technical, not necessary. Fan case is something we should talk about for a second. This is with g nine x engine triple seven x airplane. This is produced with our AFP material and other composite materials or the major fire replacement. That’s what the AFP stands for. It’s a robotic way, method for producing composite structures.

And this is planned to be included in the LIFER program, MRC life of program agreement. Next item. We had a 6.5% weighted average price increase in our MRASLTA effective January 1. That was that was already built in the s LTA, you know, a long time ago. And next item, park the LTA was park MRSA LTA was meant to include three proprietary formulation products and those are now going undergoing qualification Then life of program agreement have requested by MRAS and STE So we’re still negotiating this, I guess, and I think there’s a meeting that’s being planned for next month. We’ll see what happens. As I said to you many times, we’re okay either way.

This is requested by SDE and MRAS. It’s something they want. They want the stability of long term supply. But either we’re okay either way. If we do it, that’s fine. If not, we’ll be fine. As well. And it’s still under negotiation. It I don’t wanna give you the wrong impression It’s all, like, actually negotiating. We it’s like we talk about it, then three months go by, and then, you know, so I think now we’re planning to have some get together in December to sorry, November to hopefully get through this. We’ll see. We’ll keep you posted.

Item page 13 rather, slide 13, So let’s talk an update on some of these GA change programs, age between a Neo family. That’s a wonderful, wonderful program that Park is on, sole source qualified. And let’s talk about that program. Everybody says a huge backlog of these airplanes, over 7,000 of them. That’s a lot of airplanes. A lot of airplanes. And let’s just talk about the well, whether the we can take a look at the aircraft, the A320neo family aircraft deliveries. We’re not gonna go through it here, but, you know, you can see what’s going on here.

With the amount of orders that Airbus has, we’ll get to in a second, they would be at a much higher rate. Than this. They’d be at 75 per month. What’s be what’s holding them back is issues with supply chain. So this year, year to date, we’re at 44, but don’t get fooled by that because they usually, kinda make their year in the last three months. And if you look at September, you could see what’s going on here. They’re already the Airbus is already ramping up 59. We’re delivered in ’59 is your 20 neo family aircraft delivered in September. Let’s keep going. Slide 14, just continuing here. The importantly, the engine supply bottleneck.

Remember I said that one of big issue is supply chain restrictions That’s what’s preventing Airbus from ramping up. To their target of 75, which gives it a minute 75 per month. CFM, they have another engine. Let’s just talk about CFM, the LEAP one a engine. Reportedly improving that it’s getting better. And I think that’s a deliberate focus by g and SCFM, which is a very good thing because that’s probably the most significant restriction to Airbus’s ability to ramp up to that 75. They it’d be up there now, they upon how many orders they have. So that’s that’s very good news actually.

As we already alluded to, Airbus is targeting a delivery rate of 75, eight H320neo family per month you could see that, you know, they’re still at, you know, 50 to 55, so they still have a way to go, quite a way to go. Two engines approved for the a three twenty neo aircraft. We’re on the CFM LEAP one a engine. We’re not on the we have nothing no content on the Pratt and Whitney GTF engine. And so I guess that covers the second bullet item. We supply into the h three twenty family aircraft using the LEAP-1A engine.

According to the second quarter, 2025 edition of Aero Engine News, which is kinda like a bible, for us anyway. The CFM LEAP one a’s market share with you know, compared to the Pratt market share, aforementioned orders, A320neo family, 20 neo family aircraft per month, that’s 64.7% market share translates into 1,165 LEAP engines per year. That’s a real lot of engines and, you know, lots of revenue per park at that point. Slide 15, As of June 30, 2025, few months ago, were a little over 8,000 firm LEAP one a engine orders. These are not These are LEAP one a engine orders where we’re sole source qualified. Over 8,000.

If you wanna look at slide 29, you get a feel for what our revenue per unit is due to, you know, get your pocket calculator out and do the math. You could see what that worth to us. Those are just the firm orders that are in the books now. So this is a big deal for Park. The Airbus h three twenty one XLR, and this is a variant. We’re still talking a three twenty family. Okay? We’re not off to a different aircraft. This is part of the a 20 family. This is recently introduced, supposedly changed the air map of the world. Why is that?

Because the payload and range capability of this aircraft are very unusual for a single aisle. So it allows a single aisle to compete against wide bodies, but obviously, at much lower cost. So that’s why it’s changing your map of the world. Qantas is you know, very involved in the program, American Airlines, Iberia Airlines. The reason I highlight this is a lot of lot of airlines are buying this airplane. Why am I highlighting this They call it a game changer. But what’s really, I think, very impressive to me is that they say they claim they’ve had almost no AOGs that’s aircraft on grounds after almost a year. That’s really a big deal.

Because normally, the first year or two, there’s all kind of bugs you have to get out of a new airplane, a new design, and the airplane sits on the ground a lot. And it’s kind of you just expect it. It’s not good because, you know, when the air airplane’s sitting on the ground, the airlines aren’t making any money. And you kind of expect that if you get a, you know, an airplane that’s been recently certified and delivered. But here you go, they’re they’re saying almost no way AOGs. I’ve never heard of anything like that. That’s quite impressive. Boeing has no response. To this aircraft. Let’s go on to slide 16.

Mark Esquivel: So still on a three twenty here, folks.

Brian Shore: Airbus plans to open a new a three twenty aircraft family final assembly lines, FALs, in The US and China this month. Know, this couple weeks. So these two new FALs in combination with the existing FALs, FALs in Germany and France will provide Airbus with the manufacturing capability to achieve a 75 h 20 neo aircraft per month delivery goal in ’27. So, you know, this is nice because Airbus is they’re putting your money more than mouth this year. These FALs are they’re they’re a big deal. So that’s good news. And then breaking news, October 7 oh, this is the day in my oral surgery, I think. Yeah. There are two big things happened on October 7.

That’s just two days ago. The a three twenty aircraft family became the world’s most liver commercial jet ever. Of course, that means it beat out the seven thirty seven Not just a max. This is the seven thirty seven family versus the a three twenty family. pretty big news, I guess. COMC nine one nine that’s a Chinese made aircraft. Comac is targeting oh, this airplane is designed to compete single aisle with They’re targeting a thirty nine one nine aircraft delivered in 25. But recent and confirmed reports saying they’re probably for sure for sure that this target. I can’t tell you I’m very surprised.

I probably would’ve you know, to be just totally candid about it, I would be more surprised if they met the target. I’m not gonna go into why, but it but I’m not I’m not surprised or really disappointed. Malaysian Airlines, AirAsia, has confirmed its advanced talks to purchase these airplanes. Why is that important? Why am I on that? Because there are a lot of air airlines that are buying this airplane. But the reason I’m focusing on is this is a non Chinese airline. This airplane is certified by the Chinese FAA, I think, called CAAC or something like that. So the thought was originally this Comac airplanes would be China only airplanes.

Well, that’s not what Comac wants. They’re still the airplane outside of China for operations outside of China. The plan to achieve reduction rate of 200 airplanes But what’s interesting here, they’re they delivered it to same kind of topic really. Laos Airlines, Air Cambodia, signed up. Again, what’s what’s the theme here? Non Chinese airlines. So, originally, you’re thinking the China the Comac airplanes are gonna be China only, but that’s obviously not what Comac wants. Triple seven x, Boeing triple seven x, we have slowed down a little bit talk, but this one, this is a, you know, important program for 1,500 out flights and nearly 4,100 out flight hours. That’s a lot. That’s good.

This picture was taken by a friend of mine a couple of few years ago when the triple seven x was doing cold weather testing in Fairbanks, Good place to go for cold weather testing. So let’s talk let’s go on slide 18. Sorry. Boner poorly 565 open orders for the airplane. Boeing had previously announced that the airplane program was on track for certification late twenty five and entry into service. 26. The Boeing CEO recently stated the certification program is falling behind schedule. The CEO further stated the aircraft and the engine did Gen X engines, the nine x range, g nine x engine are really performing quite well.

And that the potential delay in certification was being caused by increasingly deliberate FPA scrutiny. Get the sense there’s some tension there Boeing and the FAA. You I do anyway. A key gating item for is the receipt of the called the type inspection authorization from the FAA. Because as the CEO explains, you know, they can fly these airplanes. They need to have five airplanes to use for certification program, but those flights don’t really count, you know, towards certification. Till they get to the TIA. There’s a lot of boxes that have to be checked for airplane to be certified. So they can go fly the airplane, which is good.

They can learn a lot more about the airplane, but they can’t check those boxes until they get their TIA from the FAA. Boeing hasn’t announced any new targets for the certification and EIS, but speculations that they’d be pushed into next year at ’26. Let’s go on to slide 19. So let’s talk about big picture GE aerospace jet engine sales history forecast estimates. The top is the sales history. One go control history accepted the site and q $27,500,000.0. But a little higher than we forecast. GE Aerospace program sale forecast, sales forecast estimates, Again, not guidance estimates.

Two three, we’re estimating $7.5 to $8,000,000 And total for the year, got a slow down here a little bit, $27.5 to 29,000,000 Now in our prior presentation, we indicated that we’re looking at 28 to 32,000,000 for the year for fiscal twenty six. But as we explained to you, information called a bill plan from our customer. Wasn’t our forecast. It was their forecast. Now we have now the current forecast 27 and half to 29. That’s now part forecast based upon what? Based upon the backlog for Q3 and Q4. Q3 is already booked. Q4 is partially booked and what we expect, you know, based on lots of life experience to the additional bookings for Q4.

So now this is our number, 27 and a half 29,000,000. Let’s go on to Slide 20. Park’s financial performance history and forecast estimates. Estimate singular. So we just have the history up top. You already saw this just for perspective and context. Down below, our Q3 twenty six Q3 financial forecast estimates. Now plural Uh-oh. Sales of 16 and a half to 17 and a half million, Adjusted EBITDA, 3.7 to 4,100,000.0. That’s our estimate for Q3. You have any questions about that, just let us know. So let’s go on to slide 21. This is just history, and we’ve showed you the slide for the last several quarters.

We think it’s interesting just so you can see what’s going on here. Historically. You go from 17 to 20, like, every year. We increased by about 10,000,000, then we got stalled out. So we’re kind of at into fiscal twenty five, we’re pretty much where we were fiscal twenty. And, obviously, that’s because of the pandemic You know, the pandemic really had a very big impact on commercial aerospace. It wasn’t the pandemic so much, it’s how we responded to it, how the industry responded to it, especially with respect to supply chain issues that’s held back commercial aerospace. So just one other thing. We’re not giving you a forecast for fiscal twenty six this time.

But we believe that the number will be over 70,000,000 for fiscal twenty six. We’ll just give you that number. We’re not giving EBITDA, not giving details I think what’s going on here, though, is the industry is getting religion. And it’s not just an opinion. This is based on my life of input we received. Different kind of attitude on the part of the OEM in terms of ramp up to meet demand and also working with suppliers and supply chain in a much more productive and you know, a more, I know, more collaborative way. Sorry. Coming up trying to come up that word collaborative way. So it’s not just a little thing. It’s a big thing.

It’s it’s very palpable in the industry. Happens. But to us, it seems like there’s something really going on here. And we’re not we’re not alone in that opinion. We’re not alone in that opinion. So let’s see what happens. You know, just so you know, we’re probably looking about a little over 70,000,000 for fiscal twenty five. Let’s go on to slide 22. Okay. General park updates. Agreements with Arian. Okay. We gotta slow down with Arian again. We entered in that business partner agreement in January 22, wondering which Arian ported up. Pointed us as exclusive North American distributor. We already covered that. Okay?

But then on March 27, ’25, just early this year, Park and Aaron entered part they’re a great partner. They’re a wonderful partner. We love them. I entered into a new agreement under which Park will advance I don’t know. It’s probably about 5,000,000 for million, €587,000 against future purchases by Park of c two b fabric. These funds will be used by Erie to help finance the purchase of additional installation of new manufacturing equipment for Aireon’s production of the p c two fabric in France. And that was that should be paid to area in three installments the first of which is already paid about, you know, $1,000,303,176,000 euro. That’s about $1,500,000.

So that would affect our cash when we reported Q1. Let’s move to Slide 23 rather. The purpose newest of this new agreement is to provide additional c two b fabric manufacturing capacity to support the rapidly increasing demand for c two b in c two b fabric in Europe and North America. Just so you know, one of the big programs that uses c two b fabric is the Patriot Missile Program. Ariane Group recently asked to partner to partner again with them on a study related to the potential significant increase of c two b fabric manufacturing capacity presumably in The US. The study expected cost about €700,000.

We split it $50.50, so that’s probably about $410,000 Park, and we’ll record that when our Q3 is a special item. Just want to be aware of that. We’ll get back to this later on the presentation on the area study. Just continuing with general updates, our lightning strike protection material certified on the Passport 20 engine. Using the using the Bombardier Global 7,508,000 Bisinjet. Its revenue is about approximately 500,000 per year expected on our LSB material. We’re very happy about this. Our LSB is already qualified, approved, and used on the a three twenty and the nine one nine, but have not just getting it approved now.

On the s four twenty engine and also thought to get approved on what’s called the 10 a engine for the back nine zero nine. So and we expect that these revenues will start to kick in fairly soon, let’s say, in a couple of months. Slide 24, still updates. This is just something we covered already. We signed we entered into an LTA with Aerospace. And for calendar years twenty five to thirty. Parked and then another update. Parked discussion with two Asian industrial conglomerates relating to Asian manufacturing. Do inventors continue? We’ve been talking about this for a while. John Jamieson’s in Asia now working on this project along with one of our other guys.

So we’ll see what happens. Seems interesting, but we’ll see what happens. Okay, Mark. Your turn. Tariff, international trade issues, what’s the expected impact of tariffs going forward, you think?

Mark Esquivel: I don’t think much. I know this quarter alone, we had about $1,700, which, you know, we don’t like to take on any additional cost. But that was mostly, you know, nonmaterial. Items. So going forward, again, as I mentioned before, we got ahead of this pretty early. You know, we’re, we put controls in place to manage it. We’re, passing the cost along to our customers, whether it’s through you know, contracts or, you know, stuff like our POs or stuff like that or order confirmation. So I don’t expect you know, to see much. I mean, it’s obviously a dynamic situation. I don’t think all the tariffs are completely locked in.

It’s been a little quiet in the news lately. But where we’re at today and what we’ve seen so far, it’s it’s very impact to our business.

Brian Shore: K. Thanks, Mark. So let’s keep going here. Current MRAS supplier core scorecard or scores. What happened? We don’t have all hundreds. Here. We don’t have all hundreds. Does MRS still love us? Yeah. I think they do. I think I mentioned to you in prior quarters that told that most suppliers would be happy to get eighties. And Emirates finds it a little bit humorous that we ask, well, what happened? And what we doing what do we need to do to fix these tissues? It’s called technical issue in terms of what how we recorded something. So we take it seriously. We’re we’re a 100 company. We’re not a 99.7 country, company rather. So we take it seriously.

And, like I said, MRC I think, finds it a little amusing that we spent so much time talking about why we’re not on a what not why we didn’t get a 100 on when we reached scores. Let’s go on to slide 25. So making customers love us, this is still in our general updates, is central to what we call parks egg strategy. How do we make our customers love us? With our calling cards of flexibility, urgency, and responsiveness? By asking how high before our customers say jump. And we’re not kidding about this. We’ll go to customers and say, what else can we do? What else can we do? What else can we do?

Before they even ask us for anything. Making customers love us is a boiler room thing, not a boardroom thing. You know, the board’s on board. With a strategy. You know? We’ve certainly reviewed it with the board. But the strategy happens on the factory floor, not on the boardroom. That’s where the rubber hits the road. It’s up to all our people to make the strategy work. It’s a boiler room thing. So first, for this strategy to work, all of our people need to be bought into it and feel passionate about it. Making customers love us is the secret to our success.

You know, it’s a hidden plain sight secret You know, sometimes the most brilliant ideas are the most obvious ones. With a benefit of hindsight and the well, why didn’t I think of that? I don’t know. Why didn’t you think of So the secret is kind of hidden plain sight, but it’s a secret to our success. Slide 26, buyback authorization. We don’t have to spend a lot of time on this. Let’s just go down to the last two check items We did not purchase any shares, and in fiscal in our second quarter, and we don’t we’ve not purchased any shares so far in our third quarter date.

I don’t think we’ll be my feeling, my opinion is we probably won’t be purchasing too many shares in the near future, but we’ll see about that. Slide 27, again, this is just gonna review Park’s balance sheet cash and incredible cash dividend history. Long term debt, we don’t have any. We had reported $61,600,000.0 of cash and marketable securities. At the end of Q2. But we also made a final transition tax installment payment of $4,900,000.0 in Q2. And Q1, we recorded cash in into q 1 of $656,000,000. So if you take that $4,900,000.0 subtracted from $65.6 million, it gets you to that $61,600,000.0 number more or less. It explains the difference.

Forty sec consecutive years of interrupted uninterrupted regular cash dividends, and we’ve now paid over $606,000,000 or going in $9 and cents per share in cash dividends since the beginning of fiscal two thousand five. This is our Park Founders. The run reason we placed a picture of our Park Founders here is because we started out with basically nothing. We’re two guys that started the company, I think, in 1954 with about $40,000 that they had saved from war duty. And, you know, here we are paying over $600,000,000 of cash dividends in last twenty years or so. Let’s go on to slide 28. Okay.

We can kind of skim through this because these three slides are exactly how the same slides that we showed you last quarter. I think the quarter before that. Financial outlooks for GE Aerospace change and Juggernaut, call it Juggernaut. It’s a timing. We’re not sure where to talk about yeah, the nine one nine is, you know, a little slow ramping up. And the triple seven x is having a little more difficult difficulty getting certified. So we don’t know. We don’t really spend a lot of time worrying about that. But the thing is that we say it’s a juggernaut. It’s coming. It can’t be stopped, and the key thing for us is we better be ready.

You go on to slide 29. There’s no change. Anything here that all the numbers are exactly the same. Like I said, the pre you know, relate to a previous slide, we feel that GE and CFM have kind of gotten a religion that they’re they’re really focused on ramping up production and working closely and collaboratively with the supply chain. Slide 30 is just footnotes related to the prior slides. We won’t go through those. If you have any questions, any of this, let us know. Okay. Let’s go on to slide 31, Warren Peace, Park Gingernaut. Peace for the Question War. These slides came from originated in the last quarter, although there’s some updates to them.

The first thing I wanna cover again though is we’re not providing any inside information on any of these programs. All every all this information in these slides is based upon publicly reported news and reports. We don’t give away inside information. Especially with defense programs. Unprecedented demand for missile systems. Missile systems stockpiles have been seriously depleted by the wars in Europe and Mideast there’s an urgent need to replenish the depleted missile system stockpiles. According to Wall Street Journal reporting, the Pentagon is pushing defense OEMs to double or even quadruple missile system production on a breakneck schedule quotes, partly in preparation for potential conflict with China.

List of Pentagon targeted missile systems, including PAC three missile system, the LRASM, and the s m six. The Patriot missile system is a particular priority. I think you should know the park is on all those programs, participates in all those programs, all three of them. Review and update of the PAC three Patriot missile system. The reason we spend more time talking about this is a lot of public visibility and information about it. Some of the other programs we’re on, it could be quite significant, but we’re not able to even mention what they are.

The largest deployment of PACS prepaid missile systems in history occurred in response to Iran’s ballistic missile strikes on our air base in Qatar. Going on to slide 32, What happened here, in anticipation of this, I guess we knew what’s gonna happen, We moved Patriot missile system to Qatar from South Korea and Japan knowing what was coming And we called it a shell game, you know, moving the systems one place to another. That’s not sustainable. The Department of War wants to very significantly increase patriot missile stockpiles in Asia to protect bases and allies in the Pacific region. So this is not working out very well at all, is it?

We take missile systems out of South Korea and Japan because we have this issue with Iran. And now we deplete their systems when the Department of War wants to significantly increase the patriot missile stockpiles in Asia. See the problem? So just public stuff. Israelis supply a patriot missile systems seriously depleted. Ukraine supply of patron missile systems. Seriously depleted. Other countries have been waiting for Patriot missile systems for years.

September 3225, Lockheed’s Missile and Fire Control division received its biggest contract in history, a $9.8 billion award from the US Army 1,970 Patriot missiles Patriot missiles According to the Wall Street Journal, the Department of War wants suppliers to ramp up to produce approximately 2,000 Patriot missiles per year which is almost four times the current production rate. Didn’t we say something about quadruple in the prior slide? We did. Four times production rate. So we’re talking about well, we’ll get to I’m gonna wait and wait. We’ll get to in a second because I thought you say park is all sorts qualified. We’ll get to that in a second. Let’s go on to slide 33.

Patriot missile systems are planned to be incorporated into the Golden Dome. As apparent from the reporting that The US plans to do much more than just replenish these depleted systems. So next hour item, parts ports, the patron missile system with specially ablated materials produced in areas of c two b fabric, And Parker sole source qualified for specially ablated materials on this program. So I was gonna say at the bottom of slide three two, there’s 2,000 missiles per year. That represents very significant revenue with Park. We’re sole source qualified in that program. Park, we’re back to slide 33. Sorry to bounce around on you here.

Parkers recently asked to increase our expected output of specially inflated materials for the program by significant orders of magnitude. We can’t really say how much but significant orders of magnitude, hopefully, that gives some kind of feel for what’s going on here. And we will fully support this request partly with the additional manufacturing capacity provided by our major facilities expansion, which we’ll discuss below. Remember that Park recently entered into this new agreement going back to area? With Arian for the purpose of increasing c two b fabric manufacturing capacity. Let’s go on to slide 34. But will that additional manufacturing capacity be enough? Considering what’s going on with the Patriot missile? No. I don’t think so.

As discussed above, park partnering with Aaron Group in a study related to potentially significantly increasing c two b fabric manufacturing capacity presumably in The US. This is a big deal. Let me just say this. Once we’re our we’re our partnership when a study is done, that’s not the end of the partnership. I don’t think anyway. That’s not what we’re talking about. I’m not gonna say anything more about it, but let me just say it’s a big deal. We covered the arrow three four missile systems last time, so we just kinda covered it again. Not too much here. Last item, updated parts involvement. Remember, we’re we were second source qualified in the r o three.

We weren’t really expecting orders. We got them. We already got them. Our four were sold source qualified on the hour four, which is expected to go into production, think relatively soon. Let’s go on to slide 35. This is really probably the most important slide this whole warrant piece section of the presentation. The above missile programs are just a small representation of critical missile programs parked is supporting or planning to support There are too many programs to iterate here, and many, probably most, are too confidential and sensitive to mention for national security or other reasons. But, you know, this is highlighted or bold whatever you an italics.

But please understand that certain of these programs represent very significant revenue for 36. Major expansions. So I’m just gonna give a quick update here. I know we’re running late, with time, but got a lot to cover here. And like I said, we got new investors, so we couldn’t just skim through things too much. A major new expansion, we talked about this in the of our manufacturing facility. We talked about this in the last February presentations, I believe. So we’re planning a major new expansion of our manufacturing facilities. It could be at Newton, or elsewhere. The plant expansion will include manufacture following lines elution treating, hot melt film, hot melt tape, hypersonic materials manufacturing.

A current estimated capital budget for new manufacturing plant equipment 40 to 45,000,000. That’s gone up. I mean, I forget what we said last quarter, maybe $30.35 to forty. Why’d it go up? Well, we know the line. That extra $5,000,000 is for another line because the requirements keep going up and up and up. It’s quite incredible, So new manufacturing slide three seven, just continuing new manufacturing, major new manufacturing major new expansion of parts manufacturing facilities. Why are we doing this? Are juggernauts required? We have a juggernaut for the aerospace. We have a juggernaut for defense and missile programs. Our long term business forecast requires it.

And the second bullet item under the that check item is that our forecast has increased since we talked to you on July 15. And also have manufacturing capacity needed for park to be parked. Or calling cards. Again, flexibility, responsiveness, urgency. We don’t run a business a mill, meaning that, okay, we campaign and you want something, well, we could figure when maybe a year from December. We don’t run our business that way. Urgency, responsiveness, flexibility. So it’d be really stupid for 38. We’re just continuing on the expansion We’re not sharing our long term business forecast this time. But opportunities for Park are significant. Timing is now.

We must take advantage of the opportunities We must not hesitate or we will squander the end quotes, once in a lifetime opportunities we have sacrificed so much over many years to develop. So this is kind of interesting. There was a board meeting last week and Mark was discussing with the board some of these missile programs and used the term once in a lifetime our opportunities. And the board was really got thought, well, let’s come from Mark. This must be really big. You know? Because Mark is not a guy who’s given to hyperbole. You know? He’s usually a skeptical guy, which is good. You know, you want your president to be skeptical of things.

That was his quote, went to lifetime and the board’s thought, wow. This must be a big thing then. Our objective is to have our expansion plan in place by the end of the calendar year and to be moving into implementation. The implementation phase by or a plan by then. Slide 39. How are doing at Park? Let’s change gears a little bit. I’m sorry. It’s gonna take you so long, but like I said, we’re trying to cover a lot of things here. So what are parks objectives? This is How do we measure success? I think there’s a lot of misunderstanding about this. So let’s talk about it. We measure success.

Our objectives are getting qualified sole source qualified whenever possible on chosen special aerospace programs. These are programs you wanna be on. These are the special programs, the wonderful programs. That’s our success. Once we get qualified on our chosen special programs, our objectives have been achieved. We’re done. Once we’re qualified in those children programs, in italics, all we need to do is support those programs with what? Extreme urgency, flexibility, responsiveness. That’s it. Other than that, it’s up to the program OEMs to determine the side of quickly their programs will ramp. That is not something over which we have control, and it’s not even our concern. We’re in the program. We achieved our objective.

Our objectives has been achieved. Some guy wrote something about you know, we’re shifting blame or mitigation plans, and it’s just kind of a total misunderstanding of how a park and our objectives and how we operate. Once we got in these programs, sole source qualified, our objectives have been realized. And we let’s talk about it. How we done with our objectives? If you ask me, we have been incredibly successful. We’ve gotten on wonderful aerospace programs, a special program that you want to be on. Most of which we can’t mention. You know, you know some of them already, a three twenty,

Mark Esquivel: Wow. Patriot. Wow.

Brian Shore: A lot of them we can’t mention. Slide 40. And we were nobodies when we came into the aerospace industry. We came from nowhere. You know, we welcomed into the industry with open arms. With the entrenched competitors, I don’t think so. They didn’t want us. I mean, they were brought polite and respectful Well, they clearly didn’t want they did not welcome us. We achieved what we achieved against great odds, incredible success, by getting on these programs that are the envy of the industry. From nowhere, nothing. Went into an industry where there’s in aerospace, there’s a lot of entrenchment. People kinda programs, they get very complacent sometimes. That’s not us. We don’t do that. Are we lucky?

If you ask me, we earned everything we got. Are we an overnight success? I don’t think so. There’s been a long and difficult row much sacrifice along the way. It’s a road we chose. Let’s go on to slide 41. I think that’s our last slide. Almost there, folks. Very fortunately for all of us, Park has the courage and conviction. This should be involved because it’s important to stay the course with our principles that are simple but elegant. X strategy in the face of sometimes unrelenting doubts, negativity, and skepticism. Very fortunate of all of us meaning, you know, investors too. Very fortunate that we stood our ground and our knees didn’t buckle.

We did what we thought was right, under know, quite a bit of pressure. Because if we didn’t do that, we wouldn’t be where we are now We wouldn’t be looking at these once in a life lifetime opportunities. Wouldn’t be. And we’d all be we’d all lose out. You know? We’ll lose out. So how are we doing at Park? We believe Park has done a remarkable job of positioning our company to capitalize our thank you, Mark, once in a lifetime opportunities we are now facing. These are unprecedented times. For Park. Okay, operator, so we’re done with our presentation, we have to take any questions at this time.

Operator: Thank you, Mr. Shore. We will now be conducting a question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate your line has been You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset pressing the star keys. I see we have a question coming from Nick Ripostella from NR Management. Your line is now live. Please proceed with your question.

Nick Ripostella: Hey. Good afternoon. Once again, nice presentation, nice quarter. And, just a couple of, easy questions. I’ve been thinking about Park and all the exciting things going on. How do you feel about, the need for additional sales personnel or are you feel that everything you have there is adequate? You’ve got so much going on. I’m just wondering, are you covered in that area? Sufficiently? And the second thing is I know you say you’re not prepared at this time to share the long term forecast. So do you think like, sometime next calendar year, you can kind of give people a longer term view of where this company could be and three to five years.

You know, there’s so many things that are blossoming. You know? You truly are a growth company, but and then the third thing is and I know this is not your primary function, obviously, but you must be on the radars of, firms out here to pick up research coverage. You know? There’s so much research out there now by niche firms, and you have such a great story. I was just wondering if anything’s happening in that regard. Thank you so much.

Brian Shore: Thanks, Nick. Thanks for your questions. So let’s take them in order. Additional salespeople, you know, I think Mark, you can chime in. We’ve learned a lot over the last twenty years, and I think our view on salespeople is a little bit skeptical. I couldn’t refer to have additional technical people, engineering people, in terms of getting more business. We certainly have our hands full of what we have already, but we’re always interested in new opportunities, new opportunities. They’re coming pretty fast and furious. But they’re not coming because of salespeople.

They’re coming because you know, it’s a small industry, particularly in the fence side, and we have close ties with a lot of the OEMs and the military as well. So the work gets out pretty quickly. The important thing is we have engineering people to support those activities rather than salespeople that go get those the business. And I’m not sure that really works anyway. I don’t think that I don’t know. Mark chime in. The typical OEMs really are that interested in you know, the guy bringing donuts and a slick salesman. More interested in what you can do, how you can help us.

And that’s gonna be more of an engineering discussion, or it could be a supply chain discussion. Okay. No. How can you support us in terms of providing a product to us? But the you know, I don’t know. I’m a little skeptical about whether additional salespeople are we wanna talk about at this point. Why don’t we Mark, why don’t you chime in? I’ll take the other two, questions, but why don’t you chime in if you have anything wanna add to that, my answer on that question.

Mark Esquivel: Yeah, Brian. I think you’re correct. I mean, we work really close with the technical and engineering folks and kinda goes back to our strategy too. They have priorities, and they need to get projects And, you know, we work directly with them and help them develop, you know, new programs and products. And that really helps us get business more so than the traditional, like you said, Brian, going to the supply chain people bringing donuts. A little different, you know, in our industry. It’s more technical, more engineering driven. And if you’re satisfying you know, those groups, you know, that’s how the business usually comes our way.

Brian Shore: Yeah. Good. Thank you. Yeah. I think a lot of times it come it comes to us rather than we go into it. You know? But, you know, is a real kinda small, close in industry, and people know where to find us. Long term forecast, I understand. Understand why you’re asking that. I think what we’ll try to do in Q3 is provide some information a little bit like, a little reluctant because I think the number is gonna be shocking. To our investors.

Nick Ripostella: I want some nice shopping.

Brian Shore: Yeah. Okay. Well, let’s see we can let’s see what we can do to give you more perspective, quantitative perspective. When we announce Q3. Okay? Would that be alright? And we’ll work on that. I’m not saying we’ll give you a hard, like, three or four year forecast, but there’s something that, you know, you could sink your teeth into a little bit more. And the research, you know, we’re here. I mean, they were know where to find us, so we’d be happy to be covered. Like I said, Nick, not really our principal focus, but we’d be happy to be covered. And, you know, if anybody’s interested, I’m happy to talk to them.

I think we are seeing a lot more visibility in the last few months or so. So we’ll see what happens. I don’t believe there’s anything imminent where somebody’s about to pick us up right now. We’re very open to pick to being covered. So, hopefully, those that is when

Nick Ripostella: when the revenue doubles from here, then they’ll come around. You know? That’s that’s the way it happens a lot. But Maybe

Brian Shore: Yeah. Maybe you’re right. Any other questions you have, Nick, or does that cover it?

Nick Ripostella: No. Thank you so much. And you know, it’s it’s glad to see that all the hard work, you know, the stock has caught lightning in the bottle after the last quarter, and it’s good. It’s night it’s a nice thing to see hard work appreciated and reflected in the value. You know? It must make all the employees and everybody feel good and the investors, obviously. But so thank you. Sure.

Brian Shore: It’s a good thing. Thank you very much for input, Nick. Operator, do we have any other questions?

Operator: Currently, there are no further questions at this time. Oh, I actually see one just popping in by Chris Showers. Private investor. Chris, your line will be unmuted. Please proceed with your question.

Chris Showers: Hi. Thank you. Brian, just, I guess, two questions. You mentioned the c two b material being a sixty forty lower to higher margin mix. When the Patriot missile gets ramped up, will that be constant, or can you get a higher mix there with the higher revenue converted material.

Brian Shore: So I’ll I’ll answer that. So what’s going on here is they’re stockpiling. Stockpiling. And that’s why there’s the ratio was not really balanced. At the end of the day, though, there will be a certain amount of c two b fab that’s required to make the c two b material. But at the end of the day, it all has kinda even out. You know? Right now, the OEMs are stockpiling Why? Because they’re nervous. They want as much as they can get. Because they see where the, you know, where the future is going, and they’re not stopping. You know. They’re gonna keep stockpiling, I think.

But eventually, you know, their plan is not to just have that stuff sitting in their factory, of course. It for us to produce the material that’s used to make the rockinized materials for the rock nozzle structures for the Patriot missile system.

Chris Showers: Okay. And is there timing on that where you think that might pick up? This calendar year?

Brian Shore: Yeah. I think as Mark alluded to, you know, we had this issue with the recall, and that was slowing down our a lot, you know, our ability to produce the materials, the c two b materials. The recall is pretty much complete now. So we think that’s gonna open things up quite a bit. Even in the next quarter. I mean I mean, even this quarter, I think. So we’ll see. We’ll see. You know, with aerospace, probably most industries, though, Chris, the demand is there, but you that the supply chain can’t turn everything on a dime.

We can, but there’s a lot of other, you know, steps along the way in the supply chain in order to be able to ramp up. Like with a three twenty, you know, we could support 75 airplanes a month at this point if they needed it, but and Airbus would like to be a 75 airplanes for a month. I’m quite sure of that. What’s holding you back is the supply chain. The supply chain is not able to turn on a dime.

Chris Showers: Okay. Thank you.

Brian Shore: Was there another question, Chris?

Chris Showers: No.

Brian Shore: Oh, good. Okay. Operator, anything else right now?

Operator: There are no further questions at this time. I would like to turn the floor back over to Mr. Shore for any closing comments.

Brian Shore: Okay. Well, Brian again here. Thank you very much for listening in. Sorry the call went so long. If you have any other questions, you wanna call us anytime. We’re happy to talk to you. Have a great day. Thank you. Bye.

Operator: Ladies and gentlemen, thank you for your participation. This does conclude today’s teleconference. Please disconnect your lines, and have a wonderful day.

Image source: The Motley Fool.

Date

Oct. 8, 2025 at 5 p.m. ET

Call participants

Chief Executive Officer — Kate W. Duchene

Chief Financial Officer — Jennifer Y. Ryu

Chief Operating Officer — Bhadreskumar Patel

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Takeaways

Revenue — $120.2 million in revenue for the fiscal first quarter ended Aug. 31, 2025, with outsourced services revenue up 4% year-over-year.

Gross margin — Gross margin was 39.5% for the fiscal first quarter ended Aug. 31, 2025. This was 300 basis points higher than the prior year quarter and significantly better than the high end of the company’s outlook range, supported by improved bill rates, benefits cost reductions, and higher consulting utilization.

Adjusted EBITDA — Adjusted EBITDA was $3.1 million.

On-demand segment — Revenue was $44.4 million, down 16% from the prior year; however, segment adjusted EBITDA rose to $4.4 million (10% margin), up from $2.6 million and a 4.9% margin in the prior year, driven by cost reduction.

Consulting segment — Revenue was $43.6 million, down 22% year-over-year; segment adjusted EBITDA totaled $5 million (11.6% margin), compared to $7.8 million and a 14.1% margin previously (non-GAAP).

Europe and Asia-Pacific segment — Revenue reached $19.9 million, up 5% year-over-year; segment adjusted EBITDA was $0.8 million (4.2% margin), up from $0.2 million and a 1.3% margin in the prior year.

Outsourced services segment — Revenue totaled $10 million, up 4% year-over-year, with segment adjusted EBITDA of $2.3 million (23.3% margin), compared to $1.4 million and a 14.7% margin in the prior year.

Average bill rate — Enterprise-wide average bill rate was $120 (constant currency), up from $118, while the consulting segment improved 11% from $144 to $160.

SG&A expense — $44.5 million, a 7% decrease from $47.7 million a year ago, due to reductions in management compensation, travel, and occupancy.

Balance sheet — $77.5 million in cash and cash equivalents; zero outstanding debt was reported.

Shareholder returns — Dividend distributions of $2.3 million; $79 million remained under the authorized repurchase program at quarter end.

Q2 revenue outlook — Guidance is $115 million to $120 million, with gross margin expected at 38%-39% and SG&A between $43 million and $45 million.

Annual cost savings — Management expects $6 million to $8 million in annual savings from the reduction in force initiated in early October 2025.

Consulting pricing — On new consulting projects, Patel said, “the value we’re bringing is warranting for us to be able to increase our rates, especially on net new projects,” despite ongoing pricing pressure in lower-value roles.

Summary

Resources Connection (RGP 2.47%) reported quarterly results for the fiscal first quarter ended Aug. 31, 2025, that outperformed its own expectations, credited to gross margin strength and cost controls rather than broad-based revenue growth. The company’s Europe, Asia-Pacific, and outsourced services segments posted year-over-year revenue growth and margin gains, differentiating from softness in U.S. consulting and on-demand. Management highlighted improved average bill rates and pipeline momentum in digital transformation and CFO advisory services, as well as strategic pipeline expansion through increased cross-selling initiatives across business lines.

Chief Financial Officer Jennifer Y. Ryu said business days, not foreign exchange, were the main factor in the reported year-over-year revenue decline, with currency accounting for “about a third of the business day impact.”

Outsourced services (County) is experiencing demand from venture-backed AI, fintech, and divestitures, combined with expanded AI and automation integration to extend client retention beyond early-stage companies.

New leadership was added in CFO advisory, with revenue pipeline described by management as benefiting from “a lot of momentum,” according to Kate W. Duchene, tied to leadership changes and ongoing pipeline development.

Ryu stated that the same day constant currency guide for the fiscal second quarter ending Nov. 30, 2025, implies a 16% decline at the top end of revenue guidance.

Recent board appointments added private equity perspective and transformation expertise, focusing the board on incentives, cross-team collaboration, and bottom-line optimization in a volatile market environment.

Industry glossary

Bill rate: The hourly charge to the client per professional deployed, inclusive of wage costs and overhead.

SG&A: Selling, general, and administrative expenses comprising all non-production operating costs.

Pipeline: The aggregate value or number of prospective client opportunities currently being pursued.

Adjusted EBITDA: Earnings before interest, taxes, depreciation, and amortization, excluding certain one-time or non-cash items.

Constant currency: A metric that removes the impact of exchange rate changes to show financial performance as if foreign currencies had not changed in value.

Full Conference Call Transcript

Kate W. Duchene: Thank you, Operator, and welcome everyone to Resources Connection, Inc.’s Q1 earnings call. We continue to make progress in evolving the company to become more integrated, diversified, and resilient. While the global macro environment remains uncertain, disrupted, and slow-moving for professional services, we are working aggressively to evolve the business to be well-positioned for the upturn. Our activities are producing meaningful progress, which I’ll highlight in Q1. We delivered results better than our outlook for all measures. Revenue was above our outlook range. Gross margin was significantly better and G&A also came in better than our outlook. As a result, we achieved more profit than expected by a significant amount.

While we have more work to do, we have a clear plan to deliver enhanced value creation. Several parts of the business are growing, and I want to highlight those. Europe and Asia-Pacific achieved a solid quarter, delivering 5% growth, and have built a strong pipeline for Q2. Japan and India delivered growth in Q1, again with solid momentum moving into Q2. Revenue from our top ten clients also grew year over year, reflecting the global transformation and transaction work happening in the very large company client segment counts. Grew in Q1 and is busy with strong proposal activity in Q2.

Jen will share more details about our progress, especially around double-digit fill rate improvements in our consulting segment, increasing deal size, and pipeline momentum. These are the indicators that we closely monitor to track our continued progress against our strategic goals. We are engaged in our transformation to deliver more for our clients and colleagues while improving return for our shareholders. We are transforming purposefully to increase our addressable market while becoming known for a focused set of solutions. We’ve taken the company from a professional staffing organization to a diversified platform combining on-demand talent with consulting and outsourced services. We are focused on two critical solution areas across all delivery models: CFO advisory and Digital Transformation.

These services are relevant to every business today, large and small. In these areas, we help our clients drive transformation from strategy through to execution by providing heightened value and impact. Our unique value proposition is built on five key differentiators. First, we bring agility, expertise, and experience. Unlike Big Four and large consultancies, we deploy skilled, analytical consultants paired with highly experienced professionals who can plug into client teams quickly without the heavy overhead, long timelines, or rigid methodologies. Clients value this model when they need execution and results fast, not just advisory. Also, our global Talent Network is unmatched.

Our experienced professionals tend to be mid to senior-level practitioners, with 10 to 20 plus years of experience who have worked in industry, not just consulting, and have operated in our client seats. This makes them credible to the client teams immediately. Second, our diversified services model is a strength. We serve clients across consulting, professional staffing, and managed solutions or outsourcing, giving clients flexibility in how they engage. Few firms combine all three effectively, especially on a global stage like ours. Clients increasingly want more choice, including blended delivery teams that can operate around the world.

In addition, with the US changing the H1-B availability and cost model, our global delivery centers in India and Asia-Pacific allow us to quickly access outstanding global talent without extra complexity or cost. Third, our focus on CFO advisory and digital transformation is right on target for the next several years. We specialize in the high-demand areas of finance transformation, including AI and data, risk and compliance, transaction integration, supply chain optimization, digital and cloud transformation. This is a sweet spot where clients need both deep functional expertise and execution support. Our pipeline of opportunities is growing in the digital finance, ERP, and data space, and we expect that to continue.

We have accordingly upskilled our talent communities to deliver the specialized skills clients need today. Fourth, our diversified model is scalable. Our clients can flex our team up or down depending on project demand. This gives clients more control over cost and outcomes compared with traditional consulting engagements. In today’s macro environment, cost efficiency and flexibility are critical considerations for clients in making procurement decisions. The models of yesterday with large, layered teams or inflexible playbook delivery are declining. This shift will play in our favor because we don’t deliver services with layers of inexperienced generalists or juniors, often learning skills on the client’s dime. We know that much of that work is being actively disrupted by automation and AI.

Our sweet spot is in the delivery of consulting and on-demand, specialized talent that embraces AI and automation to streamline, enhance, and cost optimize the delivery of complex change and transformation work. We take pride in knowing that when our clients demand teams and talent that have been in their shoes and had experienced the problems they faced, we can quickly provide that solution anywhere in the world. In digital finance work, for example, our consultants work collaboratively with modern tools for automating, processing, and analyzing, allowing focus to shift to capturing insights and designing innovative new processes and technical architectures that enable the use of these tools at scale.

As the on-demand environment improves and clients are reintroduced to the capabilities of our GP, today, we believe the market opportunity ahead is significant. The fifth differentiator is our client-centric approach. We partner to truly integrate with client teams. We do not engage as an external firm dictating solutions. Our model is designed to be collaborative, outcome-oriented, and more cost-effective than large consultancies. As one client buyer from a $6 billion enterprise undergoing finance transformation recently shared, Resources Connection, Inc. is positively unique because you deliver strategy when I need it and specialized talent when I need it. You are a trusted partner for both types of services, providing greater control and efficiency as every day brings something new.

Next, I want to comment on the qualitative aspects of our transformation as they are important to unlocking cross-sell and upsell opportunities in our exceptional client base. We are working more collaboratively across the Enterprise’s one GP and are accelerating the integration of our consulting capabilities. The mindset and attitude of our organization have significantly changed to understand the importance of sales, delivery, and talent working together. This mindset shift and accompanying behavioral changes are beginning to produce the right results. In sum, we’re transforming to build a more stable and profitable business. The past three years have been volatile and disrupted, especially in the staffing market.

During this time, we have been building our talent base and solutions to bring to market a new model of consulting that is more affordable, more flexible, and more impactful. Larger consulting projects are already beginning to help us create stickier business and higher-level client relationships. This new playing field and approach will pay dividends quickly in an improving global environment. We’re also building more outsourced services capabilities with County as it fits into our diversification strategy and the CFO and digital agendas. County is an outsourced finance and accounting service, combining automation, AI, and highly specialized fractional CFO talent to serve startups, scale-ups, and divested assets of larger enterprises and private equity firms.

We are currently expanding our offerings to incorporate more AI and automation in these outsourced services, in turn driving growth and longer-term revenue opportunity. We believe we will increase the market opportunity for County in two ways: one, adding clients that are divested assets of larger enterprises or private equity portfolios, and two, by maintaining clients longer as they mature. County is not just a solution for the startup and scale-up stage, but a long-term solution for finance and accounting services for a broader range of clients. For example, County’s newest client base is AI technology and fintech, who want FNA as an outsourced solution long-term.

County also delivers our strongest operating margins, which will continue to benefit our consolidated results and drive shareholder value. Finally, I want to share an update on our cost structure, which we are actively redesigning to fit the current size and scale of the business, our current technology platform, and our diversified services strategy. We are streamlining organizational structure, simplifying processes, embracing automation and AI, and evaluating all functions to ensure they are strategically aligned to what we need today and where we’re headed. We’ve made good progress in reducing our run rate and will continue to do so at a meaningful level.

From a holistic point of view, we will report continued progress throughout the fiscal year as we fully optimize our technology investments to simplify processes and drive efficiency. Jen will share more on our cost structure improvements in a moment. In closing, we have a clear strategy we are executing to allow us to rebound quickly as the demand environment improves. We believe the improvements we are making in the business today will enable us to return to double-digit profitability. Our strengths, including our brand, people, client base, technology, and flexible solutions, will allow us to capitalize on the opportunities ahead, driving long-term shareholder value. With that, I’ll turn it over to Bhadresh.

Bhadreskumar Patel: Thank you and good afternoon, everyone. We are pleased to report another quarter of progress in advancing our transformation strategy, positioning Resources Connection, Inc. at the intersection of professional staffing, consulting, and outsourced services. Our flexible, client-centric offerings continue to resonate with clients, supporting both their transformation and operational priorities. In the first quarter, we delivered results ahead of expectations in both revenue and gross margin. This performance reflects the ongoing stabilization of our operating model, stronger cross-practice collaboration, continued focus on value-based pricing within consulting, and disciplined cost management. Together, these actions are driving stronger bottom-line performance, which Jen will cover in more detail shortly.

Despite the still choppy demand environment that Kate referred to, our pipeline returned to growth during the quarter. Demand is strengthening across CFO advisory and digital transformation, directly aligned to client priorities around cost efficiency and process automation. This demand underscores the alignment between our sales organization and practice leaders, and our positioning at the intersection of staffing, consulting, and outsourced services. Europe and Asia, as well as outsourced services, continue to deliver year-over-year growth. On-demand is stabilizing, and consulting is building pipeline while achieving higher bill rates. We are making targeted investments in leadership and services to further accelerate this momentum. With that, let me turn to our performance by segment.

For the consulting segment, revenue declined year-over-year, but we did achieve revenue growth in a few areas, including ServiceNow, project and change management, and our federal digital offerings. Additionally, we saw meaningful improvement in bill rates and utilization compared to the same quarter last year. And importantly, we’re achieving notably higher bill rate increases on new projects. This validates client demand for our specialized solutions, supports our value-based pricing initiative, and contributed to the gross margin improvement year-over-year. In addition, stronger collaboration between our sales and consulting teams is expanding the pipeline with larger, more strategic transformation opportunities, particularly in our focus areas of CFO advisory and digital transformation.

As Kate mentioned, these areas remain directly relevant to client priorities, but the longer sales cycles and slower project starts in the current environment often translate into elongated revenue conversion. While this impacts near-term quarterly revenue, we believe these engagements represent durable demand that, over time, will translate into meaningful opportunity at increasingly higher margins. Notable wins this quarter include execution of a technology strategy across multiple work streams for a Fortune 500 financial services company, a master data management implementation for a multibillion-dollar food processing company, and employee experience modernization for a large multinational technology company.

On the pipeline side, we added several significant opportunities, including global program management support for a Fortune 500 energy company, finance transformation stabilization pods for cutover support and data validation for a complex, best-in-breed ERP and data platform deployment for a large energy distributor, and transformation advisor and implementation support of the source-to-pay function for an independent business unit of a FTSE 100 global consumer goods company. Many of these wins and pipeline additions are with clients we have historically served through our on-demand talent channel, which is a testament to our unwavering focus on the value of our integrated go-to-market strategy.

Finally, on consulting, as announced in August, I’d like to welcome Scott Rottman as our new leader for CFO advisory. Scott will oversee finance transformation, risk assurance, tax and treasury, and M&A offerings. He brings deep expertise from the Big Four and Morgan Franklin, a boutique transformation-focused consultancy with a proven track record of building practices and trusted teams, and helping clients navigate complex transformation agendas. Turning to on-demand, revenue declined year-over-year, but is showing signs of stabilization over the first quarter, with improved gross margins supported by moderate fill rate increases. After the expected seasonality of summer, the pipeline returned to growth in the quarter, driven by more net new opportunities and continued focus on extension management.

Pivoting away from operational accounting as these roles will continue to be replaced by AI and automation. We remain disciplined in pipeline management and qualification, with a particular focus in the areas of ERP, finance transformation, data, and supply chain, which are more relevant in today’s marketplace. In addition, as we continue to build leadership and capabilities in consulting, we’re increasingly positioning on-demand talent alongside consulting opportunities and engagements. This integrated approach not only strengthens client impact but also creates revenue growth across our service lines. Moving to international, our Europe and Asia segment delivered solid first-quarter year-over-year revenue growth.

Europe and Asia led the way with revenue gains, higher run rates, and stronger bill rates versus last year, underscoring the strength of client relationships and the effectiveness of our regional strategy. Growth in Europe and Asia-Pacific has been driven by a dual focus on deepening multilateral client relationships and expanding our local client base. Demand for our CFO advisory and digital transformation offerings remains strong, and our ability to combine local delivery with scalable global delivery centers continues to differentiate us. Together with management and ongoing optimization initiatives, these actions position us to maintain margins and sustain growth despite longer sales cycles and competitive dynamics. Lastly, on outsourced services, we delivered year-over-year revenue growth with continued gross margin expansion.

We added new clients to our platform while also exhibiting strong retention. While bottom-line performance benefited from both operating leverage and disciplined cost management. While our outsourced services focus continues to be on startups, scale-ups, and spin-outs, we are capitalizing on the broader venture funding environment by targeting venture-backed AI startups, where demand is increasingly robust. At the same time, we are advancing our AI strategy to support a rapidly expanding client base with scalable technology-enabled solutions. This includes enhancing internal tools, evolving our go-to-market approach, and exploring new delivery models such as AI-enabled accounting agents and innovative pricing structures.

To conclude, we remain focused on disciplined execution and delivering meaningful value for our clients as we wait for the demand environment to turn. With a diversified portfolio, strong client relationships, and a winning strategy, we are positioning Resources Connection, Inc. for sustained long-term growth and profitability. With that, I’ll now turn the call over to Jen.

Jennifer Y. Ryu: Thank you and good afternoon, everyone. We delivered strong performance this quarter against our expectations. Revenue of $120.2 million, gross margin of 39.5%, and expense of $44.5 million all beat the favorable end of our outlook ranges. We also delivered improved adjusted EBITDA of $3.1 million, or a 2.5% adjusted EBITDA margin. We’re pleased to see the return to growth in revenue for both our Europe and Asia-Pacific segment, and outdoor services segment, with 5% and 4% growth over the prior year quarter. Revenue within the on-demand and consulting segments continued to be soft as the operating environment in the US remains choppy this quarter.

Our continued focus on the number and quality of client outreaches and meetings, pipeline management, and cross-sell collaboration have yielded growth in the pipeline. Importantly, we believe the positive progress in our key operating metrics will lead to tangible improvement in revenue over time. Turning to profitability metrics, we achieved strong gross margin for the quarter at 39.5%, 300 basis points higher than the prior year quarter, and significantly better than the high end of our outlook range. Contributing to the strong gross margin are one, continued improvement in our average bill rate and expansion of the pay bill spread.

Two, significant reduction in employee benefit costs, including health care costs, holiday, and paid time off, and three, strategic management of our bench consultants. Utilization. Enterprise-wide average bill rate increased to $120 constant currency from $118 a year ago. The improvement came despite the revenue mix weighing more toward the Asia-Pacific region, and of note, we saw an 11% improvement in average bill rate in consulting from $144 to $160. As we continue to execute our pricing strategy and move up the value chain to deliver higher value, larger scale engagement, we expect more upside in bill rates, especially in the consulting business. Now on to SG&A.

Our enterprise run rate, SG&A expense for the quarter was $44.5 million, a 7% improvement from $47.7 million a year ago, primarily driven by lower management compensation expense and reductions in other G&A spend, such as travel and occupancy. Subsequent to the quarter, at the beginning of October, we further streamlined our organizational structure to rightsize leadership layers and headcount through a reduction in force. We expect approximately $6 to $8 million of annual cost savings associated with this effort. Going forward, we will continue to pull the cost levers within our control to improve operating leverage. Next, I’ll provide some additional color on segment performance. All year-over-year percentage comparisons for revenue are adjusted for business days and currency impact.

And as a reminder, segment adjusted EBITDA excludes certain shared corporate costs. Revenue for on-demand segment was $44.4 million, a decline of 16% versus prior year. However, segment adjusted EBITDA improved to $4.4 million, or a margin of 10%, from $2.6 million, or a 4.9% margin in the prior year quarter. The notable improvement is primarily driven by our cost reduction effort in this segment. For our consulting segment was $43.6 million, a decline of 22% from the prior year. First quarter segment adjusted EBITDA was $5 million, or an 11.6% margin, compared to $7.8 million, or 14.1% margin in the prior year quarter.

Turning to our Europe and Asia-Pacific segment, revenue was $19.9 million, a 5% growth from a prior year quarter. Segment adjusted EBITDA was $0.8 million, or a 4.2% margin. Both up from $0.2 million and a 1.3% margin in the prior year. Finally, our outsourced services segment revenue was $10 million, up 4% compared to the prior year quarter. Segment adjusted EBITDA was $2.3 million, or a 23.3% margin, up from $1.4 million, or a 14.7% margin driven by significant improvement in its gross margin as a result of more effective management of consulting utilization. Turning to liquidity, our balance sheet remains pristine, with $77.5 million of cash and cash equivalents and zero outstanding debt.

Quarterly dividend distributions totaled $2.3 million, with cash on hand. Combined with available borrowing capacity under our credit facility, we will continue to take a balanced approach to capital allocation between investing in the business to drive growth and returning cash to shareholders through dividends and opportunistic share buybacks. Under our repurchase program, which had $79 million remaining at the end of the quarter, I’ll now close with our second quarter outlook. Early second quarter, weekly revenue run rate has been largely stable compared to the first quarter. We expect to maintain revenue stability through the second quarter while continuing to push forward the momentum in the sales pipeline.

I’ll also note that while we have very limited U.S. government exposure and therefore are not materially impacted directly by our clients in the sector, the current government shutdown could lead to additional disruption in the operating environment. With that in mind, and based on our current revenue backlog and expectations on late-stage pipeline deals, our outlook calls for revenue of $115 to $120 million for the second quarter. On the gross margin front, we also expect similar trends to the first quarter with an outlook range of 38 to 39%, with Thanksgiving adding one additional holiday in the US compared to Q1.

Second quarter run rate SG&A expense is expected to be in a range of $43 to $45 million, reflecting the benefit from our cost reduction efforts. Non-run rate and non-cash expenses will be around $5 million, consisting primarily of non-cash stock compensation and approximately $2 million of restructuring expense associated with the reduction in force. In closing, we continue to be laser-focused on improving our sales execution as well as driving an efficient cost structure to deliver more value. Even in this operating environment, as better economic clarity emerges for our customers and new business prospects, we will be well-positioned for return to consolidated growth, accompanied by even stronger profitability.

This concludes our prepared remarks, and we will now open the call for Q&A.

Operator: Thank you. As a reminder to ask a question, please press star one on your telephone and wait for your name to be announced. To withdraw your question, please press star one again. One moment for questions. Our first question comes from Jessica Lewis with Northcoast Research. You may proceed.

Jessica Lewis: Hi. Good evening. Thank you for taking my questions. First, I would like to congratulate you on such a positive first quarter. Amazing results. And second, I have a question for you. And then one brief follow-up. To start, what would you say regarding the trend in pricing? Are you seeing pricing pressure in any particular business?

Bhadreskumar Patel: Yeah. Hi Jessica, this is Bhadresh. From a trending perspective on our staffing business, we have been able to keep our rates pretty steady. However, in the consulting side, while we do see pricing pressures, the value we’re bringing is warranting for us to be able to increase our rates, especially on net new projects that we’re selling to our clients, which, you know, ultimately is bringing a different value to our clients than what we have historically. From a professional staffing perspective, because we’re bringing thought leadership to those projects. So there are pricing pressures for sure. Roles like operational accounting and things like that face a lot more pricing pressures from our space.

But we’re also pivoting away from those roles as AI and automation take over. And we’re focused on more high-value roles, especially around ERP data supply chain, digital transformation really aligned to the strategy that we’ve laid forth for our business.

Jessica Lewis: All right. Perfect. That’s very helpful. Thank you. And then as for the follow-up question, I know that you guys are having success with cross-selling. Looking at your pipeline now, how much of the pipeline would you attribute to cross-selling?

Bhadreskumar Patel: I mean, you know, we’re still building that pipeline, but the good news is that we continue to increase million-plus dollar deals into our pipeline. And we anticipate that with the motions we’re playing across both our sales teams and our practice leaders and consulting that pipeline will increase. And then, you know, for us to see the conversion as it relates to that increase.

Jessica Lewis: Okay. Awesome. I appreciate it. Thank you again for answering my questions. And another congratulations to the company on a great first quarter.

Bhadreskumar Patel: Thank you, Jessica.

Operator: Thank you. And as a reminder to ask a question, please press star one on your telephone. One moment for questions. Our next question comes from Mark Marcon with Robert W. Baird. You may proceed.

Mark Steven Marcon: Good afternoon. I was just wondering with regards to the revenue guide that you gave us, Jen, can you break that out between the segments and specifically, you know, what are you seeing for consulting and on-demand talent?

Jennifer Y. Ryu: Yeah. Hi, Mark. Sure. The revenue guide for Q2, we’re expecting across our business units, you know, our Europe and Asia-Pacific region will continue to show strength as they did in Q1. So we expect continued strength in that, if not, it might even get better than Q1. And the other two segments, on-demand and consulting, you know, the trend is going to be more or less the same. It really depends on especially on the consulting side, some of the deals in the pipeline in late stage and the timing of conversion of that. So I would say across all of our business units, performance in Q2 will be somewhat consistent with what you’re seeing in Q1.

Kate W. Duchene: Yeah, Mark, it’s Kate. Can I just add I think it really depends on how quickly we can get some of this pipeline, especially the improving pipeline. And CFO advisory. You know, we do have, as Bhadresh shared, a new leader who’s very dynamic and has a very clear plan to improve our performance there. So, you know, he has shared that there’s a lot of momentum right now. It just depends on how quickly I think we can move that through the pipeline.

Mark Steven Marcon: Great. And then just with regards to on-demand and consulting within the US, any regional differences that you’re seeing, either from your West Coast operations or Chicago or the tri-state area?

Bhadreskumar Patel: Yeah, I mean, we are, you know, we are seeing a lot of demand in the West Coast and the southeast as well. And I think it’s really attributed to the teams and the tenure of the teams there overall in the market. We’re seeing consistent kind of demand across our core offerings. You know, we’ve aligned in CFO advisory and digital transformation for a reason because those are the two agendas that are moving in client spaces. And, you know, we’re balancing this across, you know, the tenure and the leadership that we have in other markets. And really building pipeline. And, you know, work across those markets as well.

Mark Steven Marcon: Great. And your new leader, where is he going to be based?

Bhadreskumar Patel: He’s based in Washington, DC, Northern Virginia, actually.

Mark Steven Marcon: Okay. Great. Thank you.

Bhadreskumar Patel: Thanks, Mark.

Operator: Thank you. Our next question comes from Judson Lindley with J.P. Morgan. You may proceed.

Judson Garrett Lindley: Hi, guys. Thanks for taking my question. Maybe just the first one on this quarter’s revenue. I know, same day constant currency revenues were down 13.9%. So could you maybe break out for me the delta between same day constant currency and reported revenue growth? How much of that was from FX and how much was the days impact?

Jennifer Y. Ryu: Yeah. More days impact, business day impact. There are some currency impacts, but it’s probably about a third of the business day impact. Most of it is, as you know. The first quarter we have I think we have one less day in business days this quarter compared to last year.

Judson Garrett Lindley: Okay, great. Thank you very much. And then maybe as a follow-up, if there was any acquired revenue in the quarter. And if you could maybe those same three components for the second quarter guide.

Jennifer Y. Ryu: Yeah. In the first quarter, year over year, there’s very little acquired, as you know, we acquired reference point last year in the first quarter a month into the first quarter last year. So the inorganic piece is minimal.

Judson Garrett Lindley: And then for the second quarter, if you could.

Jennifer Y. Ryu: Yeah. For the second quarter compared. Year over year at the top end of the guidance range, it’s a 16% decline. On the same day constant currency basis.

Judson Garrett Lindley: Great. Thank you very much.

Operator: Thank you. Our next question comes from Joe Gomes with Noble Capital. You may proceed.

Joseph Anthony Gomes: Good evening.

Bhadreskumar Patel: Hi, Joe.

Joseph Anthony Gomes: Just a quick question. You know, when you talk to clients or potential clients. You know, what are they saying in terms of their general appetite to move forward and spend? And how has that changed over the past year? If it’s changed?

Kate W. Duchene: I would say it hasn’t changed much, Joe. I think we’re still, you know, in a choppy environment. As we’ve said before, I expect there’s probably more of the same for the next couple of quarters. Every time I think people feel like we’re getting more stability and the foundation is getting stable, then it seems like something else happens. You know, as Jen said, we don’t have a lot of exposure to federal government or federal work, but, you know, it feels destabilizing when there’s that level of uncertainty. And so we’ve reflected that in our outlook because we’re just uncertain. As I said before, there is work that’s progressing. I mean, there’s some really interesting work.

We’re talking to clients about right now. It just depends on how quickly we can progress that work through our pipeline. I’m very impressed with some of the new talent we’ve brought into the organization, especially around, you know, whether you call it Finance 4.0, which includes ERP, cloud migration, digital finance, automation, AI data work, everything that’s happening there that work is progressing. I mean, it’s happening in our client base right now. So again, I think a lot of it is timing and making sure we’re positioned and having the right conversations with clients.

Joseph Anthony Gomes: Okay. Great. Thanks for that. And one follow-up in the summer, you guys, you did a board refresh and added two new members to the board. I was wondering, you know, what, if anything, they’ve brought to the board here that is kind of new or different ways of thinking or different approaches that would be attributable to them.

Kate W. Duchene: Yeah. So let me speak to that. We have welcomed, I think, two strong board members. One brings more of a, I would say, private equity lens, if you will, to what we’re doing. Especially as we look at optimizing our bottom-line performance. Given that we all recognize the macro environment is difficult and difficult. Really across professional services. So that has been, I think, instructive for us to look at things with a fresh set of eyes. Our other board member brings a lot of operating experience and operating experience through transformation.

And I think what we’re learning from his experience is the importance of the behavioral changes that I’ve talked about, making sure that we’re getting incentive comp right, making sure that we are creating collaborative teams to hunt and farm together, and not creating silos or competitive, you know, mindset. So competitive. I by that I mean against each other and not competitive to the broader marketplace. So I think they’re both good adds to our board. And the work that we’re undertaking right now.

Joseph Anthony Gomes: Okay. Great. Thanks for that. Appreciate it. I’ll get back to queue.

Kate W. Duchene: Okay. Thanks, Joe.

Operator: Thank you. I would now like to turn the call back over to Kate Duchene for any closing remarks.

Kate W. Duchene: Yes. Thank you, thank you, everyone for joining us today. I want to highlight that we will be participating in the Noble Capital Markets Emerging Growth Virtual Equity Conference tomorrow. So we hope to engage further with investors. Then we’ll also look forward to updating you on our strategic progress and results following Q2 in early January. Thanks again, everyone. Good night.

Operator: Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.

Image source: The Motley Fool.

DATE

Monday, September 29, 2025 at 5 p.m. ET

CALL PARTICIPANTS

Chief Executive Officer — Rob Katz

Chief Financial Officer — Angela Korch

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TAKEAWAYS

Resort reported EBITDA— $844 million for fiscal 2025, representing 2% growth compared to the prior year.

Fiscal 2026 net income guidance— $221 million to $276 million projected for the upcoming year.

Fiscal 2026 resort reported EBITDA guidance— $842 million to $898 million, including $14 million in one-time resource efficiency costs.

Season pass sales trend— As of September 19, 2025, season pass units decreased approximately 3%, while sales dollars increased approximately 1% compared to September 20, 2024.

Resource Efficiency Transformation Plan— Expected to deliver $38 million in incremental efficiencies for fiscal 2026, targeting over $100 million in annualized efficiencies by year-end.

Cash tax payments guidance— Anticipated at $125 million to $135 million for fiscal 2026.

Capital expenditures for calendar 2025— Planned at $198 million to $203 million in core capital, plus $46 million in growth capital for European resorts and $5 million in real estate projects.

Share repurchases— 1,290,000 shares repurchased (3% of outstanding) at an average price of $156 per share, totaling $200 million.

Quarterly dividend declaration— $2.22 per share dividend payable October 27, 2025, to holders as of October 9, 2025.

Net leverage— Net debt was 3.2x trailing twelve-month total reported EBITDA as of July 31, 2025.

Epic Friend Tickets initiative— New benefit for 2025-2026 Epic Pass holders offers lift tickets at a 50% discount to walk-up prices for the 2025-2026 season; full ticket value can be applied toward a future pass purchase.

Lift ticket revenue outlook— CFO Korch said, “still expect to be slightly positive on lift ticket revenue” despite lower pass visitation.

Liquidity position— Company reported approximately $1.4 billion in total liquidity (cash, revolver, and delayed draw term loan availability) as of July 31, 2025.

Transformative marketing focus— Management stated a shift is underway from email-based to broader digital, social, and influencer engagement aimed at brand building and guest acquisition.

Australia operations— Improved visitation and normalization of weather in Australia are expected to contribute $9 million to resort reported EBITDA growth.

SUMMARY

Vail Resorts(MTN 0.41%) management acknowledged financial underperformance versus expectations, attributing this to changing consumer behaviors and lagging adaptation in guest engagement approaches. The company expects overall skier visitation to be slightly down, driven primarily by an anticipated decline in pass sale units, with incremental lift ticket sales expected to offset only a portion of the decrease. Fiscal 2026 growth initiatives focus on targeted lift ticket strategies, enhanced digital marketing, and increased mobile conversion, with a multi-year timeline projected for material revenue acceleration. Net debt levels and liquidity are described as sufficient to sustain current capital priorities.

CEO Katz explicitly confirmed that visitation is expected “to be down slightly” due to lower pass sales, with a partial offset from new lift ticket initiatives.

Passholder renewals are up among multi-year loyal customers, while first-year and new buyer retention remains a challenge.

CFO Korch indicated that visitation is really the key on both ends when assessing the guidance range, highlighting the outsized impact of traffic on results.

Ancillary revenue capture and improved technology deployment (notably, launches for My Epic app integrations) are planned to boost per-guest monetization and operational efficiency.

Management reported no material geographic or demographic concentration in the weak pass trends, describing softness as broad-based rather than isolated to any segment.

Dividend maintenance is prioritized even at the lower end of guidance, with willingness to allow leverage to go up a little bit if necessary, per CEO Katz.

INDUSTRY GLOSSARY

Epic Friend Tickets: Discounted lift tickets made available to Epic Pass holders for their friends and family, priced at 50% off standard walk-up lift ticket rates, and applicable for future pass conversion.

Resource Efficiency Transformation Plan: Vail Resorts’ cost optimization initiative aimed at achieving over $100 million in annualized cost savings, centering on operational and marketing efficiency.

Full Conference Call Transcript

Angela Korch: Thank you, operator. Good afternoon, and welcome to our fiscal 2025 fourth quarter earnings conference call. Joining me on the call today is Rob Katz, our Chief Executive Officer. Before we begin, let me remind you that some information provided during this call includes forward-looking statements that are based on certain assumptions and are subject to a number of risks and uncertainties as described in our SEC filings. Actual future results may vary materially. Forward-looking statements in our press release issued this afternoon along with our remarks on this call, are made as of today, 09/29/2025. And we undertake no duty to update them as actual events unfold. Today’s remarks also include certain non-GAAP financial measures.

Reconciliations of these measures are provided in the tables included with our press release, which along with our annual report on Form 10-Ks, filed this afternoon with the SEC, are also available on the Investor Relations section of our website www.vailresorts.com. I would now like to turn the call over to Rob for some opening remarks.

Rob Katz: Thank you, Angela. Good afternoon, everyone. Thanks for joining us. Before we discuss our results and fiscal 2026 guidance, I want to share my perspective on where the business stands today and where I see opportunities for future growth after being back in the CEO role for the past four months. I want to start by acknowledging that results from the past season were below expectations, and our season-to-date pass sales growth has been limited. We recognize that we are not yet delivering on the full growth potential that we expect from this business, in particular on revenue growth, in both this past season and in our projected guidance for next year.

That said, I’m confident that we are well-positioned to return to higher growth in fiscal year 2027 and beyond. At the heart of our underperformance is that the way we are connecting with guests has not kept pace with the rapidly evolving consumer landscape. We have not fully capitalized on our competitive advantages nor have we adapted our execution to meet shifting dynamics. For years, email was our most effective channel for reaching and converting guests, leveraging data to deliver efficient and targeted communications. However, as consumer preferences have changed, particularly over the last few years, email effectiveness has significantly declined but we did not make enough progress in shifting to new and emerging marketing channels.

Compounding this, we historically have prioritized transactional call-to-action messaging with our guests and missed the opportunity to tap into the strong emotional connection our guests have with the Epic brand and our individual resorts. This approach was successful during a time period where we were rapidly adding resorts and innovating our pass product portfolio. But over the last few years, we have not benefited from those types of positive news events, and instead have dealt with actually some moments we did not deliver on the operational front. Our approach has not been reaching a broader array of guests in order to amplify brand awareness, attract new guests, and increase guest loyalty.

We’ve also not had enough focus on our lift ticket business. Again, this made sense as we were rapidly growing our pass business, but as we dramatically increased pass penetration, we have not pivoted to bring the same level of focus, creativity, and resources to engaging with guests who, for whatever reason, were not yet ready to purchase a pass before the season. Finally, while we have made great strides in developing and improving our My Epic app, the app does not have native commerce, and we have not been set up to accept either Google Pay or Apple Pay.

However, we are seeing guest engagement dramatically increase in the app and on mobile, yet purchase conversion within both are significantly lower than what we would see on our website and below its potential. I’m fully committed to course-correcting and executing a multiyear strategy that unlocks the full potential of our business. The strategy is rooted in leveraging our strong competitive advantages to drive sustained and profitable growth. We own and operate 42 resorts across almost all regions in North America and Australia, and we have the strongest brands and most popular resorts.

By owning and operating our resorts, we are able to collect extensive data from our guests across all our lines of business throughout the entire network, giving us tools we can leverage in every marketing channel, and use to inform mountain and technology investments in the highest return areas across all our resorts. We can also leverage our integrated model and data to optimize every aspect of our product and pricing approach across all lift access products, passes, and lift tickets, at each resort as well as ancillary revenue, which will continue to be a larger focus for the company going forward. Finally, we are well-positioned to leverage the new technologies that are defining the current market environment.

However, our immediate priority is increasing visitation to our resorts, an essential driver of revenue and ultimately free cash flow. We will continue to invest in our resorts and our employees, consistent with our long-standing focus on delivering exceptional guest experiences. At the same time, we are taking decisive steps that we believe rebuild lift ticket visitation, evolve our guest engagement approach, to better reach and convert guests, and reaccelerate growth of our pass program. All of which are critical to strengthening our long-term financial performance. On the first item, we are focused on rebuilding lift ticket visitation, an essential driver of revenue and long-term growth.

We are strategically enhancing lift ticket offerings, pricing strategies, and our marketing approach aimed at bringing in new guests to our resorts in ways that complement our pass program. In August, we introduced Epic Friend Tickets, a new benefit for the 2025-2026 Epic Pass holders giving them the ability to share discounted lift tickets with family and friends. This not only celebrates the social side of skiing and riding, but it also drives lift ticket sales for new guests that would be attracted to visiting our resorts with their friends and family. Importantly, the full value of the ticket can be applied towards a future pass purchase, making it a powerful tool for future pass conversion.

At the same time, we’re evolving our lift ticket pricing strategy with more targeted adjustments by resort and by time period. This allows us to balance guest access and value while optimizing demand, particularly in off-peak periods, without compromising the strength of our pass program. We are also increasing our media investment with a focus on top-of-funnel awareness of our resorts, to help us reach new audiences and drive incremental visitation throughout the winter. And intend to continue to innovate our lift ticket product offering as we get into the upcoming ski season.

Beyond the expected immediate impact on visitation, lift ticket guests represent a high conversion population for future pass sales, which supports our pass growth in FY ’27 and beyond. Second, we’re evolving our guest engagement strategy to better connect with skiers and riders and drive stronger performance. Our focus is on broadening our reach and modernizing how we engage across channels. We plan to increase our exposure within digital and social platforms and expand our influencer partnerships. We believe this shift will allow us to reach guests where they are, and to fully utilize our guest data to create content that resonates with our guests and drives action.

We’re also aiming to elevate the individual brands of our resorts, by tapping into the emotional connection guests have with each destination. We believe this is an important differentiator in a competitive landscape. Third, we continue to see meaningful opportunities to expand advanced commitment and grow our pass business. Pass price reset ahead of the 2021-2022 season exceeded our expectations in the initial years. And despite some modest declines recently, pass units are expected to be up over 50% fiscal 2026 compared to fiscal 2021. And the same is true for our Epic and Epic Local pass products, which despite recent modest declines, we expect to be up approximately 20% in units, since the 2021 season.

And importantly, we have delivered this strong growth in those products despite significantly expanding other pass options for guests, including our Epic Day Pass products. This growth in our pass program has significantly strengthened our financial resilience and stability. We’re focused on driving long-term guest loyalty, which means ensuring we’re optimizing the pass offering and continue to drive retention and conversion of new guests to the program. Toward that end, while driving lift ticket sales, Epic Friend Tickets is also a new benefit for unlimited pass. We’re also investing in personalized media and influencer channels better target and convert prospective pass buyers.

Because passes were already on sale during the CEO transition, our ability to influence fiscal 2026 pass results was limited. Looking ahead to fiscal 2027, we will be evaluating all aspects of our pass portfolio, including the product offering, pricing, and benefits, in conjunction with our lift ticket products and pricing, with a focus on driving conversion to our highest value highest frequency products, and optimizing our overall lift access revenue growth.

We are also actively searching for a new leader of our marketing organization, and have retitled the role as a Chief Revenue Officer reflecting the clear focus for this leader on driving all aspects of revenue for the company, and are looking for an executive with strong P&L ownership and overall leadership experience. Finally, we will continue to invest in our people and our resorts to ensure we are delivering an experience of a lifetime.

We are uniquely positioned to capitalize on investments in new technologies and processes that make it easier for our guests to engage with each aspect of the physical and digital experience we provide, driving both more value for our guests and revenue opportunities for the company. Vail Resorts, Inc. has delivered incredible stability and has an extraordinary foundation to execute on these opportunities, and generate stronger long-term sustainable growth. We have irreplaceable resorts, an owned and operated business model and robust data infrastructure that enables a sophisticated approach to product and pricing decisions across our resorts.

We continue to execute against our growth strategies of growing the subscription model, unlocking ancillary, transforming resource efficiency, differentiating the guest experience, and expanding the resort network. In addition, we have a resilient business model with demonstrated financial stability and strong free cash flow generation. And a track record of disciplined capital allocation and consistent innovation. Coupled with our passionate and talented teams, we believe we are well-positioned to succeed in the future. These actions taken together with the continued success of our Resource Efficiency Transformation Plan gives me confidence in our ability to deliver long-term sustainable growth and long-term value for our shareholders, our guests, our communities, and our employees in the years ahead.

With that, I will turn it over to Angela to further discuss our financial results and fiscal 2026 outlook.

Angela Korch: Thank you. As Rob mentioned, while our financial results in fiscal 2025 do not reflect the full potential of the company, the results do highlight the stability of the business model and early success of the resource efficiency transformation plan. The company generated $844 million of resort reported EBITDA in fiscal 2025, which represents 2% growth compared to the prior year, despite total 3% across our North American resorts. The results were within the original guidance range for fiscal 2025 per resort reported EBITDA, provided in September 2024, and excluding the CEO transition costs and changes in foreign exchange rates, the result was within 1% of the midpoint of the original resort reported EBITDA guidance range.

Results for our fourth quarter fiscal quarter 2025 were slightly ahead of our expectations with strong cost management, solid demand for our North American summer operations, and improved visitation in Australia relative to the prior year. Now turning to our outlook for fiscal 2026. In fiscal year 2026, we expect net income attributable to Vail Resorts, Inc. to be between $221 million and $276 million and resort reported EBITDA to be between $842 million and $898 million. The guidance includes an estimated $14 million in one-time costs related to the Resource Efficiency Transformation Plan.

We anticipate growth in fiscal 2026 to be driven by price increases, ancillary capture, incremental efficiencies related to the resource efficiency transformation plan, and normalized weather conditions in Australia in 2026, partially offset by lower pass unit sales which are expected to have a negative impact on skier visits relative to the prior year, and cost inflation. Season pass sales through 09/19/2025 for the upcoming North American ski season decreased approximately 3% in units, and increased approximately 1% in sales dollars, as compared to the prior year period 09/20/2024.

The season-to-date trends through 09/19/2025 were generally consistent with the spring selling period, a decline in units driven by less tenured renewing guests, those that had a pass for just one year, and fewer new pass holders. Renewals are up for our more loyal pass holders, those that have had a pass for more than one year. As we enter the final period for season pass sales, we expect our December 2025 season-to-date growth rates to be relatively consistent with our September 2025 season-to-date growth rates. The Resource Efficiency Transformation Plan continues to generate strong results for the company, and we expect to exceed the $100 million in annualized cost efficiencies by the end of fiscal year 2026.

Our fiscal 2026 guidance assumes we will deliver $38 million incremental efficiencies before one-time costs, contributing to the achievement of an expected $75 million of cumulative efficiencies since we announced the plan in September 2024. Finally, in fiscal 2026, we anticipate cash tax payments to be between $125 million to $135 million. As Rob noted, while our guidance for fiscal 2026 reflects growth over the prior year, it does not reflect the full potential of the company. We are committed to positioning the company to unlock stronger and sustainable long-term growth moving forward. Turning to our capital allocation priorities.

Operator: We remain committed to a disciplined and balanced approach

Angela Korch: as stewards of our shareholders’ capital. Our capital allocation priorities remain consistent. First, prioritize investments and enhance our guest and employee experience. Generate strong returns. And second, maintain flexibility to pursue strategic acquisition opportunities. After those top priorities, we return excess capital to shareholders. In support of reinvestment in our resorts, in calendar year 2025, we expect to spend approximately $198 million to $203 million in core capital, before $46 million of growth capital investments at our European resorts, and $5 million of real estate-related capital projects. In addition to this year’s significant investments, we are pleased to announce some select projects from our calendar year 2026 capital plan.

A full capital investment announced planned for December 2025, including a core capital plan consistent with the company’s long-term capital guidance. At Park City, we are continuing the multiyear transformation of the Canyon Village to support a world-class luxury-based village experience. Vail Resorts, Inc. in partnership with the Canyons Village Management Association is replacing the open-air cabriolet transport lift with a modern 10-passenger gondola which will improve the guest experience, reduce weather-related disruptions, and complement the Canyons Village parking garage, a new covered parking structure with over 1,800 spaces being developed by the developer of the Canyons Village. In addition, we plan to resubmit for permits to replace the Eagle and Silverload lifts at Park City Mountain.

To continue our investment in the on-mountain experience, which if approved, would be upgraded for the 2027-2028 North ski season. Planning of additional investments at Park City Mountain across the mountain is underway and additional projects will be announced in the future. The company also remains committed to the multiyear transformation of Vail Mountain. And in calendar year 2026, we will continue to invest in real estate planning to develop the West Lions Head area into the fourth base village in partnership with the town of Vail and developer, East West Partners.

In addition, the company plans to build on the success of its calendar year 2025 lodging investment at the Arabelle at Vail Square with plans to renovate guest rooms at the Lodge at Vail in calendar year 2026. In addition, to further enhance the guest experience across our resorts, the company will be investing in technology enhancements and new functionality for the My Epic app including new in-app commerce functionality, payment platform integrations, to improve mobile conversion, enhanced My Epic assistant functionality, and expansion of the new ski and ride school technology experience. In addition, the company will make technology investments to enhance the integration of My Epic Gear guest experience. Turning to the second priority.

Our balance sheet remains strong and is positioned to enable future strategic acquisition opportunities. As of 07/31/2025, the company’s total liquidity, as measured by total cash plus revolver availability and delayed draw term loan availability was approximately $1.4 billion. The company’s net debt was 3.2 times its trailing twelve-month total reported EBITDA. On 07/02/2025, the company completed its offering of $500 million aggregate principal amount of five and five-eighths percent notes, due in 2030. We used a portion of the proceeds from the offering to repay seasonal borrowings under our revolving credit facility, in addition to the $200 million of share repurchases completed during the quarter.

We intend to use the excess proceeds from the bond issuance together with the $275 million delayed draw term loan for the repurchase or repayment of our outstanding 0% convertible senior notes due 2026 at or prior to their maturity on 01/01/2026. After these priorities, we focus on returning excess capital to shareholders. In the current environment, we look to balance our approach between share repurchases and dividends. The company declared a quarterly cash dividend on Vail Resorts, Inc. common stock, a $2.22 per share dividend will be payable on 10/27/2025 to shareholders of record as of 10/09/2025.

The current dividend level reflects the strong cash flow generation of the business, with any future growth in the dividend dependent on material increases in future cash flow. We also maintain an opportunistic approach to share repurchases based on the value of the shares. As mentioned in the quarter, we repurchased approximately 1,290,000 shares or 3% of outstanding shares at an average price of approximately $156 per share for a total of $200 million. We continue to evaluate the highest return opportunities for capital allocation. Now I’d like to turn the call over to Rob.

Rob Katz: Thanks, Angela. In closing, we greatly appreciate the loyalty of our guests this past season and the continued loyalty of our pass holders who have already committed to next season. With our Australia winter season coming to a close, I would like to thank our frontline team members for their passion and dedication to delivering an incredible experience to our guests. I would also like to thank all of our team members who are working to welcome skiers and riders back to the mountain this coming winter season. We are looking forward to a great upcoming winter season in the US, Canada, and Switzerland. At this time, Angela and I would be happy to answer your questions.

Operator, we are now ready for questions.

Operator: At this time, if you wish to ask a question, please press 1 on your telephone keypad. You may remove yourself from the queue by pressing 2. Again, please limit yourself to one question and one follow-up. We’ll take our first question from Shaun Kelley with Bank of America. Your line is open.

Shaun Kelley: Good afternoon, everyone. Thanks for taking my questions. Rob or Angela, maybe I just wanted to start with kind of the broad backdrop for visitation for this upcoming season. So Rob, in the prepared remarks, you talked a lot about some very, I think, interesting initiatives to start to address the visitation challenges and some you see there. Obviously, the Epic Friend Tickets being a piece there, and I imagine you expect utilization on those to be pretty good.

So can you help us just kind of think about that underlying backdrop and what you’re doing on marketing and, you know, with Epic Friends and contrast that with kind of in the, you know, in the bridge for the year on the financial side, it seemed like the implication was that the expectation given the pass units are down a little bit was that maybe visits are down, but I might be misreading that. So just wondering kind of how you expect really this season to play out from a visitation standpoint given some of the initiatives in play? Thanks.

Rob Katz: Yeah. Thanks, Shaun. Yes. That’s true. We do expect visitation in total for this year to be down slightly. I think that is primarily driven by the decline in pass sales to this point. And while we do think that we’re gonna make a portion of that up with lift ticket sales, you know, it’s not gonna be enough to overcome, in our view, the decline in pass sales to this point. What I would say is that a lot of the things that I mentioned about what we need to do to correct how we engage with guests are things that are multiyear efforts. None of those things are things that happen right away.

Even the Epic Friend piece will take time for our guests to understand what they have for us to communicate with our guests, for them to then increase their utilization to understand the change in terms for that and how they can use it and how they could turn it into a ticket the following year. So we expect to see some benefit from it this year, but, obviously, additional benefit from it in future years. The same is true with our paid media investments. Again, I think, you know, if you’re looking for top-of-funnel brand building efforts, that’s not something that’s gonna happen in a month or two. That’s something that takes more time.

The same is true for getting deeper and more skilled and more sophisticated in all the other marketing channels that we have. So what I would say is I think, you know, in the end of the day, we are starting to prepare for the fiscal 2027 season now. So we have work going on. We’re obviously working on pass sales, but also working on other initiatives. If you kind of back that up, you realize, like, yeah, from the time that some of this started, right, not possible to have a full impact on fiscal 2026.

Shaun Kelley: Got it. Makes complete sense. And then just as my follow-up, and you kind of already touched on a little bit of it. Just for the 2027 and beyond plan, some of the outline for maybe the Chief Revenue Officer and some of the opportunity. But just how big of a change is on the table here, Rob, just in terms of like look, the big initiative done was, you know, to push for volume, to push pass utilization up at the expense a little bit of price. Right? That was sort of the compromise made back during the pandemic.

Is something as fundamental as that shift on the table here as we think about moving forward, whether it be raising the pass price in its entirety to balance out that ecosystem differently or maybe thinking about it differently, just the, you know, possibly charging an add-on, which has been proposed at, you know, a major, you know, kind of high-value resort like, like, Vail, like, just to change the composition of, you know, price versus volume. Just how are you thinking about sort of that very fundamental idea as we turn the page to next year?

Rob Katz: Yeah. I think the way to think about it is I think what we did with the price reset was really kind of a right across the board approach because what we saw was that we felt like all of our pricing was too high in terms of getting the penetration that we wanted in pass. And I think that was the right move at the time, and I think it’s driven actually good success. And, obviously, as we highlighted, you know, we’re still well above where we were before then. But what I would say though is I think what we have not done is we have a lot of different pass products. Right?

So it’s not just the Epic and Epic Local. Right? We have a lot of different pass products for that. We then have child pricing and college pricing and team pricing and regional passes. And then all of those products really sit on top of all of our lift ticket products. And I think what you’re hearing from us is I think what we can do is now, right? Not take a kind of across the board approach to any of this, but actually, resort by resort or pass product by pass product approach.

And there’s technology now that’s available that given our data and what we can put into it, right, where all of a sudden we have a much higher level of confidence in terms of what we can drive with some of these individual moves. It’s, you know, I we have, I don’t know, 200 plus pass products or something like that. We have thousands of lift ticket products. And those have largely been marching in lockstep. We think, actually, there’s an opportunity for us to think much more strategically about it. Again, using, you know, some of the tools that are out there that we all know about.

And so what I’d say is, you know, in a way, the big if we’re cracking something open, it’s not necessarily that we’re looking to take price up or price down per se. It’s that we’re actually cracking this kind of connection that every single product has had to each other over the last fifteen years.

Shaun Kelley: Perfect. Thank you very much.

Operator: We’ll move next to David Katz with Jefferies. Your line is open.

David Katz: With respect to the sort of single-day visitation or the walk-up,

Rob Katz: know, window, one of the debates you know, I’m I’m guess you’re you’re having is on sort of that price. Right? And know, whether any of the strategies around improving walk-up visitation you know, includes adjusting some of the price schedules that are out there or some of the pricing strategies.

Rob Katz: Yeah. What I would say is that I think we look at it, I mean, maybe a little bit more broadly. So right at a at a top-line level, we’re looking at pass. Right? So that’s all the products that are sold before the season begins that are nonrefundable. And then there’s lift tickets, and within lift tickets, we have a lot of different lift tickets, some of which most of which, candidly, are advanced lift tickets. So there’s something that you buy three days in advance, seven days in advance. And so we do put a lot of business through that. And then, yes, we do have people who walk up to buy tickets just that day.

And so we are looking at all of those prices. But, of course, I would say, yeah, we’re we’re still gonna be putting, you know, the Epic Friend Ticket is a 50% discount on the walk-up price. That would, you know, perfectly fit for somebody who wants to make a decision that day. But we think there could be opportunities for us to be more creative about some of the other prices that we have and the kind of advanced windows that we have for them because of when people if you haven’t made your decision by the pass deadline, then it’s a question of when do people start making decisions, you know, for their future trips.

So in the end, some of this is like, we’re trying to kind of tailor this to how people make a decision. You know, it’s not that many people are deciding to go to Vail that day and then, you know, come flying out. So the question is, like, when can we shift price that makes the biggest impact on driving more visitation? I understood. And, you know, interesting about

David Katz: the discussion around you know, media channels, And Yep. Historically, the company has always been particularly advanced at you know, data gathering. How much of this strategy about sort of reaching customers through the right channels

Rob Katz: is also about data gathering that builds intelligence know, for the future? Or is it just the right connection channel?

Rob Katz: Yeah. I think I actually feel really good about the data that we have on our guests. We have extensive data. I think, though, that our you know, we’ve had kind of a maybe not a singular focus, but close to around email because it was obviously we could present the information, the offer, the communication to the guests, in a great way. We could, you know, get in front of them and you know, we made a huge effort, right, to collect emails over the last ten to fifteen years.

And if that channel is still gonna be important for us, but we can use that data now with all the tools that are available to go out and use tons of different, you know, paid media networks, that do personalize. Right? And we can go through other companies that we can kind of bump our list against their list and then make sure we’re delivering the right ad to the right person. Then we can use look-alike modeling right, to even for prospects who we don’t necessarily have in our database. To make sure that we’re targeting the right people. And this is true not only with digital traditional digital media, but TV. Right?

Tons of TV now is are things that you where you can run ads that go down to the individual person. Which is important for us because, obviously, you know, we’re not a mass-marketed type item. And by the way, that’s what then, you know, that’s media. Then you add social media. You use have influencers, boosting influencers, you know, own posts about, you know, your product, and then using that creative to actually just run it you know, in those social media channels at the same time using TikTok. Historically, we have really not been you know, engaged in. And, again, all of these things made total sense.

For a lot of time because obviously we did have a much better, more efficient communication channel. But as things shift, like, we have to be out front of those as well. And take the same level of sophistication and data that we have and just leverage them in different ways.

David Katz: Understood.

David Katz: Thank you very much. Thanks.

Operator: We’ll take our next question from Jeff Stantial with Stifel. Your line is open.

Jeff Stantial: Hey, good afternoon, everyone. Thanks for taking our questions.

Rob Katz: Maybe just starting off on

Jeff Stantial: the initial fiscal 2026 guidance, which is where we’re getting the most questions.

Rob Katz: This afternoon. Angela, you listed out some of the puts and takes that factored in. One that seems to be missing or at least that we didn’t hear was sort of how you’re thinking about lift ticket or window ticket sales this year. So is it your expectation that lift unit sales are down year on year

Rob Katz: again, similar to sort of what we saw this past season and one or two before that. Or is it, like, your expectation that should stabilize on some of these efforts as quickly as fiscal 2026? And then and similarly, just how should we think about sort of the blended price growth or decline just given these changes

Angela Korch: to the to the buddy pass system and the more dynamic pricing strategy, maybe net of typical price taking action that we’ve seen from you historically?

Angela Korch: Yeah. Thanks, Jeff, for the question. Yeah. We did talk about the sun visitation where Rob was commenting on. We do expect some offset to the past visitation to occur on growth on lift ticket visitation. And with our pricing actions, while we’re taking some opportunities to introduce new products like Epic Friends and those, still expect to be slightly positive on lift ticket revenue. I’ll maybe go through some of the other kind of gives and takes that I tried to outline. You know, on the midpoint of the guidance relative to last year, it’s up about $26 million. And we called out, obviously, the resource transformation plan playing a big role in that. It’s up $38 million.

Also, the normalized kind of conditions within Australia being another $9 million. And on top of that, really coming from growth, both the past price growth that we took, but also, you know, our lift ticket prices as part of that as well. And then improved ancillary, those are kind of the positives. Right? And those are being offset by our past unit sales, right, which will have negative impact on visits. And then normal just expense and labor inflation.

Jeff Stantial: That’s great. Thanks for all that extra color, Angela. And then turning over to the Epic Friends you know, changes to the structure there, Rob or Angela. Can you just maybe start off by helping frame for us the materiality of Buddy Pass historically, whether in terms of total units, revenue contribution, just any metrics that you could provide there? And then as we think about sort of the overall return on this on this change, is it your expectation that one-time sort of pricing hit in year one can be recouped by higher volume of lift ticket sales?

Or should we really think about this more as a longer-term investment where the return manifests over time through sort of long-term replenishment of that funnel for new to sport and lapsed skiers and ultimately conversion over to pass sales. Just any extra color there would be great. Thanks.

Rob Katz: Yeah. Sure. So I would say so buddy tickets historically are material part of

Angela Korch: of lift ticket sales. Angela, have we disclosed that before? Yeah. There’s the there’s the

Angela Korch: pie chart in our investor presentation where you can see, right, it’s it’s about 7% of total lift revenue, but right, it is 20% of paid lift ticket. Revenue that comes from those benefit tickets.

Rob Katz: So yeah. So it’s, you know, material, and that gives you kind of a sizing of it. What I would say is I think our view is that

Rob Katz: it is something that we would expect to be

Rob Katz: a positive, right, to the year. We’re not expecting it to be negative to the year.

Rob Katz: Think, obviously, it’s something that’ll grow over time. But we do see that and in large part, it’s because, of course, we’re gonna be giving a discount an additional discount some people who are already using the program. But we’re expecting, right, you know, more people to use the program that we’re gonna promote it in a much more, significant way. Now that the discount is just 50% across the board for everybody, now that we’re giving the discount to pass holders, in the fall, not just pass holders in the spring, And, obviously, have been more clear about the ability to turn it, you know, turn it into the following year for a pass.

So in total, we just feel like, yeah, we will ultimately add more visits, and that is something that is contributing to the lift ticket growth that we’re expecting. For this year as we talked about earlier.

Jeff Stantial: Okay. Thank you very much. Thanks.

Operator: We’ll move next to Stephen Grambling with Morgan Stanley. Your line is open.

Stephen Grambling: Hey, thank you. A couple of follow-ups on the moving parts you ran through in the guidance for the year ahead. Do you generally anticipate that some of the efforts to communicate the new

Stephen Grambling: pricing

Stephen Grambling: and marketing will be incurred

Stephen Grambling: this year, or is that more of a 2027 thing?

Stephen Grambling: So as we think about the potential for recovery and visitation and top line in ’27, will there also be a step up in incremental costs?

Rob Katz: Yeah. I think two things. One is I think we know, there are opportunities actually to offset what you know, as we use more sophisticated technology in our marketing department to actually get more efficient with our overall cost. Which I think is kind of an overall view that we have about the business going forward that we believe that there are continued opportunities for us to drive resource efficiency and marketing is one of those places. And our goal is to take those savings and obviously redeploy them into investments that we think could be more productive.

So while we do see that there’ll be additional investments that we have to make, both within our marketing group and, of course, on the mountain, in our employees, as we, you know, look to take the experience of we also feel like there are other opportunities for us to take cost out of the business. So the investments that we wanna make are not ones that we think should pull down the margin. At all.

Stephen Grambling: That’s helpful. One other follow-up. How are you thinking about the net impacts from the disruption at Park City last year versus this year? Is that a tailwind in your expectations? Or a headwind?

Rob Katz: Yeah. It’s definitely it’s definitely a tail in our mind. Obviously, you know, of course, there could be some guests that didn’t have a good experience and are concerned about returning. But we see, you know, the experience was so challenging last year, and we think the tail from that likely was last season. Where I feel like this year we’re gonna be going in and the team, I think, there has done a great job of preparing for the season. I think we’re in a great spot to deliver a very high level of experience all season long.

I think that’s something that’s, you know, gonna come through and we’re seeing evidence of that, in the broader market bookings as well in Park City. So you know, for us, I think it’s we’re starting off in the right spot, and so we feel like it’s a tailwind.

Stephen Grambling: Great. Thank you.

Operator: We’ll move next to Laurent Vasilescu with BNP Paribas. Your line is open.

Laurent Vasilescu: Good afternoon. Thank you very much for taking my question. The March Investor Day laid out a vision think, on Slide 45 to have past revenues go from 64% of the mix

Laurent Vasilescu: to over 75% over time.

Laurent Vasilescu: Rob, with the comments provided in earlier on the lift tickets, Where do you want that mix rate to go over time? Should it still go over the 75%? Are you happy with that rate at 64 currently?

Rob Katz: I would say, you know, right now, I think my primary focus

Rob Katz: is on overall visitation to the resorts.

Rob Katz: And overall lift revenue. And I think but I would say that I do think you know, there’s yes. There’s some pullback you know, that is maybe to be expected given the kind of rapid growth that we saw know, over the last four years. But I actually feel that, yeah, there’s continued opportunity just like we talked about with Epic Friends tickets and moving people, you know, through lift tickets. Those are all opportunities for us to ultimately convert them into a pass. And so we absolutely are gonna continue to march forward you know, as we get, right, new visits from every source. To convert them and drive our path to the stuff.

It’s ultimately you know, it’s the best deal. It’s the cheapest per day price. And as people get more comfortable, you know, and more willing to commit in advance, we think we could transition them into those products. But, again,

Rob Katz: yeah, it starts with visitation growth, overall visitation growth.

Laurent Vasilescu: Okay. Very helpful. Thank you. And then tonight’s press release outline is that you

Laurent Vasilescu: expect

Laurent Vasilescu: your December 2025 CV date growth rate to be comparable to what you saw for the month of September. Can you maybe comment a bit more about this? What gives you the confidence that the trends remain consistent going forward for the next few months?

Rob Katz: What I would say is every time we put out some color commentary on that, use the trends we’re seeing, how they’re shifting, And it is true that as we go into the last you know, deadlines, it is more heavily weighted to new than renew. So there’s always a little bit more uncertainty. At the same time, obviously, a lot of the selling season is behind you. So we take all of those things, you know, into yeah. An estimate. Right? We use forecasting to come up with what we see going forward.

And it doesn’t mean we’re gonna be precisely accurate time, but we try and give people kind of our best assessment of every piece of data that we have at the moment.

Laurent Vasilescu: Okay. Thank you very much. Best of luck. We’ll move next to Patrick Scholes with Truist Securities.

Operator: Your line is open.

Patrick Scholes: Hi. Thank you. Good afternoon, everyone. I’d like to talk about the dividend coverage. When I run some back of the envelope numbers, and certainly, it could be off in my assumptions here, at the low end of the guide, it looks like the dividend is not fully covered by the free cash flow. Assuming I’m not completely wrong in my calculations, My question is, you know, how comfortable are you taking on some debt assuming you come in at the lower end of the guide? To maintain that dividend and along that line, at what’s net leverage ratios are you comfortable with? Thank you.

Rob Katz: Yeah. We’re very comfortable with the

Rob Katz: current leverage ratios that we have. We think they provide a lot of room for the company

Rob Katz: you know, especially given the stability of the business. So that has given us comfort on our dividend level. And, yeah, we’re we’re certainly comfortable you know, if it means that yeah. Leverage goes up a little bit given the you know, where we’re starting from. That said, I think we’ve been really clear that to show an increase in our current dividend yeah, we need to see a material improvement in free cash flow. But in terms of the current dividend, yeah, we’re we’re comfortable with that.

Patrick Scholes: Oh, okay. So would take on a little bit of leverage if

Patrick Scholes: needed.

Patrick Scholes: If

Patrick Scholes: needed to be in that scenario. Next or my follow-up question here, Curious as to in your past sales, what have been the trends for international guests? I know you’ve got a couple of lot of moving parts there when we say international. You know, kinda depends what country wants to visit us. This moment and what doesn’t. You know, how is that looking say, Mexico versus Europe versus Canadians? You know, what are what are trends you’re seeing? And has sort of the negative rhetoric you know, has that been a an guess, a negative for you? Because you did see some deceleration in pace since your May update. Thank you.

Rob Katz: Yeah. I think what I’d say is the yeah. That certainly no trend there that’s material enough to affect the overall results that we’re talking about. I think we yeah. We’ve not

Rob Katz: seen any specific evidence of a shift per se in

Rob Katz: you know, you know, future international visitation. You know, that, I would say, you know, international visitation has gone down if you look back over the last you know, five, seven, eight years,

Rob Katz: for a whole variety of reasons, some of which was, you know, the dollars, some of which was some of the rhetoric and stuff like that in the past or concerned about visas, this or that.

Rob Katz: But, yeah, at this point, we don’t see that as a yeah, a major issue one way or the other as we go into next

Rob Katz: season. Okay. Thank you.

Patrick Scholes: Thanks. We’ll take our next question from Arpine Kocharyan with UBS.

Operator: Your line is open. Hi. Thank you so much for taking my question. I was wondering if you could give a little bit more color where you’re seeing most weakness in your base and maybe where you’re seeing more sort of a resilient customer and anything else you would highlight on destination versus regional resorts? That you saw in past sales trends? You also talked about, you know, less tenured pass holders maybe not renewing at the same rate. As last year. Anything else you would highlight that you saw in past purchase trends that we should be aware of getting into the season here? And then I have a quick follow-up.

Rob Katz: Yeah. Sure. I think you know, one of the things I would say is that the results that we’re seeing are fairly consistent between

Rob Katz: yeah, a lot of different guest demos geos, half ties, new renew. I mean, yes, we do. We, you know, obviously, have you know, lower renewal rates for one year or less, you know, pass holders. That’s true. But I’d say broadly that maybe the takeaway from the results is this broad-based result in performance which is one of the reasons why, yeah, we pegged sometimes if we’re seeing we have so many different bath products and so many different resorts that yeah, if there’s an issue with one resort or an issue with a region or an issue with a guest group,

Rob Katz: would typically then, you know, see that show up. But when you see it, so broad-based,

Rob Katz: it says one of two things. Either there’s just a broad you know you know, potentially, like, again, you know, we grew the market dramatically. ICON was growing dramatically. You know? And now you’re seeing kind of, like, a maybe a maturation or stability of the overall market. Even if you just look at you know, the NSAA, National Skiery Association data over the last couple of years, it’s the first couple of years in a long time where past visits have actually declined.

Rob Katz: Lift ticket visits have actually increased. That’s where the growth that you saw actually came from.

Rob Katz: And so there’s probably some market maturity, right, because of the rapid growth of the last couple years. And then it’s also why when we talk about our marketing effort, and why we’re not connecting because, obviously, we’re using even though the content is not the same for each guest group, a lot of our marketing approaches are consistent. And why, you know, in my mind, it highlights, right, that’s an opportunity for us as we go forward.

Rob Katz: But, yeah, no. There’s nothing that I can call out specifically about, you know, some group or another. One thing I’ll just add on the consumer piece on renewal

Angela Korch: is we’re not seeing any change in kind of that net migration behavior as well. We’re continuing to see about the same amount of trade up as trade down as we’ve seen over the last few years. So you’re not seeing the renewal base be kind of a people pulling back because of pricing or trading down. We’re not seeing that dynamic within our renewals. Interesting. Thank you. That’s very helpful. Just to go back to the EBITDA bridge, you mostly covered this question earlier. But I was wondering, what needs to happen for you to hit

Operator: the upper end of your guidance range versus midpoint? Obviously talked about more nimble pricing in off-peak, periods, maybe more targeted approach to drive window traffic. It sounds like

Angela Korch: that has the potential to impact lift volume as soon as this season. Is it just a matter of sort of those strategies working for you to hit the upper end of the guidance range?

Operator: Thank you.

Angela Korch: Yeah. I think the range usually, I mean, the biggest driver is always visitation, right, in terms of the range that we put out, because that impacts everything. Right? It impacts all of our ancillary and flows through at a very high rate. So yeah, visitation is really the key for us on both ends of the spectrum of the guidance range.

Operator: Yeah. So what needs to for you to hit the upper end of your visitation guidance?

Rob Katz: I think I mean, I think in the end, there’s obviously opportunity for us to outperform either on pass or on lift ticket visitation. You know, we’ve got

Rob Katz: a number of assumptions that go into how we come up with guidance, and there’s always gonna be a kind of up or down, you know, estimate around each one. And, you know, sometimes things, you know, will work earlier than you think. But, of course, that’s true. You know, sometimes things don’t work as well as you think. So I you know,

Rob Katz: of the reasons why we have a range. It’s it’s, you know, it’s not possible for us to pinpoint exactly. But it’s meant to say that, yeah, that we feel, you know, when we are looking at the totality of the business that this is the most likely range that we’ll wind up in.

Laurent Vasilescu: Thank you.

Patrick Scholes: Thank you.

Operator: We’ll take our next question from Ben Chaiken with Mizuho. Your line is open.

Ben Chaiken: Hey. Thanks for taking my questions. Rob, you mentioned evaluating the past product offering in the release and the Q&A few times. I guess, just taking a different perspective, I guess, where do you see the largest holes with the past? So not asking, like, the strategy necessarily. I think is where the conversation has been. But what are you trying to solve for? Like, where do you think Vail is lacking? To the extent that you do, and where are the largest areas to improve? Thanks.

Rob Katz: Yeah. I think, you know, we’ve got a pretty, broad portfolio. So I it’s not that I feel like you know, we’re missing a particular product but I’m not sure, you know, with that this many products, you know, I’m not sure that we are pricing these products in the optimal way, but either against each other you know, or against kind of the need that we’re looking for each segment. I also think there’s opportunities for us to look at the benefits we provide on our passes. Which, again, largely have not changed that much over the over the years. And, you know, who gets what and why and where and all of that.

I mean, I think and I think what you’re seeing, it’s a little bit like what we said about resource transformation for the company, which is you know, we added a lot of resorts over a relatively short period of time and they’re now taking the opportunity to go back and say, okay. Wait a minute. We can do things a lot smarter than we’ve been doing them when we were just in full acquisition mode. But the same is true for Pat. We’ve added a lot of products. Over a very long period of time and have not really gone back to say, wait a minute.

Like, how do we optimize each one of these price relationships or benefit relationships? So in our minds, that’s you know, it’s it is a product and pricing piece. But it’s not necessarily because we, you know, we see some gaping obvious hole. That we need to fill. I mean, I think if one of the things that we did identify was buddy tickets and ski with a friend tickets and the benefit tickets. And, you know, we that was something that we have identified you know, that it wasn’t simple enough. It wasn’t clear enough. It wasn’t really moving the needle the way we wanted, And so, yes, we certainly addressed that as you saw for this season.

Ben Chaiken: Got it. That’s helpful. And then just one quick follow-up. You’ve mentioned kind of benefits a few times. I guess, what’s your thought process on adding, like, additional member benefits or perks to the past in attempt to increase the year-round utility. I think there’s, you know, a few passes out there provide these other ancillary benefit to pass holders. I mean, it’d be great to get your take on that strategy.

Rob Katz: Yeah. I think I think that’s something that we have absolutely need to look at. I also wanna make sure if we do something that it’s it’s not just like window dressing. That it’s something that really will move the needle. And that, you know, if we’re gonna you know, you know, certainly, if it’s coming from our company and we’re gonna put time and effort and our own energy to it, it’s a third-party benefit, then it has to be, yeah, a partnership that we wanna really get behind. So either one of those, I think, you know, in our mind, it’s know, the primary benefit, obviously, is skiing. And so yeah.

Then once we get beyond that, now it’s you know, when we’ve got our epic mountain rewards, right, which gives people, you know, the 20% discount. On a lot of our ancillary lines of business. So we start going beyond that, like, yes, it needs to be something that should make a difference. But, also, I think we’re in a good moment in time, I think, to start exploring all that.

Ben Chaiken: Thank you.

Laurent Vasilescu: Thanks.

Operator: We’ll move next to Brandt Montour with Barclays. Your line is open.

Brandt Montour: Great. Thanks, everybody. So my first question is on the guidance

Rob Katz: You know, do you guys

Brandt Montour: gave the usual sort of normal weather implied in guide. I just was hoping maybe, Rob, you could

Brandt Montour: put a finer point on that. Is

Brandt Montour: with last year last year seemed like it was really good weather, but was that normal was that better than normal? I know the years prior to that would be would be, firmly worse than normal, but maybe you can just give us a little bit of help with what you what you sort of

Angela Korch: baked in there.

Angela Korch: Yeah. Thanks, Brandt. I would say last year, right, we had a pretty normal ramp across most of our regions where we were able to get terrain open. Kind of on a typical schedule. I actually finished for the year. Right? Q3 actually had kind of a fall off on some of those conditions. But again, that doesn’t usually drive as much of the overall impact as being to get kind of open and train open, you know, ahead of some of those peak seasons. So we didn’t see any unusual disruptions, I would say, like we’ve called out in of the other two years.

So it’s much more of a typical pattern, though I wouldn’t say it was like a Bob average

Angela Korch: snowpack or snowfall year by any means last year.

Brandt Montour: Okay. Great. Thanks for that. And then on the lift ticket strategy and the discussion around that, I think it was know, I think the pitch was pretty clear. You know, the message from you guys today that the optimization opportunity exists. You know, when you think of plan, absorbing this from you guys, you know, you guys, and wanna say it sounds like, you know, discounting or anything like that, but just smarter marketing, smarter pricing.

Brandt Montour: Is there a risk that as you, you know, improve the

Brandt Montour: attractiveness of the lift ticket, You could cannibalize early commitment. I know that would be a little bit on a on a delay because, you know, you’re you’re

Brandt Montour: know, your marketing

Brandt Montour: day tickets after the past selling season. But those same folks are probably gonna overlap

Brandt Montour: know, in terms of who you’re reaching with that marketing. Is that a risk for the following year? Going down that road?

Rob Katz: I mean, I think it’s what I’d say is, yes, it’s a risk in terms of it’s something we pay a lot of attention to. But I think if you look at the differences between window, you know, the walk-up window or advanced lift ticket prices and the price you pay if you buy in advance, If you buy in a pass,

Rob Katz: the season,

Rob Katz: that gap has widened dramatically over the years. In particular when we took pass pricing down four years ago. So I think when you know, there’s in our minds, there’s plenty of room to be more aggressive and creative on lift ticket pricing. Without necessarily sacrificing you know, past business, but it is absolutely something we’re very, you know, cognizant of and pay close attention to.

Brandt Montour: Great. Thanks, everybody.

Laurent Vasilescu: Thanks.

Operator: We’ll take our next question from Chris Woronka with Deutsche Bank. Your line is open.

Chris Woronka: Hey. Good afternoon, Brock. Good afternoon, Angela. So I guess the first question I’m thinking about, Rob, is strategically you know, the idea to kind of go after more volume. You’ve talked about making Ski more accessible to, you know, to a wider range of, people. Is this more about an age number you know, age bucket or certain demographic? I’m I’m I’m trying to kinda square like, what you where those people are going now if they’re not going skiing and know, is price how confident are you? I don’t know if you’ve done survey work or other things around that.

How confident are you that investment in price, so to speak, and other things in the experience is gonna is gonna get those folks to your to your mountains versus what whatever else they’re they’re doing today? Thanks.

Rob Katz: Yeah. Sure. Well, I mean, one is I think, yeah, we need to

Rob Katz: make sure that even within whoever’s going to ski next year, yeah, that we’re getting our fair share representative of the quality of our resorts the quality of how we engage with them, to make sure that we’ve got the right price you know, matrix, right, to optimize our overall lift revenue. And so that I mean, it does start with that. And I would say, I think like this one of the things, know, that’s important to understand about the ski industry is that it’s constantly in flux. So there’s a ton of people every year that go out of this

Rob Katz: industry

Rob Katz: a ton of people every year that come in. Then a ton of people every year that come back or take two years off or three years off. People that take go for two days, the next year could go for four. Right? And so, actually, even within, like, we took the total number of people in let’s just start with The US. That know how to ski, so therefore could take a ski vacation, Yeah. Like, there’s a lot of opportunity to move frequency skier visits within that necessarily kind of convincing somebody who never skis to ski. Right? And so that is really our primary target. And that is a combination. Right? It’s not just price. Right?

Like we’ve gotta get the right message in front of them We’ve gotta make the right emotional connection to them. To their friends or family, to their kids, depending on who it is. And then, yeah, you have to have the right overall mix of value, right, to move some of these folks. Obviously, they are the least committed skier, But, again, it’s not, you know, there’s a huge percentage of the market each year that’s going in and out. So to speak, and a huge percentage that’s moving their frequency. And it’s within all of that, Right? It’s not like we’re selling soap, and everybody’s buying a bar of soap.

And never you know, and now you’re just trying to convince somebody who bought some other brand to buy yours. This is a product that is you know, yeah, that is very much a discretionary vacation choice, and we think there’s real opportunity for us to

Rob Katz: to drive

Rob Katz: overall frequency up. And I would say, you know, when you look at you know I mean and Chris, you know, you go back a long way. I go back a long way. It’s like, yeah, people have been talking about the fact that the ski industry never grows, but two years ago, right, we hit a record. Now people say, oh, well, that’s COVID. But okay. That’s fine maybe, but in the end, right, it was still

Rob Katz: or was it three years ago? I guess that was

Chris Woronka: record. But in the end, right, it shows that there’s enough people in The US to actually do that.

Rob Katz: Right? And so in the end for us, it’s not it’s about getting people out and getting people to the resort and getting more days.

Chris Woronka: Yeah. It makes sense. Thanks for all that Just had a follow-up on CapEx. And the question is kind of you know, almost like what you’re solving for there. I know over time, you guys identify specific projects. There’s a maintenance

Chris Woronka: piece to it. But if I guess, do you think CapEx is there a step function where CapEx

Chris Woronka: you think needs to jump up to try to you know, is that part of your plan to get people back and adding new amenities? Faster, whatever it might be. Or you think, hey. Capital plan is gonna be what it’s gonna be year to year. Constraints based on, you know, where we are in EBITDA, that kind of thing. I’m I’m really just trying to get at whether you think of bigger uptick in CapEx would actually help if it’s necessary or if you plan to do it in the in the near future? Thanks.

Rob Katz: Yeah, I guess I’d say I think after

Rob Katz: we’re always gonna be upgrading Lyft, and we, you know, announce the new Lyft for an year, obviously. And that’s critical. But it can’t I think we need to realize also as a company and as an industry that it can’t just be about Lyft. It’s not the only thing that matters to people. And in our minds, like, one of the things where I think we’re we’re kind of at the beginning of this, and we’ve made some initial forays, but like, we think there’s technology that can make a big difference.

So how people use technology in the digital experience how it makes it easier for them, to rent skis, how it makes it easier for them to connect with their ski instructor. How it makes it easier for them to get food, how it makes it easier for them figure out how to book or get around a resort or you know, overall book a vacation. I think these are all things that are critical that really speak to the entirety of the guest experience when they come to us. And those are things where we really have both a unique advantage. Right? Because, obviously, we own and operate all our resorts. They’re all on a common platform.

And it’s where you invest dollars that actually impact everyone’s experience with all of our resorts. Rather than you know, a singular left. Which affects one resort, for some people who use that lift.

Rob Katz: Now that said,

Rob Katz: have to keep investing in Lyft. When you look back historically, I think you know, you’ve seen us. We have spent a lot of money on Lyft over the last four years. So that’s that’s continuing. We’re still gonna keep proposing Lyft. But I think the differentiator is gonna be in this other area. Where I think it is actually not as capital intensive. Right, as trying to replace every lift on Vail Mountain or something like that. And so it is where we’re putting our focus. At this point, we’re not making any changes to our long-term capital guidance. You know?

But to the extent that we saw opportunities, that made sense to do it, of course, we’d come back to everybody and share that. But at this point, we’re not seeing that.

Brandt Montour: Okay.

Chris Woronka: Very good. Thanks, guys.

Operator: This concludes the Q&A portion of today’s call. I would now like to turn the call back over to Rob Katz for closing remarks.

Rob Katz: Thank you. This concludes our fiscal year-end earnings call. Thanks to everyone who joined us today. Please feel free to contact Angela or me directly should you have any further questions. Thank you for your time this afternoon, and goodbye.

Operator: This concludes today’s Vail Resorts, Inc. fiscal 2025 year-end conference call and webcast. You may now disconnect your line at this time. Have a wonderful day.

Image source: The Motley Fool.

DATE

Tuesday, September 23, 2025 at 10 a.m. ET

CALL PARTICIPANTS

Chief Executive Officer — Martin Kay

Chief Financial Officer — Coreen S. Hay

Operator

Need a quote from a Motley Fool analyst? Email [email protected]

TAKEAWAYS

Revenue— $190,000 for the three months ended July 31, 2025, a 34% increase over the same period in 2024, driven by higher portal fees and service revenues exchanged for equity securities.

Customer concentration— One issuer accounted for 73% of total revenue after raising approximately $5 million through the platform between March 24, 2025, and May 30, 2025.

Operating loss— Operating loss of approximately $3.3 million, widening from $2.5 million in the same period of fiscal year ended July 31, 2025.

Loss per share— Loss per share of $1.27, narrowing from $5.10 in the same period of fiscal year ended July 31, 2025.

Cash position— $4.6 million in cash and cash equivalents as of July 31, 2025.

Strategic shift— Management reiterated a transition away from equity-based consulting revenue to focus on scalable business growth.

New advisory boards— The company established a crypto advisory board and a game advisory board to guide integration with blockchain technologies and deepen engagement with online gaming sectors.

SUMMARY

Netcapital(NCPL 2.09%) reported a significant increase in quarterly revenue, primarily attributed to a single issuer’s fundraising success. The company continues to rely heavily on a concentrated customer base, with one issuer responsible for the majority of revenue. Management emphasized ongoing efforts to reposition the business model toward scalable core operations and highlighted the formation of new advisory boards to drive innovation in digital assets and gaming.

CEO Martin Kay stated, “This initiative positions us to play a larger role in fintech and to explore opportunities in decentralized finance, or DeFi.”

Portal and broker-dealer operations serve both issuers and investors, with management expressing intent to enhance these services through blockchain, crypto, and digital asset capabilities.

INDUSTRY GLOSSARY

DeFi (Decentralized Finance): Blockchain-based financial services that operate without traditional central intermediaries, enabling peer-to-peer transactions and programmable contracts.

Full Conference Call Transcript

With that said, I’d like to now turn to our financial results for the first quarter fiscal 2026. We reported revenues of $190,058 for the three months ended July 31, 2025, which was an increase of approximately 34% as compared to $142,227 during the three months ended July 31, 2024. The increase in revenues was primarily attributed to an increase in portal fees and an increase in revenues for the services that we provide in exchange for equity securities during the quarter. One issuer that accounted for 73% of our revenues in the three months ended July 31, 2025, was responsible for the increase. That issuer successfully raised approximately $5 million from March 24, 2025 to May 30, 2025.

We reported an operating loss of approximately $3.3 million compared to an operating loss of approximately $2.5 million for the first quarter of fiscal year 2025. We reported a loss per share of $1.27 compared to a loss per share of $5.10 for the first quarter of fiscal year 2025. As of July 31, 2025, the company had cash and cash equivalents of approximately $4.6 million. I’ll now turn the call over to our CEO, Martin Kay.

Martin Kay: Thank you, Coreen, and thank you again to all our shareholders for being on this call today and for your continued support and interest in the company. As Coreen mentioned earlier, we began the new fiscal year with encouraging results. Revenue and portal fee growth of more than 30% highlights the solid performance of our core business. On our recent fiscal 2025 year-end call, we emphasized the strategic shift in our business model, moving away from equity-based consulting revenue to focus on building a stronger, more scalable business. While fiscal 2025 presented challenges, we’re pleased to see this vision taking shape in the first quarter of fiscal 2026.

We remain committed to driving long-term growth through innovation, execution, and focus to build the best fintech ecosystem. In addition to improved financial performance, we achieved several significant milestones this quarter. We established a crypto advisory board composed of accomplished industry leaders to guide our efforts in integrating blockchain, digital assets, and crypto with traditional finance. This initiative positions us to play a larger role in fintech and to explore opportunities in decentralized finance, or DeFi. We also launched a game advisory board to advance our strategic growth initiatives and deepen engagement with the online game community. This board brings together innovative leaders whose expertise will help us expand our ecosystem and drive long-term growth.

With our Netcapital Funding Portal and our broker-dealer Netcapital Securities Inc., we already serve a broad base of issuers and investors. By enhancing our services through blockchain, crypto, and digital asset innovation, we hope to position the company to help lead the future of private market opportunities for companies raising capital and direct investment opportunities for investors. Thank you again for your support, and we look forward to continuing to share our progress in the months ahead. Operator, we’re ready for questions.

Operator: Certainly. Everyone at this time will be conducting a question-and-answer session. If you have any questions or comments, please press star one on your phone at this time. We do ask that while posing your question, please pick up your handset if you’re listening on speakerphone to provide optimum sound quality. Once again, if you have any questions or comments, please press star one on your phone at this time. Please hold while we poll for questions. Thank you. Once again, everyone, if you have any questions or comments, please press star then one on your phone. Please hold while we poll for questions. Thank you. That concludes our Q&A session.

I’ll now hand the conference back to Martin Kay, CEO, for closing remarks. Please go ahead.

Martin Kay: Thank you. Once again, thanks to all who joined today. We appreciate your continued interest and support of Netcapital. Have a good day.

Operator: Thank you. Everyone, this concludes today’s event. You may disconnect at this time and have a wonderful day. Thank you for your participation.

Times journalists are annotating this speech. If you see a passage highlighted in yellow, you can click on it to see what we have to say about it. You can also highlight passages and leave your own comments.

Speech as delivered.

Wow. Thank you. That’s a lot of people, Phoenix, that’s a lot of people.

Thank you very much.

Thank you, Phoenix. I am so glad to be back in Arizona.

The state that has a very, very special place in my heart. I love people of Arizona and together we are going to win the White House in November.

Now, you know this is where it all began for me. Remember that massive crowd also. So, I said let’s go and have some fun tonight. We’re going to Arizona, OK?

This will be a little bit different. This won’t be a rally speech, per se. Instead, I’m going to deliver a detailed policy address on one of the greatest challenges facing our country today, illegal immigration.

I’ve just landed having returned from a very important and special meeting with the President of Mexico, a man I like and respect very much. And a man who truly loves his country, Mexico.

And, by the way, just like I am a man who loves my country, the United States.

We agree on the importance of ending the illegal flow of drugs, cash, guns, and people across our border, and to put the cartels out of business.

We also discussed the great contributions of Mexican-American citizens to our two countries, my love for the people of Mexico, and the leadership and friendship between Mexico and the United States. It was a thoughtful and substantive conversation and it will go on for awhile. And, in the end we’re all going to win. Both countries, we’re all going to win.

This is the first of what I expect will be many, many conversations. And, in a Trump administration we’re going to go about creating a new relationship between our two countries, but it’s going to be a fair relationship. We want fairness.

But to fix our immigration system, we must change our leadership in Washington and we must change it quickly.

Sadly, sadly there is no other way. The truth is our immigration system is worse than anybody ever realized. But the facts aren’t known because the media won’t report on them. The politicians won’t talk about them and the special interests spend a lot of money trying to cover them up because they are making an absolute fortune. That’s the way it is.

Today, on a very complicated and very difficult subject, you will get the truth. The fundamental problem with the immigration system in our country is that it serves the needs of wealthy donors, political activists and powerful, powerful politicians. It’s all you can do. Thank you. Thank you.

Let me tell you who it does not serve. It does not serve you the American people. Doesn’t serve you. When politicians talk about immigration reform, they usually mean the following, amnesty, open borders, lower wages. Immigration reform should mean something else entirely. It should mean improvements to our laws and policies to make life better for American citizens.

Thank you. But if we’re going to make our immigration system work, then we have to be prepared to talk honestly and without fear about these important and very sensitive issues. For instance, we have to listen to the concerns that working people, our forgotten working people, have over the record pace of immigration and it’s impact on their jobs, wages, housing, schools, tax bills and general living conditions.

These are valid concerns expressed by decent and patriotic citizens from all backgrounds, all over. We also have to be honest about the fact that not everyone who seeks to join our country will be able to successfully assimilate. Sometimes it’s just not going to work out. It’s our right, as a sovereign nation to chose immigrants that we think are the likeliest to thrive and flourish and love us.

Then there is the issue of security. Countless innocent American lives have been stolen because our politicians have failed in their duty to secure our borders and enforce our laws like they have to be enforced. I have met with many of the great parents who lost their children to sanctuary cities and open borders. So many people, so many, many people. So sad. They will be joining me on this stage in a little while and I look forward to introducing, these are amazing, amazing people.

Countless Americans who have died in recent years would be alive today if not for the open border policies of this administration and the administration that causes this horrible, horrible thought process, called Hillary Clinton.

This includes incredible Americans like 21 year old Sarah Root. The man who killed her arrived at the border, entered Federal custody and then was released into the U.S., think of it, into the U.S. community under the policies of the White House Barack Obama and Hillary Clinton. Weak, weak policies. Weak and foolish policies.

He was released again after the crime, and now he’s out there at large. Sarah had graduated from college with a 4.0, top student in her class one day before her death.

Also among the victims of the Obama-Clinton open borders policy was Grant Ronnebeck, a 21-year-old convenience store clerk and a really good guy from Mesa, Arizona. A lot of you have known about Grant. 

He was murdered by an illegal immigrant gang member previously convicted of burglary, who had also been released from federal custody, and they knew it was going to happen again.

Another victim is Kate Steinle. Gunned down in the sanctuary city of San Francisco, by an illegal immigrant, deported five previous times. And they knew he was no good.

Donald Trump’s complete convention speech, annotated »

Then there is the case of 90-year-old Earl Olander, who was brutally beaten and left to bleed to death in his home, 90 years old and defenseless. The perpetrators were illegal immigrants with criminal records a mile long, who did not meet Obama administration standards for removal. And they knew it was going to happen.

In California, a 64-year-old Air Force veteran, a great woman, according to everybody that knew her, Marilyn Pharis, was sexually assaulted and beaten to death with a hammer. Her killer had been arrested on multiple occasions but was never, ever deported, despite the fact that everybody wanted him out.

A 2011 report from the Government Accountability Office found that illegal immigrants and other non-citizens, in our prisons and jails together, had around 25,000 homicide arrests to their names, 25,000.

On top of that, illegal immigration costs our country more than $113 billion dollars a year.

And this is what we get. For the money we are going to spend on illegal immigration over the next 10 years, we could provide 1 million at-risk students with a school voucher, which so many people are wanting.

While there are many illegal immigrants in our country who are good people, many, many, this doesn’t change the fact that most illegal immigrants are lower skilled workers with less education, who compete directly against vulnerable American workers, and that these illegal workers draw much more out from the system than they can ever possibly pay back.

And they’re hurting a lot of our people that cannot get jobs under any circumstances.

But these facts are never reported. Instead, the media and my opponent discuss one thing and only one thing, the needs of people living here illegally. In many cases, by the way, they’re treated better than our vets.

Not going to happen anymore, folks. November 8th. Not going to happen anymore.

The truth is, the central issue is not the needs of the 11 million illegal immigrants or however many there may be — and honestly we’ve been hearing that number for years. It’s always 11 million.

Our government has no idea. It could be 3 million. It could be 30 million. They have no idea what the number is.

Frankly our government has no idea what they’re doing on many, many fronts, folks.

But whatever the number, that’s never really been the central issue. It will never be a central issue. It doesn’t matter from that standpoint. Anyone who tells you that the core issue is the needs of those living here illegally has simply spent too much time in Washington.

Only the out of touch media elites think the biggest problems facing America — you know this, this is what they talk about, facing American society today is that there are 11 million illegal immigrants who don’t have legal status. And, they also think the biggest thing, and you know this, it’s not nuclear, and it’s not ISIS, it’s not Russia, it’s not China, it’s global warming.

To all the politicians, donors, and special interests, hear these words from me and all of you today. There is only one core issue in the immigration debate, and that issue is the well being of the American people.

Nothing even comes a close second. Hillary Clinton, for instance, talks constantly about her fears that families will be separated, but she’s not talking about the American families who have been permanently separated from their loved ones because of a preventable homicide, because of a preventable death, because of murder.

No, she’s only talking about families who come here in violation of the law. We will treat everyone living or residing in our country with great dignity. So important.

We will be fair, just, and compassionate to all, but our greatest compassion must be for our American citizens.

Thank you.

President Obama and Hillary Clinton have engaged in gross dereliction of duty by surrendering the safety of the American people to open borders, and you know it better than anybody right here in Arizona. You know it.

President Obama and Hillary Clinton support sanctuary cities. They support catch and release on the border. they support visa overstays. They support the release of dangerous, dangerous, dangerous, criminals from detention. And, they support unconstitutional executive amnesty.

Hillary Clinton has pledged amnesty in her first 100 days, and her plan will provide Obamacare, Social Security, and Medicare for illegal immigrants, breaking the federal budget.

On top of that she promises uncontrolled, low-skilled immigration that continues to reduce jobs and wages for American workers, and especially for African-American and Hispanic workers within our country. Our citizens.

Most incredibly, because to me this is unbelievable, we have no idea who these people are, where they come from. I always say Trojan Horse. Watch what’s going to happen, folks. It’s not going to be pretty.

This includes her plan to bring in 620,000 new refugees from Syria and that region over a short period of time. And even yesterday, when you were watching the news, you saw thousands and thousands of people coming in from Syria. What is wrong with our politicians, our leaders if we can call them that. What the hell are we doing?

Hard to believe. Hard to believe. Now that you’ve heard about Hillary Clinton’s plan, about which she has not answered a single question, let me tell you about my plan. And do you notice —

And do you notice all the time for weeks and weeks of debating my plan, debating, talking about it, what about this, what about that. They never even mentioned her plan on immigration because she doesn’t want to get into the quagmire. It’s a tough one, she doesn’t know what she’s doing except open borders and let everybody come in and destroy our country by the way.

While Hillary Clinton meets only with donors and lobbyists, my plan was crafted with the input from Federal Immigration offices, very great people. Among the top immigration experts anywhere in this country, who represent workers, not corporations, very important to us.

I also worked with lawmakers, who’ve led on this issue on behalf of American citizens for many years. And most importantly I’ve met with the people directly impacted by these policies. So important.

All Things Trump »

Number one, are you ready? Are you ready?

We will build a great wall along the southern border. 

And Mexico will pay for the wall.

One hundred percent. They don’t know it yet, but they’re going to pay for it. And they’re great people and great leaders but they’re going to pay for the wall. On day one, we will begin working on intangible, physical, tall, power, beautiful southern border wall.

We will use the best technology, including above and below ground sensors that’s the tunnels. Remember that, above and below.

Above and below ground sensors. Towers, aerial surveillance and manpower to supplement the wall, find and dislocate tunnels and keep out criminal cartels and Mexico you know that, will work with us. I really believe it. Mexico will work with us. I absolutely believe it. And especially after meeting with their wonderful, wonderful president today. I really believe they want to solve this problem along with us, and I’m sure they will.

Number two, we are going to end catch and release. We catch them, oh go ahead. We catch them, go ahead.

Under my administration, anyone who illegally crosses the border will be detained until they are removed out of our country and back to the country from which they came.

And they’ll be brought great distances. We’re not dropping them right across. They learned that. President Eisenhower. They’d drop them across, right across, and they’d come back. And across.

Then when they flew them to a long distance, all of a sudden that was the end. We will take them great distances. But we will take them to the country where they came from, OK?

Number three. Number three, this is the one, I think it’s so great. It’s hard to believe, people don’t even talk about it. Zero tolerance for criminal aliens. Zero. Zero.

Zero. They don’t come in here. They don’t come in here.

According to federal data, there are at least 2 million, 2 million, think of it, criminal aliens now inside of our country, 2 million people criminal aliens. We will begin moving them out day one. As soon as I take office. Day one. In joint operation with local, state, and federal law enforcement.

Now, just so you understand, the police, who we all respect — say hello to the police. Boy, they don’t get the credit they deserve. I can tell you. They’re great people. But the police and law enforcement, they know who these people are.

They live with these people. They get mocked by these people. They can’t do anything about these people, and they want to. They know who these people are. Day one, my first hour in office, those people are gone.

And you can call it deported if you want. The press doesn’t like that term. You can call it whatever the hell you want. They’re gone.

Beyond the 2 million, and there are vast numbers of additional criminal illegal immigrants who have fled, but their days have run out in this country. The crime will stop. They’re going to be gone. It will be over.

They’re going out. They’re going out fast.

Moving forward. We will issue detainers for illegal immigrants who are arrested for any crime whatsoever, and they will be placed into immediate removal proceedings if we even have to do that.

We will terminate the Obama administration’s deadly, and it is deadly, non-enforcement policies that allow thousands of criminal aliens to freely roam our streets, walk around, do whatever they want to do, crime all over the place.

That’s over. That’s over, folks. That’s over.

Since 2013 alone, the Obama administration has allowed 300,000 criminal aliens to return back into United States communities. These are individuals encountered or identified by ICE, but who were not detained or processed for deportation because it wouldn’t have been politically correct.

My plan also includes cooperating closely with local jurisdictions to remove criminal aliens immediately. We will restore the highly successful Secure Communities Program. Good program. We will expand and revitalize the popular 287(g) partnerships, which will help to identify hundreds of thousands of deportable aliens in local jails that we don’t even know about.

Both of these programs have been recklessly gutted by this administration. And those were programs that worked.

This is yet one more area where we are headed in a totally opposite direction. There’s no common sense, there’s no brain power in our administration by our leader, or our leaders. None, none, none.

Here’s an interesting graphic from a study published this summer on voting attitudes among people who heard incumbents use restrictive rhetoric on immigration — tough enforcement, no amnesty, deportations — and its affect on their own opinions.

On my first day in office I am also going to ask Congress to pass Kate’s Law, named for Kate Steinle.

To ensure that criminal aliens convicted of illegal reentry receive strong mandatory minimum sentences. Strong.

And then we get them out.

Another reform I’m proposing is the passage of legislation named for Detective Michael Davis and Deputy Sheriff Danny Oliver, to law enforcement officers recently killed by a previously deported illegal immigrant.

The Davis-Oliver bill will enhance cooperation with state and local authorities to ensure that criminal immigrants and terrorists are swiftly, really swiftly, identified and removed. And they will go face, believe me. They’re going to go.

We’re going to triple the number of ICE deportation officers.

Within ICE I am going to create a new special deportation task force focused on identifying and quickly removing the most dangerous criminal illegal immigrants in America who have evaded justice just like Hillary Clinton has evaded justice, OK?

Maybe they’ll be able to deport her.

The local police who know every one of these criminals, and they know each and every one by name, by crime, where they live, they will work so fast. And our local police will be so happy that they don’t have to be abused by these thugs anymore. There’s no great mystery to it, they’ve put up with it for years, and no finally we will turn the tables and law enforcement and our police will be allowed to clear up this dangerous and threatening mess.

We’re also going to hire 5,000 more Border Patrol agents.

Who gave me their endorsement, 16,500 gave me their endorsement.

And put more of them on the border instead of behind desks which is good. We will expand the number of border patrol stations significantly.

I’ve had a chance to spend time with these incredible law enforcement officers, and I want to take a moment to thank them. What they do is incredible.

And getting their endorsement means so much to me. More to me really than I can say. Means so much. First time they’ve ever endorsed a presidential candidate.

Number four, block funding for sanctuary cities. We block the funding. No more funds.

We will end the sanctuary cities that have resulted in so many needless deaths. Cities that refuse to cooperate with federal authorities will not receive taxpayer dollars, and we will work with Congress to pass legislation to protect those jurisdictions that do assist federal authorities.

Number five, cancel unconstitutional executive orders and enforce all immigration laws.

We will immediately terminate President Obama’s two illegal executive amnesties in which he defied federal law and the Constitution to give amnesty to approximately five million illegal immigrants, five million.

And how about all the millions that are waiting on line, going through the process legally? So unfair.

Hillary Clinton has pledged to keep both of these illegal amnesty programs, including the 2014 amnesty which has been blocked by the United States Supreme Court. Great.

Clinton has also pledged to add a third executive amnesty. And by the way, folks, she will be a disaster for our country, a disaster in so many other ways.

And don’t forget the Supreme Court of the United States. Don’t forget that when you go to vote on November 8. And don’t forget your Second Amendment. And don’t forget the repeal and replacement of Obamacare.

And don’t forget building up our depleted military. And don’t forget taking care of our vets. Don’t forget our vets. They have been forgotten.

Clinton’s plan would trigger a constitutional crisis unlike almost anything we have ever seen before. In effect, she would be abolishing the lawmaking powers of Congress in order to write her own laws from the Oval Office. And you see what bad judgment she has. She has seriously bad judgment.

Can you imagine? In a Trump administration all immigration laws will be enforced, will be enforced. As with any law enforcement activity, we will set priorities. But unlike this administration, no one will be immune or exempt from enforcement. And ICE and Border Patrol officers will be allowed to do their jobs the way their jobs are supposed to be done.

Anyone who has entered the United States illegally is subject to deportation. That is what it means to have laws and to have a country. Otherwise we don’t have a country.

Our enforcement priorities will include removing criminals, gang members, security threats, visa overstays, public charges. That is those relying on public welfare or straining the safety net along with millions of recent illegal arrivals and overstays who’ve come here under this current corrupt administration.

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Number six, we are going to suspend the issuance of visas to any place where adequate screening cannot occur.

According to data provided by the Senate Subcommittee on Immigration, and the national interest between 9/11 and the end of 2014, at least 380 foreign born individuals were convicted in terror cases inside the United States. And even right now the largest number of people are under investigation for exactly this that we’ve ever had in the history of our country.

Our country is a mess. We don’t even know what to look for anymore, folks. Our country has to straighten out. And we have to straighten out fast.

The number is likely higher. But the administration refuses to provide this information, even to Congress. As soon as I enter office I am going to ask the Department of State, which has been brutalized by Hillary Clinton, brutalized.

Homeland Security and the Department of Justice to begin a comprehensive review of these cases in order to develop a list of regions and countries from which immigration must be suspended until proven and effective vetting mechanisms can be put in place.

I call it extreme vetting right? Extreme vetting. I want extreme. It’s going to be so tough, and if somebody comes in that’s fine but they’re going to be good. It’s extreme.

And if people don’t like it, we’ve got have a country folks. Got to have a country. Countries in which immigration will be suspended would include places like Syria and Libya. And we are going to stop the tens of thousands of people coming in from Syria. We have no idea who they are, where they come from. There’s no documentation. There’s no paperwork. It’s going to end badly folks. It’s going to end very, very badly.

For the price of resettling, one refugee in the United States, 12 could be resettled in a safe zone in their home region. Which I agree with 100 percent. We have to build safe zones and we’ll get the money from Gulf states. We don’t want to put up the money. We owe almost $20 trillion. Doubled since Obama took office, our national debt.

But we will get the money from Gulf states and others. We’ll supervise it. We’ll build safe zones which is something that I think all of us want to see.

Another reform, involves new screening tests for all applicants that include, and this is so important, especially if you get the right people. And we will get the right people. An ideological certification to make sure that those we are admitting to our country share our values and love our people.

Thank you. We’re very proud of our country. Aren’t we? Really? With all it’s going through, we’re very proud of our country. For instance, in the last five years, we’ve admitted nearly 100,000 immigrants from Iraq and Afghanistan. And these two countries according to Pew Research, a majority of residents say that the barbaric practice of honor killings against women are often or sometimes justified. That’s what they say.

That’s what they say. They’re justified. Right? And we’re admitting them to our country. Applicants will be asked their views about honor killings, about respect for women and gays and minorities. Attitudes on radical Islam, which our President refuses to say and many other topics as part of this vetting procedure. And if we have the right people doing it, believe me, very, very few will slip through the cracks. Hopefully, none.

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Number seven, we will insure that other countries take their people back when they order them deported.

There are at least 23 countries that refuse to take their people back after they’ve been ordered to leave the United States. Including large numbers of violent criminals, they won’t take them back. So we say, OK, we’ll keep them. Not going to happen with me, not going to happen with me.

Due to a Supreme Court decision, if these violent offenders cannot be sent home, our law enforcement officers have to release them into your communities.

And by the way, the results are horrific, horrific. There are often terrible consequences, such as Casey Chadwick’s tragic death in Connecticut just last year. Yet despite the existence of a law that commands the Secretary of State to stop issuing visas to these countries.

Secretary Hillary Clinton ignored this law and refused to use this powerful tool to bring nations into compliance. And, they would comply if we would act properly.

In other words, if we had leaders that knew what they were doing, which we don’t.

The result of her misconduct was the release of thousands and thousands of dangerous criminal aliens who should have been sent home to their countries. Instead we have them all over the place. Probably a couple in this room as a matter of fact, but I hope not.

According to a report for the Boston Globe from the year 2008 to 2014 nearly 13,000 criminal aliens were released back into U.S. communities because their home countries would not, under any circumstances, take them back. Hard to believe with the power we have. Hard to believe.

We’re like the big bully that keeps getting beat up. You ever see that? The big bully that keeps getting beat up.

These 13,000 release occurred on Hillary Clinton’s watch. She had the power and the duty to stop it cold, and she decided she would not do it.

And, Arizona knows better than most exactly what I’m talking about.

(APPLAUSE)

Those released include individuals convicted of killings, sexual assaults, and some of the most heinous crimes imaginable.

The Boston Globe writes that a Globe review of 323 criminals released in New England from 2008 to 2012 found that as many as 30 percent committed new offenses, including rape, attempted murder, and child molestation. We take them, we take them.

Number eight, we will finally complete the biometric entry-exit visa tracking system which we need desperately. For years Congress has required biometric entry-exit visa tracking systems, but it has never been completed. The politicians are all talk, no action, never happens. Never happens.

Hillary Clinton, all talk. Unfortunately when there is action it’s always the wrong decision. You ever notice? In my administration we will ensure that this system is in place. And, I will tell you, it will be on land, it will be on sea, it will be in air. We will have a proper tracking system.

Approximately half of new illegal immigrants came on temporary visas and then never, ever left. Why should the? Nobody’s telling them to leave. Stay as long as you want, we’ll take care of you.

Beyond violating our laws, visa overstays, pose — and they really are a big problem, pose a substantial threat to national security. The 9/11 Commission said that this tracking system would be a high priority and would have assisted law enforcement and intelligence officials in august and September in 2001 in conducting a search for two of the 9/11 hijackers that were in the United States expired visas.

And, you know what that would have meant, what that could have meant. Wouldn’t that have been wonderful, right? What that could have meant?

Last year alone nearly half a million individuals overstayed their temporary visas. Removing these overstays will be a top priority of my administration.

If people around the world believe they can just come on a temporary visa and never, ever leave, the Obama-Clinton policy, that’s what it is, then we have a completely open border, and we no longer have a country.

We must send a message that visa expiration dates will be strongly enforced.

Number nine, we will turn off the jobs and benefits magnet.

We will ensure that E-Verify is used to the fullest extent possible under existing law, and we will work with Congress to strengthen and expand its use across the country.

Immigration law doesn’t exist for the purpose of keeping criminals out. It exists to protect all aspects of American life. The work site, the welfare office, the education system, and everything else.

That is why immigration limits are established in the first place. If we only enforced the laws against crime, then we have an open border to the entire world. We will enforce all of our immigration laws.

And the same goes for government benefits. The Center for Immigration Studies estimates that 62 percent of households headed by illegal immigrants use some form of cash or non-cash welfare programs like food stamps or housing assistance.

Tremendous costs, by the way, to our country. Tremendous costs. This directly violates the federal public charge law designed to protect the United States Treasury. Those who abuse our welfare system will be priorities for immediate removal.

Number 10, we will reform legal immigration to serve the best interests of America and its workers, the forgotten people. Workers. We’re going to take care of our workers.

And by the way, and by the way, we’re going to make great trade deals. We’re going to renegotiate trade deals. We’re going to bring our jobs back home. We’re going to bring our jobs back home.

We have the most incompetently worked trade deals ever negotiated probably in the history of the world, and that starts with NAFTA. And now they want to go TPP, one of the great disasters.

We’re going to bring our jobs back home. And if companies want to leave Arizona and if they want to leave other states, there’s going to be a lot of trouble for them. It’s not going to be so easy. There will be consequence. Remember that. There will be consequence. They’re not going to be leaving, go to another country, make the product, sell it into the United States, and all we end up with is no taxes and total unemployment. It’s not going to happen. There will be consequences.

We’ve admitted 59 million immigrants to the United States between 1965 and 2015. Many of these arrivals have greatly enriched our country. So true. But we now have an obligation to them and to their children to control future immigration as we are following, if you think, previous immigration waves.

We’ve had some big waves. And tremendously positive things have happened. Incredible things have happened. To ensure assimilation we want to ensure that it works. Assimilation, an important word. Integration and upward mobility.

Within just a few years immigration as a share of national population is set to break all historical records. The time has come for a new immigration commission to develop a new set of reforms to our legal immigration system in order to achieve the following goals.

To keep immigration levels measured by population share within historical norms. To select immigrants based on their likelihood of success in U.S. society and their ability to be financially self- sufficient.

We take anybody. Come on in, anybody. Just come on in. Not anymore.

You know, folks, it’s called a two-way street. It is a two-way street, right? We need a system that serves our needs, not the needs of others. Remember, under a Trump administration it’s called America first. Remember that.

To choose immigrants based on merit. Merit, skill, and proficiency. Doesn’t that sound nice? And to establish new immigration controls to boost wages and to ensure that open jobs are offered to American workers first. And that in particular African- American and Latino workers who are being shut out in this process so unfairly.

And Hillary Clinton is going to do nothing for the African- American worker, the Latino worker. She’s going to do nothing. Give me your vote, she says, on November eighth. And then she’ll say, so long, see you in four years. That’s what it is.

She is going to do nothing. And just look at the past. She’s done nothing. She’s been there for 35 years. She’s done nothing. And I say what do you have to lose? Choose me. Watch how good we’re going to do together. Watch.

You watch. We want people to come into our country, but they have to come into our country legally and properly vetted, and in a manner that serves the national interest. We’ve been living under outdated immigration rules from decades ago. They’re decades and decades old.

To avoid this happening in the future, I believe we should sunset our visa laws so that Congress is forced to periodically revise and revisit them to bring them up to date. They’re archaic. They’re ancient. We wouldn’t put our entire federal budget on auto pilot for decades, so why should we do the same for the very, very complex subject of immigration?

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So let’s now talk about the big picture. These 10 steps, if rigorously followed and enforced, will accomplish more in a matter of months than our politicians have accomplished on this issue in the last 50 years. It’s going to happen, folks. Because I am proudly not a politician, because I am not behold to any special interest, I’ve spent a lot of money on my campaign, I’ll tell you. I write those checks. Nobody owns Trump.

I will get this done for you and for your family. We’ll do it right. You’ll be proud of our country again. We’ll do it right. We will accomplish all of the steps outlined above. And, when we do, peace and law and justice and prosperity will prevail. Crime will go down. Border crossings will plummet. Gangs will disappear.

And the gangs are all over the place. And welfare use will decrease. We will have a peace dividend to spend on rebuilding America, beginning with our American inner cities. We’re going to rebuild them, for once and for all.

For those here illegally today, who are seeking legal status, they will have one route and one route only. To return home and apply for reentry like everybody else, under the rules of the new legal immigration system that I have outlined above. Those who have left to seek entry —

Thank you. Thank you. Those who have left to seek entry under this new system — and it will be an efficient system — will not be awarded surplus visas, but will have to apply for entry under the immigration caps or limits that will be established in the future.

We will break the cycle of amnesty and illegal immigration. We will break the cycle. There will be no amnesty.

Our message to the world will be this. You cannot obtain legal status or become a citizen of the United States by illegally entering our country. Can’t do it.

This declaration alone will help stop the crisis of illegal crossings and illegal overstays, very importantly. People will know that you can’t just smuggle in, hunker down and wait to be legalized. It’s not going to work that way. Those days are over.

Importantly, in several years when we have accomplished all of our enforcement and deportation goals and truly ended illegal immigration for good, including the construction of a great wall, which we will have built in record time. And at a reasonable cost, which you never hear from the government.

And the establishment of our new lawful immigration system then and only then will we be in a position to consider the appropriate disposition of those individuals who remain.

That discussion can take place only in an atmosphere in which illegal immigration is a memory of the past, no longer with us, allowing us to weigh the different options available based on the new circumstances at the time.

Right now, however, we’re in the middle of a jobs crisis, a border crisis and a terrorism crisis like never before. All energies of the federal government and the legislative process must now be focused on immigration security. That is the only conversation we should be having at this time, immigration security. Cut it off.

Whether it’s dangerous materials being smuggled across the border, terrorists entering on visas or Americans losing their jobs to foreign workers, these are the problems we must now focus on fixing. And the media needs to begin demanding to hear Hillary Clinton’s answer on how her policies will affect Americans and their security.

These are matters of life and death for our country and its people, and we deserve answers from Hillary Clinton. And do you notice, she doesn’t answer.

She didn’t go to Louisiana. She didn’t go to Mexico. She was invited.

She doesn’t have the strength or the stamina to make America great again. Believe me.

What we do know, despite the lack of media curiosity, is that Hillary Clinton promises a radical amnesty combined with a radical reduction in immigration enforcement. Just ask the Border Patrol about Hillary Clinton. You won’t like what you’re hearing.

The result will be millions more illegal immigrants; thousands of more violent, horrible crimes; and total chaos and lawlessness. That’s what’s going to happen, as sure as you’re standing there.

This election, and I believe this, is our last chance to secure the border, stop illegal immigration and reform our laws to make your life better. I really believe this is it. This is our last time. November 8. November 8. You got to get out and vote on November 8.

It’s our last chance. It’s our last chance. And that includes Supreme Court justices and Second Amendment. Remember that.

So I want to remind everyone what we’re fighting for and who we are fighting for.

I am going to ask — these are really special people that I’ve gotten to know. I’m going to ask all the Angel Moms to come join me on the stage right now. These are amazing women.

These are amazing people.

(Family members speak individually.)

Thank you.

These are amazing people, and I am not asking for their endorsement, believe me that. I just think I’ve gotten to know so many of them, and many more, from our group. But they are incredible people and what they’re going through is incredible, and there’s just no reason for it. Let’s give them a really tremendous hand.

That’s tough stuff, I will tell you. That is tough stuff. Incredible people.

So, now is the time for these voices to be heard. Now is the time for the media to begin asking questions on their behalf. Now is the time for all of us as one country, Democrat, Republican, liberal, conservative to band together to deliver justice, and safety, and security for all Americans.

Let’s fix this horrible, horrible, problem. It can be fixed quickly. Let’s our secure our border.

Let’s stop the drugs and the crime from pouring into our country. Let’s protect our social security and Medicare. Let’s get unemployed Americans off the welfare and back to work in their own country.

This has been an incredible evening. We’re going to remember this evening. November 8, we have to get everybody. This is such an important state. November 8 we have to get everybody to go out and vote.

We’re going to bring — thank you, thank you. We’re going to take our country back, folks. This is a movement. We’re going to take our country back.

Thank you.

Thank you.

This is an incredible movement. The world is talking about it. The world is talking about it and by the way, if you haven’t been looking to what’s been happening at the polls over the last three or four days I think you should start looking. You should start looking.

Together we can save American lives, American jobs, and American futures. Together we can save America itself. Join me in this mission, we’re going to make America great again.

Thank you. I love you. God bless you, everybody. God bless you. God bless you, thank you.

@latimespolitics

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Image source: The Motley Fool.

DATE

Wednesday, September 3, 2025 at 5 p.m. ET

CALL PARTICIPANTS

President & Chief Executive Officer — Antonio Neri

Chief Financial Officer — Marie Myers

Head of Investor Relations — Paul Glaser

Need a quote from a Motley Fool analyst? Email [email protected]

RISKS

Marie Myers noted that networking operating margin declined to 20.8%, down 160 basis points year over year for fiscal Q3 2025 (period ended July 31, 2025), including both Intelligent Edge and Juniper, driven by variable compensation and product-related costs.

GAAP diluted net earnings per share of $0.21 was below guidance of $0.24–$0.29, with $326 million in net costs primarily attributed to Juniper-related acquisition costs, stock-based compensation, and amortization of intangibles, excluded from non-GAAP results.

Net leverage ratio increased to 3.1x pro forma post-acquisition at fiscal Q3 2025; management targets a reduction to around 2x by fiscal 2027, emphasizing debt paydown as a strategic priority.

Marie Myers highlighted that the inclusion of Juniper had an unfavorable impact on the cash conversion cycle, which increased to 35 days from last quarter, and noted “costs that I believe are commented on in Q3 and Q4 and also the increase in OI and E.”

TAKEAWAYS

Total Revenue— $9.1 billion, up 18% year over year and sequentially, with $480 million from one month of Juniper included.

Networking Revenue— $1.7 billion, up 54% year over year; Intelligent Edge revenue alone up 11% year over year, and the networking segment contributed nearly 50% of non-GAAP consolidated operating profit.

Annualized Recurring Revenue (ARR)— $3.1 billion, up 75% year over year including Juniper; Excluding Juniper, ARR grew 40% year over year, mainly driven by software and services.

Server Revenue— $4.9 billion, an all-time high, up 16% year over year and 21% sequentially, with AI systems revenue at $1.6 billion (up 25% year over year and 57% sequentially).

Operating Margin— Non-GAAP operating margin at 8.5%, down 150 basis points year over year, but up 50 basis points quarter over quarter (non-GAAP). Excluding Juniper, non-GAAP operating margin was 8.1% (down 190 basis points year over year, up 10 basis points sequentially).

Free Cash Flow— Free cash flow was $719 million, a significant sequential improvement aided by inventory reduction and higher AI backlog conversion.

AI Orders— Nearly doubled quarter over quarter, with sovereign AI orders up approximately 250% sequentially; record AI backlog at $3.7 billion.

Cost Synergy Commitment— Management affirmed at least $600 million in acquisition-related cost synergies over the next three years, with $200 million expected to be realized next year.

Guidance Updates— Full-year non-GAAP EPS outlook for fiscal 2025 raised to $1.88–$1.92. GAAP EPS revised to $0.42–$0.46 for fiscal 2025; projected constant-currency revenue growth of 14%–16% for fiscal 2025. Fiscal Q4 2025 networking revenue expected to be up over 60% sequentially due to full Juniper inclusion.

Hybrid Cloud Revenue— $1.5 billion, up 11% year over year; Segment operating profit dollars grew 26% with a 70 basis point increase in margin year over year.

SUMMARY

Hewlett Packard Enterprise(HPE 0.75%) reported record total revenue of $9.1 billion following the acquisition ofJuniper Networks(NYSE:JNPR), with all major segments experiencing year-over-year revenue growth and margin expansion in select product lines. Gross margin pressure emerged due to mix shifts in server, networking, and hybrid cloud. Networking became nearly half of consolidated non-GAAP operating profit, demonstrating outsized profitability from business realignment. Robust demand for AI offerings, with a record-setting backlog and new order growth, materially improved free cash flow, which helped lower inventories and better position working capital. Management reaffirmed synergy targets and improved its non-GAAP EPS outlook for fiscal 2025, while also explicitly highlighting the impact of acquisition-related costs and leverage on earnings and capital allocation.

CEO Neri stated, “Our improved profitability flowed through to non-GAAP diluted net earnings per share of $0.44.” near the high end of guidance for non-GAAP diluted net earnings per share, emphasizing earnings quality amid major portfolio shifts.

Management outlined plans for salesforce harmonization by year end, targeting synergy realization and expanded channel reach.

Marie Myers clarified that “free cash flow generation is paramount” underscoring debt reduction and restoring leverage ratios as HPE’s capital allocation priorities post-acquisition.

HPE’s ARR mix is increasingly tilted toward software and services, which now exceeds 81%.

Neri indicated HPE will detail its networking and longer-term AI strategy at the October Securities Analyst Meeting.

INDUSTRY GLOSSARY

ARR (Annualized Recurring Revenue): Run-rate metric measuring recurring subscription, service, and lease revenue accumulated over the prior quarter, scaled to a full year.

SASE (Secure Access Service Edge): Security framework that combines wide area networking (WAN) and network security services in a cloud-native offering.

AUP (Average Unit Price): Average selling price per unit, relevant for analyzing mix shifts and pricing trends in product segments.

SMB (Small and Medium Business): Segment of customers defined by Hewlett Packard Enterprise as organizations smaller than large enterprises, a key networking target.

Gen 11/Gen 12 servers: Hewlett Packard Enterprise’s eleventh and twelfth generation server platforms featuring new processor architectures and enhanced AI capabilities.

Full Conference Call Transcript

Operator: Good afternoon. And welcome to the Fiscal 2025 Third Quarter Hewlett Packard Enterprise Earnings Conference Call. All participants will be in a listen-only mode. Please note that today’s event is being recorded. I would now like to turn the conference over to Paul Glaser, Head of Investor Relations. Please go ahead, sir.

Paul Glaser: Good afternoon. I am Paul Glaser, head of investor relations for Hewlett Packard Enterprise. I would like to welcome you to our fiscal 2025 third quarter earnings conference call with Antonio Neri, HPE’s president and chief executive officer, and Marie Myers, HPE’s chief financial officer. Before handing the call to Antonio, let me remind you that this call is being webcast. A replay of the webcast will be available shortly after the call concludes. We have posted the press release and the slide presentation accompanying the release on our HPE Investor Relations webpage.

Elements of the financial information referenced on this call are forward-looking and are based on our best view of the world and our businesses as we see them today. HPE assumes no obligation and does not intend to update any such forward-looking statements. We also note that the financial information discussed on this call reflects estimates based on information available at this time and could differ materially from the amounts ultimately reported in HPE’s quarterly report on Form 10-Q for the fiscal quarter ended July 31, 2025. For more detailed information, please see the disclaimers on the earnings materials relating to forward-looking statements that involve risks, uncertainties, and assumptions.

Please refer to HPE’s filings with the SEC for a discussion of these risks. For financial information, we have expressed on a non-GAAP basis we have provided reconciliations to the comparable GAAP information on our website. Please refer to the tables and slide presentation accompanying today’s earnings release on our website for details. Throughout this conference call, all revenue growth rates unless noted otherwise, are presented on a year-over-year basis and adjusted to exclude the impact of currency. Antonio and Marie will reference our earnings presentation in their prepared comments.

Finally, I would like to clarify that in the discussion today, any mention of HPE Intelligent Edge will refer to HPE’s prior business segment and network will refer to the combination of Intelligent Edge and Juniper Networks. With that, let me turn it over to Antonio.

Antonio Neri: Thank you, Paul. Good afternoon, everyone. In Q3, we delivered solid results and completed a major milestone. Closing our acquisition of Juniper Networks. Together with Juniper, we will accelerate our momentum across our three strategic business pillars. Networking, cloud, and AI, building a stronger, leaner, and more profitable HPE. In Q3, HPE achieved record-breaking revenue with and without Juniper. Revenue was $9.1 billion, up 18% year over year fueled by strong momentum across AI, networking, and hybrid cloud. We grew revenues year over year across our three largest business segments. Demand was broad-based across our products and services. We increased sequential operating profit dollars in server hybrid cloud and both Intelligent Edge and the new combined networking segment.

We also grew operating profit dollars in financial services on a year-over-year basis. The new combined networking segment accounted for nearly 50% of HPE’s non-GAAP consolidated operating profit. We also improved sequential operating profit margins in server, and hybrid cloud. Our improved profitability flowed through to non-GAAP diluted net earnings per share of $0.44. Free cash flow was $719 million as we significantly lowered our inventory driven by higher AI backlog conversion to revenue and strong supply chain execution. We continue to transform our business through Catalyst, the structural cost-saving program we announced last quarter, including enhancing operational efficiency, simplifying our portfolio, adopting AI, and optimizing our workforce. In Q3, customers continued to demonstrate strong demand for our AI portfolio.

We nearly doubled our AI orders sequentially, driven by sovereign opportunities up approximately 250%. Cumulative orders since Q1 2023 for sovereign and enterprise now account for more than 50% of total AI systems net orders. We exited the quarter with record AI backlog at $3.7 billion. Marie will provide more details on the quarter and our Q4 fiscal year 2025 guide. But first, I would like to provide key Q3 highlights across our business segments. I am incredibly pleased that we closed the Juniper acquisition in July. Integration is progressing well. I have been spending time with Rami and the new combined networking leadership team, which is world-class.

Going forward, we will refer to the combination of our HPE Intelligent Edge segment and Juniper as our new HPE networking segment. Our vision for this segment is clear. To build the best network in business providing customers with a modern secure and AI-driven networking portfolio. Rami and I will discuss our networking strategy in more detail at our upcoming securities analyst meeting in October. On the demand front, the networking market recovery continues. In enterprise, we continue to see robust demand in campus and branch, driven by the wire and wireless refresh, SASE, and data center switching. Wi-Fi seven demand is ramping with orders up triple digits sequentially. In cloud, we see strong demand for networking for AI.

Particularly in data center switching and Juniper PTX routing. Revenue of $1.7 billion increased 54% year over year driven by strong performances in both Intelligent Edge and Juniper. Intelligent Edge revenue increased 11% year over year and 8% quarter over quarter. We generated double-digit year-over-year revenue growth in Campus and Branch, data center switching, automated one, and services. We also grew SASE and security revenue. These strong results contributed to sustained momentum in networking SaaS support services. Operating profit for the networking segment was $360 million up 43% year over year. Benefiting from one month of Juniper results and operating profit dollars expansion in Intelligent Edge. Networking innovation is accelerating across the entire networking portfolio.

Just last week, we introduced new Mist AgenTiC AI native innovations for campus and branch data center switching and automated one. These complement the new agentic AI mesh technology from our HPE Aruba networking portfolio that we announced alongside GreenLake Intelligence at HP Discover in June. Our innovation is being noticed by the market. HPE and Juniper Networks were both recognized again as leaders in the latest 2025 Gartner Magic Quadrant for Enterprise wire and wireless LAN infrastructure. Customers are already taking advantage of the power of our full HPE portfolio with the inclusion of HPE Juniper solutions. For example, early this year, HPE won a multimillion-dollar deal with Spar Austria Group. A leading retailer in Central Europe.

SPAR is building out a digital business services platform underpinned by GreenLake. The full IT stack solution is designed and implemented by HPE Professional Services. It will be fully managed by HPE managed services and includes Aruba switches, Juniper firewalls, Alletra MP storage, plus HPE Clouds ops software including Zerto, OpsRamp, and Morpheus. The solution will enable a cloud-native and AI-driven platform experience. Finally, with respect to integration synergies, we are reiterating at least $600 million in cost synergies over the next three years. In the server segment, market demand is robust across our portfolio.

Revenue of $4.9 billion was an all-time high, increased 16% year over year and 21% quarter over quarter driven by strong conversion of AI orders and solid demand for traditional servers. AI systems revenue of $1.6 billion was also an all-time high. As we completed delivery of a large GB 200 system. Server operating margin improved sequentially benefiting from the changes we made in pricing and discounting early in the year. Which returned traditional server product margins to historical levels. This was partially offset by higher AI mix, including a large deal. As we enter Q4, we continue to expect total server operating margin to be around 10% for the quarter.

AI systems orders increased nearly 100% quarter over quarter, including Middle East sovereign winds and continued traction in enterprise. We have grown enterprise AI orders year over year every quarter. Since the beginning of fiscal 2024. From an innovation perspective, we continue to keep pace with new accelerators technology and time to market customer demands. Last month, we launched HPE servers with the new NVIDIA Pro 6,000 Blackwell and NVIDIA Blackwell Ultra accelerated computing platforms. In traditional servers, customers are continuing to refresh edge infrastructure with more powerful, richly configured servers. As a result, revenue increased double digits year over year on mix shift to HPE Gen 11 and Gen 12 servers.

During the quarter, we expanded the Gen12 compute portfolio to include the latest AMD fifth-generation EPYC processors. The new servers include support for HP compute management with AI-driven lifecycle management. We expect the Gen 12 adoption to accelerate through 2026. In Q3, we also released our next HP nonstop compute solutions for mission-critical workloads. We doubled the memory capacity and doubled the system interconnect bandwidth. Finally, hybrid cloud performance was solid. Revenue of $1.5 billion increased year over year for the fourth consecutive quarter. In addition, operating profit margins were up 70 basis points and operating profit dollars increased 26% year over year. ARR increased 75% compared to Q3 2024 with the inclusion of one month of Juniper results.

On an organic basis, AIR increased 40% in line with our guidance of 35% to 45% CAGR. In storage, we saw robust growth in our IP product portfolio. HPE Alletra MP storage revenue increased triple digits year over year. We have now shipped more than 5,000 Alletra MP arrays to date. We continue to successfully migrate our customer installed base while gaining new customer logos resulting in a one-point gain in the most recently released IDC market share report. Private cloud, we continue to ramp sales of our enterprise AI factory solutions. During Q3, we added twice the number of new private cloud AI customers compared to Q2 with particular interest in our developer configuration.

Software is a core differentiator for our GreenLake cloud for our private cloud portfolio, which is a key contributor to our AIR growth. In June, we announced our new HPE hybrid cloud ops suite software bringing together Morpheus, VM Essentials, OpsRamp, and Zerto. To assist customers from hybrid cloud orchestration virtualization, and observability to continuous data protection. Our cloud software revenue in the quarter increased strong double digits year over year. At Discover Las Vegas, we unveiled GreenLake Intelligence. Our framework for deploying AI agents across cloud and infrastructure to simplify customers’ hybrid IT operations. We also expanded our agentic AI capability in OpsRamp networking and storage. Innovations like these continue to attract new customers to our GreenLake cloud.

In Q3, we added approximately 2,000 new customers bringing our GreenLake cloud customer count to approximately 44,000. In closing, as we look ahead, I am excited for HPE’s next chapter. The completion of our Juniper acquisition, positions us to win in networking as the market enters a new era of IT and business transformation where AI cloud and networking converge. We launched a new brand for HP to reflect this potential. The brand is modern, expresses what our technology and talent make possible and reinforces our relevance with our customers. Our vision for the company is clear. To lead in the AI era through a modern secure cloud-native and AI-driven networking portfolio that accelerates our profitable growth.

We are focused on executing with precision capitalize on the growing opportunities in the market, deliver strong value to our customers and our shareholders. I look forward to providing more details about our strategy our long-term value creation framework at our Securities Analyst Meeting on October 15 at the New York Stock Exchange. I would like now to turn it over to Marie to provide more insights into our quarterly results and full fiscal year guide. Marie?

Marie Myers: Thank you, Antonio, and good afternoon. I’m pleased with our performance this quarter while navigating an evolving market environment. Regarding our results, first, all segments of our business performed well. Our server business has moved past the pricing and discounting issues we reported earlier this year in compute. Hybrid cloud posted its fourth consecutive quarter of year-over-year top-line growth and operating margin expansion. And revenue growth in our Intelligent Edge business is improving as the networking market recovery continues. Second, I’m pleased that we completed our acquisition of Juniper, which will shift our revenue mix towards a higher growth higher margin networking business.

We continue to expect the acquisition to be accretive to our non-GAAP results in year one, enhancing our profitability as we capture synergies and drive new market opportunities with our increased scale. And finally, we made solid progress on our cost reduction initiatives announced last quarter. I’m looking forward to sharing more about the next chapter of our company at our security analyst meeting next month. Let’s talk about the details of the quarter. Third-quarter revenue of $9.1 billion which included Juniper, was up 18% year over year and quarter over quarter. And up 11% excluding Juniper revenue of $480 million. Excluding Juniper, total revenue of $8.7 billion exceeded the high end of our outlook range.

Demand was strong this quarter, and we did not see material demand pull in. Our reported annualized recurring revenue run rate was $3.1 billion including $590 million contributed by Juniper. Reported ARR was up 75% year over year or up 40% excluding Juniper. Software and services ARR, including Juniper, doubled year over year as the mix of this higher margin revenue improves sequentially by 640 basis points to over 81%. Including Juniper, non-GAAP gross margin was 29.9%, down 190 basis points year over year and up 50 basis points quarter over quarter.

On a year-over-year basis, gross margin was impacted by an unfavorable mix within server, networking, and hybrid cloud, which more than offset the benefit margin contribution from one month of Juniper. Excluding Juniper, gross margin was 28.3%. Non-GAAP operating expense, including Juniper as a percentage of revenue, was flat sequentially and declined 40 basis points year over year, reflecting strong revenue performance and disciplined cost management, partially offset by variable compensation. We will continue to manage costs rigorously as we target efficiencies through Catalyst, complemented by at least $600 million at expected Juniper-related cost synergies over the next three years with $200 million expected to be realized next year.

Excluding Juniper, non-GAAP operating expense as a percentage of revenue was 20.2%, down 160 basis points year over year and down 120 basis points sequentially. Driven by strong cost discipline as we grew revenue faster than expenses. Non-GAAP operating margin, including Juniper, was 8.5%. Down 150 basis points year over year primarily due to lower gross margins partially offset by cost management. The 50 basis point sequential improvement was primarily due to the inclusion of Juniper’s results. Excluding Juniper, operating margin was 8.1%, down 190 basis points year over year, but up 10 basis points sequentially.

During the quarter, we generated free cash flow of $790 million including approximately $200 million of deal-related costs, and higher net interest expense, partially offset by improved inventory management. Non-GAAP diluted net earnings per share of $0.44 was toward the high end of our guided range of 40 to 45¢. Our non-GAAP diluted net EPS includes a $0.01 net attributable to consolidating one month of Juniper’s results and the impact of net interest cost related to the acquisition. Q3 GAAP diluted net earnings per share was $0.21 below our guidance of $0.24 to $0.29.

In terms of these results, non-GAAP diluted net earnings per share excludes $326 million in net costs primarily due to Juniper-related acquisition costs, stock-based compensation expense, amortization of intangible assets and acquisition disposition, and other charges. Partially offset by adjustments for taxes, gain from litigation settlement, and other adjustments. Now let’s turn to our segment results. Starting with networking, As previously mentioned, we closed our acquisition of Juniper on July 2. So our Q3 earnings report includes only one month of Juniper’s results. Our Q4 networking results will include our first full quarter of consolidated Juniper financials. We will provide more details regarding our near-term and longer-term strategy and outlook for our networking business and our security analyst meeting.

Next month. Networking revenue for the quarter was $1.7 billion, up 54% year over year up 48% sequentially, and up 11% year over year, excluding Juniper. Strong networking revenue growth was driven by the ongoing recovery in the networking market and consolidation of Juniper’s results for the month of July. While it’s early days, we are pleased with our order growth, and revenue performance we generated across the combined networking business. Reported orders grew strong double digits year over year, including double-digit growth in both campus switching and the SMB markets. Excluding Juniper, Intelligent Edge orders grew a mid-teens percent year over year, Demand in Q3 was strong as sellout increased sequentially and year over year.

Networking operating margin was 20.8%, down 160 basis points year over year. This is inclusive of a 22.7 operating margin from HPE’s former Intelligent Edge business and 15.8% operating margin from Juniper’s networking business. Excluding Juniper, operating margin was down 90 basis points sequentially primarily due to variable compensation, and product-related costs. Server revenue was $4.9 billion, up 16% year over year and up 21% sequentially, above the high end of our guidance range. The quarter-over-quarter revenue increase was driven largely by a double-digit increase in AI systems revenue due to a large AI deal we shipped in the quarter. Augmented by higher AUP from a favorable mix shift in core compute.

In traditional server, revenue increased sequentially driven by volume increases and AUP strings supported by the continued shift to Gen 11 service. Augmented by early yet improving sales of our Gen 12 service. In AI systems, we signed $2.1 billion in net new orders, driven by robust growth in sovereign net new orders, which increased by triple digits both year over year and sequentially, while enterprise net new orders were also up year over year. Together, enterprise and sovereign constitute greater than 50% of our cumulative AI orders since Q1 2023. We generated $1.6 billion of revenue during the quarter up 25% year over year and up 57% sequentially.

Driven by the previously disclosed large AI system that we shipped in the quarter. We finished Q3 with our pipeline at multiple of our $3.7 billion ending backlog. Server operating margin of 6.4% was consistent with our outlook. Margin performance improved sequentially benefiting from the changes we made in pricing and discounting earlier in the year which returned traditional server product margins to historical levels. This was partially offset by higher AI mix, including a large deal and AI inventory. Moving to hybrid cloud. Revenue was $1.5 billion, up 11% year over year the fourth consecutive quarter of double-digit growth. Sequentially, revenue increased 1% consistent with our outlook.

In storage, our HPE Eletro MP platform continues to drive robust growth, achieving triple-digit year-over-year revenue growth for the third consecutive quarter while high double-digit margins expanded sequentially again. In Q3, new logos were up more than three hundred and fifty and grew over 70% year over year. In private cloud, revenue grew strong double digits year over year as we see continued growth in our pipeline for PCAI, where the number of new enterprise customers doubled quarter over quarter. Also, our VM Essentials solutions closed over 120 customers in Q3 and has generated a pipeline exceeding 1,000 interested since its launch last November.

Hybrid cloud operating margin increased 50 basis points sequentially to 5.9% and increased 70 basis points year over year the fourth consecutive quarter that our OP margin has expanded on a year-over-year basis. Lastly, our financial services business generated revenue of $886 million down 1% year over year and flat quarter over quarter. Financing volumes increased 2% year over year to $1.5 billion. Our Q3 loss ratio was 0.7%, and return on equity improved sequentially and year over year to 17.7%. Operating margin of 9.9% increased 90 basis points year over year primarily due to a higher mix of financing versus operating leases. But declined 50 basis points quarter over quarter driven by unfavorable operating expenses despite the higher revenue.

Last quarter, we announced Catalyst, a series of initiatives designed to accelerate growth. Increase efficiency, and make it easier to do business with HPE. Our starting point was at approximate 5% workforce reduction from the exit of Q1 with gross savings of at least $350 million by fiscal year 2027. We are executing well against our plan and expect to achieve our target of 20% of the total savings by fiscal year end 2025. We are taking an AI-first approach to reimagine our key workflows I have started in my own finance organization leveraging AI to increase productivity. Turning to cash flow and capital allocation.

We generated $1.3 billion of operating cash flow in the quarter and free cash flow was a positive $719 million a significant improvement sequentially as expected. At the end of fiscal Q3, inventory totaled $7.2 billion down $933 million sequentially, Excluding July ending Chewterbury inventory of approximately $1 billion Q3 ending standalone HP inventory was $6.2 billion down $1.9 billion sequentially. Reducing inventory levels has been a key priority and we exited q with our balance near our normalized level. Our Q3 cash conversion cycle was positive thirty-five days, up nine days from last quarter.

The inclusion of Jurupa unfavorably impacted our CCC calculation this quarter as it includes only one month of Juniper’s revenue and cost of sales results versus the consolidation of Juniper’s July ending balances. This timing issue obscures both the progress we made improving our CCC and the positive contributions for working capital the business generated on a sequential basis when excluding Juniper. We expect our CCC will improve in Q4 four with a full quarter’s consolidation of Juniper’s financials. As we expect the amount of free cash flow we generate to increase sequentially consistent with typical seasonality.

We returned $171 million to shareholders through dividends but were unable to repurchase shares during the quarter because we were in possession of material non-public information that we have since disclosed. As we prioritize debt reduction, we remain committed to our dividend policy and expect quarterly share repurchases comparable to levels reported in the 2025, partially offsetting share dilution resulting from stock-based compensation. At quarter end and including incremental debt associated with the transaction, our pro forma combined net leverage ratio was 3.1 times. We remain committed to our investment-grade credit rating and intend to reduce our net leverage ratio back to our target in the two times range by the 2027. Now let’s turn to guidance.

We are revising our FY 2025 outlook to incorporate four months of contributions from Juniper Networks. For revenue, we expect constant currency growth of 14% to 16%, estimate currency impacts of 30 basis points up nominally versus last quarter’s estimate. With the inclusion of Chudapur, we expect our non-GAAP gross margin outlook for Q4 to be in the mid-thirty percent range and fiscal 2025 to be above 30%. We expect operating expense to increase sequentially driven by full quarter inclusion of Juniper.

We expect full-year non-GAAP operating margin to be in the upper 9% range at the midpoint benefiting from a sequential improvement in Q4 to the upper 11% range driven by the continued improvement in server margins and the accretive contributions from Juniper. We are revising our FY 2025 GAAP EPS range to $0.42 to $0.46 which includes the impact of Juniper. Are raising our non-GAAP EPS range to $1.88 to $1.92 which reflects accretive contributions from Juniper though minimal for the year. We are reaffirming our estimate of a 2¢ impact from tariffs in the second half of the year. Lastly, we are revising our free cash flow outlook to approximately $700 million.

Excluding Juniper, we expect to generate approximately $1 billion of free cash flow in line with the guidance we provided last quarter. Through the end of Q3, year-to-date free cash flow was a $934 million use of cash. We expect Q4 free cash flow to be up materially quarter over quarter due to better net earnings, in addition to favorable working capital driven by significant improvements in accounts receivable collections. For Q4, we expect revenue to be between $9.7 billion and $10.1 billion. For networking, we expect revenue will be up over 60% quarter over quarter, reflecting a full quarter of Juniper. Expect our networking operating margin in Q4 and fiscal 2025 to be in the low 20% range.

For hybrid cloud, we expect revenue to be roughly flat quarter over quarter with a sequentially improved operating margin in the mid to high single digits. For server, we forecast a mid to high single-digit decline in revenue quarter over quarter driven by a greater than 30% sequential decline in AI systems revenue Following the large deal that shipped in Q3. We expect server operating margin to improve sequentially to around 10% for the quarter, reflecting continued momentum behind our improved execution and an improved mix towards enterprise and sovereign as we continue to focus on profitable growth.

Going forward, we will remain focused on profitable growth in the service segment we’ll continue to assess the optimal balance between volume growth, and margins. We expect GAAP diluted net earnings per share to be between $0.50 and $0.54 and non-GAAP diluted net earnings per share to be between $0.56 and $0.60. Our Q4 EPS outlook reflects a sequential increase in diluted shares outstanding to 1.44 billion, attributable to the conversion of Juniper-related stock-based compensation shares and forward awards. Following the acquisition of Juniper, we now expect Q4 OI and E in the $180 million to $200 million range. We expect Q4 free cash flow to be up sequentially, reflecting typical seasonality, favorable working capital, and increased net earnings.

With that, I look forward to seeing you at SAM in October. And now let me open the floor for questions.

Operator: Thank you. We will now begin the question and answer session. And your first question today will come from Aaron Rakers with Wells Fargo. Please go ahead. Yes. Thanks for taking the question and congrats on the close of the Juniper acquisition.

Aaron Rakers: I guess I want to just dive a little bit deeper into the server margin profile that you guys see. I think Antonio, in your prepared comments, you said that we’ve returned to more of a normalized operating margin on the traditional server line. I guess if I look back, I would assume that’s kind of in that low double-digit, let’s call it, 11% to 13% range I guess if I’m to do that math, it leads me to question the profitability of the AI server business. And so I guess, you know, as you think about that 10%, maybe you can unpack the drivers of getting to that level.

And I you know, how should we think about that AI server you know, margin profile? Thank you.

Antonio Neri: Thank you, Aaron, for the question. First, we are very pleased with the progression we made between Q1 to Q2 to Q3 based on the challenges we experienced in Q1 with price and discounting and as you said, we resolved those issues and the traditional server is back to historical levels around 10-12% as you talked about it. We believe that’s consistent with we see going forward. Remember there is a mix shift in addition to those pricing and discount changes. To GEN-eleven and GEN-twelve the structural of those products is different than gen 10 or gen 10 and a half. Obviously, it has higher AUP, different attach rates and the like.

And that’s gonna be a core foundation as we enter Q4. For delivering at the total server segment the around 10% for the quarter. Now this quarter obviously the mix of AI and in particular one deal and the work we did on inventory had a short term impact that ultimately took that what I call the overall server down to the 6.4% but as we exit that which already recognized then you’re going to get the natural lift into that higher single digit to close to 10%. And then therefore also you have the mix of sovereign and enterprise in the AI revenue conversion.

Because as we move from more a server provider centric revenue conversion to more a sovereign and enterprise revenue conversion in AI obviously we’re going to convert less in aggregate numbers it’s gonna have a different margin profile. And that’s why Maria and I the team are very confident that in Q4, the total server operating margin will be around 10%. So that’s the walk. Aaron.

Marie Myers: I’d just add, Aaron, we also have a robust internal framework that guides us in how we evaluate these AI related deals and prioritize them as well.

Operator: Very good. Thank you, Aaron. Operator, next question please.

Operator: Your next question today will come from Wamsi Mohan with Bank of America. Please go ahead.

Wamsi Mohan: Yes. Thank you so much. Now that Jennifer is closed, can you maybe just talk about some of the early progress on integration and go to market changes that we should expect? And any top line synergies and early customer feedback And Marie, maybe if you could talk about just the longer term opportunity for HPE in AI or Antonio. Just relative to networking versus servers, where do you see the larger opportunity for AI both from a revenue TAM and from a margin or profitability standpoint? Thank you so much.

Antonio Neri: Thank you, Wamsi. So first, we are incredibly pleased we closed the transaction of Juniper I think it was closed at the right time because obviously market recovery is taking place but also we see demand across sub segment of the networking market. And as we commented during my remarks and Marie’s remark, every subsegment on networking had a very strong performance. Whether it was HPE Intelligent Edge standalone or Juniper standalone and obviously on a combined basis, it’s even very, very strong. If you look at Compass and Branch, both companies are doing very well. Both company growing double digits, so that’s very strong. In data center switching and we talked about this during the July 9 call.

Juniper had that record breaking performance in data center switches and also a very good performance in routing which we call it the automated one Security was also up in the single digit year over year revenue growth driven by SASE. Then progress we have made is that is very strong, meaning integration is progressing really well. We have a series of milestones which we call it the employee day one, which is onboarding the employees into our systems. That’s a combination of benefits and other things that have to take place.

And then we have the harmonization of the Salesforce which we call it sales day one and that takes place at the end of this calendar year We already are incentivizing both sales forces to sell both products. And I can tell you the channel community is super excited to be able to sell both products. Because the combination of both products allows them to cover every vertical, every use case in every geography. And the fact of the matter is that the complementarity of the two portfolio allows us to drive strong security integration in our stack in addition to the integration with the rest of the portfolio with server and storage.

So we will be able to talk more about this Wamsi the securities analyst meeting. Rami, will take center stage and walk through the strategy. Early views of the proverb map, how we are driving the Salesforce integration, including our channel ecosystem. And we believe that’s going to be an opportunity as we 2026 and then obviously 2728. Your question about AI, as I think about the AI space, I always ground on three very distinct customer segments. In the service provider segment, and model builders Our strategy is to lead with networking or AI. The opportunity is significant. Juniper is getting traction.

It’s becoming the de facto standard in many of those customers and the opportunity with HP is to expand that footprint. And then we will sell these server products in that unique segment where it makes sense from an accretion from a margin perspective and working capital perspective. If you go to the sovereign space, which we saw this quarter of 200 plus percent growth on a year over year basis, and that sovereign also includes Neo Clouds, We will lead with an integrated rack scale architecture. Meaning networking plus the server business and all the services that comes with it.

And that will allow us to cover multiple type of offerings as customers in that segment may have the need to drive optionality and flexibility. And we have unique conversations with our partners. Then in the enterprise space, through the AI factory engagement with our private cloud AI portfolio which this quarter added 300 plus new logos double from last quarter we will lead with a full integrated stack. And that’s what we did with NVIDIA, the integration. Their software with our GreenLake plus the integrated infrastructure with our IHP Proline and Cray for the GPUs and then our Alletra MP storage or fast object and file plus all the services around it. To lifecycle manage that solution.

So I think at the portfolio level we can service every segment and find the right balance but I think networking us make us now stronger in the AI space because one of the key elements of that IT stack is the network at scale Juniper brings amazing technology both for the data center switching and the routing piece because once you integrate this in a large AI deployment, you need to core aggregate all of this through the leaf and spine into the data center footprint. And that requires also a routing product. So more to come at SAM. Okay. Thank you, Wamsi.

Operator: Next question please.

Operator: Your next question today will come from Samik Chatterjee with JPMorgan. Please go ahead.

Samik Chatterjee: Yes. Hi, thanks for taking my question. Antonio, you talked about just following up here on the Juniper sort of line of topics. Your networking overall margins are taking a bit of a step down to the sort of low 20 range. Where the segment historically has been about mid-twenties. How should we think about with the synergy road map that you have when the segment gets back to that sort of mid-twenties level? Because some of the back of the envelope math and the synergies would suggest you could actually probably go north of that as well long term.

But maybe just lay out the road map for us in terms of how to think about the progress on the margin front from the new set of level that you have post consolidation of Juniper? And, Murray, if I can quickly squeeze in one on cash, get the headwinds terms of closing Juniper on the cash flow this year, but how should we think about of the impact in on next year’s cash flow in relation to any closing costs or integration costs?

Antonio Neri: So I will pass it to Marie because I think will be able to answer both questions.

Marie Myers: Yeah, no worries. Thanks Antonio. Hey Sami, good afternoon. So Just to preface my answer before I get started, I’m going to answer both questions in the context of Q4 and full year ’25 guide. We will provide longer-term update to your questions, particularly around cash as we get into security analyst meeting in early October. So let me unpack first of all, the networking margin rate. So in the quarter, as you recall, we integrated a month of Juniper’s results and our intelligent edge business. We combine them now into one segment called the networking segment. And the combined operating margins were twenty point eight. If you look I think your question was focused specifically at the edge business.

Edge margin, actually, I disclosed in my prepared remarks, was 22.7, and we did see a sequential reduction, and that was really due to two primary factors. One’s variable comp expense, and the other one product related costs. And I did guide the Q4 op range to the low twenties as we get into the quarter. And the reason for that Samik, is obviously Juniper’s rate was a few points below our Intelligent Ed business. So just bear that in mind as you think forward to the networking margin rates. Now with respect to your question on cash flow, you know, we’re confident in our guide for the year.

And I would just say, you think about cash, there’s puts and takes. Now, obviously, you brought up Juniper costs, and we will give more clarity on that as we get through to Sam. Even as we get into Q4, there’s obviously costs that I believe are commented on in Q3 and Q4 and also the increase in OI and E. So all of that taken into account when you think about cash flow. And I just add, look. You know, we are absolutely focused on free cash flow. We’ll give you a lot more detail as we head to security analysts. As you know, our leverage has gone up, and so free cash flow generation is paramount for us.

Antonio Neri: Thanks. I want to reinforce the last point. Because of the integration of Juniper, the ability to generate earnings but also pay down the debt. Our main focus going forward in addition to drive the right balance of growth and operating margins is really free cash flow generation. And so we will be able to talk more about this at some.

Operator: Thank you for the question, Samik. Operator, next question please.

Operator: And your next question today will come from Amit Daryanani with Evercore. Please go ahead.

Amit Daryanani: Good afternoon. Thanks for taking my question. I guess, Antonio, I wanted to get sort of go back to the networking discussion. It sounds like, know, both Intelligent Edge and also Juniper are doing fairly well from a revenue basis. Guess simplistically, do you think about the growth rates for the combined business as we go forward, if you think networking market grows five, 6% a year, how do you think HPE plus Juniper can do And then, you know, really over time, how do you think about product integration on a campus side between Aruba and Mist? Do you think we need to Mist to Aruba, or and have a single product?

Or you think you can have both the products support in the marketplace simultaneously? Thank you.

Antonio Neri: Yeah. Thanks, Amit. Rami and I and the team are very pleased with the momentum both businesses have in the market. That’s a reflection that both offers are very strong. And let’s remind ourselves that’s true for campus and branch but when you go to data center switching and, obviously, the one business that’s 100% Juniper Then in the security space, we have a robust security portfolio because we need to lead with a secure network approach and that’s inclusive of Juniper firewalls, and the secure access service edge or the SSC which both company have very strong offerings. As you recall, in 2020, we acquired Silver Peak. To drive the convergence between SD WAN and security.

But as I think going forward, our goal is to build the best network in business. And that means we’re gonna grow above market. And that’s the reality. We’re gonna explain how that’s gonna be the case over the next three years. And we have an opportunity across AI and cloud and across the infrastructure itself. When I think about the Campos and Branch question, we were very clear with Rami. We’re gonna thoughtfully integrate the Juniper platform and the Aruba Central platform because you need to think about that layer Everything below that, is very straightforward.

There is no confusion because the reality is that we have a very strong robust campus switching portfolio which obviously has a lot of that has the wire piece which is Aruba silicon then Wi Fi access points. I don’t think that’s too complicated, and we’re gonna show what that looks like. And then finally, is the extension into IoT probably five gs which obviously HPE has unique offers. That integration of the cloud and AI ops is where that experience will evolve. But we are not going to leave any customer behind. We’re going to sell both products and you’re gonna see an integration that suddenly happen over time through the AI ops layer.

And that’s the opportunity we have here. And the good news customers want both today and we can serve every market vertical and we can also deploy any type of solution whether it’s cloud based virtual private cloud, meaning sovereign and then on prem. And that’s the opportunity we have ahead of us. And then last but not least on the data center switching side, in addition to networking for AI, we are also working integration in the private cloud, portfolio with the software defined networking components that Juniper brings. Through Fidelma’s hybrid cloud ops suite And then obviously in our storage and server business which require the switch along the way.

Operator: Very good. Thank you, Amit. Operator, next question please.

Operator: Your next question today will come from David Vaught with UBS. Please go ahead.

David Vaught: Great. Thanks guys for taking the question. So Antonio, I want to go back to the networking piece and maybe Marie can chime in on this. I think you talked about the traction that Juniper is getting with some these AI model builders and sort of that part of the network. How much of sort of the opportunity to grow is predicated on traction with those customers? And then maybe along those lines, I think Marie mentioned some product related costs. Was that mix in the networking section? To more, you know, AI centric offerings?

And how do we think about that mix shift going forward from a more enterprise campus centric model to one more hopefully, one more towards an AI model building sort of cloud model going forward? Thank you. Yeah. Thank you.

Antonio Neri: No, the AI opportunity is across all the three segments I mentioned earlier. Right, in networking, which is the service provider where we have the vision to lead with networking there because there is unique value proposition performance, cost, simplicity, lifecycle management. And AI driven capabilities. When you go to the sovereign space, same thesis. That’s even more important because you now drive rack scale integration with the rest of the server business. And then at the enterprise layer, course, we want to integrate the Juniper switch in everything we do in cloud and AI going forward by giving customers choice and flexibility. So the opportunity for networking in AI is across all three segments.

Now in the service provider space, obviously once you lay down the simple analogy I made, you laid the pipes inside the data center and you connect the data center to the rest of the interconnect process then obviously you become the standard And then from that, that solution, hang these amount of GPUs that comes with those deployments.

And so this is why the opportunity is significant and the benefit for Juniper which already had good traction is access to a very a larger number of customers that were not able to access before because we are strategic in many deals Remember, we cover 172 countries and also our heritage in countries and geographies where our mix is shifted to those example Europe and Asia versus North America. There is an opportunity here as we integrate the Salesforce but also integrate the architecture.

Marie Myers: And then, David, just to add on to your question around the product cost that was actually in the Intelligent Edge business that I mentioned that was on a sequential basis. And it was related to a platform transition. Thank you.

Operator: Thank you, David. Operator, next question please.

Operator: Your next question today will come from Eric Woodring with Morgan Stanley. Please go ahead.

Eric Woodring: Hey, guys. Thanks so much for taking my question. Antonio, was wondering if you could maybe just take a step back and share some details on you’re hearing from customers, what you’re seeing in the pipeline as it relates to kind of end market growth for your three core end markets, networking, server, and end And really, what I’m trying to understand is, there are some maybe concerns that the markets could be rolling over. There’s a lot of age infrastructure that can be refreshed. What are you hearing from your customers about prioritizing those types of upgrades?

And from the HPE perspective, you know, if we put network into the side because you’ve talked ad nauseam there, just where do you see the biggest opportunity to take share with the core HPE portfolio in those respective end markets? Thanks so much.

Antonio Neri: Well, you, Eric, and welcome. I know you are starting the coverage of our company just few weeks ago. So we appreciate you spending time with us. My view is that the market is robust We saw that throughout the Q3 order linearity was very consistent. There was nothing unnatural despite sometimes the true tariffs, no tariffs, but Marie commented on that the net impact of that is very minimal for us. At this point in time. And I will say on the server side, let’s start with that. On the traditional server side. There is a refresh going on We saw double digits year over year revenue growth in traditional servers.

Customers are refreshing edge infrastructure with more richly configured servers because they can reduce space and cooling on an aggregate basis. So with introduction on Gen 12 servers, we demonstrate that we can replace seven gen 11 servers and 14 Gen10 servers. And at the same time reducing the power consumption by 65% in addition to increase the security in their because now we support our own internal aisle of seven, which is basically the quantum proof encryption. And so that’s an example of what we see. And that was consistent across all three geos.

Now, there we participate with discipline, and ultimately, it’s a question of volume and margins we demonstrated in Q3 that we can do after the challenge we had in Q1. That’s one example and we believe over time, we believe we are poised to potentially gain share in enterprise. In the hybrid cloud space, huge opportunity through the transition of the virtualization layer. One of the areas people are focused on AI obviously for good reasons, but I can tell you one of the most exciting areas we see is the ability for customers to update or change their virtualization layer because of the rising costs they have seen in the last call it two years.

We have an enormous amount of proof of concepts going on with our Morpheus and VM Essentials. What we really focus there is the conversion from POCs to revenue This quarter we had double digit growth in our entire software portfolio. Which includes ops ramp provides deep observability inside the data center and outside the data center in a multi and multi vendor so that they can use our AI co pilot capabilities that we built inside GreenLake reduce OpEx. So they can reduce OpEx on licenses and can reduce OpEx on running that infrastructure in the way it is observed. So that’s another example of growth that we expect. Private cloud is another areas we expect to grow.

And then storage on our transition to our IP portfolio. This was the third consecutive quarter of triple digits year over year revenue growth in AlletraMP Why that’s happening is because we architected a new platform. That’s totally disaggregated. That provides the most effective block solution for those structural databases while at the same time leverage the same infrastructure and grow that in a scale out architecture into the unstructured data for fast object which is necessary for training or fine tuning rack models especially if you do that on prem and then eventually to do file ingestion. That value proposition is resonating with customers That’s why we gained one point of share in the last report from IDC.

And then in networking, you’re right, we spoke of Notion but I do believe there is a transition anyway in the wire switching. Remember we grew triple digits in Wi Fi seven and when you go to WiFi seven also you need more power at the port level to support those access points. And I believe that’s going to be also another opportunity for us.

Operator: Very good. Thank you, Eric. Welcome. Last question please, operator.

Operator: And your final question today will come from Simon Leopold with Raymond James. Please go ahead.

Simon Leopold: Thanks for taking the question. I wanted to see if you could revisit the topic of Juniper’s position in AI. On the call you hosted in July, Rami had indicated that Juniper had landed some deals in the back end. I’m wondering if you could unpack and give us a little bit more detail on that particular part of the business. Thank you.

Antonio Neri: Yeah. Simon, I think Ron and team have done a great job in lending several customers to become the reference in the networking space above the deployment of NVIDIA Spectrum So obviously inside the rack you have Spectrum SpectrumX all the way down to the NBLINK. With the NVIDIA Blackwell GPUs and the Grace Hopper GPUs. But above that, we have become the standard in some of these very large deployments And we are in a number of conversations with Neo Clouds and other service providers where we want to become the standard in that space. That’s why we believe is a big opportunity in leading with networking for AI in that particular couple of segments.

And so that’s our strategy going forward. And then obviously that will make our servers more attractive because also we will have more integration of the rack scale the sovereign space. And Juniper when the transaction closed had a very nice backlog that they built prior to the acquisition and we expect to unwind up back and new orders as we go forward. And so Rami will be able to explain more about this as we go to the security analyst meeting from a pure architecture perspective and how we are approaching that from a sales perspective. So thank you. Yeah, sorry we’re running out of time but we appreciate your time today.

I hope you take away that we are executing with precision. That we have a clear vision for the company, I am and the management team is very excited about the next chapter of HPE after the closing of the Jouvert transaction. You see the results of Juniper in our numbers with just one month and we’re excited to share more about this when we get at the security analyst meeting in New York, which I know everybody’s wanting to get a framework for twenty six, twenty seven, twenty eight. But beyond that, I’m excited to share our vision and the strategy for the company with this amazing portfolio we built. Thank you very much for your time.

Operator: Conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.

Image source: The Motley Fool.

Date

Tuesday, Sept. 2, 2025, at 8 a.m. ET

Call participants

• Chief Executive Officer — William Li
• Chief Financial Officer — Stanley Qu
• Investor Relations — Rui Chen

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Takeaways

• Vehicle deliveries— 72,056 smart EVs delivered in Q2 2025, representing 25.6% year-over-year growth.
• Revenue— Total revenue of RMB19 billion for Q2 2025, up 57.9% quarter over quarter.
• Vehicle sales— RMB16.1 billion in vehicle sales for Q2 2025, reflecting 2.9% year-over-year growth and a 62.3% quarter-over-quarter increase in vehicle sales revenue.
• Other sales— RMB2.9 billion for Q2 2025, a year-over-year growth of 62.6% and a 37.1% increase quarter over quarter.
• Vehicle gross margin— 10.3% vehicle margin.
• Overall gross margin— 10% overall gross margin.
• Non-GAAP operating loss— Adjusted loss from operations was RMB4 billion (non-GAAP), down 14% year over year and 32.1% quarter over quarter (adjusted, non-GAAP).
• Non-GAAP net loss— Adjusted net loss was RMB4.1 billion (non-GAAP), decreasing 9% year over year and 34.3% quarter over quarter (adjusted net loss, non-GAAP).
• Q3 delivery guidance— Management expects 87,000 to 91,000 deliveries, representing 40.7%-47.1% year-over-year growth.
• Q4 delivery target— The company targets average monthly deliveries of 50,000 units, for a quarterly target of 150,000 units across three brands.
• Q4 group vehicle gross margin target— Management expects 16%-17% group vehicle margin, with L90 and ES8 targeted at 20% each.
• R&D expenses— Non-GAAP R&D expense guided at RMB2 billion per quarter for Q3 and Q4.
• SG&A expenses— Non-GAAP SG&A guided to be within 10% of sales revenue in Q4.
• Non-GAAP breakeven guidance— The company expects group non-GAAP operating breakeven in Q4.
• Third-generation platform highlights— CEO Li cited high-voltage architecture, lightweight battery packs, and in-house smart driving chip as major contributors to cost and product efficiency.
• Production ramp— L90 supply chain capacity targeted at 15,000 units per month in October.
• No new model launches for remainder of 2025— Management said no additional model launches or deliveries are planned for the rest of the year, citing full production allocation to existing models.
• Firefly brand— Over 10,000 Firefly deliveries within three months, now the top-selling model in the high-end small bath market.
• Charging & swap network— 3,542 power swap stations and over 27,000 charging points deployed worldwide as of July 2025.

Summary

NIO(NIO 0.70%) reported a 57.9% sequential increase in total revenue, driven primarily by expanding vehicle deliveries and substantial contributions from other sales, including used vehicles, R&D services, and after-sales support. Management reaffirmed momentum with a delivery outlook of up to 91,000 units for Q3 and set aggressive Q4 production targets for the L90 and ES8 models. Cost optimization is being achieved through a revamped organizational structure and deployment of self-developed technology platforms, which underpin sequential improvement in operating and net losses on a non-GAAP basis. The company highlighted non-GAAP targets for Q4 vehicle margin (16%-17%) and brand-level margins (20% for key new models), together with breakeven guidance on a non-GAAP basis, supported by disciplined R&D and SG&A spending. Management outlined no further model launches in 2025, reallocating resources to maximize production output and market responsiveness.

• CEO Li emphasized, “Vehicle gross margin in Q4 is expected to be around 16% to 17% for the entire group to achieve breakeven,” confirming the margin focus embedded in model launches and supply chain management.
• CEO Li stated there is “no major impact” on margins due to exchange of prior offers for upgraded battery standardization.
• Management attributed margin and cost improvements to technology, including proprietary smart driving chips and a 900-volt architecture, that reduce BOM cost and enable aggressive pricing without eroding profitability.
• The self-developed chip NX9031 is positioned to offer chip performance “on par with four flagship chips in the industry,” according to CEO Li, yielding cost savings without disclosing per-unit figures.
• Supply and production capacity were cited as current constraints on further launches, with combined production capacity of all three brands in Q4 expected to be as high as 56,000 units a month to support demand.

Industry glossary

• BOM (Bill of Materials) cost: Total spend on raw materials and components directly attributable to manufacturing a finished product.
• Power swap: NIO’s proprietary technology/platform that enables drivers to exchange depleted EV batteries for fully charged ones at dedicated stations.
• High-voltage (900V) architecture: Vehicle electrical infrastructure designed to improve charging speed, energy efficiency, and support advanced vehicle functionality.
• NX9031: In-house smart driving chip developed and deployed by NIO for advanced autonomous and smart vehicle features.

Full Conference Call Transcript

William Li: Hello, everyone. Thank you for joining NIO’s 2025 Q2 earnings call. In Q2, the company delivered 72,056 smart EVs, up 25.6% year over year. The new brand refreshed four products to model year 2025, further enhancing its product competitiveness. With improved organizational efficiency and growing brand awareness, the Envoy brand is gaining momentum in the mainstream family market. And thanks to the clear product positioning and deep market insight into the high-end small car market, the Firefly has been well received by the target audience. The company delivered 21,017 vehicles in July and 31,305 in August.

The launch of the Envoy L90 in late July and the pre-launch of the new all-new ES8 in late August dropped strong market demand, boosted user confidence, and lifted overall sales. We expect total deliveries in Q3 to range from 87,000 to 91,000, representing a new high of 40.7% to 47.1% growth year over year. On the financial side, vehicle gross margin remained stable while other sales saw significant margin improvements. Moreover, the implementation of the cell business unit mechanism has begun to yield tangible cost reductions and efficiency gains. In Q2, the non-GAAP operating loss narrowed more than 30% quarter over quarter.

Since the start of deliveries in Q2, NIO ET9 has performed strongly in the executive flagship sedan market. Building on continuous R&D investments, NIO was the first to bring the in-house developed smart driving chip and full domain vehicle operating system on production models such as ET9 as well as the 2025 ET5, ET5T, ES6, and EC6. In late June, we rolled out the new world model across all new vehicles equipped with our proprietary smart driving chip.

Within just five months, this in-house developed chip enabled the mass release of functions and the seamless migration of core models and applications across five vehicle models, representing China’s and also the industry’s first full function delivery on a self-developed flagship smart driving chip. On August 21, NIO hosted the product and the technology launch of its core strategic model, the all-new ES8. As an all-around tech flagship SUV designed for the success of business, family, and individuals, the third-generation ES8 is an epitome of NIO’s tech innovation.

The all-new ES8 features original and distinctive design language, class-leading capping and storage space, premium features and comfort experience, flagship safety as well as smart driving and cabin experience ahead of its time. It is the most competitive model in the premium large zero SUV segment, receiving significant attention and recognition from both media and users. Pre-orders have started with test drives starting in mid-September followed by the official launch at NIO Day in late September and deliveries afterward.

On July 31, the Ambo L90, a game-changing product among large three-row family SUVs, was launched with ingenious space and comfort design, all-around smart safety, competitive pricing, and comprehensive charging and swapping services, the Almighty redefines the large zero SUV experience, making it a good fit for large families. The Envoy L90’s sales performance exceeds our expectations. In its first full delivery month, its deliveries reached a history high of 10,575. We are working closely with our supply chain partners for the ramp-up production capacity and keep pace with the strong market demand. L90’s strong market performance has also boosted Ango’s brand awareness and the demand for the L60.

In August, the L60’s order intake also hit a new high this year. As for Firefly, since deliveries begun over 10,000 Firefly has been delivered within just three months. It’s already the best-selling model in the high-end small bath market. Its novel design, flagship-level safety, and agile driving dynamics have been well received. Notably, in recent CIA SI test Firefly together with the ARMOR L60 achieved the highest safety rating ever. We are pleased to see the growing brand awareness is driving growing demand for Firefly.

In terms of product quality in June, MiO ET5 and ET5T ranked segment first in JD Power’s NEV IQF study, while the EC6 and ES6 ranked top two in the premium fab segment in J.D. Power’s NEV appeal study. With outstanding product quality, NIO has been the segment leader in J.D. Power’s quality study for seven consecutive years in 2019. As of now, the company operates 176 NIO Houses and four sixteen NIO Spaces as well as four fourteen Amo stores. On the service side, the company has three eighty-eight service centers and 68 delivery centers. Our sales and service network now operates efficiently and cohesively across all three brands earning recognition from our users.

Regarding charging and swapping, the company has 3,542 power swap stations worldwide, including over 1,000 stations on highways in China and has provided over 84,000,000 swaps to users. By July, the battery swap network had thoroughly covered the highways between major cities in China, connecting five fifty cities with three-minute swaps and eliminating users’ fringe anxieties on long trips. In August, we completed the power swap route along China’s iconic G318 Sichuan Hizhang Highway. NIO and Amo users now can drive their cars and swap all the way to the base camp of Mount Kumolama. Besides, the company has built over 27,000 superchargers and destination chargers. So far, NIO is the car company with the most chargers in China.

In Q2, NIO has entered a new cycle where its continuous investment in technology innovation, infrastructure, and the multi-brand strategy in the past decade begun to translate into market competitiveness. The strong sales momentum of the new All New ES8 and ARMOR L90 proves that our decade-long commitment to the fab roadmap with chargeable, swappable, and upgradable technologies can create user value beyond expectations, increasingly recognized and embraced by a growing base of users. We believe the all-new ES8 and L90 will drive the transition of the large rear wheel SUV market towards full electrification and boost the sales growth across other models.

At the same time with NIO’s continued efforts in the charging and swapping infrastructure, its power swap network now covers major highways and expands into more counties in China. As the network effect of power swap is becoming more evident, over time more users will experience and understand the unique benefits of the NIO Power Swap. Built on the company’s 12 full stack technological capabilities and the nationwide charging and swapping network, the three brands are reaching a broader user base. Starting in Q3, the multi-brand strategy will drive our sales growth and capture greater market shares across the various segments, helping to advance our mission of shaping a sustainable and brighter future.

Since the beginning of this year, the company has focused on systematically enhancing operational efficiency and execution, leading to significant improvement in both R and D as well as sales and service. With rising sales, improving gross margin and the more efficient cost of control, we expect to see a substantial improvement in the company’s financial performance paving the way for the next phase of rapid growth. Thank you for your support. With that, I will now turn the call over to Stanley for Q2’s financial details. Over to you Stanley.

Stanley Qu: Thank you, William. Let’s now review our key financial results for the 2025. Our total revenues reached RMB19 billion, increased 9% year over year and 57.9% quarter over quarter. Vehicle sales were RMB16.1 billion, up 2.9% year over year and 62.3% quarter over quarter. The year-over-year growth was mainly due to higher deliveries, partially offset by a lower average selling price from product mix changes. The quarter-over-quarter increase was mainly from higher deliveries. Other sales were RMB2.9 billion, grew by 62.6% year over year and 37.1% quarter over quarter.

The annual growth was driven by increased sales of used cars, technical R and D services, sales of parts and after-sales of vehicle services at Power Solutions, while the quarter-over-quarter increase was mainly due to the increase in revenues from used cars, technical R and D services, parts accessories and after sales vehicle services. Looking at margins, vehicle margin was 10.3% compared with 12.2% in Q2 last year and 10.2% last quarter. The year-over-year decline was mainly due to changes in product mix, partially offset by lower material cost per unit, while quarter-over-quarter vehicle margin remained stable. Overall gross margin was 10% versus 9.7% in Q2 last year and 7.6% last quarter.

The year-over-year gross margin stayed stable and the quarter-over-quarter increase was mainly attributable to positive mix effect driven by the increase in revenue from used cars and technical R and D services. Turning to OpEx. R and D expenses were RMB3 billion, decreased 6.6% year over year and 5.5% quarter over quarter. The decreases year over year and quarter over quarter was mainly driven by lower design and development costs from different development stages, with the year-over-year also reflecting reduced depreciation and amortization expenses. SG and A expenses were RMB4 billion, up 5.5% year over year and down 9.9% quarter over quarter.

The year-over-year increase was mainly driven by higher personnel costs, rental and related expenses associated with the expansion of sales and service network, partially offset by decreased sales and marketing activities. The quarter over quarter decrease was mainly due to the decrease in personnel costs and marketing and promotional expenses, primarily driven by the company’s comprehensive organizational optimization efforts in marketing and other supporting functions. Loss from operations was RMB4.9 billion, down 5.8% year over year and 23.5% quarter over quarter. Excluding share based compensation expenses and organizational optimization charges, adjusted loss from operation was RMB4 billion, representing a decrease of 14% year over year and 32.1% quarter over quarter.

Net loss was RMB5 billion, showing a decrease of 1% year over year and a decrease of 22% quarter over quarter. Excluding share based compensation expenses and organizational optimization charges, adjusted net loss was RMB4.1 billion, representing a decrease of 9% year over year and 34.3% quarter over quarter. That wraps up our prepared remarks. For more information and the details of our unaudited second quarter 2025 financial results, please refer to our earnings press release. Now I will turn the call over to the operator to start our Q and A session.

Operator: Your first question comes from Geoff Chung from Citi. Please go ahead.

Geoff Chung: Hi, this is Geoff from Citi. Thank you, Li Bin Zhong and Stanley Zhong and congratulate with the good result. My first question is about ES8 and L90’s capacity ramp up pace and the delivery target for the rest of the year. And due to the strong order backlog, can we expect December single month run rate for the group to hit 55,000 unit or above? This is my first question.

William Li: Thank you for the question. It’s true that with the launch of the Envoy L90 and also the new Audio ES8, we actually see a stronger market demand higher than what we’ve expected before the launch. In that case, we’ve been working closely with our supply chain partners to improve and enhance the production capacity throughout the value chain and also the supply chain. Our target is that in October the full supply chain capacity for the Envoy L90 can achieve and reach 15,000 units a month. And for the ES8 as the ramp up of production takes slightly longer, we hope that the full supply chain capacity can achieve 150,000 units in December.

With that by looking at both the demand and the supply availabilities and capacity, our Q4 target is to achieve an average of 50,000 units deliveries per month for all three brands, which means that in Q4 our quarterly delivery target combining all three brands is 150,000 units.

Geoff Chung: Thank you, Li Bin Zhong. So my second question is about the gross profit margin and whether fourth quarter can breakeven at the bottom line level. So if we look at the second quarter, our revenue up 58%, but our gross profit up more than 100% Q on Q. So could you give us more color on the second half vehicle GP margin trend and the non vehicle GP margin trend? And also to be specific, how do you see the L90 and the ES8 GP margin independently? Thank you very much.

William Li: Thank you for the question. I would like to walk you through our Q2 product margin. In terms of the vehicle margin in the second quarter of this year, it was 10.3%. As in the second quarter, we have conducted the model year upgrades on the ET5, ET5T, EC6 and ES6 as the product upgrades happened in the mid and late May. In that case among the 72,000 units we’ve delivered in Q2 only around 20% was contributed by the model year ’25 products. In that case the actual margin improvement contributed by this four models is not that significant in comparison to Q1.

And then in the third quarter as we have the full quarter deliveries for the model year 2025 products as well as the start of deliveries of the L90, which will further help improve the vehicle gross margin. And then in Q4 as William mentioned starting late September, we are going to start the deliveries of the ES8. We expect the vehicle margin to further grow. So Q4 also represents the first full quarter for the deliveries of both L90 and ES8. With that, we expect the Q4 vehicle gross margin to be around 16% to 17% for the entire group to be able to achieve breakeven.

As based on the decade long battery bus tech innovation, the in house developed of core parts and components as well as the continuous efforts in the cost of control and the savings on the supply side as well as the product cost structure, We achieved not only competitive product performance for the L90 and beyond ES8, but also a very competitive cost structure and the pricing point. With that in Q4 our gross margin target for the L90 and ES8 is 20%. In terms of the gross margin of other sales, it’s 8.2 in Q2 and it’s mainly contributed by two factors.

The first is regarding the revenues contributed by our existing users, including via our aftermarket services, our auto financing business as well as the narrowed loss on the power services. And the second factor is regarding the margin contributed by our technological service provided to our partners. With this two combined, we’ve achieved a good and positive gross margin on other sales in Q2. And in terms of the revenues or margin contributed by the technological services we provide to the partners as it is highly dependent on the product and the project stage, the actual revenues contributed may not be consistent from quarter to quarter.

In that case excluding that part, our expectation for the gross margin on other sales is to be breakeven or slightly with a slight loss quarter over quarter.

Geoff Chung: Thank you for the new guidance. Looking forward to the fourth quarter. Thank you.

Operator: Thank you. Your next question comes from Bin Wang from Deutsche Bank. Please go ahead.

Bin Wang: Thank you. I just want to ask for more detail about number four quarter breakeven. Number one is that what’s your R and D expense for number three and number four quarter? I think you actually guide close to billion in the number four quarter. Do you still maintain the same guidance for the number four quarter? And secondly, it’s the same for SG and A. Lastly, what’s the breakeven means? Do you breakeven in the OP level or net profit level? Is GAAP or non GAAP? Thank you very much for my question.

William Li: Thank you for the question. Regarding the breakeven target, our quarterly breakeven target is based on the non GAAP basis. And regarding the R and D and SG and A guidance, starting Q2 this year, we have conducted a series of measures combining our CPU mechanism to control our R and D expenses. Our principle is that without compromising on the major and the core R and D activities and also product planning, we will keep improving the R and D efficiency, which means that without compromising or affecting our major product planning and R and D, we will push for higher efficiencies in the R and D activities.

With that our target for the Q3 and the Q4 R and D expenses on the non-GAAP basis will be RMB2 billion per quarter. And in terms of the SG and A expenses also based on our CPU mechanism we’ve conducted measures to improve the overall SG and A efficiency. In the second quarter, our sales volume is at the magnitude of around 70,000 units. So the SG and A ratio to the sales revenue still accounts for a relatively high percentage. But as in Q3 and Q4, we grow our sales volume and also sales revenue, we expect the percentage of SG and A in the sales revenues to actually coming down to a more reasonable range.

But as in Q3, we’re planning several new product launches, there will also be corresponding marketing and go to market expenses. In that case, in Q3, we are still not able to achieve a breakeven on the SG and A expenses. But in Q4 the non GAAP target for the SG and A expenses will be within 10% of the sales revenue.

Bin Wang: Thank you, Womin.

Operator: Thank you. Your next question comes from Tim Hsiao from Morgan Stanley. Please go ahead.

Tim Hsiao: Hi. This is Tim from Morgan Stanley. Thanks for taking my question. So I have two questions. The first one is about the new model pipeline. Given the robust demand of L90 and ESD that occupied our capacity, well, the company adjust the launch schedule for the upcoming models. And we noticed that the NIO days, has notably moved forward to late September. Can management also share more insight into the updated model pipeline in the following quarters? That’s my first question. Thank you.

William Li: Thank you for the question. It’s true that at the moment we actually prioritize the production of the L90 and also the All new ES8 from the production capacity perspective. For the ARMOR brand, we even have to really give way to the L90 productions and compromising on the production of L60. So that it will find that our L60 users are also waiting up to pick up their cars. So right now we actually have four models with backlog order backlogs accumulated and the users will need to wait for the new car pickup including L90, Onu ES8, L60 and also Firefly.

And regarding the production capacity for the ARMOR product starting October, we expect the capacity to come back to a normal range, mainly supported and fueled by the production capacity of the battery. As in the past several months, we’ve been working closely with our battery partners to ramp up the production capacity. With that in Q4 for the ARMOR brand, we expect the full supply chain production capacity to be around 25,000 units a month. And regarding the new brand for the launch of all new ES8, we also have challenges regarding the supply of the brand new 102 kilowatt hour battery.

As the demand of the ES8 is actually stronger than we expected, then we at the beginning we underestimated the demand for the ES8 and also the volume assumption for the battery packs. We’ve been working closely also with the battery suppliers and partners to secure the supply of this new battery pack. With that in Q4, we expect the full supply chain capacity for the new brand can also achieve a 25,000 units monthly capacity. And regarding FarFly, we are also steadily increased its production and supply capacity. And in Q4, we expect the production capacity to ramp up to up to 6,000 units a month at its peak.

So it means that in Q4, the combined production capacity of all three brands will be as high as 56,000 units a month to be able to support our demand. As we have already dedicated our full capacity to the production of the existing models in the market, So for this year, we will not have any new models launched or delivered to the market. Previously, we’ve mentioned that we plan to also launch the L80 of the Ambu brand. But as now we have run out of all the capacities available, we actually have to decide to delay the deliveries of this new model.

But in terms of the launch or the go to market cadence for the L80, that’s to be decided. In addition to the onboard L80, next year in the coming quarters, we also have another two new models coming under the new brand to also two large SUVs. One is the ES9 as many of the users and the public already know about it and also ES7, a large five seater SUV model. As for the New Day this year, as it is happening in September, the protagonist of this event will be definitely the all new ES8.

Tim Hsiao: Thank you, Lian. My second question is about the pricing strategy and also just a quick follow-up on the margin side. Because we noticed that both the L90 and the new ES8 have launched with aggressive pricing strategies. So I just want to know that will this pricing strategy be extended to all the upcoming models under both brands? And if that’s the case, how should we think about NIO’s gross profit margin trajectory into next year? What would be a more sustainable and ideal equal margin level once all the new models are upgraded next year? That’s my second question. Thank you.

William Li: Thank you for the question. For the entire company as we’ve also previously mentioned for the long term our group level product margin is actually 20%. That’s our target. More specifically on the gross margin by brand for the new brand our target is to achieve 20% vehicle gross margin and even target a higher margin of 25%. And for Anvil, no lower than 15% for the long term and for Firefly around 10%.

For the ES8 and the L90 newly launched this year as well as the new models coming up next year, we also have this we’ll also contribute to this target as at the product definition and design stage we have already prepared for an aggressive pricing strategy and our cost structure can also support such strategy to be able to achieve more competitive pricing of our products without compromising on the product competitiveness itself. This is actually driven and enabled by our decade-long tech innovation, technology accumulation, in house developed parts and systems and also stringent cost control.

Operator: Your question comes from Jing Cheng from CICC. Please go ahead.

Jing Cheng: Thank you for taking my questions. My first question is still about our L90 and also ES8. So we have already seen that these two new models have already demonstrated our enhanced product capability and also very competitive pricing still with a very solid gross profit margin. So besides previously Stanley has already told us of the technology and also the platform upgrades. Could you share more about the underlying successful experience about these two new models such as our changes on maybe supply chain, maybe the dealers networks? This is my first question.

William Li: Regarding the overall product competitiveness on the third generation, it is actually getting stronger and better. And this also allows for more competitive product competitiveness as well as the cost structure. And as we’ve mentioned, this is enabled by our continuous tech innovation. Let’s say the 900 volt high voltage architecture, this platform actually allows for more integrated and a lightweight design that’s not only in the powertrain system as well as the high voltage architecture throughout the vehicle to be able to achieve high performance and the lightweight design. Such lightweight design also allows for improved cost structure and also experience competitiveness.

For example, on the ES8 and also L90 we’ve achieved a huge frunk and also trunk space, such huge storage space is also enabled by the high integration level of our architecture and systems. And another example is regarding the smart technologies, the digital architecture. On the third generation, we adopted the innovative digital architecture with the central computing cluster plus the zonal controllers. This can help achieve a better cost as well as the mass performance and the management. Let me take e fuels as an example. Previously on other older models, there are physical fuse box, which is as heavy as 10 kilos per car and it can take up eight liters of space.

But with eFuse, we are able to integrate them into the master board that can actually manage the power supplies throughout the vehicle at a very detailed and precise level, but still contributing to the mass reduction and cost improvement. So this improvement in both cost structure as well as user experiences are enabled by the tech innovation. Another example is regarding our proprietary smart driving chip. Of course, we’ve made the major upfront investment in the chip development, but the performance of our in house developed smart driving chip NX9031 can achieve the performance that is on par with four flagship chips in the industry.

So R&D-wise, we made investment upfront yet BOM cost wise this smart driving chip can also achieve savings. And another thing is regarding the technology roadmap, mainly the chargeable, swappable and upgradeable technologies for our products. With this, we are able to select the most suitable and optimal battery packs, including its capacity and the size for our users. For example, for some of our peers and competitors, they actually needed to strike a balance between the battery cost and also the battery range. Then they choose the LFP as the chemical system and they make a battery pack of around 90 or 100 kilowatt-hour capacity.

But with that the battery pack is actually very big and heavy. If you look at our battery packs for the Envoy L90, put a 85 kilowatt hour battery inside and for the ES8, a 102-kilowatt-hour battery inside. They can achieve the driving range and performance on par with those peers. But in terms of the mass, the 80 fiveone is only around 400 kilos and the 102 kilowatt hour battery pack is only around 500 kilos. So it is actually around 200 kilos lighter than many of our peers’ solutions. This is also another mass and cost optimizations enabled by our chargeable swappable and upgradable tech solutions.

And in terms of a competitive product in both cost as well as the user experience, I think three things will define the competitiveness of a product. The first is regarding the technology roadmap, the second is regarding the product planning and the third is regarding the product definition itself. And our past practice and experiences prove that our technology roadmap, including our multi-brand strategy, our chargeable, swappable, upgradable solutions, our full stack tech capabilities develop in house as well as our product planning are in general in the right direction. Yet when it comes to the product definition, we did have some lessons learned from the previous generations and platforms.

With that on the third generation with our all new ES8 and L90, we not only draw the best practices from the industry and peers, but also make corrections from within to be able to achieve a better product performance and the success with ES8 and L90 as it is actually drawing the effort of our competitive technology roadmap, reasonable product planning as well as more precise product definition and the market insights that can fit for the users’ needs in the Chinese market. And in terms of the supply chain, this is also playing a very important role in achieving the long term competitiveness of our product cost structure by establishing a win cooperation with our partners.

And in the past one or two years, we’ve also made adjustments to our supply chain and the partner strategy. In general, we look for the partners who believe in the roadmap technology decisions of the company as well as believe in the long term potentials of the company. And we work closely with these partners to jointly define the cost of targets and all types of targets. So for the existing products and also the coming platforms, we will also adopt this principle in our nomination and the sourcing strategy to be able to work with our partners closely.

Stanley Qu: Thank you, Tianjin.

Operator: Thank you. Your next question comes from Ming-Hsun Lee from Bank of America. Please go ahead.

Ming-Hsun Lee: Thank you, Wei Lin, and congrats for the good results. I also have two questions. So my first question is, could you confirm your new model pipeline for 2026? Can I confirm there will be at least five new car, which include ES6, ES7, ES9, L80 and also the second model under the Firefly brand?

William Li: Regarding our product strategy for 2026, as we’ve mentioned, we will focus on three large SUV models for the Envoy and also the new brand. Regarding the ET5, ET5T, ES6 and ES6, as this year we have just upgraded these four models to the model year 2025. For next year, we don’t have major plans to upgrade or facelift these four models. As on the model year 2025, we’ve already upgraded interior, exterior, the smart system is also upgraded to the latest C. S platform with both upgrade in the smart driving chip as well as the operating system. And recently we have also announced to make 100 kilowatt hour battery as a standard configuration on these four models.

We believe that with all these changes the competitiveness of these four models will continue to be strong in the coming quarters. Of course, it doesn’t mean that we will make zero changes to this model. We will still roll out some product calendars as this year earlier this year we have released the Champion Edition for the five and the six series and in the coming year we will also have such special versions and additions for these models. And also for the Firefly brand, we don’t have a plan for the second model next year.

Ming-Hsun Lee: Thank you, William. And my second question is regarding to the operating expense control. So in 2026, what level do we expect for your R and D expense per quarter? Do you think you can maintain around RMB2 billion non GAAP R and D expense per quarter? And also, could you guide your latest CapEx plan for 2025 and 2026? Thank you.

William Li: Regarding the R and D expenses, starting this year we’ve made major efforts based on the CPU mechanism improving our R and D efficiencies and the overall ROI of our R and D activities and investment. For the next year, our quarterly R and D expense non GAAP will be around RMB2 billion to RMB2.5 billion per quarter. That is a reasonable range for us to also maintain our long term competitiveness from the technology perspective. The major liabilities comes from the new model development as we believe that the investment for the foundational level R and D activities and technologies are mostly finished.

And also regarding the CapEx as we haven’t started the operational target discussion and the setting for the next year, I may not have a very clear or precise outlook regarding the CapEx for 2026, but I can share with you two principles we have. The first is regarding the power swap network. In general, we still hope to leverage as much as possible the Huffman’s resources and for the Power Swap network construction. And regarding the R and D CapEx and it’s well, regarding the CapEx on the product, it’s mainly dependent on the overall R and D cadence and also go to market strategies of the new models.

Overall speaking for next year, we hope the CapEx can be similar to the level of this year or if possible achieve even better results next year. But as I’ve emphasized, it’s highly dependent on the overall launch cadence and also R and D cadence of the new models.

Operator: Thank you. Your next question comes from Paul Gong from UBS. Please go ahead.

Paul Gong: Thanks William for taking my question. My first question is regarding the impact of the 100 kilowatt hours of the battery that you are going to adopt across new brands. Can you share with us the financial impacts of this strategy? Definitely, we can see that the competitiveness of the vehicles are getting enhanced because of this 100 kilowatt hours of the battery. But what would be the incremental costs on your front? Thank you. This is my first question.

William Li: Thank you for the question. When we announced the policy changes on the 100-kilowatt-hour battery pack, we’ve already introduced the potential impact or implications on the financials of the product. As when we launched the model year 2025 product, we offered a series of special offers and discounts to our users together with the products. And this time when we make the 100-kilowatt-hour battery standard configuration of the five and the six series, we actually withdraw many of these offers we provided at the launch of the product. And in exchange, we offer the 100-kilowatt-hour battery as a standard configuration.

So from the transactional perspective, there is no major change from the users perspective as well as from the vehicle margin perspective, there is also no major impact. And another impact is more on the sales and the upper funnel of our sales leads for the five and six series after announcing the change on the 100 kilowatt hour battery. We actually observed increases in the upper funnel incoming leads. Of course, this is a newly launched policy in terms of the long term implication, we will still need some time to observe, but overall impact is more positive than negative.

Paul Gong: Okay. So my second question is regarding the impact of switching to your self developed chips. Just now I think William mentioned that it is saving cost and it is also depending on the volume because of the fixed cost versus the volume. So can you give us some color that, for example, if you are delivering 20,000 per month with a new self developed chip, what would be the cost saving on the per car basis If this volume is coming to 50,000 per month, what would be the positive impacts from the cost saving angle due to the switching of the self developed chips? Just want to have the better estimate and sensitivity on that. Thank you.

William Li: Thank you for the question. Regarding the chip R and D expenses and investment as we actually recognize that in our immediate financials and the P and Ls, so it’s actual cost of savings per unit is not really closely tied in the actual volume we sell or actual number of the pieces we sell. As in terms of the production of these chips, we purchased the wafers directly from our chip manufacturing partners. So in that case, cost of saving per unit through the in house developed chip is not tied into the delivery volumes we achieve.

But in comparison to the chip solution we used on the second generation products, achieving the same level of computing performance, the cost is actually more advantageous and competitive with our own solution. And even on the third generation in comparison to the industry flagship smart driving chips, we still have a cost advantage and the competitiveness with our in house solution. But here I will not elaborate on the specific savings achieved per piece.

Paul Gong: Okay, I understood. That is very helpful. Thank you.

Operator: Thank you. Your next question comes from Yuqian Ding from HSBC. Please go ahead.

Yuqian Ding: Thank you, team. The first question would be more exploration on the pricing side. So ES8, L90 attractive pricing, good volume traction. So how does management would evaluate the potential internal cannibalization to the existing portfolio such as ES6 or L60 and the potential splash impact into next year’s new model pipeline?

William Li: As we’ve mentioned, the pricing of strategy for a product is highly dependent on the market competition, the cost structure of the product as well as the volume and the pricing sensitivity of the product in the segment. For the L90 as we’ve mentioned with its launch actually it has helped boosted the sales volume of L60. Right now even for the L60 users they will have to wait for the new cars deliveries and pickup. Actually in August, we even achieved a new high for the order intake of L60 for this year. So the overall impact from L90 on L60 is positive.

Regarding And the all new ES8, as we’ve also mentioned, we have now made the 100 kilowatt hour battery as standard configuration on the five and six series. So the attractive pricing of ES8 is helping boost the brand awareness of the new brand, which can also introduce more attention to the five and the six series. So with this logical and clear pricing system set up for the brand, we believe that the overall impact will also be positive on the new brand. Maybe at the beginning, our fellow will struggle with how to allocate their focuses at the time across different products.

But for the long term, we believe that the impact of these two models and the new models will be positive across the brands and the products. And also as we see strong demand for the Onui S8 and L90, we have also observed the successful product or great product great large three row battery electric SUV models launched not only by NIO, but also by our competitors who used to have only with products in the market. So with all these large three row SUVs coming to the market, we also observed a market trend in the first half of this year.

The growth rate of BAB segment increased by 39% year over year and for RIBS that’s only 14%. If we consider about the sales volume in July and August for the BAF and the RAV respectively, I believe that the growth rate of the BAF will be even faster than that of RAV. In that case, are observing growing competitiveness of the products in the mid and the mid large battery electric SUV segments as this is more well received and also evident to the public.

This is why we say that the golden era of the large fair role battery electric SUV is arriving as with more mature user mindset and also stronger competitiveness of the product, the market is shifting towards that direction. This will also help the long term competitiveness and the popularity of our existing SUV models including ES6 and L60.

Stanley Qu: Thank you, Richard.

Yuqian Ding: Yes, got it. Thank you. The second question is a little bit more exploration on OpEx side. You touched upon the innovation redesign and R and D commitment. So could you give us a little bit more quantification and breakdown in terms of the OpEx cuts target, if there is any? Or just breakdown the cost optimization initiatives seeing a little bit more details? Thank you.

William Li: Thank you for the question. As we’ve introduced towards the Q4 non GAAP breakeven target, our overall principle is that for the R and D expenses without compromising on the major R and D activities and also long term competitiveness, we would like to control the quarterly R and D expenses to be within RMB2 billion for this year and for SG and A ratio to the sales revenue around 10% this year. That’s our target for this year towards the quarterly breakeven.

And for the long term, as we’ve also mentioned, for the year of 2026, our R and D expenses will be around RMB2 billion to RMB2.5 billion per quarter depending on the product go to market and also development cadence. And as for the SG and A expenses, we would like to continue to achieve higher efficiency and utilization of expenses. That’s the overall principle.

Stanley Qu: Thank you, Yuxin.

William Li: Thank you.

Operator: Thank you. Your next question comes from Tina Hou from Goldman Sachs. Please go ahead.

Tina Hou: Thanks management for taking my question. Just a very quick one. So in the longer term, how should we think about the stabilized sales volume of L90 as well as ES8 on a like average monthly basis? Thank you.

William Li: Thank you for the question. As the automotive industry here in China is highly competitive and if you look at the sales trend of the smart electric vehicles, you seldom see any new model that can capture a very stable market share and very major trend or popularity in the market for a very long time. In that case, it’s also difficult for us to really share with you a clear outlook regarding what the stabilized sales volume of the ES8 and L90 will be for the long term. But definitely, we set ourselves a higher target and we will also try the best.

Starting this year for the new and ARMOR brand, we also started to build up the team capabilities by implementing a completely new sales and marketing paradigm. We hope that through this new sales and marketing paradigm, it can actually help us to maintain and capture the market share of our new models as soon as possible to prolong their impact and influence in the market and also to stabilize their winnable and satisfying sales volume in the market against the fierce competition as long as possible.

But as we have just implemented this paradigm and it will also take time for us to understand if it is truly helping us with the stabilization of these two great models ES8 and L90. But overall, we hope that this can achieve a good result that is satisfying to the market, investors and also our users.

Operator: Thank you, William.

Rui Chen: Thank you. As there are no further questions now, I’d like to turn the call back over to the company for closing remarks.

Rui Chen: Thank you again for joining us today. If you have any further questions, please feel free to contact NIO’s Investor Relations team through the contact information on the website. This concludes the conference call. You may now disconnect your lines. Thank you.

Image source: The Motley Fool.

DATE

Thursday, August 7, 2025 at 8:30 a.m. ET

CALL PARTICIPANTS

Chief Executive Officer — Daniel T. Scavilla

Chief Financial Officer — Matthew E. Garth

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RISKS

Goodwill and Intangible Asset Impairment—DENTSPLY SIRONA(XRAY -4.13%) recorded a $214 million noncash after-tax impairment charge for goodwill and other intangibles within the OIS and CTS segments in fiscal Q2 2025 (period ended June 30, 2025) (GAAP), attributed to tariffs and volume changes that diverged from initial investment assumptions.

Tariffs— CFO Garth disclosed an annualized gross tariff impact increase from $50 million to $80 million for fiscal year 2025, with $25 million expected to affect 2025 earnings as costs roll through fiscal Q3 and Q4.

U.S. Revenue Decline— U.S. segment sales fell 18% in fiscal Q2 2025; excluding Byte, the decline was 11% (non-GAAP), primarily due to weakness in connected technology solutions and orthodontic and implant offerings.

Cash Flow Decrease— Operating cash flow dropped to $48 million, compared to $208 million in the prior year quarter, mainly due to the timing of cash collections, inventory build, and the absence of a $42 million foreign tax refund received in fiscal Q2 2024.

TAKEAWAYS

Revenue— $936 million, down 4.9% as reported and 6.7% on a constant currency basis for fiscal Q2 2025, with half the decline from Byte.

Adjusted EBITDA Margin— Adjusted EBITDA margin was 21%, up 360 basis points versus the prior year, driven primarily by Byte impact and cost reductions.

Adjusted EPS— Adjusted EPS was $0.52, representing 7% year-over-year growth, attributable to margin expansion, FX, and lower share count, partially offset by higher taxes and below-the-line items (non-GAAP).

Cash and Cash Equivalents— $359 million at quarter end, with a net debt-to-EBITDA ratio of 3.1x (non-GAAP), unchanged sequentially.

Hybrid Bond Offering— Completed a $550 million raise, improving financial flexibility.

EDS Segment— Sales rose 1.1% in constant currency, led by Rest of World, offsetting lower volumes in Europe and the U.S.

OIS Segment— Sales (non-GAAP) dropped 19.4% in constant currency. Byte comprised more than half, and value implants were down low double digits.

CTS Segment— Sales fell 5.9% in constant currency; double-digit European imaging growth offset by declines in U.S. CAD/CAM and imaging (non-GAAP).

Wellspect Healthcare— Sales declined 2.5% in constant currency (non-GAAP), reflecting prior-year dealer stocking and new product launches.

SureSmile— Delivered 3.3% year-over-year global growth, with strong European and Rest of World results partially offset by softness in the U.S.

Germany— Marked a fourth consecutive quarter of growth, driven by CTS and SureSmile expansion; offset by IPS weakness.

Outlook— Full-year 2025 sales, adjusted EBITDA margin, and adjusted EPS (non-GAAP) guidance reiterated. Fiscal Q3 sales and adjusted EPS are expected to decline sequentially due to tariffs and seasonality.

DS Core Platform— Reached 50,000 unique users, with increasing device connectivity and lab orders processed monthly.

Field Investment— CEO Scavilla committed to enhancing field team support, customer focus, and proceduralization as strategic imperatives.

SUMMARY

Management confirmed a strategic shift toward customer-centric execution, emphasizing field enablement and operational streamlining to support margin enhancement despite top line pressures. The company is actively accelerating innovation and procedural offerings, with DS Core adoption highlighted as a central element of the growth strategy. Investments in sales force capabilities and prioritized capital allocation aim to strengthen competitive positioning and free up resources for sustained innovation.

CFO Garth said, “The year-over-year decline is primarily attributable to the timing of cash collections, a higher build of inventory in anticipation of ERP go-lives and tariffs, and an approximately $42 million foreign tax refund received in the prior year quarter [fiscal Q2 2024].”

CEO Scavilla confirmed active engagement with distribution partners, noting an intention to “listen and learn” before determining long-term channel strategy.

Segment-level results (non-GAAP) demonstrate relative stability in Europe and Rest of World compared to pronounced U.S. sales compression, with Germany sustaining positive momentum amid global variability.

No significant distributor inventory shifts impacted revenue year-over-year, according to CFO Garth.

Management aims to offset emerging tariff costs and macro softness through ongoing cost controls, focused investments, and procedural innovation, pending further review under new leadership.

INDUSTRY GLOSSARY

Byte: Direct-to-consumer clear aligner business, referenced in segment and revenue discussions related to orthodontics.

CTS: Connected Technology Solutions, a segment encompassing digital imaging, CAD/CAM equipment, and related dental technologies.

EDS: Essential Dental Solutions, a segment covering endodontic, restorative, and preventative dental products.

SureSmile: A DENTSPLY SIRONA clear aligner solution for orthodontic treatments; performance is reported within OIS and by region.

IPS: Implant Prosthetic Solutions, referencing dental implant and prosthetic product lines within the OIS segment.

DS Core: Company-developed digital platform integrating devices, data, and workflows for dental professionals.

VBP: Volume-Based Procurement, a purchasing model in China impacting implant sales volume and pricing.

Hybrid bond: A subordinated debt security combining debt and equity features, used to bolster liquidity and financial flexibility.

Full Conference Call Transcript

Dan Scavilla, Chief Executive Officer; and Matt Garth, Chief Financial Officer. I’d like to remind you that an earnings press release and slide presentation related to the call are available in the Investors section of our website at www.dentsplysirona.com. Before we begin, please take a moment to read the forward-looking statements in our earnings press release. During today’s call, we may make certain forward-looking statements that reflect our current views about future performance and financial results. We base these statements and certain assumptions and expectations on future events that are subject to risks and uncertainties.

Our most recently filed Form 10-K and any updated information in subsequent Form 10-Q or other SEC filings list some of the most important risk factors that could cause actual results to differ from our predictions. On today’s call, our remarks will be based on non-GAAP financial results. We believe that non-GAAP financial measures offer investors valuable additional insights into our business’ financial performance, enable the comparison of financial results between periods where certain items may vary independently of business performance and enhance transparency regarding key metrics utilized by management in operating our business. Please refer to our press release for the reconciliation between GAAP and non-GAAP results. Comparisons provided are to the prior year quarter unless otherwise noted.

A webcast replay of today’s call will be available on the Investors section of the company’s website following the call. And with that, I will now turn the call over to Dan.

Daniel T. Scavilla: Thank you, Andrea, and good morning, everyone. This is my first earnings call since taking the CEO role on August 1. So I thought it would be appropriate to open with a few statements before progressing into the Q2 business results. Then Matt will cover Q2 financials and give an update on our 2025 outlook. First, I want to thank Simon for his nearly 3 years in the role, where he built a strong team, strengthened communications with our customers and initiated multiple programs to improve DENTSPLY SIRONA’s position in the market.

Having come from our Board of Directors, I can tell you that I personally appreciate the work he’s done, and I plan to build on these programs with an eye on moving deeper, faster and strengthening our long-term position in the market. Second, I look forward to partnering with Matt as our new CFO. I believe Matt’s experience and background are exactly what we need, and we’re forming a strong partnership as we move forward together. I’ve also had the opportunity to engage with senior leadership at DENTSPLY SIRONA, and my initial assessment is that we have the core foundation to shape this company’s future.

I’m sure many of you are wondering what I plan on doing and what changes you should expect from me. While I do have several hypotheses and ideas on what to focus on, I’m currently working with the team and our customers to listen and learn so we can prioritize and focus our approach before fully developing pathways. There are a few areas that are immediately apparent that I’ll share with you now, starting on Slide 3. I’ve been focusing initially on providing stability to the organization through the CEO change, so we can focus on execution and drive results.

I’ve been active with the DS team connecting, interacting and conducting deep dives to listen, learn and align on our go-forward approach. We will continue to improve our focus on the customer and the customer experience. Every position in every department will make this a priority. We will enhance our support of the customers and our field-based employees through simplifying interactions, speed of response and increased strategic investments. The field team is and will become even more so a strength of our company, the tip of our spear.

We will focus on enhancing investments in innovation, including speed to market and adding value to our clinicians and their workflows so that they can offer the best products and services to their patients and grow their skills and practices. As market leaders, we will need to shape the future of our markets, partnering with our practitioners to migrate from product offerings into proceduralization, focusing on the complete provider patient experience, leveraging the strength of our entire company’s broad portfolio to outpace competition. DS Core platform is a critical element of the company’s strategy, and it continues to gain traction with 50,000 unique users now using the platform and more connected devices and lab orders processed each month.

We have a strong supply chain under great leadership that I believe we can enhance even further through streamlining several components to unlock value, reduce cost and free funds to invest in fueling future growth. As you’ve heard from us, we have programs underway that will continue, but we’ll also be looking at more strategic moves to better position ourselves for the future. Wrapped around our commercial enablement, innovation engine and operations muscle will be streamlined support functions that will add value through simplifying and standardizing systems, processes and structure that will allow us to move faster support customers better and unlock funds that can be redirected into sustained profitable growth.

The team has made progress here as seen in our financial results, but there’s more work to do in this area. I believe that focusing on the customer, moving with urgency, while investing in our sales team and product development capabilities will unlock value throughout our P&L. We will make decisions to support long-term sustained growth that leads to stronger financial performance, benefiting our business and our shareholders. Moving into our Q2 business results on Slide 4. Global sales were $936 million, decreasing 5% as reported or negative 7% on a constant currency basis. Excluding the Byte impact, sales declined approximately 4%. Adjusted EBITDA margin was 21%, increasing 360 basis points versus prior year Q2.

Adjusted earnings per share were $0.52, growing 7% versus prior year. Both adjusted EBITDA and EPS results are driven primarily from Byte impact and active cost reduction programs. Cash flow from operations was $48 million for the quarter. Our data and customer survey in the second quarter show global patient volumes and procedures largely unchanged from previous quarters. From a regional perspective, U.S. sales in Q2 were $293 million, down 18% in total or 11%, excluding the Byte impact. Results were driven primarily by continued softness in connected technology solutions and orthodontic and implant solutions. Given the performance, this is a priority area for us to address. We’ve already kicked off activities in my first week.

European sales were $404 million, basically flat versus Q2 prior year. Germany delivered its fourth consecutive quarter of growth, driven by CTS and SureSmile, which was up over 27%, offset by softness in IPS. Rest of World sales were $239 million, up slightly versus prior year with growth in Essential Dental Solutions and SureSmile up double digits, partially offset by softness in CTS. Before I hand the call to Matt, I want to say that I’m excited to join the DENTSPLY SIRONA team and be part of shaping the future of this organization.

I believe our potential has never been greater, but it’s up to us to harness our resources and shape the future of our markets, placing our customers at the center of all we do and making thoughtful investments to drive long-term sustained profitable growth. Thank you. I will now turn the call over to Matt.

Matthew E. Garth: Thanks, Dan. Hello, everyone, and thank you for joining us. As Dan noted, it’s early days for us, but we are working closely together and share the belief that DENTSPLY SIRONA’s potential has never been greater than it is now. Since joining DS, my priority has been helping the team focus on value-accretive activities. There is very strong engagement across the company in this regard, and Dan’s arrival is helping to further our efforts and increase our pace. Our areas of immediate focus are fully aligned and currently being actioned. First, customer experience. We are directing our firepower to establish the best outcomes for customers through service and innovation. Second, margin enhancement.

We are raising the speed of transformation by eliminating waste throughout our operations and focusing the organization on value-accretive actions. And lastly, capital allocation. We are taking a disciplined approach and making appropriate investments to deliver increasing rates of return and shareholder value. And now let me turn to our second quarter results and a review of our full year 2025 outlook. Let’s begin on Slide 5. Our second quarter net sales were $936 million, representing a decline of 4.9% versus the prior year quarter and a 6.7% decline on a constant currency basis, of which roughly half was due to Byte.

Adjusted EBITDA margins expanded 360 basis points to 21.1%, benefiting from the suspension of Byte sales and lower operating expenses. Despite lower sales, adjusted gross margin expanded 60 basis points to 55.9%. Adjusted EPS in the quarter was $0.52, up 6.6% from prior year largely due to higher adjusted EBITDA margins, FX and a lower share count, partially offset by below-the-line items and a higher tax rate. As you will have seen, we recorded a roughly $214 million noncash after-tax charge related to the impairment of goodwill and other intangible assets within the OIS and CTS segments. These impairments were driven by the impacts of tariffs and current period volume changes relative to the initial investment thesis.

In the second quarter, we generated $48 million of operating cash flow compared to $208 million in the prior year quarter. The year- over-year decline is primarily attributable to timing of cash collections, a higher build of inventory in anticipation of ERP go-lives and tariffs along with an approximately $42 million foreign tax refund received in the prior year quarter. We finished the quarter with cash and cash equivalents of $359 million. Our Q2 net debt-to-EBITDA ratio was 3.1x and flat on a sequential basis. We also completed a $550 million hybrid bond offering in Q2, which helped to increase our ongoing financial flexibility. And now let’s turn to second quarter segment performance beginning on Slide 6.

Starting with EDS, which includes Endo, Resto and preventative products, sales on a constant currency basis increased 1.1% with growth in the rest of the world, partially offset by lower volumes in Europe and the U.S. It’s worth noting that EDS performance in the quarter reflected stable patient traffic across our major markets, a good indicator of the relatively stable environment and consistent with our customer surveys. Shifting to OIS. Sales in constant currency declined 19.4% with Byte accounting for over half of the decline. IPS declined double digits in the quarter, driven by lower lab volumes globally and lower implant sales in the U.S. and Europe, which were partially offset by growth of implants in China.

SureSmile continued to make solid gains, rising 3.3%, driven by strong performance in Europe and Rest of World, partially offset by softness in the U.S. Turning to CTS. Sales in constant currency fell 5.9% versus the prior year quarter as double-digit growth in imaging in Europe was more than offset by declines in CAD/CAM and imaging in the U.S. Note that changes in distributor inventories did not impact the comparison of CTS sales year-over-year. Moving to Wellspect Healthcare. Sales in constant currency declined 2.5%.

As expected, year-over-year results were negatively impacted by a U.S. dealer initial stocking order, which occurred in the prior year period and had an approximately 4.5% negative impact, which was partially offset by the benefit of new product launches. We continue to expect this business to deliver mid-single- digit growth for the full year. With that, let’s move to Slide 7 to discuss our updated outlook for 2025. We are maintaining our full year 2025 outlook for sales, adjusted EBITDA margin and adjusted EPS.

Now looking to the third quarter, on a sequential basis, reported sales are expected to be down slightly, following normal seasonality, while adjusted EBITDA margin is expected to decline due to tariff-related costs beginning to roll through the P&L. We expect that these factors, combined with a higher tax rate, will result in sequentially lower adjusted EPS. This outlook helps us maintain our full year projection and a relatively balanced first and second half of the year. Before we wrap up, I’d like to share an additional thought on capital allocation. We believe that DENTSPLY SIRONA has the potential to yield sustainably high levels of free cash flow.

Effort is underway to work down inventories and reduce our overall working capital requirements. We plan to prioritize investments in innovation and growth, financial flexibility and returns to shareholders. And now let me summarize on Slide 8. In the second quarter, our top line continued to be challenged. However, we delivered adjusted EBITDA margin expansion and adjusted EPS growth through continued financial discipline. We’re maintaining our full year outlook for sales and adjusted EPS. We’ve added flexibility to our balance sheet, and we are actively working to enhance our cash flow generation. We see significant untapped opportunity at DENTSPLY SIRONA. Unlocking it starts with taking a value-creation- oriented approach to financial management, and that work has already started.

We believe combining this approach with the customer experience transformation underway at DS will allow us to yield greater results faster, and we look forward to sharing our proof points in the coming quarters. With that, let’s open it up for questions.

Operator: [Operator Instructions] Our first question comes from Elizabeth Anderson of Evercore ISI.

Elizabeth Hammell Anderson: Welcome, Dan and Matt. There’s obviously lots going on in terms of some of the product changes and you guys are new and things like that. I was wondering if you might be able to give us a little bit of like a state of the union as you see the broader overall dental market, so we can kind of set out what you’re seeing on that level and then obviously some of the specific, like idiosyncratic factors that you were discussing on top of that?

Daniel T. Scavilla: Thanks for the question, Elizabeth. This is Dan. And so I’ll give you my perspective of being 5 days in the seat here and go at it that way. But just using data that we have and that we’ve talked about, the Q2 survey in particular, which we found consistent with the ADA survey saying that patient volumes remain stable. Procedural utilization in the electives like implants and ortho continue to be soft. And we see some shifts but nothing meaningful. Maybe Germany, the dentist sentiment looks like it’s slightly better. Tough to call, right? You have a lot of activity on the macro with tariffs and activities that fluctuate every hour.

I think the real thing is remain focused on the patient and the chair and the dentist, give them the right products and drive this. When you do that the right way, all those other things can soften out. Our thought is focus on the long term and not react to the short-term noise that’s out there. So that’s really where we’re headed.

Elizabeth Hammell Anderson: Got it. That’s very helpful perspective, and makes sense. Maybe just as a follow-up, anything to call out in terms of distributor stock- ups or destocking dynamics in the quarter, maybe particularly in CTS and EDS? That might be more a question for Matt.

Matthew E. Garth: Yes, it is. This is Matt. Again, we said in the prepared remarks that we really didn’t see a significant revenue impact on a year-over- year basis related to stocks at dealers. And in fact, when you look at it on a year-over-year basis, they’re, both on an imaging basis and on a CAD/CAM basis, in a good healthy position and the deltas year-over-year were pretty similar. So feeling good about the overall stock situation.

Operator: Our next question comes from David Saxon of Needham & Company.

David Joshua Saxon: Dan, maybe I’ll start with a higher level question for you, and nice talking to you again on a DENTSPLY call. So just wanted to understand kind of what about the opportunity at DENTSPLY motivated you to switch over and then with backgrounds in spine, most recently in vision care and other areas at J&J, anything you learned in those markets that might be particularly useful as it relates to DENTSPLY’s positioning in dental and how you’re thinking about profitability?

Daniel T. Scavilla: Yes. Thanks for the question, David. And it’s good to connect with you in another part here. So I look forward to going forward with you. There’s a couple of things. Globus is such a great company, and there’s such a great learning there, followed by, as you said, the breadth of moving around the different things with J&J. What I saw at DENTSPLY is the opportunity to honestly apply all of those. And I think it’s more about the operational experience and the execution coming from those and bringing it in here that I think would be what interested me most. And there’s a lot of areas to focus on.

I think the vast majority, I’ve had my hands in, in the past, and I think I can apply and help the team. And so for me, it’s about taking my experience, helping what I think is truly a great team, accelerate to get where we need to get to.

David Joshua Saxon: Great. And then as my follow-up, I wanted to ask on implants. So maybe you can give a little more color on how that part of the portfolio did both geographically and then across premium and value. And then in the script, you talked about it being a priority area and already had some initiatives going. So can you give me — give a little more color there? Like what exactly are you doing in that part of the business? And how should we think about the impact they might have?

Matthew E. Garth: Yes. And the implant story continued this quarter from what you have seen earlier in the year, where we’ve seen slower legacy brands transitioning to our new products, particularly as we looked at the premium side of the business. On the value side of the business, the Middle East volatility, I think you know that we produce a lot of our value implants in that region, and so the volatility there did impact our volumes with the limitations on being able to get product out of certain countries and into other countries, but that should be passed as we move forward.

From a headline perspective, we saw a premium down about 5%, and that is due to the exchange that we are seeing as we roll out the new products and the shift from legacy brands. We do expect for the full year that we are going to have some growth expected because of the sales force changes that we’ve made and that we talked about and what Dan just spoke to in terms of driving some new consumer experiences, and then also from the China VBP program that we’ve seen so far this year, that should carry us. From a value perspective, Q2 was down, let’s call it, low double digits.

And again, largely due to what was taking place in the Middle East, and that will carry through for the full year as we look forward. But overall, the big driver, as we’re looking at implants, has been from the lab side of the house, and so we expect to see that continue through EMEA and the U.S., both in the quarter and then over the year.

Operator: Next question comes from Kevin Caliendo of UBS.

Dylan Christopher Finley: Welcome, Dan and Matt. This is Dylan Finley on for Kevin. To start, just wondering, if you could maybe reframe some of your tariff assumptions for the year. I believe, previously, the team had sized at about $50 million in annual costs per year. So wondering if there’s any changes around that? And then second of all, does the guide contemplate any mitigation efforts and any kind of supply chain action or price action you can talk about there?

Matthew E. Garth: Yes. Let me start with the activities that the teams are driving today, which have been extremely good results on expense control and driving efficiencies through the supply chain organization. You see that showing up in our margin as we speak. Last quarter, we told you that we were expecting about a $50 million annualized impact from tariffs. What has happened over the past couple of weeks with Europe and with Switzerland and Sweden has showed us that, that has grown to about $80 million that we were looking at on an annualized basis. So the interesting thing there for 2025 is that we have a similar situation on the $25 million that we spoke about last quarter.

The puts and takes and the timing impacts that we’ve seen are going to result in the same level of impact here in 2025. So that $25 million roughly spread across Q3 and Q4. The mitigation factors, we continue to look at ways, including cost savings, including activities that we are driving towards finding initiatives and finding mitigation efforts. And I think that will continue through the end of this year, and we’ll look hard at what we’re going to do for 2026.

Dylan Christopher Finley: And then on orthodontics, quick clarification. Did you see any adjustments or kind of chargebacks on Byte? I know last quarter, there was like a reverse of some of the refunds. It was a bit of a positive. So just wondering if there’s any adjustment there on Byte. And then second of all, just quickly, if you could talk about SureSmile and what you’re seeing in the U.S. today. One of your competitors called out challenging conversion rates, a potential shift to wires and brackets from orthodontists. Just any commentary you can provide on that market?

Matthew E. Garth: Yes. So the assumptions that we put into place, as you know, you saw last quarter around Byte and what’s happening there, the patient load has come off faster. We did see about a $4 million adjustment here in the second quarter. For the second half of the year, we now believe we are in line appropriately with the rates of the drop-off. So not anticipating any further changes in that assumption. As you look at SureSmile, again, we said good performance, 3.3% growth on a year-over-year basis. The U.S., like many other areas that we are seeing in the U.S., there is a little bit of a drag there.

The things that we are doing to try and drive change, education programs, working with our sales force and driving new ways of working specifically with specialists and orthodontists, that’s what you will see help us drive a change in the U.S.

Operator: Our next question comes from Michael Cherny of Leerink Partners.

Michael Aaron Cherny: This might be getting a little ahead of ourselves, but maybe tying back a little bit to what Elizabeth asked off the top. She talked about the end market. I’d love to talk internally about how you see the portfolio, Dan, as you settle in. Obviously, we have the Wellspect review going on, but how do you see the rest of the portfolio? And relative to the business, do you feel at this early point in time like there are areas where you have holes that you want to pursue? And how do you think about the build of inorganic versus organic growth along that front? It might be a philosophical question, but thought I’d at least start there.

Daniel T. Scavilla: No problem, Mike. I appreciate the question. So there’s a couple of things. I actually believe that no one else is better suited to compete holistically in this market than DENTSPLY SIRONA. We have everything that we need to do this and drive it. It’s about focus and execution. I don’t think there’s major gaps that are out there and any minor gaps, I think you’ve got an incredible innovation engine seriously that is working on those things. Should we do it faster? Can we penetrate deeper? The answer is, of course. And that will always be it, no matter what the performance is that way.

But the potential and when I talk about unlocking the potential, it’s about using every single thing that we have to impact further than what we’ve been doing. And I think that’s really it that way where it comes. Organic versus inorganic, the answer is both. I lean more towards the organic because I think you build the right in-house capabilities and right productions. And you can actually do that in usually a more profitable way, eliminate unnecessary impairments and other external costs. But opportunistically, when we have a strong cash flow, the ability to buy and accelerate speed, of course, is something that we’ll consider and do at the appropriate times.

Michael Aaron Cherny: Got it. And then just one more on implants, if I can. As you think about the market, I know that under the previous leadership team, there was a major focus on reinvigorating various different areas of growth. How do you feel about where those pieces of the reboot on implants fit as you settle into the seat? Again, I know these are early questions, but just trying to get a sense of some of the key trends we should expect going forward.

Daniel T. Scavilla: No, I appreciate your positioning with it. Listen, I think the following. I think the team is moving in the right direction in several areas. I haven’t come in and said we’re changing this, we’re making a radical shift. And what I don’t want to do is create a disruption that actually slows us and puts us at a temporary competitive disadvantage. I will continue to look. I might change my opinion as I go deeper in my listen and learn sessions. But to date, while I’ve seen the things that are in progress, I think I’m going to keep them in progress. I want to go deeper and faster in a lot of the areas.

I probably won’t be as specific and focused in key areas. I think all of these are meaningful areas for us, and I want to see growth and health in all of them. How we do that, in which you order and prioritize what do we do that? Let me step back and take some time to learn and get to you later on. But so far, continue the path, accelerate it and probably broaden where I think we ought to be focused.

Operator: Our next question comes from Steven Valiquette of Mizuho Securities. Our next question comes from Michael Sarcone of Jefferies.

Michael Anthony Sarcone: Dan, congrats on the new role.

Daniel T. Scavilla: Thanks, Michael.

Michael Anthony Sarcone: Just a follow-up on the tariff stuff and how it relates to margin expansion. You talked about the updated thoughts being about $80 million annualized impact. I don’t want to get too far ahead of ourselves here, but when you think about 2026 and you do see that full impact, how do you think about your ability to continue to expand gross and EBITDA margins?

Daniel T. Scavilla: Yes, Michael, let me start. This is Dan, I’ll hand it over to Matt. But right now, we’re not in a position to project what we want to do in 2026 and the volatility of every hour of every day of the change in tariffs would certainly tell you that prudence says to pause and focus before reacting. And so ultimately, what I think we’re going to do is assess the situation and see, do keep in mind that we have the manufacturing and logistic firepower globally to position ourselves for a benefit longer term, but we’re just simply aren’t going to react in such a volatile market at this point.

Matthew E. Garth: Yes. The only thing I would add to that, Dan, is, as you look at how we’re building the rest of 2025 and the outlook that we gave you, it does embed the tariff impact into our outlook. And the things that are allowing us to manage through that are the good activities that are taking place in the organization. And that’s why having a longer-term view here as to what the value is that we can drive through innovation, through our product pipeline and the changes that Dan spoke about at the top of the prepared remarks, that’s why we’re taking some time to really develop what that’s going to mean for 2026.

Michael Anthony Sarcone: Got it. Okay. That’s helpful. And then second one for me. Dan, in the prepared remarks, you mentioned you’ve already started taking some activities to address the softness in CTS. Any chance you can elaborate on some of those?

Daniel T. Scavilla: I appreciate the question, but I think that let me do it and execute it and tell you what we did versus tell you where we’re going. I’d rather keep that for competitive reasons into this team to go execute.

Operator: Our next question comes from Jonathan Block of Stifel.

Jonathan David Block: Great. Maybe I’ll just start with a clarification. The $50 million that I thought you said going to $80 million tariff annualized headwind, sorry, was that a net number? Or arguably that grows before any mitigating initiatives that maybe you’re able to put in place over the coming months. Just a clarification there.

Matthew E. Garth: That is the gross annualized impact. And again, for 2025, though, based on how we see the components moving, the impact to us in 2025 is still roughly $25 million.

Jonathan David Block: Got it. Not a full year and maybe some inventory that’s at pre-tariff levels on the $25 million. Got it, okay. And then Dan, this one might be too early to ask, but just when we think about some of the company’s prior initiatives, right, there was a lot there. I mean there was ERP, there was SKU rationalization. There were some, call it, consolidating of the manufacturing footprint. You inherit some of those things that are at various stages of completion. So would love your thoughts. I mean, are those top-of-the- list initiatives? Do those all make sense to you? Are those on track according to prior time lines?

Any update that you’re able to give there would be great.

Daniel T. Scavilla: Thanks, Jonathan. Yes, it’s a great question. And so what I’d say is I think all of those are the right moves. I think we have to go deeper and faster for sure. And again, let me go assess some of that and come back at a later date with a bigger, broader plan. But there’s nothing in there that I would step in and say stop this or don’t do this. It made sense. Listen, the real focus and the macro approach here for this company is we need to return the U.S. to health and sustained growth period.

And there’s different mechanisms to do that, but it simply starts with remaining focused and improving our focus on the dentists, the customers and the field, supplying them with great innovation and with a consistent supply chain, and that’s all about supporting it in-house, that’s really where we’re going to stay focused. And if there are some activities to strengthen that, that’s really where we’ll go along those lines. There’ll be some broader things later, but again, more with the focus of the U.S. health first, Rest of World and Europe continuing to feed and then driving through that engine. And that’s really what we’re focusing in with the team now.

Operator: Our next question comes from Jeff Johnson of Baird.

Jeffrey D. Johnson: Dan, I think John just asked you on kind of your commitment to some of those cost savings initiatives and other kind of middle of the P&L kind of efforts that prior management has been focused on. Maybe I’ll go the opposite direction. Just kind of on the top line. There’s been an intense focus over the last couple of years on some of this cloud-based DS Core strategy, some of the equipment becoming cloud-native equipment. My view on that, not that you care about that, I guess, but has always been that might be a great long-term opportunity, harder to monetize that in the short run.

Would love to get your input on kind of how you’re thinking about that commitment to DS Core and the intense focus there versus maybe improving some of the actual hardware and products themselves, especially in some of the specialty areas.

Daniel T. Scavilla: Yes. And Jeff, that’s a fantastic question, seriously. So thanks for asking it. So there’s 2 pathways that you kind of asked, and I’ll go through both. I believe that the world is moving into a proceduralization model, the holistic experience and not just individual components. And so having software and implants and instruments, all that are the best-in-class, are what companies are going to need to go. And of course, there’s data and machine learning and all sorts of things like that, that can create connectivity and better outcomes and better planning. We have to pursue that path. DS Core is obviously a foundation for that.

But as you said, the best software in the world is meaningless unless you have great implants and great instrumentation and a procedural flow that benefits the practitioner. So the answer is, we have to go through all of those, we’ll remain on our course with DS Core. We have to make sure that the investments are healthy and that innovation is consistent in all of those other things of instrumentation and implants as well.

So when Matt and I discuss how to unlock value or where to go, we’re signaling that we need to streamline throughout the entire P&L, not just the middle to free up cash, so that we can reinvest and drive sustained growth through all of those mechanisms.

Jeffrey D. Johnson: Fair enough. And then maybe just one follow-up question. Just on your value implant commentary around MIS and maybe some manufacturing, headwinds there throughout the rest of the year. How confident are you or how are you able to assess whether it’s truly getting product out the door versus market share gains for some of your competitors who have really focused on those value implants as well over the last couple of years. It seems like the value implant side of the market still has a little more strength in premium.

So for that to remain down, and I don’t know, if you said down double digits for the rest of the year, but still down the rest of the year, a little surprised to hear that.

Matthew E. Garth: Yes. No, that’s a good point of reference. The second half of the year will definitely be stronger on the value side. Again, that event in the Middle East that went down, obviously, had an impact on our ability to ship out of the region. And so you’ve seen some headwinds there. But that will flip, and we will be competitive as we move into the second half of the year on the volume side. The bigger piece of the overall implant story though, you’ve also noted, which is overall competitiveness and what is taking shape in the market.

And I think those lean purely into what Dan was talking about with changes and movements and evolutions that are taking place with our sales force in the U.S. We’ve seen over the last couple of weeks, a significant retraining and education program that the U.S. team has launched. Those are the types of efforts that are going to allow us to be able to get back into the game and drive growth in premium.

Operator: Our next question comes from Brandon Vazquez of William Baird.

Brandon Vazquez: I wanted to follow up on a comment, sharing his thought that was going on, I think it was John’s question. But how much of the U.S. business in your mind as you come into the seat is underperforming simply because of execution on behalf of DENTSPLY? Or how much of it is simply underperformance of the dental macro market?

Daniel T. Scavilla: Brandon, it’s a great question. And my honest answer is, let me evaluate it and go deeper and see. To make that split this early on, I’m not really quite comfortable doing it. I do have the belief that we have an incredibly strong team in the field and a great bag. And I think we have to look at ourselves and say, how can we move with better speed and decision-making so that we give our field the chance to actually come out and perform stronger than they’ve been.

What that percent split is versus macro, I don’t really know, but I happen to believe that when you have the right team doing the right things, it softens a lot of those macro impacts anyway. And so let me dig deeper and come back to you once I have some better understanding.

Brandon Vazquez: Okay. And I guess my follow-up is related and it somewhat leads into this, which is the dental market has seen macro headwinds for several years now. I’m not sure, and you guys — I’d be curious, if you guys disagree with me, but I’m not sure we see kind of like a silver lining here and where things are meaningfully improving for dental in the foreseeable future or at least in the next 6 — let’s call it, 2025. Again, if you disagree, please let me know. But in that, if this is the case for a little bit of time now, does DENTSPLY need to readjust to operate in this new environment?

I think the prior leadership team, while there were a lot of great execution initiatives going on, there was a chunk of kind of their EPS goals that was built on improving macro. Is this something that you guys think you will bank on as you start to develop plans? Or do you think the macro is weighing on the sector so much that you need to just build plans to execute regardless and anything that macro would just be upside to that.

Daniel T. Scavilla: I’ll take a swing at that. So I think macro changes over time. And I think that as we look even to your point to the foreseeable future, it will obviously evolve both stronger and weaker over our lifetimes, and that’s something that you need to think about us focused on the long term anyway. How do you thrive in that? I happen to believe that a strong cash flow and a strong profitability that allows you to go buy and execute and do what you want will allow you to react in a very meaningful way and eventually leads the market in a stronger way.

And so U.S. growth right now that generates more profitability through our programs, continuing and expanding that give us stronger profit and cash are going to allow us to not only react to but shape the macro as we go forward. It’s about making sure we focus on the holistic set of our teams and portfolios to be able to do that. And while that sounds lofty, I truly believe that it is more than doable.

Operator: Our next question comes from Allen Lutz of Bank of America.

Allen Charles Lutz: I have a high-level question for Dan and Matt. There’s a lot of areas where you can focus investments as you’ve talked about, sales force, implants, aligners, clinical education, you talked about DS Core. I know it’s very early, so not looking for any specifics on where you’re looking to invest, but just any early learnings and thoughts you’ve had as you’ve looked at the business? And then moving forward, how should we think about timing of potential investments here? And would this be a shift of dollars you’re already spending? Or would this be incremental spend?

Daniel T. Scavilla: Yes, I’ll go first, and then let Matt kind of go in there. So my experience, not just DENTSPLY, but my experience would show that a focus in investing on the customer and the field are always going to be the thing that will help us be the strongest and go. And so that’s going to be there. There’s nothing that Matt and I would signal as a significant shift that would throw off your models at this point, but rather us looking with our eyes where we can find efficiencies and free up cash to reinvest and ideally do that in a way that can generate growth.

So I would tell you, we’re not going to see a radical shift that’s going to throw you off. We are going to dig deep and move fast for sure. But ultimately, I think giving the field what they need, providing the customers what they need is really the key here, and doing that in a faster manner with more options in an easier way is what I think we’re going to focus on.

Matthew E. Garth: Just to add, because I think Dan and I are in 100% alignment. And I — frankly, in my time here so far, I think the entire team is, which is there is a repurposing of spend that we can do to drive speed, to drive growth and put areas where the team was already looking for efficiencies, namely in those middle P&L elements, but certainly within the corporate, shifting those into the field, shifting those into innovation. And so I think that’s the primary viewpoint that I have that I’m going to try and keep them build out with Dan, and the team is of the same mindset.

So I don’t know yet if there’s a significant amount of additional incremental spend. I will tell you we’re going to go through our strategic planning process. We will go through our annual planning process. That will be a great time after that to really hone in on some of the changes that we want to drive from a modeling perspective. But all of it is to reformulate a financial model for DS that returns higher cash, that gives us the optionality for growth and returns to shareholders.

Daniel T. Scavilla: And I would just add one last thing. Matt and I are big fans of spending what we earn and actually reducing leverage that will create longer-term flexibility.

Operator: Our next question comes from Vik Chopra of Wells Fargo.

Vikramjeet Singh Chopra: Dan, congrats on the new role and looking forward to continue to work with you. I just had a quick high-level question, Dan. Maybe just talk about some of the lessons you’ve learned from your time at Globus Medical that you think are applicable here? And then I had a quick follow-up, please.

Daniel T. Scavilla: Vik, thanks. It is great talking to you. Look forward to getting together again. Again, Globus is such a great facility with such great teams. I could talk a lot about that, but I won’t. What I learned from that team is hands-on, literally hands-on, not some executive talking from a tower, but getting in the field with the reps and living their life eye-to-eye with the dentist and then owning it back and making sure there’s execution where you as CEO are accountable to that person in the field to do it and do it better. I think that is the strength of Globus, and that’s what I’m going to bring in here with that learning.

Vikramjeet Singh Chopra: Great. And I had a follow-up question. Apologies if this has been asked. I’ve been bouncing on a couple of calls, but I noted a double- digit decline in implants and prosthetics in the quarter. This is sort of worse than you saw in Q2, which I believe was a mid-single- digit decline. Can you maybe provide some additional color on what you’re seeing in the market and your expectations for the rest of the year?

Matthew E. Garth: Yes. We went over it earlier, but let me do a quick summary here. So we did see a performance trend and the way that we spoke about it was breaking out premium and value in the quarter, premium down slightly. We continue to see the shift from our legacy brands to the new evolutionary products that we made in the market, some changeover headwinds there. On the value side, the volatility in the Middle East did provide a bit of a headwind for us in the quarter. It was significant double digits — low double digits on the value side. That will carry through for the rest of the year.

So on the value side, you will see performance improve, but it will still be down overall for the year. Labs was the other place that we called out that had a significant double-digit decline, primarily in EMEA and the U.S. And so that rounds out, I think, on the implant side. When you look at the aligner side of the house, SureSmile up 3.3% and then you adjust out the Byte performance from the overall segment, that gets you back to that double digits.

Operator: Our next question comes from Steven Valiquette of Mizuho Securities.

Steven James Valiquette: I apologize. Earlier, I was kind of juggling multiple calls at once. Dan, this’s obviously a time for you to focus on in the short term as you’re joining the company. One area that was somewhat in limbo over the past year with some of the relationships with major dental distributors. So I guess, I’m just curious if you could provide a little more color on where that ranks on the totem pole of your priorities. And do you have a general bias coming into the role that distributors are vital or the door be opened maybe somewhere down the road where maybe a larger portion of your sales are direct.

Just curious to getting any early thoughts around this whole topic.

Daniel T. Scavilla: Steven, I appreciate the question. So a couple of things. I did have a chance to connect with both Schein and Patterson CEOs. And we’re going to get together as I get further up to speed, have conversations. I would tell you, I’ll refrain from telling you what I think and where we’re going and what we’re doing right now until I have a chance to better engage and learn this. I am not really focused on the short term. Everything we’re doing is going to be about long term here. That would include what our relationship is with those. So for now, I’m active in speaking and engaging with them. I need to go further.

But let’s kind of readdress that after I’ve got a little bit of time under me.

Operator: Our next question comes from Erin Wright of Morgan Stanley.

Erin Elizabeth Wilson Wright: There have been several iterations of turnaround stories, not just at DENTSPLY, but also across dental. I guess, how — can you talk about what’s different in your approach? And outside of some of these investments that you’re making and execution and everything, what do you really think is like the optimal mix across your business, like to really set yourself up for success in dental and more consistent growth? And are you taking a hard look at even some of the strategies around some of the more flagship areas, for instance, like how do you feel about the game plan around CAD/CAM?

And how much are you taking into account the evolution of the competitive landscape there and other parts of your business that you’re taking a hard look at.

Daniel T. Scavilla: Erin, I appreciate the question, and I think it’s a legitimate question. Being 5 days in, let me dig deep, listen, learn, engage with the field, engage with customers, evaluate this out. Again, I do feel like the company is tracking in the right direction, but not deep and fast enough. I think there are some things we can do better internally. But again, let me get through my listen-and-learn sessions, and I will connect with you and probably give you broader scopes as I get a quarter or 2 under my belt to further answer that question the right way.

Operator: Thank you. This concludes the question-and-answer session. I would like to turn it over to Dan Scavilla, CEO, for closing remarks.

Daniel T. Scavilla: Thank you all for joining the call today. Matt and I look forward to engaging the investment community as we settle into our respective roles. Before we close, I want to take a moment to thank the entire DENTSPLY SIRONA team for the warm welcome and for their unwavering commitment to our customers. As I shared earlier, I’m truly excited to be here and to be part of shaping the future of the organization so that we can accelerate the value we provide to our customers and unlock the true potential of the company. In addition, I want to thank Andrea Daley for her dedication and leadership in the Investor Relations role.

Andrea will be moving into a new opportunity elsewhere. We’re grateful for her contribution, and we wish her continued success in her new role. Thank you, everyone.

Operator: Thank you for your participation in today’s conference. This does conclude the program. You may now disconnect.

Image source: The Motley Fool.

Date

Aug. 28, 2025, at 9 a.m. ET

Call participants

• Chief Executive Officer — Todd Vasos
• Chief Financial Officer — Kelly Dilts

Need a quote from a Motley Fool analyst? Email [email protected]

Takeaways

• Net sales— $10.7 billion in net sales in the second quarter of fiscal 2025 (period ended Aug. 2, 2025), representing a 5.1% year-over-year increase.
• Same-store sales— Same-store sales increased 2.8% in Q2, with customer traffic up 1.5% and average basket size up 1.2%.
• Gross profit margin— Gross profit was 31.3% of sales in Q2 (up 137 basis points year over year), primarily driven by a 108 basis point improvement in shrink.
• SG&A as % of sales— 25.8% (up 121 basis points), mainly due to higher incentive compensation, repairs and maintenance, and benefits costs.
• Operating profit— Operating profit was $595 million (an increase of 8.3% year over year); margin rose 16 basis points to 5.6%.
• Net interest expense— Net interest expense was $57.7 million, down from $68.1 million in the prior year period.
• EPS— Diluted EPS (GAAP) was $1.86 per share in Q2, up 9.4% year over year and above the company’s internal expectations.
• Inventory— Merchandise inventories totaled $6.6 billion at the end of Q2, down $391 million (5.6%) overall and 7.4% per store.
• Cash flows from operations— $1.8 billion during the first half of the year, an increase of 9.8% compared to the prior year.
• Dividends— $0.59 per common share in the second quarter of fiscal 2025, with a total payout of approximately $130 million.
• Fiscal 2025 guidance— Net sales growth of 4.3%-4.8% expected for fiscal 2025, same-store sales growth of 2.1%-2.6% for the year, and diluted EPS (GAAP) of $5.08-$6.30.
• Capital expenditures— Planned $1.3 billion-$1.4 billion, including approximately 4,885 real estate projects, 575 new U.S. store openings, and up to 15 in Mexico.
• Store remodel activity— 729 Project Elevate remodels and 592 Project Renovate remodels completed in the second quarter of fiscal 2025.
• Delivery partnership expansion— DoorDash is available for 17,000 Dollar General stores, and Uber Eats works with 4,000 stores, with expectations to soon reach 14,000 stores.
• DG Delivery expansion– Management now expects to offer DG delivery for more than 16,000 stores by year’s end, compared to previous expectations of approximately 10,000 stores.
• DG Media Network— Retail media volume grew significantly year over year in the second quarter of fiscal 2025, supporting personalized customer engagement and partner ad spend.
• Non-consumable comps— Each major non-consumable category posted at least 2.5% same-store sales growth.

Summary

Dollar General(DG -2.10%) delivered sales and earnings growth above internal expectations in the second quarter of fiscal 2025, citing balanced performance across both consumable and non-consumable categories. Management committed to keeping more than 2,000 SKUs at a $1 or less price point, and highlighted that its $1 Value Valley assortment achieved same-store sales growth at more than double the total company rate in the second quarter of fiscal 2025. The company emphasized broad-based market share gains, expansion of delivery coverage to urban and rural stores, and successful shrink and inventory management as key drivers of financial improvement. Fiscal 2025 guidance was raised, and the company will redeem $600 million of senior notes early in the third quarter of fiscal 2025, using cash on hand, signaling a focus on improving balance sheet metrics.

• Todd Vasos noted, “To that end, we’re pleased to see growth with customers across all income brackets in [the second quarter of fiscal 2025]. This includes our core customer, who increased spending despite worsening sentiment. In addition, we continue to see trade-in growth with middle- and higher-income customers, which we believe is contributing to the strong performance in our non-consumable categories.”
• The company maintained that its price gaps remain within three to four percentage points of average mass retailers, underlining Dollar General’s positioning on everyday value.
• Dollar General’s initiatives in store remodels (Project Elevate and Renovate) are contributing to first-year annualized comp sales lifts in the range of 3%-8% for completed locations, based on the second quarter of fiscal 2025 results, with early customer satisfaction data described as significantly improved post-remodel, according to management commentary in the second quarter of fiscal 2025.
• DG Media Network is delivering incremental returns for partners seeking rural and lower-income customer reach, supported by proprietary customer data assets.

Industry glossary

• Project Elevate: Incremental remodel initiative targeting mature stores, focusing on merchandising optimization and physical investments to achieve 3%-5% first-year annualized comp sales lifts.
• Project Renovate: Traditional full remodel program targeting older stores, designed to deliver 6%-8% first-year annualized comp sales increases.
• DG Media Network: Dollar General’s retail media platform providing partners with retail ad space, audience data, and multichannel marketing access to Dollar General’s unique customer base.
• SKU: “Stock Keeping Unit”; a unique identifier for each distinct product carried for sales and inventory management.
• Value Valley: Merchandising set within Dollar General featuring rotating SKUs at the $1 price point, aimed at price-conscious customers.

Full Conference Call Transcript

Todd Vasos, our CEO, and Kelly Dilts, our CFO. Our earnings release issued today can be found on our website at investor.dollargeneral.com under News and Events. Let me caution you that today’s comments include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, such as statements about our financial guidance, long-term financial framework, strategy, initiatives, plans, goals, priorities, opportunities, expectations, or beliefs about future matters and other statements that are not limited to historical fact. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections.

These factors include, but are not limited to, those identified in our earnings release issued this morning under Risk Factors in our 2024 Form 10-K filed on March 21, 2025, and any later filed periodic report. In the comments that are made on this call, you should not unduly rely on forward-looking statements which speak only as of today’s date. Dollar General disclaims any obligation to update or revise any information discussed in this call unless required by law. At the end of our prepared remarks, we will open the call up for your questions. To allow us to address as many questions as possible in the queue, please limit yourself to one question.

Now it is my pleasure to turn the call over to Todd.

Todd Vasos: Thank you, Kevin, and welcome to everyone joining our call. I want to begin by thanking our team for their great work to fulfill our mission of serving others every day in our stores, distribution centers, private fleet, and store support center. These efforts are resonating with our customers as well as driving strong operating and financial performance. To that end, we are pleased to deliver strong second-quarter results highlighted by earnings growth that significantly exceeded our internal expectations. For today’s call, I’ll begin by recapping some of the highlights of our second-quarter performance as well as sharing our latest observations on the consumer environment.

After that, Kelly will share the details of our financial performance as well as our updated financial outlook for fiscal 2025. I will then wrap up the call with an update on some of our key growth-driving initiatives. Turning to our second-quarter performance, net sales increased 5.1% to $10.7 billion in Q2, compared to net sales of $10.2 billion in last year’s second quarter. This growth was driven by strong performance from new stores and our mature store base. We grew market share in both dollars and units highly consumable product sales once again during the quarter.

In addition to growing market share in non-consumable product sales, same-store sales increased 2.8% during the quarter driven by relatively balanced growth of 1.5% in customer traffic and 1.2% in average basket. The basket growth was driven by an increase in both average unit retail price per item and average items per basket. We were excited to see a second consecutive quarter of broad-based category growth with positive comp sales in each of our consumables, seasonal, home, and apparel categories. From a monthly cadence perspective, we saw same-store sales growth above 2% in all three periods, with our strongest comps in June and July.

We believe these strong and balanced top-line results are a reflection of the hard work the team has done to improve execution and further enhance the value and convenience proposition for both existing and new customers. To that end, we’re pleased to see growth with customers across all income brackets during the quarter. This includes our core customer, who increased spending despite worsening sentiment. In addition, we continue to see trade-in growth with middle and higher-income customers during the quarter, which we believe is contributing to the nice performance we’ve seen in our non-consumable categories. Ultimately, customers across all income brackets are coming to Dollar General as they seek value.

As America’s neighborhood general store in more than 20,000 locations across the country, we recognize and embrace our role in being here for what matters for our customers. This includes providing the items they want and need at prices they can afford. With that in mind, we are committed to delivering everyday low prices that are within three to four percentage points on average of mass retailers. While we are pleased that we continue to operate within the targeted price range, we are also focused on maintaining our substantial offering of more than 2,000 SKUs at or below the $1 price point.

We know this price point is important in helping our core customers stretch their dollar particularly at the end of the month and when budgets are tight. In fact, our $1 Value Valley merchandising set which is comprised of more than 500 rotating SKUs was one of our strongest performing areas in the quarter with same-store sales growth more than twice the rate of the overall company. We believe this holistic approach to offering value will continue to be important for our customers, particularly in the back half of this year. Now I’d like to provide a brief update on how we’re thinking about tariffs.

With the rates currently in place, we believe we will be able to mitigate the majority of the impact on our cost of goods. The proactive approach of our sourcing team coupled with our relatively low direct import exposure has positioned us well to serve our customers with a quality assortment at tremendous value. While the landscape remains dynamic, tariffs have begun to result in some price increases and we will continue to work to minimize them as much as possible. Most importantly, we know this further amplifies the need for value with our communities. And we remain committed to serving our customers with the everyday low prices they have come to know and appreciate from Dollar General.

Overall, we’re proud of our performance during the quarter and the tremendous progress we’ve made throughout the first half of the year. Our actions are delivering an enhanced shopping experience for our customers and driving strong operating and financial results. We are further strengthening our value and convenient proposition for our customers, while making significant progress on our long-term financial goals. Before I turn the call over for our financial update, I want to thank Kelly for her partnership. As well as her leadership of our financial organization over the last few years. We wish her the very best as she prepares and begins her new chapter.

I also want to note that we’re excited to welcome Donnie Lau back to Dollar General as our next CFO beginning in October. He is highly regarded throughout the organization for his deep understanding of the business, thoughtful strategic leadership, and appreciation for our culture and values. We look forward to his leadership of our financial organization as we seek to drive excellence and create long-term shareholder value. With that, I’d now like to turn the call over to Kelly.

Kelly Dilts: Thank you, Todd, and good morning, everyone. First, on a personal note, I wanted to express my appreciation to this team, our customers, and our shareholders. This is a special organization with a unique mission and I’m grateful for the time I’ve had to serve alongside them. Now that Todd has taken you through a few of the top-line highlights of the quarter, let me take you through some of the other important financial details. Unless we specifically note otherwise, all comparisons are year-over-year, all references to EPS refer to diluted earnings per share and all years noted refer to the corresponding fiscal year.

For Q2, gross profit as a percentage of sales was 31.3%, an increase of 137 basis points. This increase was primarily attributable to lower shrink higher inventory markups and lower inventory damages. Our focus on reducing shrink has continued to produce positive results. Including a healthy year-over-year improvement of 108 basis points in the second quarter. We’re excited to be outperforming the shrink reduction expectations contemplated within our long-term financial growth framework. In terms of both timing and magnitude. Given these results, we are optimistic about the potential for shrink reduction to contribute more than 80 basis points toward the operating margin goal of 6% to 7% contemplated within our long-term financial framework.

In addition, we were pleased to drive a reduction in damages in the second quarter as our efforts in this area have begun to take hold as well. The gross margin increase was partially offset by increased LIFO provision as well as increased markdowns and increased distribution cost. Now, let’s turn to SG and A. Which as a percentage of sales was 25.8%. An increase of 121 basis points. The primary expenses that were a higher percentage of net sales in the quarter were incentive compensation, repairs and maintenance, and benefits. Moving down the income statement, operating profit for the second quarter 8.3% to $595 million. As a percentage of sales, operating profit increased 16 basis points to 5.6%.

Net interest expense for the quarter decreased to $57.7 million compared to $68.1 million in last year’s second quarter. Our effective tax rate for the quarter was 23.5%, and compares to 22.3% in the second quarter last year. Finally, EPS for the quarter increased 9.4% to $1.86 which exceeded the high end of our internal expectations. Turning now to our balance sheet and cash flow, where we continue to make great strengthening our financial position. Merchandise inventories were $6.6 billion at the end of Q2, a decrease of $391 million or 5.6% compared to prior year. And a decrease of 7.4% on an average per store basis.

The team continues to do a tremendous job reducing inventory while increasing sales and improving in-stock levels which is having positive operational impact in both stores and distribution centers. The business generated cash flows from operations of $1.8 billion during the first half of the year an increase of 9.8% compared to the prior year. Our strong top and bottom line results along with our focused inventory management efforts continue to generate significant cash flow. During the quarter, we returned cash to shareholders through a quarterly dividend of $0.59 per common share outstanding for a total payment of approximately $130 million. Our capital allocation priorities continue to serve us well and remain unchanged.

Our first priority is investing in our business including our existing store base as well as high return growth opportunities. Such as new store expansions, remodels, and other strategic initiatives. Next, we seek to return cash to shareholders through a quarterly dividend payment and over time and when appropriate, share repurchases. And while our leverage ratio remains above our goal, which is below three times adjusted debt to adjusted EBITDAR, we are making great progress towards reaching our target level. Importantly, we remain focused on improving our debt metrics in support of our commitment to middle BBB ratings by S&P and Moody’s. Overall, we’re very pleased with our operating performance and financial results.

Our strong performance has positioned us to raise our financial outlook for 2025. This update primarily reflects our outperformance in the second quarter and improved outlook for the second half of the year. While considering the potential uncertainty, particularly on consumer behavior as we move through 2025. With that in mind, we now expect the following for 2025. Net sales growth of approximately 4.3% to 4.8% same-store sales growth of approximately 2.1% to 2.6% and EPS in the range of $5.08 to $6.30. Our EPS guidance continues to assume an effective tax rate of approximately 23.5% and that we will not repurchase shares under our share repurchase program. Now I want to provide some additional context around our expectations.

While we’re not providing specific quarterly guidance, the low end of our sales and earnings guidance ranges allow for increasing pressure on consumer spending as we move through the back half of the year with Q4 potentially more than Q3. In addition, we expect shrink to be a continued tailwind throughout the remainder of the year, though to a lesser extent in Q4 as we begin to lap the improvements we made toward the end of last year. Turning to SG and A, given our strong performance we now anticipate incentive compensation expense to be a headwind of approximately $200 million.

Moving to the final portions of our guidance for 2025, we continue to expect capital spending in the range of $1.3 billion to $1.4 billion designed to support our ongoing growth. This includes our continued expectations to execute approximately 4,885 real estate projects in 2025 including 575 new store openings in The United States and up to 15 in Mexico. 2,000 project renovate remodels 2,250 project elevate remodels, and 45 relocations. Finally, as a result of our strong cash position, we are using cash on hand to redeem $600 million of our senior notes in the third quarter, earlier than their April 2027 maturity.

In summary, we’re pleased with our Q2 results, and we’re proud of the work that the team has done to strengthen our operating and financial position. This business model is strong and we believe Dollar General is well positioned to drive sustainable long-term growth on both the top and bottom lines while creating long-term shareholder value. With that, I’ll turn the call back over to Todd.

Todd Vasos: Thank you, Kelly. I’ll take the next few minutes to provide updates on three of the most important initiatives across the business. As we look to further advance our progress toward achieving our short and long-term goals. I’ll start with our real estate work. As we continue to focus on driving sales and market share growth by expanding our unique real estate footprint while also enhancing our mature store base. We opened 204 new stores in Q2, primarily using our 8,500 square foot format in rural markets. Dollar General continues to serve as a vital partner, bringing value and convenience to communities across the country through new store growth.

In addition to our US growth, we opened four new stores in Mexico during the quarter, bringing us to a total of 13. Our team is doing a wonderful job serving those communities as we continue to test and learn and further develop that potential growth opportunity. We are also pleased with the progress of our remodel projects, As a reminder, in addition to our traditional remodel program, which we call Project Renovate, we have introduced a new incremental remodel program called project elevate in 2025. This initiative is designed to drive sales and market share growth in portions of our mature store base that are not yet old enough to be part of a full remodel pipeline.

These projects include physical asset investments as well as merchandising optimization, product adjacency adjustments, and category refreshes, all of which impacts approximately 80% of the total store. We completed 729 project elevate remodels in Q2 and an additional 592 project renovate remodels during the quarter. While still early, we expect to reach our goal of delivering first-year annualized comp sales lifts in the range of 6% to 8% for project renovate stores and three to 5% for project elevate stores. Importantly, we’ve seen significant improvements in customer satisfaction in these locations upon completion of the remodels.

And we believe the improved performance and customer response in these stores paves the way to make Project Elevate a key component of our real estate strategy in the years ahead. The next area I want to discuss is our digital initiative. Which serves as an important complement to our expansive store footprint as we continue to deploy and leverage technology to further enhance convenience and access for our customers. Our digital capabilities include an engaging mobile app and website that continues to be very popular with our customers as well as growing our delivery options and DG media net. We continue to expand the reach of our delivery options with solutions targeted both new and existing customers.

Our DoorDash partnership, now serves more than 17,000 stores, continues to drive significant incrementality and sales growth. To that end, our Q2 sales through this platform increased by more than 60% year over year. Building on this success, we partnered with DoorDash to launch our own same-day delivery offering through our DG digital solutions late in 2024. We have now expanded this offering to nearly 6,000 stores. We are also excited to note that we now expect to offer DG delivery for more than 16,000 stores by year’s end. Compared to our previous expectation of approximately 10,000 stores.

And most recently, we entered a partnership with Uber Eats to further expand the reach of our delivery capabilities as we provide value and convenience to customers on their platform. We have already expanded to approximately 4,000 stores with Uber and expect to be in approximately 14,000 stores by the ‘3. Collectively, more than 75% of the orders through these offerings are delivered in one hour or less. Ultimately, we believe this suite of delivery options will introduce new customers to Dollar General and drive incremental sales growth while also further enhancing the value and convenient proposition for our existing customer base.

The linchpin of our digital initiative is our DG media network, which enables a more personalized experience for a unique customer base while delivering a higher return on ad spend for our partners. We continue to be pleased with the performance of DG Media Network. Which is driving significant year-over-year growth in retail media volume as partners seek to access our unique customer base.

This initiative is an important component of our strategy to deliver on our long-term growth framework and we are excited about its Over time, we believe we can leverage our digital initiative to increase market share and drive profitable sales growth while further evolving our relationship with our customers and driving greater customer loyalty within the digital platform. The final initiative I want to discuss is our non-consumables growth strategy. As a reminder, we are focused on a few key growth drivers in our non-consumable categories over the next three years. These include brand partnerships, a revamped treasure hunt experience, and reallocation of space within our home category.

During Q2, we were pleased to deliver positive quarterly same-store sales growth in each of the three non-consumable categories for the second consecutive quarter. Notably, the magnitude of growth was broad-based with same-store sales increases in each of these categories of at least two and a half percent. Our brand partnerships are resonating with customers, and we have been pleased with the strong sell-through in many of these sets. As a result of the success, as well as our improved execution, our home products category saw its largest quarterly same-store sales increase in more than four years. In addition, our pop shelf stores delivered another quarter of strong same-store sales growth.

We continue to be pleased with the performance of the new store layout in this banner including a greater emphasis on categories such as toys, party, candy, and beauty. The pop shelf banner also continues to produce learnings that we are able to apply to our non-consumable categories in our Dollar General stores to further strengthen that offering for our DG customers. We believe our non-consumable sales performance both in Dollar General and Popshelf stores also benefited from improved execution in our stores and supply chain. As well as from the expanded trade in shopping we’ve seen from middle and higher-income customers.

These results, strong sales performance and market share gains continue to demonstrate that our treasure hunt approach is resonating with the customer. In turn, we believe we are well-positioned to serve them in these discretionary categories in stores across both banners and ultimately drive further growth in both sales and gross margin. In closing, we’re pleased with our second-quarter performance. Operationally, we are improving execution stabilizing our workforce through lower turnover rates, advancing our key initiatives, and enhancing our position for sustainable long-term growth. Financially, we’re delivering balanced sales growth significant margin improvement, and strong earnings, while also strengthening our balance sheet and operating cash flow.

With that said, we have ample opportunity in front of us to drive growth and further improve our operating and financial performance. And this team is laser-focused on delivering on these goals. As an essential partner in communities across the country, our customers rely on Dollar General in all economic environments. Delivering on our mission of serving others continues to guide everything we do, and we are excited about our plans for the back 2025 and beyond. Lastly, I want to thank our more than 195,000 employees for their commitment and dedication. And I’m looking forward to all we can accomplish together in the second half of the year.

With that operator, we would now like to open the lines for questions.

Operator: Thank you. At this time, we’ll be conducting a question and answer session. If you like to ask a question, please press star 1 from your telephone keypad, a confirmation tone will indicate your line is in the question queue. May press star 2 if you’d like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. We may address questions for as many participants as possible, ask you to please limit yourself to one question. One moment please for our first question. And the first question is from the line of Michael Lasser with UBS. Please proceed with your question.

Michael Lasser: Good morning. Thank you so much for taking my question. Given that you are optimistic that shrink could contribute more than 80 basis points to your long-term financial framework. Does that mean that you expect to be able to realize the six to 7% operating margin maybe as soon as next year, or, alternatively, your long-term range should be recalibrated above 7%, or are you seeing anything in the environment that might suggest you’ll have to take some of this upside and shrink and other factors and reinvest it back in the business in order to drive the top line. Thank you so much.

Kelly Dilts: Yeah. Thank you, Michael. Great question. So we are definitely optimistic that we could potentially outperform on shrink and get a little bit more than 80 basis points over the mid to longer term. But we’re still targeting that long-term framework of 6% to 7% on the operating margin. This quarter just solidifies the fact that we feel good about where we are. Shrink is a big component of that and we’ve got a lot of strategies and initiatives in place to achieving that long-term framework. I think what’s important for us is not only getting to that 6% to 7%, but also the sustainability of that operating margin as we go forward.

Operator: The next question is from the line of Simeon Gutman with Morgan Stanley. Please proceed with your question.

Simeon Gutman: Hey. Good morning, everyone. And, Kelly, good working with you, and then eventually, congratulations to Donnie. I’m gonna ask you a two-part you’re welcome. Two-part question. So first, if you take the gross margin in the second quarter, and we hold that base, it does look like it steps down in Q3, but is there any reason why it should step down more than expected seasonally? Meaning, is there anything temporal about the gross margin that’s not a good proxy? And then second, Todd, from when you came back in 2023, thinking about all the execution items, can you talk about what’s left and what you’ve gotten done? Thanks.

Kelly Dilts: Yes. So I’ll answer the gross margin question first. What we’re seeing now is obviously just an outperformance on shrink. So 108 basis points this quarter of the 137 basis points improvement. As we think about cadence for the back half, we’re certainly expecting a year-over-year improvement in both of the quarters. But what I would tell you is we actually have tougher laps in Q4 on the gross margin front. And so we would expect maybe a little bit less on Q4 as far as improvement over year-over-year. And then you didn’t ask about SG and A, but I do want to call out just one thing on the SG and A front.

We would expect more pressure in SG and A in the third quarter, and that’s really around repairs and maintenance. It’s kind of the season for repairs and maintenance we get into hurricane season and we’re still kind of in that warm weather. But what’s the big contributor there is we’re also wrapping up our project Elevate and Renovate. Projects mostly in the third quarter, and so that puts a little bit of pressure on Q3.

Todd Vasos: Yes. And Simeon, I am very, very pleased with where we are, with our back-to-basics work. I would tell you that the team has done a really good job from, back of house. So our supply chain, our merchants, to front of house, if you will, and that’s in our stores and the execution. It really is paying off. You can see it in our top line. Not only a strong 2.8% comparable sales number that we posted, but as you look at that sales number, it’s very balanced. Consumables and non-consumables contributed very nicely to that 2.8%. I would tell you that we are retailers.

We always have work to do as it relates to a lot of what we’ve been working on. But, again, if I was to step back and think about it and base terms and innings, I would say we’re in the very late innings of this game. And then we’re really into now sustainability. Of what we have worked on. And I would tell you, feel real good about that as well. From a couple standpoints. Number one, we have done a really nice job in our turnover rates have come down. We’ve had some consecutive quarters of those decreases and we continue to be happy with where we’re at.

I would tell you that our pipeline for folks coming into the organization is as robust as ever. And I’m very happy to say that our store manager turnover rates are down again this quarter. So a lot of what we’ve been working on to make life easier at the store level is starting to really resonate not only with the customer, but our employee base, which is really important.

Operator: Our next question is from the line of Rupesh Parikh with Oppenheimer. Please proceed with your question.

Rupesh Parikh: Good morning, and thanks for taking my question. And also, Kelly, best of luck. So I’m gonna focus my comments just on delivery. So as you look at the DoorDash and I guess Uber is still very early, but just any surprises or key learnings to date? And then, you know, as you’ve added Uber, like, how do you think about the incrementality of that offering? Thank you.

Todd Vasos: Yeah. Rupesh, thank you. Yeah. I can tell you, our digital solutions in general, just totality, we’re very happy with where we are. Very early innings. Again, baseball analogy for you. Very early innings on our digital journey. But as you know, and you’ve pointed out, DoorDash has been really the start of our digital journey, if you will, from a delivery perspective. We’re up to 17,000 locations which is great to see. And I would tell you that we saw a 60% year-over-year increase on that platform. And by the way, off of a pretty robust number to start with. So very happy with what we’re seeing there.

But the team isn’t slowing down here because again, we’re in the early innings. Saw where we just signed a deal with Uber Eats. We are happy with what we are seeing very early there in the partnership. 4,000 stores up and running. And by the end of the third quarter, we’ll have 14 stores is what our goal to have up and running on that platform. And that just expands the reach to our to our consumer. And then last lastly, on our delivery piece, white label program that we stood up Again, very early days, but we’re seeing both incrementality there as well as larger bass baskets.

And these larger baskets and some of them well north of $20 baskets for us would point to incremental ality and would point to more of a fill up versus a fill in. With that notion, you would feel that and we feel that a lot of it is incremental to our base. The great thing about our delivery piece is we are going to have more and more stores up and running. Believe we were great to be able to put out there 16,000 by year end now. Which is an acceleration from where we were. And I think that’s a real testament to what we’ve already seen so far.

You know, to use my terminology, we’re gonna put the pedal to the metal here. Because we see some real opportunity ahead. And I would tell you again the platform across all the digital properties The linchpin of this is our digital media network. And again, it has shown strong results this quarter. And continues to show strong results. So stay tuned there because I believe there’s going to be even more incrementality that comes from that media network. We have a very unique customer base, as you know, being that 80% of our stores are in small town rural America.

And it is hard for CPG companies and other companies to get ahold of clientele that is just in those areas and we have all that data. And so that data will be used in our media network. And I would tell you that our partners already very interested in that. And then lastly, our secret sauce here, if you will, is that so far to date, we have seen that 75% plus of our deliveries are in one hour or less. And I would tell you that is the fastest that we’ve seen out there across the spectrum so far. Rural America where it is hard to reach many, many customers.

So, we believe that’s a competitive advantage for us. And will continue to be as we move forward.

Operator: Our new question is from the line of Matthew Boss with JPMorgan. Please proceed with your question.

Matthew Boss: Thanks and congrats on a nice quarter. So Todd, on your forecast for increasing pressure, on the low-income consumer as the year progresses, what are you seeing in your survey work today across your income, customer cohorts? And where do you see DG’s value proposition as it stands today relative to opportunities maybe planned to amplify value? And Kelly, on the gross margin, where do you see shrink recovery in terms of innings today? And how best to think about additional drivers of gross margin multiyear from here?

Todd Vasos: Yeah. I’ll start, Kelly, and, send it over to you. You know, right now, Matt, I would tell you that, I would characterize the number one as resilient. And number two, seeking value. And seeking value we’re seeing that in all cohorts of customer, meaning our core customer, mid and high-end customers, all seeking value at this point. We’re seeing in our numbers, our trade-in has been accelerating over the last few quarters. We saw that again And what we’re seeing from the customer You know, coming into and out of Q2. is a good start to Q3. Our back-to-school offering was solid and in good shape.

And I would tell you our harvest and Halloween programs are off to a great start. It really shows and what we see in our data is not only our existing customers, but those new customers coming in. And those new customers coming in have a little extra money in their pocket to spend on that non-consumable categories. And as you heard in my prepared remarks, and I mentioned earlier, we saw a really nice balance in our sales of both consumables and non-consumables. But I would tell you, it’s it’s much deeper than that as well. As they seek value, we have a great proposition for them. Right?

So our everyday low price stance, we have never lost focus on that. We’re as good as ever across all classes of trade on our everyday price, and our customers resonate with that very nicely. We have a great promotional cadence that we use. To continue to stimulate that consumer and especially stimulate these newer consumers as they come in to, to deliver value because they’re not as familiar with that value proposition and what we offer them. So that digital through digital properties, we’re able to reach them. And, so a nice promotional cadence in as well.

Here’s the other value proposition that I think gets lost at times, and that is we still have and will continue to have at least 2,000 items at a dollar or less every day on the shelf. Matter of fact, our Value Valley area, which I know you know, Matt, pretty well, we have over 500 SKUs, and they’re rotating SKUs. At that $1 price point still today. With 2,000 overall inside the store. And I would tell you in Value and across the store, the gross margin on those items are it may exceed the category margins in each one of those items that they play in. So it’s very sustainable for us.

And by the way, when you look across the retail spectrum, it’s a very elusive price point at this point. I would say we’re one of the only ones that have really doubled down here and really pushed that $1 price point. So value to me, and I believe as our consumers look at it, is multi-pronged here at Dollar General and is very sustainable.

Kelly Dilts: On the gross margin side, take it in a couple of pieces. So first on the shrink side, again, we were just really excited to be outperforming the shrink reduction that we contemplated in our long-term framework again and timing and magnitude. Shrink continues to build then the trend and like I talked to earlier, we do anticipate it’s going to continue to be a tailwind. Into 2025 even with the tougher lap in the second half and particularly in Q4. If you don’t mind, I’m just going to list out all the actions that we’re taking because as you know, we’ve got a full team that sits on this shrink problem and they are really producing it results.

The first thing was just the self-checkout conversion and that’s been a big tailwind. But we’re also getting back to our operational excellence with strong in-store control environments and we see that because we continue to see shrink improvement in stores that never had self-checkout. And so that’s great to see. All the inventory reduction and SKU rationalization work is contributing. The improving retail turnover that you heard us talk about is certainly a contributor to this as well as just the expanded shrink incentive programs that we put in place.

We’re still utilizing the high shrink planograms Then as you know, we really worked at this end-to-end process in so that we make sure that we’re mitigating shrink at all points of exposure. I think what all of this combined gets us really excited because there’s as you can remember, it takes a full year for benefits of any actions to truly show up in the P and L. And our workaround shrink never ends, as we add continual actions, we should see some improvement.

So over the mid to long term, we do feel optimistic that we would give it more than the 80 basis points of shrink improvement I think the other piece that we’ve talked about in the long-term framework and that we’re starting to see improve is also around damages. So our goal going into 2025 for damages was flat to slightly favorable. We’re still holding that in the back half but I’ll tell you that Q2 exceeded our expectations and as you saw, it was actually a call out of the good guy in our variance analysis in our earnings release.

So really pleased to see that starting to take hold and just like shrink, we’ve got a team after this A lot of the things that help us on the shrink side also help us on the damage side, which is the inventory reduction, SKU rationalization. We’re also having a full court effort around product rotation, getting more precise in our inventory allocation, which helps us to mitigate future expiration damages. Then just that proactive investment in the repairs and maintenance through our two remodel programs should also help us reduce cooler damages.

So I would tell you between the two overall, we are just feeling really good about the path to improvement, that 80 basis point on shrink, the 40 basis points on damages that we identified in our framework that we rolled out in March. And then just on the initiative side, think you’ve heard Todd talk all about the initiatives that we have in place to drive their 150 basis points around DG media network, all the exciting things that we’re doing with delivery and the non-consumable as well. So we feel good about gross margin as we head into that mid and longer term.

Operator: Our next question is from the line of Edward Kelly with Wells Fargo. Please proceed with your question.

Edward Kelly: Hi. Good morning, everyone. Thank you for taking my question. I wanted to follow-up on the gross margin. Obviously, a very strong result this quarter, shrank a big driver. You know, but LIFO was an offset, and it does seem like there’s I don’t know, roughly, like, 80 basis points in here of, you know, a tailwind that I mean, I guess, it seems like a lot of it is initial markup. So can you just talk about, you know, what that is? And then just a quick follow-up. SG and A, you know, there has been some talking about increased higher liability claims.

Just kinda curious, is that something that are seeing, sort of like where you are in the process there, from, an actuarial standpoint in assessment, and if there’s any risk there. Thanks.

Kelly Dilts: Yeah, thank you for the question. So, yeah, on the LIFO, would say, you know, year to date Q2 reflects what we know as regards to current tariff rates as well as it contemplates any cost increases that we’ve gotten from any of our vendors. If you step back and just take a look at the big picture what I would say is of the 137 basis points improvement in gross margin, we got 108 basis points of that in shrink. And then we’re getting 29 basis points tailwind from all of the other areas combined. Solid improvement on the gross margin front.

Todd Vasos: You to address workers’ comp and those people?

Kelly Dilts: Yeah. Thank you, Todd. And then on the general liability front, we are seeing some impact. It’s not material. Generally, we’re seeing the trend towards claims being more expensive as resolve those, but not material impact to us right now. Trends that we are seeing has certainly been contemplated in our guidance.

Operator: Our next question is from the line of Zihan Ma with Bernstein. Please proceed with your question.

Zihan Ma: Great. Thank you so much for taking my question. I wanted to break down the comp sales performance a bit more. In terms of, you mentioned, the trade-in benefit and also, of course, the better store operations driving more traffic. Can you help us better understand what proportion of the comp is driven by more macro-oriented trade-in versus more company-specific? And then going into next year as we start to lap the tougher trading comps, what is going to be sustainable on the top line? Thank you.

Todd Vasos: Yeah. Well, I would think as we look at where we are today, let me address the first part. And then we’ll get to that sustainability piece. We feel good about where we are both from our core consumer as well as the trade-in consumer. And I would tell you that a lot of the work that we did Back to Basics has served us well. And, quite frankly, has set us up nicely for that trade-in consumer. As that trade-in consumer came into the brand, over the last few quarters, they’ve seen a better store both from cleanliness in stock, as well as friendly as well as having somebody at the front end to meet and greet them.

So I would tell you that from all the work that the team has done organically, has produced a nice outcome. On the comp of 2.8%. I would tell you that as I look at the composition, as I mentioned earlier, being pretty balanced between consumables and non-consumables, that The work the team has done on the merchandising side on our non-consumable business has been phenomenal. All these brand partnerships that we’ve been talking about along with great execution at store level, and the flow of freight from our distribution centers has all been very, very good to deliver that outsized comp that we saw in our non-consumable businesses.

We believe as we move to the back half of the year, we’re well positioned. Think about it this way, right now, as we look at the back half of the year, our value proposition is as strong as ever. Matter of fact, we’ve got about $1 SKUs for the seasonal piece for the back half of the year. 25% of the offering is at $1 or less. So even in the face of tariffs, we’ve been able to maintain a $1 price point in our seasonal offering, which should resonate with the consumer. Matter of fact, 70% of the total offering is at $3 or less. So again, the team has done a great job.

What that shows me, and I believe will show in our results with our customer is that value is alive and well at Dollar General. They’re and they are seeing that as they trade into the brand. So I would say it’s really both sides. It was some self-help but also that consumer coming into the brand. But without that self-help, I’m not so sure that she would have stuck with us. That really brings me to the second part of your question. And we do this very well and that is being able to retain that trade-in customer We’ve got a playbook that is very robust and dense. We digitized it a few years back coming out of COVID.

And what I mean by digitize it, we had a great playbook coming out of the great recession, call it that 02/1011 time frame. We digitized it coming out of COVID in 2122. And now we’re pulling that playbook back out. Matter of fact, we’ve already started marketing to these new customers digitally. To, one, continue to keep them engaged and two, hopefully keep them on that Dollar General journey even if time start to get a little better or different for that core consumer. So or I’m sorry for that trade-in consumer. So we’re working on all angles as you would imagine from Dollar General. But comp sales are the lifeblood of this business.

And we’re pushing to deliver a comp at or above where we said we would be.

Operator: The next question is from the line of Chuck Grom with Gordon Haskett. Please proceed with your question.

Chuck Grom: Thanks. Good morning. Real nice work here, Todd. You know, it seems like the only really missing ingredient here is getting the comp back above 3% and being able to do it consistently. I guess, how are you feeling about that opportunity and what are the drivers to get there? And then, Kelly, the gross margin line, a lot of questions there. Can you talk about the interrelationship between shrink and inventory damages and maybe size up the damages opportunity relative to maybe where you were the past couple of years? Thank you.

Todd Vasos: Yeah, Chuck, thanks for the question. In our long-term framework, as you probably recall, we feel very comfortable in that two to 3% to deliver that. Now we are retailers. You know me pretty well. You know this team well. We will strive for more to drive it above those numbers. But I would tell you, we feel very comfortable in two to three range as we go forward. Now in saying that, we’ve got a lot of drivers, not only the self-help that we talked about, not only that great value proposition, that we continue to have for our core consumer as well as these trade-in consumers But what we also have is a plethora of initiatives.

So when you start to think about our project renovate and elevate, stores, those are great comp drivers. Matter of fact, our mature store base really threw off a very nice comp this past quarter. A lot of that driven again on all of the initiatives that we laid out but also as you start to look at what projects elevate and renovate, are doing, they’re they’re they’re starting to produce those comps of six to eight for renovate and starting to produce and working our way to three to five on the on the project elevate stores. So those are all great mature store based comp drivers.

And we’ve got a long runway for that as you would imagine over the next few years. With 20 to almost 21,000 stores now in the portfolio. So we’ve got a great opportunity there. And by the way, the customer response has been overwhelming on these remodels. And as important, so has our associate our employee base has really loved the and because they’re very proud because the customer is loving it. And then lastly, we want to deliver a very balanced portfolio sales. Those non-consumable initiatives continue to be very important.

And I would tell you that, that PopShelf will continue to be important for us as we continue to test learn, and then bring back to the mothership, if you will, Dollar General, those learnings and then deploy those across the chain. We’re doing that as we speak, and I believe that’s been some of the comp driver you’ve also seen on our non-consumable businesses.

Kelly Dilts: And then just as I think about shrink and damages, one thing I’d just like to say is, seeing shrink and damages improve together is a real positive. And so you know, we’ve talked a lot about strengths and maybe I’ll just give you a little bit more color on the damage side. Like I noted just a little bit earlier that we did expect damages to be flat to slightly favorable as we work towards that 40 basis points improvement over our mid to long-term framework. And we believe we’re well on our way to that with Q2 exceeding our expectations there.

And so as you as you’re probably noting in your question, a lot of the things that improve shrink will also improve damages and we’re seeing all of those things come to fruition. And so we feel good about our ability and our to that 40 basis points of improvement.

Operator: The next question comes from the line of Seth Sigman with Barclays. Please proceed with your question.

Seth Sigman: Hey, good morning, everyone. I wanted to focus on SG and A. Q2 seemed unique because of the incentive comp Returning. You talked about maintenance and repairs, I guess, in Q3. Can you talk a little bit more about the path back to normal operating leverage in light of the 2% to 3% comps that you mentioned? Guess a lot of costs have come back over the last two years, including this year or year to date. Should we assume this is just catch up and then we enter next year with a more normal expense base? How do you guys think about that? Thank you so much.

Kelly Dilts: Yes. No. That incentive piece is certainly a big headwind for us this year, almost $200 million. And so I think probably a more normalized rate is one that we would exit out of this year. As we think about going into 2026. I will say, there’s just been a ton of work around just making sure that we’re mitigating SG and A deleverage as we move forward. It’s part of our framework that we called out so that the huge focus for us. Specifically around simplifying work and driving efficiencies, as well as we think about the CapEx side and how it plays into depreciation. Just optimizing CapEx to stabilize depreciation and amortization.

And so working hard to make sure we’re mitigating that SG and A deleverage. And then with all of the gross margin levers that we have in place, that’s where we feel really good about getting to that 6% to 7% framework as we go over the mid to longer term.

Operator: The next question is from the line of Kelly Bania with BMO Capital Markets.

Kelly Bania: Hi. Good morning, and best of luck to you as well, Kelly. Thank you. Wanted to wanted to dig into the to the comp on the discretionary side. Sounds like the they were in that maybe 2.5 range, but can you unpack that between the price mix and units and just help us understand what is in the plan in terms of inflation for those discretionary categories in the back half?

Todd Vasos: That’s a great question. I would tell you that the AUR was very similar year over year in those categories. Matter of fact, you know, a lot of this is spring and summer during Q2 sales in seasonal areas as an example, and a lot of the goods that we brought in prior to tariffs really were the drivers here. So tariff and price increases were not a real factor in our overall comp in non-consumables. And as I mentioned earlier, even with tariff numbers starting to flow into our seasonal home and other categories, we’re still holding price points on many of them.

You heard me mention the 25% of our holiday assortment will be at a dollar or less. And as we look at 70% of our offering, still being at $3 or less. I would tell you that the team has done a really good job of trading off items and bringing in new items for the seasonal areas to keep price points pretty stable for our consumer overall, especially as we look at non-consumable businesses. I feel as if the business is very stable but growing. And the reason I am bullish there is we’re seeing the takeaway early on our holiday, especially in our harvest and Halloween areas. And those areas, again, have tariff rates embedded in them.

But again, very manageable for our core consumer. And then lastly, I would tell you that all of the work that the team has done in non-consumables is really starting to come together and start to generate this positive momentum we’re seeing. To your point, each of the three major categories in our non-consumable areas comped at 2.5 plus. Some of them couple of them crossed in the three mark. And I would tell you, you know, feeling really good about that sustained momentum as we go forward with all the work that the team has done through brand partnerships, as well as the what the team has done at execution at store level.

And I can’t say enough about that. That is a very big component especially for our trade-in consumer that’s coming in to resonate with these items.

Operator: The next question is from the line of Peter Keith with Piper Sandler. Please proceed with your question.

Peter Keith: Hi, thank you. Nice quarter, guys. And, Kelly, best wishes. Thank you. I was wondering if you had an early view on how the one big, beautiful bill will have an impact on your core customer And then maybe digging into that a little bit, looks like Snap Dollar’s will get cut starting in October. Maybe by about high single digit percent. Is that something that’s factored into the outlook? Do you think that will have any impact?

Todd Vasos: Yeah. Let me take the first one first. It Everything we know to date is factored into our outlook. Now, we don’t believe in snap things that are out there, especially those related to work requirements, will be very impactful for us. As we went through this a few years ago, the work rule requirements was not really a factor for that SNAP customer for us. Now as you look at the bill in totality, whether it s this year and items that will be coming up from 26 through ’29. You know, we believe, overall, it should be a little bit of a tailwind for our core consumer.

Some of you may be surprised at that, but I would tell you as you look at those areas, especially the ones that are already in play, even though a lot of them won’t be they won’t recognize the income until tax time next year. You know, things like no tax on tips. Up to the, you know, up to the levels. No tax on overtime. The Social Security no tax pieces. All of that is very beneficial for our core consumer. And we believe we will get our fair share of those benefits. As we move forward. So a lot of positives, at least initially early.

Some of the headwinds broader snap cuts perhaps and a few other things that probably come more in late twenty seven, twenty eight. We’ll continue to watch for. And see how they progress and what they look like But overall, feel really good about what our core customer initially will see from these tax benefits. We believe it really will be including the child tax credits, really be a benefit for our core consumer.

Operator: Thank you. Our last question is from the line of Robbie Ohmes with Bank of America. Please proceed with your question.

Robbie Ohmes: Oh, thanks for sneaking in sneaking me in here. Todd, can you just talk about what Dollar General? Remind what you guys are doing on the fresh initiatives you guys are doing with DG Market and maybe how you see competing with Walmart and I guess, maybe even Amazon at some point trying to get more fresh food delivery into the rural markets.

Todd Vasos: Yeah. Thank you for the question. We’re really proud about the work that we’ve done in these fresh categories. And quite frankly, that work has been going on and accelerating for the last twelve, thirteen years here at excuse me, at Dollar General. As you As a reminder, we stood up our own fresh distribution network in 2021 and into early twenty two. Which has given us a real leg up and opportunity to get product to our stores. Timely and in full. We’ve got produce now in 7,000 plus stores. We have got fresh meat in thousands of others.

We are building our DG market concept and also putting produce in even outside of DG Market concept in our in our Dollar General stores where it makes sense. Especially as you mentioned in rural America. And the great thing about our delivery pieces is that and we’re already seeing it in rural America where folks are buying those fresh items, fresh, frozen, deli, dairy, produce online and being delivered in an hour or less. To our consumer base. We believe again, as I mentioned earlier, that to be a competitive advantage as we move forward, especially the speed that we’re able to offer her and at the value pricing that she knows and loves for that Dollar General already.

So we believe that it’s a powerful combination. That we will continue to cultivate in the years to come.

Operator: Thank you. At this time, we’ve reached the end of our question and answer session. This will also conclude today’s conference. You may now disconnect your lines at this time. We thank you for your participation, and have a wonderful day.

Image source: The Motley Fool.

DATE

Thursday, August 28, 2025 at 5 p.m. ET

CALL PARTICIPANTS

Chief Executive Officer — Max Levchin

Chief Financial Officer — Michael Linford

SVP, Investor Relations — Zane Keller

SVP, Finance — Rob O’Hare

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TAKEAWAYS

Record Quarterly Performance—Affirm Holdings(AFRM 3.08%) reported new records for most key operational and financial metrics, which management noted is unusual for a fiscal fourth quarter ended June 30, 2025, outside the normal seasonal peak.

Repeat Borrower Rate— 95% of transactions in the fiscal fourth quarter ended June 30, 2025, were from repeat borrowers, indicating high platform engagement.

0% APR First-Time User Penetration— Approximately 50% of first-time users in the most recent quarter originated on 0% APR products, with these users exhibiting repeat usage patterns similar to the broader user base.

Conversion from 0% to Interest-Bearing— Customers who initially use 0% APR loans convert to interest-bearing products, according to management, providing incremental future revenue streams.

Merchant Adoption of 0% APR— The number of merchants subsidizing 0% APR loans doubled year over year.

Funding Capacity Growth— Funding capacity grew by approximately 55% year over year, as Affirm secured additional “blue chip” capital partners focused on long-term relationships.

Affirm Card Metrics— Card annualized GMV reached $1.2 billion and the attach rate reached 10%, with trailing 12-month average GMV per cardholder rising from $3,500 to $4,700 for the period ended June 30, 2025.

AI-Powered Adaptive Checkout (Adapt AI)— Adapt AI deployment led to an average 5% increase in GMV for participating merchants by optimizing financing offers at checkout.

International Expansion Progress— Initial “friends and family” testing has begun in the UK in partnership with Shopify, with early results showing higher interest-bearing product mix.

Enterprise Merchant Relationship Wind-Down— Guidance assumes integration with a significant enterprise partner will be fully concluded in the second quarter of fiscal 2026, with zero volume expected thereafter.

Revenue Less Transaction Cost (RLTC) Outlook— Management expects the RLTC take rate to remain at the high end of the targeted 3%-4% range based on current product mix trends.

SUMMARY

Management confirmed accelerated growth across core metrics in the fiscal fourth quarter ended June 30, 2025, and significant expansion of the 0% APR product among both users and merchants. Repeat engagement climbed, with a substantial proportion of total volume attributed to returning customers. Funding capacity grew by approximately 55% year over year and deepening long-term partnerships with leading asset managers. Innovative AI deployments, notably Adapt AI, demonstrated measurable uplift in merchant sales conversion. International entry is underway via UK pilots, supported by the Shopify channel, signaling future additional geographic moves.

Max Levchin said, “our growth is accelerating, and we are firing on old pistons.”

Michael Linford said, “a one-point move in reference rates should translate to about a 40 bps change in our funding cost,” with impacts flowing through gradually given portfolio duration.

The company highlighted that 0% APR loans remain “still profitable” for Affirm despite lower margins, as they convert users to more lucrative products over time.

Affirm indicated no anticipated impact to its underwriting standards or credit controls despite an increasingly competitive funding and lending landscape.

INDUSTRY GLOSSARY

GMV (Gross Merchandise Volume): The total dollar value of transactions processed on the Affirm platform within a period.

RLTC (Revenue Less Transaction Cost): A profitability metric defined as revenue net of direct transaction costs, used by Affirm to track unit economics.

Attach Rate: The proportion of total eligible transactions in which a specific product, such as the Affirm card, is used.

Adaptive Checkout / Adapt AI: Affirm’s proprietary checkout flow enhanced by machine learning, which customizes financing offers for each consumer to optimize conversion and merchant economics.

0% APR Product: A loan or installment financing offer provided at zero interest to the consumer, typically subsidized by participating merchants.

Repeat Borrower Rate: The percentage of total transactions originated by customers who have previously borrowed through the Affirm platform.

Full Conference Call Transcript

Max Levchin: Thank you, Zane. The results, which I do think are exceptionally strong, is all the explaining we need to do. So just one tidbit. Left on a cutting room floor. That we didn’t just crush this quarter. We actually set a new record most of our metrics, which is unusual fiscal Q2 is a normal peak, but this is Q4, and, yep, it is the record. So that’s really cool. Tell you that our growth is accelerating, and we are firing on old pistons. Also, we just celebrated Libor’s decade at a firm a few months ago, and so I want to Michael on his seven years here as of yesterday. And Rob’s upcoming fifth anniversary this Sunday.

Privilege to lead an extremely talented and dedicated team, and I don’t take for granted that they and their families are willing to put up with my antics for so many years. Thank you guys, and here’s to many more years of building a firm together. Back to you, Zane.

Zane Keller: Okay. Great. Thank you, Max. With that, we’ll now take your questions. Operator, please open the line for our first question.

Operator: Great. We will now be conducting a question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. Confirmation tone will indicate that your line is in the question queue. You may press 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. One moment while we poll for questions.

Dan Dolev: And our first question comes from the line of Dan Dolev with Mizuho. Please proceed with your question.

Dan Dolev: Hey, guys. Max, Rob, Michael. Great results as always. So obviously, really strong quarter, amazing guide for next year. It sounds like last quarter, you were talking a little bit about the potential stress and the impact on the firm. It sounds like things have gotten a little better for you from when you reported last time to now. And it has what is, you know, what is your best take on how things stand now and what are the reasons for that optimism? Again, really strong stuff. Very good.

Max Levchin: Thank you, Hans. You know, as Michael loves to say, we take our guidance very seriously and on the side of being thoughtful and, aiming to, get ourselves some a pluses. Instead of just straight a’s. And, we typically, do deliver. Not a forward-looking statement. But you know, from the consumer point of view, which I gather was the question we think that it continues to perform. It’s really maybe a commentary on how strong the momentum is in The US and to at least similar degree Canadian consumer. And, soon, we’ll find out that looks like for UK one. But we’re feeling very good about the originations we’re driving.

We feel quite excellent about our ability to get paid back on time. So the credit side of the equation, continues to perform really well. On the demand for our service, you see the acceleration in GMV and the, new record in that sense. It off calendar, if you will, is also a reflection of the fact that folks are using Affirm for more and more things.

Dan Dolev: Thank you. Great stuff again. Thank you. And our next question comes from the line of Dan Perlin with RBC Capital Markets. Please proceed with your question.

Dan Perlin: Thanks. Good evening, everyone. So I want to go back to the 0% APRs with the first-time users coming in. I think you said that was, like, 50% Mhmm. Which is, again, like, a very, very strong number. So the question is it’s bringing in a lot of new users. I’m wondering when you look at kinda prior quarters, obviously, you can’t look at it this quarter, but prior quarters, what kind of, like, repeat rates are you able to, I guess, glean from those initial users coming in? And the real crux of the question is, are they coming on the platform because of 0% APR, but they’re not using it again?

Or are they behaving similar to maybe more traditional firm user? Thank you. It’s a great question. I appreciate the implied dig at how real are these growth users, but I have good news on that front. They do repeat. Obviously, every credit strata behaves a little bit differently in a sense that folks choose us more or less depending on what alternatives they have, how they feel about the merchant coverage or the deal covers that they want.

But generally speaking, there’s not a tremendous difference in terms of repeat of users that have been acquired through zeros or not, But the more interesting thing, which you didn’t ask, but I’m gonna answer anyway, is do zero users flip over to interest bearing? And they do. And that’s, I think, is a really, really important indicator. Obviously, 0% transactions are somewhat less profitable for us. They’re still profitable, so this is not a loss leader. But the interest income that comes in interest-bearing loans, is obviously more profitable, and those folks enjoy zeros when they are available to them.

But experience using Affirm is so positive, they do convert to interest-bearing users just fine and, come back to us for many other things than just zeros. That’s great. I figured I’d sort of dig in early. So thanks. Oh, yeah. That’s a good it’s I when I was reading her numbers, like, you know, what would I stick my finger and be like, how good is that? And this is a good one to ask. Yeah. And the answer positive. Awesome. Yeah. That’s fantastic. Thank you. Have a good one.

Adam Frisch: Thank you. And our next question comes from the line of Adam Frisch with Evercore ISI. Please proceed with your question.

Adam Frisch: Hey, guys. Good afternoon. It seems like you guys are just Max, I’ll quote you. You guys are crushing it. The only thing I could see kinda derailing the story is what’s going on with the consumer. And if you expect things like the resumption of college loans and so forth, maybe the data around consumers gets a little dicier in the next couple months into the end of the year. Could you just remind us where you are in your spectrum of the folks that use your platform, where they are on the FICO scores relatively, like, how many of your transactions are with consumers that are near prime, prime, or super prime?

So when the data inevitably comes out, the consumer might be getting a little shakier, we have someone to fall back on in terms of the quality of the folks engaging. With Affirm. Thank you.

Max Levchin: I don’t know if it’s gonna come out any sooner than right now. It’s all our supplements, I think. But generally speaking, student loan repayment resumption is something that we’ve all been aware of. Of for quite some time and have definitely taken measures to make sure we are not overextending that borrower and also monitoring how that is going for them. And so it the reason or the fact that we don’t give or didn’t give an enormous amount of attention to the credit performance in this particular letter, isn’t because we forgot. It’s because it’s been highly consistent and con perform really well.

But it also doesn’t mean we’ve taken our eyes off The sort of the thing that we kept on repeating for years and years is that credit is job number one. It still is. The team still gets the executive team still gets a full credit performance update every single Monday. And anytime the disturbance in the force we move that from once a week to three times a week and you know, daily if that’s that warrants it. And so we are very, very mindful of threat performance. Are not even a little bit asleep with the switch. The numbers you see are there exactly because we want them to be there. Set a many times before.

Credit performance is an output of our settings of the models that we run. You know, not sure to belabor the obvious, but we underwrite every single transaction, and there’s reserve the right to decline transactions we feel are too risky for the end borrower and for Affirm, and we do. And if there’s ever a deviation from our normally, extraordinarily high net promoter scores because not everybody enjoys hearing, hey. You shouldn’t borrow. You’re overextended. But we won’t change our point of view on their ability to borrow and our willingness to lend if they are in fact overextended, be it with a firm or overall in their credit utilization. So no, I’m not concerned about that.

Obviously, macroeconomic shifts are a thing that happens to everybody at the same time. That’s not a thing we control, but we can control our results and have controlled the results for years and years as the macroeconomic environment moved up and down, sometimes pretty suddenly.

So I feel very good about our performance, feel good more importantly, in our ability to control that performance so long as we keep our eyes on the credit numbers, and we certainly And I would just add that I think given the short duration of the loans that we’re originating, the most important things for us is that we have a full picture of the borrower’s wherewithal to repay the loan at the time of origination. And then the asset is so short-dated and we’re increasingly working with consumers that we’ve seen before. 95% of our transactions came from repeat borrowers this quarter.

So that setup really allows us to focus on underwriting the consumer here today where they are and making sure that we’re instrumented to catch changes in the future, but we don’t really stare at those problems in advance. I think we’re really focused on making sure that the cohorts that we originate today pay us back. And if we need to adjust the underwriting, you know, to be more inclusive or less inclusive in the future, we’ll we’ll do that. In normal course.

Will Nance: Thank you. And our next question comes from the line of Will Nance. With Goldman Sachs. Please proceed with your question.

Will Nance: Guys. Thanks for taking the questions. Nice results today as always. Wanted to ask a question just on the funding environment. Max, we’ve continued to see the capital markets be wide open for consumer lenders. Like your funding capacity was up roughly 55% year over year, utilization is way down. We’ve also seen that in pretty much every other lender in the space. With the rise of kind of alternative credit coming into the space. How do you think about the incentives that this creates in the market and, like, the risk of credit issues that result from more of an oversupply of funding from of the lower quality competitors in the space.

Or, you know, people who are kind of flush with funding and haven’t have kind of incentives to make a lot of loans because of that. Thanks.

Michael Linford: I can start and Max can add like, I don’t know the way I can really speak to the people in the in the broader ecosystem. I know that we are really mindful of the health of the capital markets when we think about picking our partners. As important that we pick capital partners who we think are going to be our partners for the long term and not just worrying about who’s the lowest bid today. And as a result, we partner with what we think is the blue chips of these asset managers.

And that can come in the form of large strategic partnerships, with world-class investors like Sixth Street or very good insurance asset managers up and down our stack. That’s not an accident. We think really long and hard about picking the partners who we think are gonna be, committed and long term with us. And therefore, we don’t move too quickly either. We don’t pivot out of a strategy. We think in the better part of decade increments. So we’re not so concerned with, what those partners do because they’re obviously thinking about the problem, in the right way. I will say the conditions are very favorable as you pointed out, and that’s to our to our benefit.

We’re really mindful of that, and I think that’s part of the reason why the execution is so good right now.

Moshe Orenbuch: Thank you. And our next question comes from the line of Moshe Orenbuch with TD Cowen. Please proceed with your question.

Moshe Orenbuch: Thanks. Thanks very much for taking my question. I was hoping we could talk a little bit about the Affirm card. You gave some statistics, you know, talk about it being a billion 2 volume, a 10% attach rate. And also that the 0% volume on the card kinda tripled you just talk a little bit about, you know, the current strategy with respect to the card, how you think it’s gonna you know, impact the firm’s customers and volume going forward, and maybe is there any special significance to the 0% of that product?

Max Levchin: Yeah. Try to parse all the really cool threads to pull on here. Actually, cars are growing really well. So the meaning of the update for the avoidance of doubt was it’s kicking ass and taking names, and we’re very proud of it. And we got a lot more to go before we think it might change. The percent attach rate is just a number. We’re we’ll celebrate more when it increases. The strategy with the card, I learned the hard way that I’m not gonna front run what’s next for it. But it is an extremely active area of investment for us. So we have more coming more things coming. Some really we think, yeah.

It incrementally powerful boosters to this particular rocket are on the way. So we’re pretty excited about what’s to come there. I will not pronounce them now. But you know, I’m I’m still spending a lot of my time figuring out how to make the card even more compelling. You can see a little bit about the offline category growth. In the update, I think, and that sort of speaks to the fact that we are learning how to offer it in the right way to the consumer so that they remember to take it with them to places where they haven’t used for EG, a gas station, which is just not a thing you can integrate you know, online.

In terms of zeros on the card, it’s actually a more than anything an amazing surprise and delight. And frequency driver. So if you remember last call, we said that the really ambitious version of the card gets us to 10,000,000 card the vision version of the card future is 10,000,000 cardholders active and, something along the lines of 7,500 plus. Transaction GMV per year. The current trailing twelve months of the cardholder is about $4,700. So think the last time we dropped this number, it was along the lines of 3,500. This is across all Affirm services. So this is card and all the other places where you might go with CART. Dominates.

That’s been, obviously, The only way he’s So we’re not quite at the 7,500, but we’re more than halfway there. And so like, there are many things that are coming together to make sure the card is the best expression. Of the firm. So just as far as I think I wanna go right now, we’re kinda long-winded on this one. But there’s a lot to do, and there’s some unexpected things that are coming soon.

Rob Wildhack: Thanks very much. And our next question comes from the line of Rob Wildhack. With Autonomous Research. Please proceed with your question.

Rob Wildhack: Hey, guys. You know, you’ve been extolling the virtues of the 0% APR product for several quarters now. I mean, as far as I can tell, we haven’t really seen your peers lean into that product in the same way. I appreciate that you’re not them, but even so, like, why do you think that is? Why has no one else be it fintech or legacy, gone into the 0% APRs with the same kinda vigor that you have?

Max Levchin: Because underwriting is hard. And we’re good at it, and others aren’t. So couple of things. First of all, I mean to come off of quite so arrogant, but we do think that this is a difficult thing to do, and we spent a long time being good at it. And plenty of internal consternation. Every time we look at a model and ask ourselves, is this a good idea or a bad idea, It’s not just cool. Let’s give people promotional rates. It’s gonna be amazing. If you remember, our zeros are real zeros. It’s in the letter as well, but, we don’t do deferred interest.

We don’t charge fees, which means that if it’s zero, consumer really does pay nothing above sticker. That means the transaction has to be profitable strictly through merchant subsidies. Which is a thing to negotiate in a custom contract and a lot of control services that you have to offer to the merchant because they need the ability to turn it on and off if they don’t have the margin to do it forever, and we have to have the support infrastructure internally to guide them through such campaigns. Do you wanna do zeros? During this holiday period but not? And you have to do it in a way that compliant with fair lending laws.

Because if you start doing things that are a little too creative, you might end up discriminating advertently against the group that should not be discriminated against. And you’re not just doing zeros. Zeros are easier in a sense that at least you know it’s a 0% loan. But for a large swath of consumers, actually, five ninety-nine APR is extraordinarily compelling. It’s way better than anything else they could get. And so when I see 0% in the letter, what we really mean here is consumers get the benefit of reduced APRs as merchants subsidize them.

And doing that in real-time price to perform on the credit side, on a capital market side because these loans are purchased downstream by people who expect yields that are strong whatever the deal the consumer got. Making sure that these are truly incredible for merchants. It’s a massive multivariate problem, and we love math here more than just about anything else. I think most of our competitors just don’t. And, that’s our strength. Our advantage is we you know, live better through mathematics.

Rob Wildhack: It’s helpful. Thanks. And just quick on the guidance, in the comment that the enterprise merchant will transition off in the fiscal second quarter. It’s kind of an important time with the holiday season. So a little in the weeds, but do you think that happens at the end or the beginning of that quarter? I guess I’m asking if you’re gonna get the holiday spend there or not.

Max Levchin: The assumption in our outlook, Rob, is that enterprise partner is wound down Please proceed with your question. Great. Good afternoon, guys. Nice results. Thanks for taking the questions. I want to touch on the outlook and the take rate. It looks like it’s going to be kind of fairly stable with at least the run rated four q level. I guess, does that imply that the mix the product mix that we saw in the fourth quarter should be fairly steady or are there any other you know, take rate impacts that we should be mindful of? Like, for example, with the enterprise partner or anything that might influence some of these numbers as well. Yeah.

We stopped short of guiding to mix specifically, but as you saw this quarter, monthly 0% loans were growing north of 90 year on year. So we would expect that loan product in particular continues to take a bit of share within our mix. But, otherwise, you know, I think most important thing for us is that the units we’re creating are profitable and that we have a funding plan and a mixed plan that allows us to sort of stay in that 3% to 4% RLTC range and with the guide, we’re expecting to be at the very, very high end of that range from a revenue less transaction cost take rate perspective. Okay. That’s really helpful.

And then I guess just a follow-up following up on Will’s question around funding. I want to ask are you guys seeing, just given that the funding environment is the best, it’s been in quite some time, have you guys seen any, like, uptick in competition or like, irrational players that might be kinda spoiling the water. And I guess, like, it’s so how are you guys kind of dealing with that and continuing to grow while maintaining really solid credit. Yeah. For us, the crawl the quality of the credit isn’t a isn’t really a decision It’s it’s something we constrain the business with. Then we operate from that point. And that’s not lost on our capital partners.

Again, I think the reason why what I consider to be the best investors in the world wanna partner with a firm and do is because of that commitment we’ve made operate the business in a certain way. And we’ve done that not just when things are really good. We’ve done that back through all of the turmoil you’ve seen over the past half decade. Our best investors see that. They recognize that, and they’re attracted to it. Again, we think about these things as long term partnerships. Think some of the behavior or concerns that you’re alluding to would exist in people who are looking for just kind of more trade y type relationships, one time y.

And that’s just not how we operate our business. So kinda far away from us. And again, when you think about choosing your partners and we have the luxury of choice given our performance, think about the partners we choose to do business with. Our team is really selective around partners who we know are gonna be thoughtful and not get over their skis and chase anything away from them. Know, I talked to partners, and they share that they, you know, either pursuing opportunity and didn’t get it because they weren’t willing to pay up.

I both of us are happy in those moments because I know that my partner is being disciplined and that discipline will benefit us in the long run. And I think there’s just so much capital to go to work right now that it doesn’t really give me any concern. Great. To hear. Thank you, guys. Nice results.

Andrew Jeffrey: Thank you. And our next question comes from the line of Andrew Jeffrey with William Blair. Please proceed with your question.

Andrew Jeffrey: Hi. This is Adeeb Chaudhary on for Andrew. Thanks for taking our questions. We wanted to ask on the international strategy in The UK, but also in other geos. You might be looking at and kind of the opportunity for a firm to bring its underwriting product to the rest of world. And then secondly, how the mix of GMV might look differently internationally kind of versus Affirm’s core domestic business?

Max Levchin: It’s a great question. Happy to report that we are in friends and family testing in The UK. With our Shopify friends. It’s very exciting. So that’s obviously an enormous potential up of that is not lost on anyone. Obviously, we have merchants that we’ve taken live there and are excited to bring on a few more of our own, but Shopify is just an incredible partner in our growth. And we think we have it for them as well. So that’s coming quite soon. The mix is little hard to tell in the following sense. We know that the market has tremendous appetite for pain three and pain four, which are traditionally zeros.

Because that’s what the majority of the competition does the totality of their business in But we also know that all the major merchants we’ve spoken with are signed have said, what we really need from you guys is longer terms. We want six months, twelve months, which obviously to a large degree, will be interest bearing. So as of right now, I think the mix that we have in The UK is skews more interest bearing than not. As we scale Shopify that is absolutely subject to change just based on what this will do relative to what’s available. So I you know, little too early to make claims.

You know, we are absolutely going to be as mindful and as attentive to credit in The UK as we have in The US and Canada. Like, that’s not an optional thing. Not going to play it fast and lose whatsoever. But we feel very good about our ability to get the data we need to underwrite and, just to achieve the scale we need to make sure that the levers of control are useful. In terms of other geographies, I think we’ve been pretty transparent that we’re not gonna show you a map, but if we drew one, it would look like Europe.

Andrew Jeffrey: Got it. And if I could ask a quick follow-up, can we just get a high-level update on the Apple Pay partnership and if there’s anything kind of incremental to share there? Thanks so much.

Max Levchin: We as is our custom, do not talk about, generally speaking, individual partners, but in particular, we do not talk about all the partnerships in any detail.

John Hecht: Thanks. And our next question comes from the line of John Hecht with Jefferies. Please proceed with your question.

John Hecht: Afternoon, guys. Good quarter. You know? And I’m looking at a globe, and I can’t find anything that looks like Europe other than Europe. So, thank you for that. New Zealand kinda looks like Japan. Sorry. The Question on, I guess, customer engagement. You know, higher frequency of engagements. You know, as a I guess, a customer seasons on the platform, platform, do the dynamics or characteristics of their typical transaction change as they kinda mature?

Max Levchin: That is a really good question. I don’t know if I have a really thoughtful answer for you right now. The theory behind the card and things like Affirm Anywhere and all the other products we’ve built to gain frequency, was largely that we already understood to be a considered purchase helper. If you’re buying a bicycle or a mattress, that’s a once every in a year type purchase. You obviously should use Affirm because you will probably find a great brand sponsored zero or subsidized APR, all that. And so as we added more products, they were always meant to take the AOV down at the average. So we would be useful in more situations more frequent situations.

And that’s generally speaking been the case. Yeah. I think if you track our average ticket, you can sort of see a gentle downtrend even as the frequency increased. Faster than the downtrend for sure. As we sort of grabbed onto more purchases just some with more frequent ones. So that’s sort of the best I got off the cuff. I am sure we can publish something off cycle explaining really happens. But needless to say, we’re very happy with the increased frequency. We’re not super fussy about AOVs. We don’t think it’s our job to make you buy two mattresses.

We’re answering demand that you naturally have versus telling you in any sort of promotional way to buy a mattress, buy another one. And so that means whatever natural average ticket average spend the user has on any unit time that’s what we should have. We’re still ahead of the averages if you look at things like debit cards, which is kind of our primary debit card and credit cards, which are prime primary replacement goods. Or services, you will see that we’re still ahead of them, but we’re coming closer and closer.

And we wanna rest until we are a proper replacement for credit cards, of course, and at that point, our AOV should be roughly the match to them.

John Hecht: Okay. That’s very helpful. And then you guys provided the general framework to think about the impact of rising rates. I mean, the futures curve or the forward curve looks like there’s a high probability of lower rates. So maybe can you guys give us a framework to think about the impact of lower rates on the business?

Michael Linford: Yeah. Great question, John. You know, it should be generally the rough the same rough mechanics that we outlined during the rising rate environment where a one-point move in reference rates should translate to about a 40 bps change in our funding cost. So that should be true whether the rates are going up or down. The other part of the framework that we shared previously just for everyone is that there will take time for those mechanics to play out because a portion of our funding is variable in nature, but the majority of our funding actually is not truly variable and will adjust with the time lag.

So it may take a year or two, or even longer for those rate changes to fully show up in our funding cost and in our platform portfolio base. So there’s nothing to believe. There’s nothing in our agreements with merchants or otherwise that would lead us to believe that we wouldn’t see the same impact of a declining rate environment as a rising rate environment if you’re looking purely at funding costs. I think the question that we make sure we ask internally is if rates are declining, why is that happening? Right?

And there could be offsetting impacts elsewhere in the business, you know, if rates were to decline because unemployment was rising or there was stress on the consumer, obviously, that lead to costs. Elsewhere, in our in our base.

Matt Code: Okay. Thank you very much. Thank you. And our next question comes from the line of Matt Code with Truist Securities. Please proceed with your question.

Matt Code: Hi. Hey, guys. Thanks for taking the question here. Wanted to go back to the 0% topic. But wanted to address it from the merchant side. So you talked about the number of merchants funding this offering double. Doubling year over year. And I believe that’s up to 7% of your total merchant base now. That’s funding the 0% APRs. Curious, like, as we look forward, what you think that penetration rate can get to?

Max Levchin: It should round up to almost a 100. There are and I’m prone to some hyperbole with numbers, and Rob was laughing at me. But the here’s what I really mean by this. So merchants are broadly divided into a handful of categories, but one way to do it is to think of the margin they spend on marketing. My contention is that marketing budget is at least as well spent at the bottom of the funnel as it is at the top. If you’re broadcasting a story why somebody should come shop with you’re frequently doing it in terms of going out of business sale, hopefully not, more like, you know, 20% sale or Christmas sale.

So the sort of sales driven sale driven, consumer acquisition. Is a little bit of a hand grenade approach to trying to make sales. At the very bottom of the funnel or at the product exploration level of the funnel, you can be much more precise. And with our technology such as Adapt AI where we offer consumers the exact or our estimation of exact financing offer that would compel them to buy, is just much cheaper for the merchant. They would spend a lower percentage of their marketing budget if they thought of it this way at the bottom of the funnel.

The adoption curve of these tools, the 0% APR contract, is entirely a function of these merchants’ realizing that the marketing money they’re spending is better spent on such promotions at the bottom of the funnel versus the blanket coverage at the top of the funnel. And every year, we’re just doing slightly better making sure this is convincing. You know, everything from showing the results, and or working with them to test this. Publishing white papers, educating our salespeople, helping them educate their internal, accounting people, etcetera. And so at the limit, I think every single merchant will benefit from these programs. There are merchants whose margins are quite low, naturally.

And they spend very little of the overall GMV marketing themselves, maybe because they’re already at scale, maybe because they just have an alternative distribution model, that will be the last holdout. But generally speaking, this is a more efficient way of driving sales It is apparent to a large enough body of GMV producers that it will eventually trickle down to the rest of the bunch. So that’s my conviction, and I’m standing by it. And every year, we have more and more zeros to show for it. It will, it will keep happening until morale improves.

Matt Code: No. Thanks, Matt. That Anything for that, Rob? Oh, if I could just sneak in a follow-up, Max, you addressed this in the shareholder letter. You touched a lot on AI. Was hoping you could just talk about it on the call here too. Just kinda like how you’re thinking about the future for AgenTek Commerce and Affirm’s role in it.

Max Levchin: It’s in a letter. I try to try to boil it down to be relatively pithy, so you’re tempting me to give the longer form that Michael successfully talked me out of. Putting in, but it the letter speaks to it pretty well. We think that AgenTek Commerce is going to be extremely successful for some categories of transactions. It may not be super successful for all of them, Many transactions require final human approval just because they have to do with taste. Kind of the unstated weakness of today’s state of AI. Is it’s fundamentally taste free. It doesn’t know what’s beautiful. Certainly, it doesn’t know what’s beautiful to you.

A lot of purchases are made with taste as the front and center of the y. But the need to finance beautiful things or things that you require isn’t going away. So, inherently, we will be in those transactions just like we have been able to find our way into all the other ones. The thing that’s compelling for us about AgenTek Commerce in particular it’s fundamentally a rehashing or remixing of ecommerce as it exists. Before AI. Like, you can imagine you know, the conversation about universal carts has been around forever. No one’s ever really built the universal cart of any kind of scale. Universal shopping cart is very much what’s going to happen inside these chatbots.

If you are to close these transactions from multiple brands, multiple stores, multiple warehouses, in the same chat session. So this idea of remixing ecommerce is what I think successful certainly successful first act, maybe all the act of agenda commerce looks like. We are built to be mixed into all environments. Do you see us pop up in places like shop pay installments, which is a really deep integration? We are a component of someone else’s wallet. You see us inside Chrome Autofill, which is a completely different integration. But not actually very different from our point of view because our services work in that environment. Very different environment, very similar integration.

Almost identical consumer experience as far as Affirm is concerned. You will see versions of this in Agenda Commerce as that rolls out as well. And we’re pretty excited about it. I don’t I’m generally a techno optimist, so you should be careful what you sort of believe with my sort of rose-colored glasses on, but I don’t think it’s going to cannibalize commerce a fundamental level. I think it’s actually going to increase volume for a lot of merchants. I think we will find that some things are still going to be purchased the old way, and other things are just gonna become naturally more obvious inside of the assisted or assistance driven transactions.

And we’re gonna be for here for all of this.

James Faucette: Really helpful. Thank you. Thank you. And our next question comes from the line of James Faucette. With Morgan Stanley Investment Management. Please proceed with your question.

James Faucette: Hey. Good afternoon, everybody. Wanted to ask on the PSP integration Pretty interesting announcement of BNPL with Stripe terminal. I think we there’s potential for that to or similar type announcements to be made with other payment service providers. I’d be curious if there’s any framing you would provide in terms of how important think the PSP channel will be for your business, particularly when we think about the business overall excluding Amazon and Shopify as a way to add additional merchants? And how do you intend to lean into that channel etcetera? Good question.

Max Levchin: Generally speaking, offline is still kind of the greenfield of buy now, pay later. The fraction of online to offline is still whatever it is these days. 10 to one eight to one. So there’s a lot more there than inside ecommerce, and, yeah, binoculator is a minute fraction that world because the integrations are just difficult. And discovery is hard. Know, placement of you should think of this in more affordable terms sort of messaging prompting at the product level is difficult. So it’s important. It’s important insofar as when we go to talk to a merchant that has a large offline presence, talking to them about let’s promote something together, and then integrate something together are two conversations.

Being able to say, actually, we don’t have to worry about the latter. It’s already built into your point of sale processor. Let’s just talk about the promotional details and how we’re gonna advertise the opportunity to finance things without fees, frictionlessly, without gimmicks, makes the conversation easier because now you are talking about that marketing budget and discussing it with just one part of the retailer versus a whole separate IT environment that says, well, We’d love to do it, but our road map is busy until 2030. So in that sense, it’s a huge boost. It’s an enabling technology. Not a now that we have it every offline partner is just gonna fall into our lap.

So the work isn’t eliminated, but it’s meaningfully reduced.

James Faucette: Got it. That’s really helpful. And then just a quick clarification on 0%. I certainly understand and think that it’s the push there and the benefits you get are pretty clear. But I’m wondering in terms of the shorter duration of 0% that you called out, and how that evolved during the course of the June. Is that a seasonal thing? Is that just an expansion of availability? A change in the type of customers that are eligible and opting for 0%? Just trying to get a little bit of color to think about that component on a go forward basis. Thanks.

Michael Linford: Yeah, thanks for the question, James. I think the answer really was in the question. It was really a mix of both. We do have seasonality in our business generally, but certainly seasonality within our 0% programs, and that showed up a bit as well, especially when you’re comparing Maybe across Q3 and Q4. And then also, you know, when we introduce zeros to a new merchant, one of the ways that we can do that is by making the shortest term that’s presented in the financing program a 0% offer. And so that has the natural output of shortening term links for that merchant’s program as well.

So it really is a range of things that were at play in this quarter. And I think it speaks to the flexibility and just our ability to customize across multiple surfaces, term length, and APR, to make sure that we’re putting the best program together for our merchants and for consumers.

Reggie Smith: Great. Thanks so much, guys. Have a good day. Thanks. Thank you. And our next question comes from the line of Reggie Smith with JPMorgan. Please proceed with your question.

Reggie Smith: Good evening, guys. Thanks for taking the question. It’s funny. I wanted to follow-up. On the question that James just asked, but taking in a slightly different direction. So I’m thinking about PSPs you know, primarily online, so ecommerce. Not named Shopify. Is there a way to kind of frame how do you guys think about your penetration within that channel? And, I guess, the maturity of that channel. So, like, if you were to look at the volumes in that segment, are they growing faster than the line average, slower? Like, help, you know, kinda frame, that channel for us to the extent that you can.

And then, you know, whether or not you guys often have default on status or how that how that works. And then my last question, just around the follow-up to that is just quickly on that merchant that’s leaving in the end of the first fiscal quarter. Is the thinking that you’ll still your logo will still be available on the website? Or has that changed at Thank you.

Max Levchin: I’ll start and let Rob finish. Just because I think you’re asking about assumptions in the guide. On the PSP side of things, we’re pretty early there. Obviously, default on is a really important, really powerful thing. We have multiple partnerships of this matter with PSPs not named Shopify, and we’re working pretty hard on expanding the list and being default on I don’t have the growth rates of the top my head, so I don’t wanna perjure myself here But I think they are accretive to the growth rate of the business, not detracting. But I will let Zane or Rob look this up. And if I’m wrong, I’m sure they’ll correct me soon enough.

But I’m pretty sure I’m right on this one. So it’s a really important channel. It’s pretty early. If you just follow our announcements, you’ll see that these are significantly more recent than example, the Shopify announcement. So just from the pure scale and time to penetrate, These are latercomers, and there’s more to be had there. So all of that we think, accretes to the future growth merchant sets are a little bit different sometimes. Obviously, Shopify has an extremely broad appeal, but given they have some degree of this is the canonical Shopify merchant, the same is true for every other platform. Aggregator or payment processor, etcetera, etcetera.

So each one gives us to something that we probably haven’t seen before to at least some degree. I think that’s all I wanna say on Tuesdays.

Rob O’Hare: Yeah. And in terms of the question around the merchant, I think the easiest way to talk about the relationship is just to outline what’s in our Outlook and what we’ve assumed in the Outlook is that the integration goes away, at the end of this quarter. And so it’s unclear exactly the mechanics will be of how the relationship plays out. But that’s what we’ve assumed, and we think we’ve taken a pretty conservative stance in terms of volume. In fiscal twenty-six coming from this merchant.

Reggie Smith: Got it. And not to belabor it. When you say go away, is that does that mean zero volume from that merchant, or am I that net would go away? What does that mean exactly?

Rob O’Hare: What we’ve assumed in the Outlook is that through the integration, there would be zero volume. After Okay.

Reggie Smith: Yes. Got it. Okay. Thank you.

Harry Bartlett: Thank you. And our next question comes from the line of Harry Bartlett. With Rothschilds and Company re Redburn. Please proceed with your question.

Harry Bartlett: Hey, guys. Yeah. Thanks for taking the question. I just wanted to touch on international again. So I mean, I’m just thinking about shop pains. You talked about going to but, you know, in terms of how quickly you can roll that into other geographies, is it now a case of you have a playbook and then you’ll be able to kinda move a bit faster if you’re looking to move in other areas of Europe. And, also, I guess, just outside of shop, you know, do you have any, I guess, difference in your approach to how you’re gonna expand internationally?

I’m guessing just curious from this from the point of know, brand awareness maybe isn’t quite as strong as it is in The US, and are some incumbent players at checkout. So I just know, wonder if you have a dip approach here on maybe the sales and marketing or consumer loans. Thank you.

Max Levchin: I’ll try to touch on all these things as quickly as I can since there’s a lot here. So the short answer to your first question is yes and no concurrently. So in terms of the platform build, and a lot of the technology, it is certainly built to be reusable. Not gonna launch UK and go off into build another complete different system to be live and fill in your favorite European country. That’s all reusable and designed to be reusable. Etcetera. We’re also not too concerned about spinning up technological or data center presence in AWS that they exist in every market.

The different things that are or things that are different about every market is access to data, Some of the peculiarities of local regulation and then also local licensing is really important. So some things you can infer pretty easily about how might one approach to not having to do double and triple work on licensing or following regulatory regimes. So you can be assured that we’re doing all those things as intelligently as we can. But there’s some work involved even if you’re sort of as intelligent as you can possibly be with all those things. So that part, I think we’re in really good shape.

We don’t expect you know, to go off the radar for too long, and we’ll have more to say about it in coming quarters. Things like Apple markets is, not a concern. Just for the avoidance of doubt. In terms of sales and marketing, we said it before, so this shouldn’t be news to anybody. But we have a nice list of multinational partners. There are partners that are with us in The US or Canada or UK who are multinational and are generally speaking, very pleased with our performance. We think we have a very good shot at talking those folks into being useful to them in more than one market.

We’ve been successful at it US and Canada, certainly. So see no reason why with the appropriate level of attention and good hygiene, we couldn’t do this again. So that’s the expansion plans for kind of these lighthouse brands. We don’t anticipate a dramatic investment in our brand in The US or UK or beyond. Mostly because we market very successfully with our partners, and there’s a the majority of the marketing spend in our financials reflects the go-to-market efforts we share with our merchant partners where we come together in all sorts of interesting promotional ways. So we’ll do that. We have some pretty exciting plans for that in our latest market.

I don’t wanna spoil any surprises just yet, but that’s certainly coming. It will not break our bank by any stretch. So it’s all fully priced into the guide.

Harry Bartlett: That’s great. Thank you.

Jamie Friedman: Thank you. And our next question comes from the line of Jamie Friedman with SIG. Please proceed with your question.

Jamie Friedman: Hi. Back to the AI conversation. I know Max wanna keep it pithy, but I wanna ask specifically about what you call it here in adaptive checkout. And specifically the Adapt AI deployments that show an average 5% increase in GMV. What is that about? Can you, like, unpack the business process of how that works?

Max Levchin: Sure. And we are not the best at naming products here as we were lamenting earlier today internally, so you’ll have to forgive the repetitive sounding names. So adaptive checkout is the umbrella name of all the various manifestations of how checkout at Affirm works. So if you encounter an Affirm powered checkout, Affirm checkout inside a wallet, Affirm checkout inside a website, directly integrated. So on and so forth. It’s all powered by this thing called adaptive checkout. And it wasn’t always this way we had a bunch of different builds. Of a firm checkout flow. And over the years, we’ve been we generally have a tendency to refactor and rewrite a bunch of our products.

Because we think it’s just good hygiene. So as we maintain good hygiene, we’ve over time consolidated into almost a single thing with lots and lots of very thoughtful configurability pieces. Until Adapt AI came along, most of this configurability was essentially manual in a sense that we would sign a contract with the merchant. The merchant would say, here are the terms I want. Here are the programs I’m willing to fund, and I would like a lot of control over when I them on and turn them off.

And, of course, we’re very happy to oblige because a huge part of our moat is this configurability is very powerful for the merchant, but it’s also not replicable with any of our competitors. Adapt AI was sort of the answer to the question of alright. So we’ve now built this thing that’s the ultimate mousetrap of optimization of checkout. But there’s a lot of human effort involved in getting to the best results, and it’s not really there’s not a book we’ve published on best practices of tuning adaptive Check out for merchants and we should And then they say, well, actually, we have this really great AIML effort.

Don’t we, instead of writing a book about it, build a model that automatically figures out the absolute best way of converting consumers at an Affirm powered checkout. And while we’re at it, let’s try to transition a lot of our merchant relationships any all of them if we could, to something that looks like we will take care of all the optimization.

Let us figure out the best set of programs for any given consumer as they’re staring at a cart or a product on your site or in your store, and we will take care of the rest We will convert them to a buyer from a shopper, at the best possible terms for them that is compelling to them. Not everybody wants a zero percent deal. Many people actually really care about the monthly cash flow impact, and they’re far less APR sensitive or total interest sensitive. Many people are extremely headline APR sensitive. And you can sort of slice and dice it from there. Tuning that manually works beautifully. Tuning that automatically is an extraordinary improvement.

And the 5% is great early result. We expect more, and we’ll certainly brag about it as we get there. But adapt.ai is AI powered configuration of adaptive checkout. And that’s what we talked about rolling it out Last quarter, we’ve rolled it out with select versions now. Obviously, we are asking for more control from the merchant. We’re telling them, look. If you just give us the ability to tune for each individual consumer what they see it will cost you less, and it’ll convert into more volume. It’ll take a little while for everyone to sign up for that.

But the ones that have are enjoying the benefits early, and we’re tuning the models more and more as we go.

Jamie Friedman: Fascinating. Thank you. I’ll jump back in the queue.

Giuliano Bologna: Thank you. And our next question comes from the line of Giuliano Bologna with Compass Point. Please proceed with your question.

Giuliano Bologna: Well, thanks for taking my questions and, you know, congratulations on another incredible quarter. As a question and this is Yale. Somewhat of a high level, you know, concept. But I’m curious when you look at a lot of the wall partnerships, there’s kind of a new frontier where you know, some of the wallet partnerships can enable offline transactions in the future, and, you know, how you would plan for that and how, you know, material that could be you know, in terms of, you know, driving incremental GMV growth. And then maybe how you think about the underwriting because you have an interesting opportunity Yep.

Continue to differentiate and, you know, increase your leads, you know, ahead of your competitors with such products like that. Yep.

Max Levchin: Certainly very excited about offline commerce. I’m on the record. Talking about that every quarter, I think. Think if you look back at some of the announcements made by some of the largest wallets out there, you will see that they too are excited about offline applicability of the products that Affirm offers. So some of that is, in the near future. We try to be to be con as always conservative in our sort of promises and degrees of excitement about things that aren’t live yet. So I’ll hang back on the sort of exactly what we expect from it I think the opportunity is enormous. I think there yeah.

It sort of covers a little bit earlier question, but they’re two very distinct puzzles. Number one is how do you inform someone that this thing, this thing being a firm, works in their favorite store? We have some we think, really good ideas on how to do that. You will see some of them actually quite soon. On our own surfaces. But, there’s also the problem of integration and what in payments nerd slang is called tender delivery. Tender delivery is integration with point of sale systems, digital wallets, various forms of NFC, all of that’s in our radar. All of that is really important to us, and we’re quite engaged in all those things.

Again, the greenfield size is roughly 10 x of what we’re chasing in ecommerce. If you believe we can solve the latter problem, which we’re very confident in, it becomes a question of how well can you communicate it and how aggressive can you be in communicating it to shoppers from the brand point of view, which I think asked five years ago, some of them would have been wondering when might if someone might go first, I think at this point, it’s flipped to actually it should be promoted because it’s so successful in driving conversion. One fun fact, we see increase in demand for Affirm anytime anyone in the industry runs a large promotional campaign.

There’s just the notion of, oh, yeah. Buy now pay later is available. Accretes to Affirm naturally even if we’re not the ones putting our name on the ad. So it’s just a matter of awareness more than it is anything else. In the offline world.

Giuliano Bologna: That is extremely helpful, and I really appreciate that. I’ll jump back in queue.

Operator: Thank you. And with that, there are no further questions at this time. I’d like to turn the floor back to Zane Keller for closing remarks.

Zane Keller: Thank you for the questions today, everybody. We’ll see many of you on the conference circuit soon, I’m sure. Have a good Labor Day weekend, and talk to you soon. Bye.

Operator: Thank you. With that, this does conclude today’s teleconference. We thank you for your participation. May disconnect your lines at this time.

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Date

Aug. 28, 2025, 9:00 a.m. ET

Call participants

Chairman and Chief Executive Officer — Efraim Grinberg

Executive Vice President and Chief Financial Officer — Sallie DeMarsilis

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Risks

There was a $2.2 million impact from unmitigated U.S. tariff expenses in the fiscal second quarter ended July 31, 2025. Management stated mitigation actions “will predominantly impact future periods.”

Gross margin fell by 20 basis points to 54.1% from 54.3% in the fiscal second quarter of the prior year, primarily due to increased tariffs and unfavorable foreign exchange, according to management.

The Movado brand experienced a 5.6% sales decline in the fiscal second quarter.

Management confirmed it will not provide a fiscal 2026 outlook, stating, “Given the current macroeconomic environment and the ongoing uncertainty of the impact of tariffs on our business.”

Takeaways

Net sales— $161.8 million, up 3.1%, with constant currency growth of 1.4% in the fiscal second quarter.

Adjusted operating profit— $7 million, more than double the $2.6 million reported in the fiscal second quarter of the prior year.

Gross margin— Gross margin was 54.1%, down 20 basis points in the fiscal second quarter, primarily due to higher tariffs and currency headwinds, partially offset by a favorable mix.

Net income— $5.3 million, or $0.23 per diluted share, compared to $3.5 million, or $0.15 per diluted share in the fiscal second quarter of the prior year.

Inventory— $28.3 million higher than the prior year (+15.5%) in the fiscal second quarter, with $16 million pulled forward in the U.S. to mitigate tariff exposure.

International sales— Increased by 6.9% (reported) and 3.9% (constant currency) in the fiscal second quarter, led by growth in Europe, Latin America, and India.

U.S. sales— Decreased 1.6% in the fiscal second quarter, impacted by continued channel rebalancing.

Licensed brands— Reported growth of 9.5%, or 6.5% at constant currency, in the fiscal second quarter.

Movado brand sales— Declined 5.6% in the fiscal second quarter, though e-commerce posted 6% growth and brick-and-mortar sell-through improved.

Operating expenses— Fell by $2.0 million to $80.6 million (adjusted) in the fiscal second quarter, due to lower marketing spend, partially offset by higher performance-based compensation.

Annualized cost savings— $10 million in expected savings for fiscal 2026 from prior operating expense reductions.

Cash balance— $180.5 million with no debt reported at the end of the fiscal second quarter.

Outlet stores segment— Grew 2.4% in the fiscal second quarter, supported by recent initiatives and positive momentum.

Share repurchases— 100,000 shares repurchased, with $48.4 million remaining on the authorization as of the fiscal second quarter.

Summary

Management stated it established a “strong position in inventory of Swiss-made watches in the United States” to cover a substantial portion of anticipated demand in response to the new 39% tariff as of the fiscal second quarter ended July 31, 2025. Tariffs and currency pressures were cited as the primary drivers of lower gross margin, with strategic pricing actions implemented on July 1 and further actions planned. Cost-saving efforts are expected to deliver approximately $10 million in annualized reductions for fiscal 2026, which management stated are mitigating operational increases and supporting profitability growth. International growth outpaced the U.S., with Europe, Latin America, and India leading performance in the fiscal second quarter, while the U.S. saw a 1.6% decline in net sales due to strategic changes in distribution channels.

The CFO explained that approximately $4.6 million of reciprocal tariff costs remained embedded in inventory at the end of the fiscal second quarter.

Management described licensed brands as benefiting from a resurgence in “fashion watch and jewelry category” demand, citing heightened Gen Z interest on digital platforms.

Efraim Grinberg said, “We would expect our inventories to be in line by year-end,” addressing concerns about the significant rise in inventory levels.

Management referenced the completion of most restructuring charges and expects these “will be reduced significantly” in future quarters, as discussed on the fiscal second quarter earnings call.

Recent trends in mini and microwatch sizes have drawn young women back to the category, creating product opportunities across the brand portfolio.

Industry glossary

Mini watches: Wristwatches with case diameters typically between 23 to 28 millimeters, positioned as appealing to younger and female consumers per discussed brand trends.

Microwatches: Even smaller wristwatches than mini watches, referenced in the call as an emerging size segment within the portfolio.

Full Conference Call Transcript

Efraim Grinberg: Thank you, Allison. Good morning, and welcome to Movado Group’s second quarter conference call. With me today is our Executive Vice President and Chief Financial Officer, Sallie DeMarsilis. After I review the highlights of the quarter and share our progress on key strategic initiatives, Sallie will take you through the financial results in more detail. We will then be happy to answer questions. We are pleased with our overall results this quarter as we return to growth in both sales and profitability. Sales grew by 3% to $161.8 million, and adjusted operating profit more than doubled to $7 million from $2.6 million last year despite a $2.2 million impact from unmitigated U.S. tariff expenses.

Although we have taken certain actions to partially offset tariffs, those actions will predominantly impact future periods. After the quarter ended, the United States implemented a tariff rate of 39% on Swiss imports. During the second quarter, we have built a strong position in inventory of Swiss-made watches in the United States and would expect a substantial portion of the year’s needs are covered. We are hopeful that over the next several months, the United States and Switzerland will agree to lower tariff rates. Of course, we continue to monitor the situation closely and to develop mitigation plans. We continue to operate with a strong balance sheet, with over $180 million in cash and no debt.

Overall, we are pleased with the progress that we have made on our strategic initiatives, with a focus on returning the company to growth and profitability. We would expect to see approximately $10 million of annualized savings spread evenly throughout this year as a result of the actions we took late last year to reduce operating expenses. Although we experienced a 5.6% sales decline in our Movado brand, we continue to make progress on our Movado strategy, which I will discuss later in my remarks. In our licensed brands, we grew by 6.5% on a constant currency basis or 9.5% on a reported basis.

Overall, we reported gross margins of $54.1 million versus 54.1% versus 54.3% in Q2 of last year despite the 130 basis point impact of additional tariffs in the U.S. Most of our strategic pricing actions to partially offset the impact of tariffs became effective July 1. Our international business grew by 6.9%, or 3.9% on a constant currency basis, led by a strong performance in Europe, Latin America, and India, with Europe seeing particularly strong trends. As expected, this performance was offset somewhat by the Middle East, where we are in the process of rebuilding our team.

Our U.S. business declined by 1.6% as we focus on rebalancing our chain jewelry store distribution, although we had an improved performance in our domestic department store and e-commerce channels. Our outlet stores segment grew 2.4% for the quarter, and we are excited by the recent initiatives and accelerating trends in that channel. As we look at the progress that we are making in our brands, we are particularly pleased by the success that we are seeing in the overall performance of trend-right products across our brand portfolio. In Movado, we are making significant progress in returning the brand to growth in our wholesale distribution.

We have seen strong performance in our own e-commerce site, with 6% growth and strong trends in our digital partners. In brick and mortar, Movado brand sell-through has returned to growth in the second quarter in our department store channel, where we have implemented and expanded our coverage as a point of sale and installed our new point of sale display. We will continue to execute behind these initiatives as the year progresses. On the product front, Movado has seen increased penetration and success in women’s watches, including our new iconic bangle watches and our new mini quest in bold, which along with our bold tank watch is a best seller.

On the men’s side, we are seeing strong performance in the Movado bold collections, including Verso automatic and Quest automatic. Our heritage collection inspired by Movado’s rich heritage continues to do particularly well in a limited distribution across the country. The Movado brand marketing campaign for the second half will include new creative featuring our Movado icons, Ludacris, Jessica Alba, Julianne Moore, Christian McCaffrey, and Tyrese Halliburton. We are very excited by the digital-first content that our team has executed with a greater focus on products associated with each of the icons. We have exciting new products debuting this fall, like the new Museum Imperial with Christian McCaffrey and Our Heritage 1917, with Tyrese Halliburton.

On the women’s side, Jessica Alba and Julianne Moore will be featured with different shapes of our museum bangle collection and a women’s version of the museum imperial and Heritage 1917. Turning to our licensed brands, we are seeing a return to the fashion watch and jewelry category with increased interest by Gen Z consumers across digital platforms like TikTok, Reels, and YouTube. Sales in our licensed brands grew by 9.5% for the quarter or 6.5% in constant currency. In Hugo Boss, we have experienced strong growth in our iconic families, Time Traveler and Candor. Our new updated Grand Prix is quickly becoming a best seller.

We are also excited by our new women’s watches led by the May family with a petite square shape. In Tommy Hilfiger, we are very excited to be refocused on the women’s watch category. Our EMEA family is already showing signs of strong sell-through and will be featured in our fall campaign. Complementing Mia is Moira, a new mini East West Oval that has gotten a strong reception. On the men’s front, we are excited by our new seventies-inspired Chronograph Hudson Collection, which will be featured in our holiday campaign, as well as by RegattaTH, a new sports watch collection in exciting colors opening at $139.

In Lacoste, we are introducing a new black and gold version of our iconic LC 33 collection and will complement our Tang Parisienne with a new oval version. Our Lacoste jewelry business continues to exceed expectations, and we are very excited to introduce the Arthur and Crocodile families to complement our best-selling Metropole bracelet collection. In Calvin Klein, we are launching a new mini version of our best-selling Pulse collection, as well as a new 18-millimeter contemporary collection that has really piqued our retailers’ attention. Coach continues to perform extremely well, particularly in the United States, and is now showing momentum in Europe as well.

For the second half, we have several new introductions in our best-selling Sammy Oval collection with a strong new 20-millimeter Reese tank. We will also be expanding our best-selling charter collection for him. As we enter the second half of the year, we recognize that uncertainty remains around tariffs and the broader retail environment. At the same time, we are excited by the new products we have introduced and encouraged by the resurgence we are seeing in the fashion watch market. As a leadership team, our focus remains on driving profitability and delivering consistent growth in both sales and operating margin while maintaining the strength of our balance sheet and executing against our strategic plans across all of our businesses.

While some of our initiatives have longer time horizons, we are confident that we are taking the right actions for the long term and positioning Movado Group for sustainable success. I am happy about the plans that we are building for the year ahead, and I would now like to turn the call over to Sallie.

Sallie DeMarsilis: Thank you, Efraim, and good morning, everyone. For today’s call, I will review our financial results for the second quarter and year-to-date period of fiscal 2026. My comments today will focus on adjusted results. Please refer to the description of the special items included in our results for the second quarter and first six months of fiscal 2026 in our press release issued earlier today, which also includes a reconciliation table of GAAP and non-GAAP measures. Turning to a review of the quarter, overall, we were pleased with our performance for 2026. Sales were $161.8 million as compared to $157 million last year, an increase of 3.1%. In constant dollars, the increase in net sales was 1.4%.

Net sales increased across licensed brands and company stores, partially offset by a decrease in net sales in owned brands. By geography, U.S. net sales decreased 1.6% as compared to the second quarter of last year. International net sales increased by 6.9%. On a constant currency basis, international net sales increased 3.9% with strong performances in certain markets such as Latin America and Europe. Gross profit as a percent of sales was 54.1% compared to 54.3% in the second quarter of last year. The decrease in gross margin rate as compared to the same period of last year was primarily driven by increased tariffs and unfavorable foreign exchange, partially offset by favorable channel and product mix.

Operating expenses were $80.6 million as compared to $82.6 million for the second quarter of last year. The $2 million decrease was driven by a strategic reduction in marketing expenses, partially offset by an increase in performance-based compensation. The combination of higher revenue and gross profit and a decline in operating expenses drove operating income to $7 million, a $4.4 million improvement from $2.6 million in 2025. We recorded approximately $1.1 million of other non-operating income in 2026 as compared to $1.8 million in the same period of last year. Other non-operating income is primarily comprised of interest earned on our global cash position. We recorded income tax expense of $2.7 million in 2026 as compared to $843,000 in 2025.

Net income in the second quarter was $5.3 million or $0.23 per diluted share as compared to $3.5 million or $0.15 per diluted share in the year-ago period. Now turning to our year-to-date results, sales for the six-month period ended July 31, 2025, were $293.6 million as compared to $291.4 million last year. Total net sales increased 0.8% as compared to the six-month period of fiscal 2025. In constant dollars, the increase in net sales for the year-to-date period was 0.3%. U.S. net sales declined by 1.6%, and international sales increased by 2.6%. Gross profit was $158.9 million or 54.1% of sales, as compared to $158.2 million or 54.3% of sales last year.

The decrease in gross margin rate for the first six months was primarily due to unfavorable foreign exchange and increased tariff costs, partially offset by favorable channel and product mix. Operating expenses were $151 million as compared to $153.4 million for the same period of last year. The decrease was driven by a strategic reduction in marketing expenses, partially offset by an increase in performance-based compensation. For the six months ended July 31, 2025, operating income was $7.9 million compared to $4.8 million in fiscal 2025.

We recorded approximately $2.7 million of other non-operating income in the six-month period of fiscal 2026, which is primarily comprised of interest earned on our global cash position, as compared to $3.8 million in the same period of last year. Net income was $7.2 million or $0.32 per diluted share as compared to $5.5 million or $0.24 per diluted share in the year-ago period. Now turning to our balance sheet, cash at the end of the second quarter was $180.5 million as compared to $198.3 million of the same period last year. Accounts receivable was $94.4 million, up $7.7 million from the same period of last year, primarily due to timing and mix of business.

Inventory at the end of the quarter was up $28.3 million or 15.5% above the same period of last year. $5.1 million of the increase was due to foreign currency, and $4.6 million of reciprocal tariffs is included in inventory on hand at the end of the second quarter. As Efraim mentioned, as of July 31, we have built a strong position in inventory of Swiss-made watches in the United States and would expect that a substantial portion of this year’s needs are covered. We are comfortable with the composition and balance of our inventory at year-end.

In the first six months of fiscal 2026, capital expenditures were $2.8 million, and we repurchased approximately 100,000 shares under our share repurchase program. As of July 31, 2025, we had $48.4 million remaining under our authorized share repurchase program. Subject to prevailing market conditions and the business environment, we plan to utilize our share repurchase program to offset dilution in fiscal 2026. As Efraim mentioned, we closely monitor the changing tariff landscape, and we will continue to develop mitigation plans. Given the current macroeconomic environment and the ongoing uncertainty of the impact of tariffs on our business, the company is not providing fiscal 2026 outlook. I would now like to open the call up for questions.

Operator: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up their handset before pressing the star keys. One moment, please, while we poll for a question. Our first question comes from the line of Hamed Khorsand with BWS Financial. Please proceed with your question.

Hamed Khorsand: Hi, good morning. So there was lots of commentary about mini watches, and I just wanted to understand what you are seeing from consumer habits or purchasing that you think that the mini is the route that you are taking?

Efraim Grinberg: So I think, and you know, we have both what we call mini watches, and we have microwatches, which are smaller. Mini watches for us are watches from, like, 23 to 28 millimeters. And what had happened is that for a period of time, watches had gotten bigger both for men and for women. So over the last few years, they have gotten smaller again. And with that aspect, it has actually brought young women back into the category. And there is a lot of social media around that and layering of women’s watches with jewelry. And so we believe it represents a significant opportunity across our brand portfolio.

And that trend has, as many trends do, begun in luxury and then moves into more accessible products as well.

Hamed Khorsand: Okay. And during Prime Day, I know you guys were participating. Was there anything that stood out of that event that has continued since? Or was it purely the consumer responding to price?

Efraim Grinberg: So we are probably a bigger participant in the prime events in Europe than we are in the United States. But we have seen our overall digital business with those retailers that are completely focused on the digital environment, whether it be Zalando or the Amazons of the world, really doing very well on a global basis. And that is really good to see, and that is really across our brand portfolio. So we believe that is an increased opportunity as we continue to progress down our strategic plan.

Hamed Khorsand: Okay. And then I know you have talked about raising inventory because of the Swiss watches, but earlier this year you had also raised inventory because of what is going on with tariffs. How much of your increase overall year to date, and I am speaking on calendar so excuse me, year to date on the calendar, can you just digest through the channel by the holiday shopping season?

Efraim Grinberg: Sure. So I will start, and then I will turn it over to Sallie. Our inventories got very low at year-end, so we began to rebuild inventory in Q1 of this year. We would expect our inventories to be in line by year-end. And what that has allowed us to do at the same time is to offset some of the tariff impact by having inventory moved to the United States prior to the implementation of certain tariffs. Obviously, we cannot offset all of it, and then we have taken other actions, whether it be pricing or negotiations with suppliers, to help mitigate some of the effect as well. But I will turn it back to Sallie as well.

Sallie DeMarsilis: The only detail I will add to that, and thank you, Efraim, that was very thorough, is we have, as I mentioned, about $28 million of additional inventory at this time. We do expect to work it down by the end of the year to something more reasonable. But of that, about $16 million of it is in the U.S. So we did pull it forward into the U.S. so that we can manage through these tariffs and kind of get ahead of some uncertainty with that. As we also mentioned, just to reiterate, we do think that a substantial portion of what we need in the U.S. is probably already here.

We will add in what might be new styles or something that is an advertisement or maybe something that is just selling faster than we had anticipated. Bring it in, but we should be in relatively good shape.

Hamed Khorsand: Okay. Can I ask one more question?

Efraim Grinberg: Certainly. Absolutely.

Hamed Khorsand: You have taken a lot of these restructuring charges in the last few quarters. When do they stop? And when do us investors see it show up in quarterly results?

Efraim Grinberg: Well, I think it is a combination both of charges dealing with our event that occurred in the Middle East last year, as well as some charges on the restructuring side. I would think on the restructuring side, they are predominantly done. There could be some laggard expenses on the other charges, but I would expect overall that they will be reduced significantly.

Sallie DeMarsilis: And just to remind you that we did mention when we were talking about the savings and the initiatives we were putting in place, those are offset by some increases this year in our costs. So you will see they offset some of the increases that we would have for regular year-over-year increases for merit, adding back performance-based compensation, and, of course, currency.

Hamed Khorsand: Okay. Very good. Thank you.

Operator: Thank you. And we have reached the end of the question and answer session. I would like to turn the floor back to Efraim Grinberg for closing remarks.

Efraim Grinberg: Okay. Thank you all for participating with us today, and we look forward to joining you again for our third quarter conference call where we will hopefully be able to share with you the progress that we continue to make on our strategic initiatives. Thank you.

Operator: Thank you. And this concludes today’s conference, and you may disconnect your lines at this time. We thank you for your participation.

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DATE

Tuesday, August 26, 2025 at 8:00 a.m. ET

CALL PARTICIPANTS

Chief Executive Officer — Kristian Sorensen

Chief Financial Officer — Samantha Xu

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TAKEAWAYS

Time Charter Equivalent (TCE) Income— $38,800 per available day and $37,300 per calendar day, both above prior guidance of $35,000 per day.

Profit After Tax (Attributable to Equity Holders)— $35 million profit with earnings per share of $0.23.

Dividend Declared— $0.22 per share dividend declared, representing 75% of shipping NPAT, supplemented by retained dividends from Product Services 2024 results.

Product Services Segment Profit After Tax— $6 million net profit after tax for Product Services, with realized gross profit of $15 million.

Aggregate Realized Product Services Profit YTD— $39 million as of June 30, 2025.

Dry Docking Days— 139 days in Q2 2025; management expects 143 days in Q3 and 135 days in Q4 2025, impacting available earning capacity.

Third Quarter Guidance— Approximately $53,000 per day fixed for 90% of available days, exceeding all-in cash breakeven of $24,800 per day for the year 2025.

Financing Activity— New $380 million term loan and revolving facility secured for advanced gas fleet, plus $215 million term loan facility for BW LPG India; $250 million shareholder loan terminated early.

Fleet Composition and Growth— 409 VLGCs in service globally as of Q2 2025, with only 7 new deliveries expected in 2025 and an order book of 111 vessels.

Time Charter Portfolio Exposure— 44% of shipping exposure, including 32% fixed rate; Q3 2025 fixed at 90% of available days.

Segment Profitability— the balance of fixed time charter out estimated to contribute $74 million in the second half of 2025.

Net Leverage Ratio— 31% in Q2, down from 33% at the end of last year primarily due to lease liability reduction.

Operating Expenses (OpEx)— $9,000 per day OpEx in Q2 2025; own fleet operating cash breakeven expected at $19,100 per day for full year 2025 and total fleet at $21,700 per day for full year 2025; all-in cash breakeven projected at $24,800 per day for the year.

Liquidity Position— $287 million in cash at the end of Q2 and $421 million in undrawn revolving credit lines at quarter end.

Trade Finance Utilization— $303 million trade finance utilization, equating to 38% of total available credit for trading activities.

Kristian Sorensen— “VLGC market is characterized by solid fundamentals with robust growth in export volumes from the U.S. and Middle East; fleet inefficiencies and Panama Canal congestion are absorbing capacity and elevating rates, with spot rates reaching above $70,000 per day for certain routes as reported in Q2 2025.

Product Services Value at Risk— Average bar value at risk was $6 million, reflecting a balanced trading book.

Return Metrics— Shareholders’ equity was $1.9 billion as of Q2 2025; annualized return on equity and capital employed were 98%, respectively.

SUMMARY

Management highlighted a volatile quarter driven by exceptional geopolitical disruptions and shifting trade flows, resulting in elevated freight rates and increased demand for very large gas carriers (VLGCs). The company’s ongoing drydocking program is expected to constrain operational days through Q4, which may affect near-term capacity and reported income. BW LPG Limited’s time charter strategy has provided downside protection but has also limited exposure to recent spot rate surges, influencing guidance for Q3 2025. Liquidity remains robust following recent financings and early loan repayments, with the next major maturity not due until 2029. Management underscored the significant impact of Panama Canal congestion and evolving cargo flow patterns on market fundamentals.

CEO Sorensen stated, “the supply-demand balance in the VLGC market is tight, and the bargaining power is in the shipping market’s favor.”

Samantha Xu said the reported net asset value for Product Services does not include a $10 million unrealized physical shipping position as of Q2 2025, indicating additional latent value not recognized in current financials.

Fleet renewal and newbuild activity remain limited in the near term, with only seven new VLGCs expected for delivery in 2025 and approximately 60 ships in the global fleet over 20 years of age.

Spot rates above $70,000 per day are described as sustainable by management under current conditions, though potential downside risk remains if market dynamics shift.

The CFO cautioned that unrealized gains and losses for Product Services will continue to see fluctuations before the positions are realized, underscoring ongoing earnings variability tied to market volatility.

INDUSTRY GLOSSARY

VLGC (Very Large Gas Carrier): Ocean-going vessel designed for the bulk transport of liquefied petroleum gas (LPG), typically with a capacity exceeding 80,000 cubic meters.

FFA (Forward Freight Agreement): Derivative contract used for hedging freight rate exposure by locking in future shipping rates for a particular route and timeframe.

Tonne Mile: A demand metric calculated as the volume of goods shipped multiplied by the distance transported, reflecting overall transportation demand in shipping markets.

NPAT: Net Profit After Tax; company earnings after all expenses and taxes.

Full Conference Call Transcript

Kristian Sorensen: Thank you, Aline, and hello, everyone, and thank you for taking the time to be with us today as we review our second quarter financial results and recent relevance. So let’s turn to Slide four, please. The second quarter was marked by extraordinary geopolitical and market events, which substantially increased the market volatility both for shipping and trading. For the quarter, we reported a TCE income of $38,800 per available day and $37,300 per calendar day, above our guidance of $35,000 per day. In a quarter with spot rates fluctuating between $10,000 and $70,000 per day, the time charter portfolio played a vital role in protecting our downside.

After minority interests, the Q2 profit was $35 million, equivalent to an EPS of $0.23. And the Board of Directors has declared dividends of $0.22 per share, consisting of 75% of our shipping NPAT, topped up with retained dividends from Product Services 2024 results. Moving on to our trading operations. Product Services achieved a gross profit of $15 million and a profit after tax of $6 million. Samantha will take you through the details later in the presentation. And it’s important to keep in mind that it is the realized result, which generates Product Services dividend capacity. As of June 30th, the aggregated realized result for 2025 is $39 million.

Further on our shipping activities, 2025 is a busy drydocking year for us. In the second quarter, we had 139 days related to vessels drydocking. In the second half of the year, we expect 143 and 135 days, respectively, for Q3 and Q4. These numbers should be noted since they impact our revenue-generating potential on top of the drydocking cost itself. For the third quarter, we are guiding on about $53,000 per day fixed for 90% of our available days. These are solid levels above our all-in cash breakeven of $24,800 per day. On the asset side, BWG was added to our own fleet in June after we declared a very lucrative purchase option earlier this year.

On financing, we finalized a $380 million term loan and revolving credit facility to finance the advanced gas fleet and secured a $215 million term loan facility for BW LPG India fleets. Our $250 million shareholder loan from BW Group was terminated earlier due to ample liquidity. But now that Q2 is over, the focus is on 2025, which has started off on a strong note. So let’s turn to the next slide, please. The current VLGC market is characterized by solid fundamentals with robust growth in export volumes from the U.S., supported by high domestic LPG production and ongoing terminal expansions. The Middle East volumes are also slightly up, backed by a reversal of the OPEC cuts.

The extraordinary factor is how inefficiencies in the LPG trade pattern have absorbed substantial shipping capacity in recent months. The first such inefficiency emerged after China imposed retaliatory tariffs on U.S.-sourced LPG, which led to a significant reshuffling of U.S. export volumes away from China and into other parts of Asia. The sudden shift of U.S. volumes toward India and Southeast Asia, combined with the redirection of Middle East volumes to China rather than India, absorbed considerable capacity from the VLGC fleet and pushed rates up. The short but intense Israel-Iran conflict also fueled spot rates for ships loading around that period in the Middle East.

Now trade patterns are slowly returning to pre-trade workflows, but the Panama Canal has once again become a bottleneck as growing traffic from container ships, ethane carriers, and other prioritized or high-paying segments strains capacity. The consequence has been more VLGCs routing around South Africa, which significantly impacts the tonne mile for the global VLGC fleets, making fewer ships available, which, in turn, is pushing rates up. In addition, the global fleet growth is at a low level, with 409 ships currently in service and only seven more to be delivered in 2025.

We keep an eye on the LPG FFA market, which is currently pricing the balance of 2025 at an equivalent of low $60,000 per day for the Middle East Japan benchmark leg. Next slide, please. This slide shows how the LPG market dynamics played out after the Chinese retaliatory tariffs were implemented. The U.S. LPG export volumes shifted from Chinese destinations to India, but also Japan took a big chunk of the rerouted cargoes. U.S. LPG exports to India were above 1 million tonnes in 2025 compared to less than 100,000 tonnes for the entire 2024.

Middle Eastern volumes also played a key role by replacing U.S. cargoes to China, thereby redirecting traditional cargo flows for India to longer haul destinations in China and absorbing more shipping capacity. Furthermore, China substituted U.S. LPG with cargoes from Canada and Australia, a trend that we see continues. All in all, the massive reshuffling of cargoes that took place was creating substantial inefficiencies in the LPG supply chain, which required more shipping capacity and moved rates up. The trade pattern is now pivoting towards the pre-liberation day structure in anticipation for a trade deal between the U.S. and China. But the Panama Canal has created new inefficiencies for the fleets. Next slide, please.

In 2023, 2024, we all spent significant time analyzing the Panama Canal dynamics. Now with the canal regaining relevance, it’s worth revisiting its key aspects driving our markets. The new Panama Canal locks have a daily capacity of around 10 ships in total combined for both directions. VLGCs have over the last years taken up between two to three of these 10 transit slots. As previously explained, VLGCs are not prioritized through the canal during periods of increased traffic. So when waiting times become excessive or auction fees for available slots are prohibitively high, the alternative is to route vessels around the Cape Of Good Hope.

And this rerouting increases sailing distances by up to 50% compared with the Panama Canal route to Northeast Asia and has an immediate and material impact on the VLGC market by raising demand for tonnage to offset the longer voyages. Monitoring developments in the Panama Canal will therefore be important in assessing the direction of the VLGC freight rates going forward. The increased demand for shipping capacity has pushed spot rates up to a level above $70,000 per day for loading in the U.S. Gulf. As you can see from the graphs on this page, shipping is currently capturing almost all the profit in moving cargoes from the U.S.

Gulf to the Far East, and there is very little room left for profit on the cargo price itself. Demand for vessels, driven by increased export volumes and the aforementioned inefficiencies, is growing faster than the capacity of the VLGC fleets. And the upcoming export terminal expansions will likely lend support to shipping share of the U.S. Far East arbitrage. In the LPG value chain, there is a daily arm wrestling going on between terminals, cargo owners, and the shipping market on capturing as much as possible of the price difference between the U.S. and the landed price in Asia.

For the time being, the supply-demand balance in the VLGC market is tight, and the bargaining power is in the shipping market’s favor. On that note, I’d like to remind you how this may impact the Q3 accounting result for Product Services since the change in the mark to market valuation of their shipping portfolio is not captured in the P&L, while forward cargo and paper positions are included. Looking ahead on this slide, the U.S. export volumes are forecasted to continue growing on the back of increased production of LPG.

The crude oil wells in the Permian Basin are more gaseous than we expected some years ago, and the gas production is forecasted to grow at least twice as much annually as the crude oil production, where lower growth figures are expected in the next five years’ periods. The growth in U.S. LPG exports is supported by several terminal expansions from now into 2028. And Energy Transfer has already started their LPG exports from their Nederland terminal expansion. Moving over to the Middle East. The export growth is forecasted to accelerate next year with Qatar leading the way as well as Abu Dhabi. In neighboring Saudi Arabia, the Jafura project is worth keeping an eye on.

Although it’s further out in time, the size of the LPG volumes made available for exports are potentially adding another 5 to 10 million tons of LPG to the growing volumes from the Middle East. On the fleet and newbuilding front, there is little new to report and the order book counts 111 additional vessels to the current fleet of 409 vessels where about 15% equal to 60 ships and thereabouts are older than 20 years. And then it’s over to you, Samantha.

Samantha Xu: Thank you, Kristian, and hello, everyone. Let’s dive into our shipping performance. The 2025 completed with the TCE of $37,300 per calendar day or $38,800 per available day, over 94% fleet utilization after deducting technical off hire and waiting time. The healthy result achieved in a volatile market was a strong testament to our commercial strategy, consistently taking on time charter and FFA for coverage in a strong market to provide support when spot markets are under pressure. In Q2, the time charter portfolio was 44% of the total shipping exposure, amount of which 32% is fixed rate time charter.

Looking ahead for Q3 2025, we have fixed 90% of the available fleet days at an average rate of about $53,000 per day. For the second half of 2025, we have secured 34% of our portfolio with fixed rate time charter and FFA hedge respectively at $45,200 and $51,700 per day. Our time charter out fleet is estimated to generate a profit of around $9 million over our time charter in fleet. On top of that, the balance of our fixed time charter out of portfolio is estimated to generate $74 million. On the product services side, the business posted a realized gain of $6 million for Q2.

The positive result reflected a disciplined approach and effective risk management in a volatile quarter. On the unrealized open positions, we reported a $12 million increase in mark to market on our cargo position, which was offset by a negative movement in paper position of $3 million. After accounting for other expenses, which mainly comprise general and administrative expenses, product services reported a net profit after tax of $6 million for Q2 and net asset value of $58 million as at the quarter end. As we mentioned in the previous quarters, the large mark to market valuation movement is due to the gradual phase in of our multiple year term contract, which reflects value adjustments in time of volatile market.

While the value is significant, it reflects the delta between the balance sheet dates, and we’ll continue to see fluctuations before the positions are realized. We also want to highlight that due to the nature of trading, its gain and loss are realized in different financial periods and cannot be extrapolated and predicted using its historical performance. Its unrealized position will fluctuate depending on the valuation at the end of the financial period, driving the accounting results up and down drastically. It’s important to remember that our trading model looks at creating value combining positions of cargoes, paper, and shipping positions.

As such, we would like to remind you that the reported net asset value does not include the unrealized physical shipping position of $10 million, which was based on our internal valuation. In light of the strong shipping market outlook, the open cargo contracts and hedging position may in turn experience negative mark to market valuation changes, and we’ll continue to see fluctuations before the positions are realized. In Q2, our average bar value at risk was $6 million, reflecting a well-balanced trading book of cargoes, shipping, and derivatives after including the increased term contract volume as mentioned. Going on to our financial highlights.

We reported a net profit after tax of $43 million, including a profit of $16 million from BW LPG India, a $6 million profit from product services. Profit attributable to equity holders of the company was $35 million for this quarter, which translates into an earnings per share of 23¢ and an annualized earning yield of 8% when compared against our share price at the June. We reported a net leverage ratio of 31% in Q2, a slight decrease from 33% reported end of last year. The decrease was due to lease liability reduction of $123 million from the purchase option exercised for BW Kisuku and BW Yushi, partly offset by the net drawdown of some banking facilities.

For Q2, the board declared a dividend of 22¢ per share, which translates to a 110% payout of our quarterly shipping profit. These are also supported by some of the retained dividends from product services in 2024. For the period end, our balance sheet reported a shareholders’ equity of $1.9 billion. The annualized return on equity and capital employed for Q2 were 98%, respectively. Our Q2 OpEx was $9,000 per day. For full year 2025, we estimate our own fleet’s operating cash breakeven per day to be $19,100 per day and total fleet’s operating cash breakeven, including time charter in vessels, to be $21,700 per day.

Please note, this is a reduction compared with the cash breakeven of 2024 of $22,800 per day, primarily due to meticulously managed financing, reduced time charter in vessels, and lower G&A per day. And this is also offset by increased OpEx. All in cash breakeven, including dry dock program, for the year is estimated to be $24,800. Next slide, please. On the liquidity side, at the end of Q2, we maintained a strong position of $7.8 billion, including $287 million in cash and $421 million in undrawn revolving credit facilities. Due to our meticulously managed financing plan, we are able to support our fleet growth and remain a robust and resilient financial position to weather the future.

Our repayment profile continues to be sustainable and healthy with major repayment only kicks in after February 19, 2029. On the product services side, trade finance utilization stood at a moderate level of $303 million or 38% of our available credit line, providing sufficient room for future trading needs. Okay. With that, I would like to conclude my update. Thank you for listening, and back to you, Aline.

Operator: Thank you, Samantha, and thank you, Kristian. We would now like to open the call for Q&A for questions. So please type your questions in the Q&A channel. You can also click the raise hand button to ask your questions verbally. Please note though that participants have been automatically muted, so please press unmute before speaking. We will start with the verbal questions first before then moving on to the chat. So please, if you want to ask a question, please raise your hand. I see first up Thomas Christiansen. Please unmute yourself.

Thomas Christiansen: Thank you. Can you hear me?

Operator: Yes.

Thomas Christiansen: That is really good. I have a question regarding the fleet growth. First of all, if you could that’s a factual question. Put some figures regarding the capacity of the VLGC fleet today and with the expected 111 vessels going forward. And then my next question is if that is a concern, this fleet growth to you? And if it is, how you will mitigate the impact? And if not, why it’s not a concern?

Kristian Sorensen: Thank you, Thomas. I can say I mean, it’s to go into detail of every vessel size. It’s probably going to take too long, but these ships are quite standardized, except that you have about is it 60 ships now of this fleet, which are Panamaxes, which can go both the old and the new canal lane with a capacity of 88,000 cubic meters. Otherwise, the VLGCs are relatively standard in their design. Some are 91,000, some are 93 and some are 88,000. Like I said, if you go back to the years before 2010, these ships are typically 82,000, maybe 84,000 cubes. So that’s kind of the way that the design has developed over the last ten years.

When it comes to the fleet growth in 2027, 2028, it’s something we’re absolutely not naive about. It should be viewed in the context of also more LPG volumes coming on stream, like mentioned, from the U.S. as well as the Middle East. I think the fleet growth is kind of the same picture we had going from 2022 into 2023, where the fleet growth was actually absorbed very well in the market because the inefficiencies and the volume expansion from the U.S. in particular absorbed the fleet capacity, which came on the water. But we are absolutely not naive about this.

And as previously mentioned, we also have a time charter portfolio, which is currently just above 30% of our capacity, which we are given provided the rates are found attractive, probably going to grow into towards 40%. So that’s the way we are protecting the downside as also mentioned in the beginning of our presentation.

Operator: Thomas, you had a follow-up question?

Thomas Christiansen: Oh, yes, I did. I mean, little bit in the same context. I mean, recently, Panama announced that it wouldn’t register the ships above fifteen years. I mean, you say on a global level, how does that impact the fleet of big gas carriers? And also, does would that impact the BW LPG’s business?

Kristian Sorensen: Sorry. I didn’t get that. That the Panama Canal has?

Thomas Christiansen: No. The Panama register, the flag register Panama, announced that it will not register ships above fifteen years going forward. How that how does that impact the global market and your market?

Kristian Sorensen: Well, then there will be fewer ships going through the Panama Canal, and I guess more ships have to sail around South Africa if to and from Asia and the U.S., if that is the case.

Thomas Christiansen: I think it’s more I think it’s more about, to register, to be to be to flag the Panama flag going forward that the

Samantha Xu: Hello?

Kristian Sorensen: Thomas, you disappeared.

Operator: Yeah. It looks like we lost him.

Kristian Sorensen: Thomas, are you with us?

Thomas Christiansen: Can you hear me now? Yes.

Kristian Sorensen: Yeah. We can.

Thomas Christiansen: Okay. Sorry. Yeah. It’s no. I think it’s more about it’s the register, the flag register, Panama’s flag register that one doesn’t want to allow, vessels above fifteen years to be registered, with Panama Flak going forward. So I guess that somehow will exclude some vessels from the global fleet of big gas carriers. So if you have a view on how that will impact the global fleet and your business too.

Kristian Sorensen: I think the I’m not sure about the restrictions on flagging ships in Panama. But if that is the case, I presume that there are all the registers where you can flag your ships. So it’s nothing which will have a commercial impact on our markets as far as I can see.

Thomas Christiansen: Alright. Thank you.

Operator: Thank Next up was Climent Molins. Please go ahead.

Climent Molins: Hi, good afternoon, and thank you for taking my questions. Over the years, you’ve generated significant shareholder value by exercising the purchase options at well below market prices on time charter team vessels with the Yuchi as the most recent example. Could you remind us whether you have purchase options on any of your remaining time charter in vessels?

Kristian Sorensen: We do have on one ship later in the decade, but there are no purchase options in the immediate future to say to phrase it that way. But we do have some towards the end of the decade.

Climent Molins: Okay, makes sense. Q3 guidance was a bit, let’s say, disappointing maybe relative to recent market trends, especially on the spot market. A portion of that is attributable to your time charter book. But could you please delve a bit into the numbers? Where a significant portion of days fixed before rates went up?

Kristian Sorensen: That’s something we will have to get back to you on for the next quarter because that’s that requires a bit of meticulous working to get that number correct. But you’re absolutely right that the time charter portfolio, which protected our downside in the second quarter is also affecting the number we’re guiding on for the third quarter. And also keep in mind that we do have dry dockings taking place throughout this year. And there is also a position and timing effect here, which is important to keep in mind because these voyages are usually three months voyages.

And to have ships in position for the uptick in the rates takes time to before you see ships are load ready and can actually benefit from the strength in the market. So I think we have to get back to you on the details on the split between spots and time charter like we typically do in our earnings presentation.

Climent Molins: Makes sense. Thank you for the color anyway. And final question from me. You had 139 dry docking days in Q2 followed by 143 and 135 in Q3 and Q4 respectively. How many vessels are expected to go through drydocking each quarter? And secondly, have you seen any congestion going into drydocks?

Kristian Sorensen: No congestions, but it’s another six, seven ships for the remainder of this year.

Climent Molins: Thank you. That’s all from me. I’ll turn it over.

Kristian Sorensen: Thank you.

Operator: Thank you, Climent. We have, John Dixon next.

John Dixon: Good morning, Kristian. Good morning, Samantha. I just have a real quick question for you related to the Panama Canal. We saw earlier this year like, just you can hear me. Right?

Samantha Xu: Yeah. I can hear you well, John.

John Dixon: Oh, okay. Earlier this year, President Trump here in the United States has really spent a lot of time with Panama trying to get the freight rates down for US flag vessels. Is that and US naval vessels, of course. Is that something that you see that’s impacting the congestion in the Panama Canal? And do you kind of expect to see that going forward?

Kristian Sorensen: Not really. The capacity is mainly being absorbed by container ships. We see more ethane carriers on the back of the increased exports of ethane from the U.S. And this is going to accelerate in coming years as well as other ship types. But we don’t so far see any impact from the, let’s say, naval ships or the U.S. flagships as you mentioned.

John Dixon: Okay. Thank you very much. That was my only question.

Operator: Thank you, John. Do we have any more questions that you would like to ask verbally before we move on to the chat? If not right now, we might just turn to the chat, maybe starting with Andreas first. SGA has come down from Q4 and also Q1. What is driving this? And is the current level a more realistic level going forward?

Kristian Sorensen: Samantha, I guess this one is for you. On the G and A side, what typically drives this up? I presume this is the G and A we are referring to. Right?

Samantha Xu: I assume the SGA refers to the G and A. Yeah. From this and the current level is more or less. Yeah. I think, Andreas, so GNA is not something that we can how to say how to say we can give you a good base for you to estimate because partly of that is the shipping’s journey and the other part is product services journey, which is a reflection of the realized profit as part of the incentive scheme. So that’s why it would you will see fluctuations of a G and A as a true up reflecting that the product services are realized profit as well.

Operator: Alright. Anders had another question related to spot rates being lower. So the question was, with the current market dynamics being favorably and comparing relative to peers reporting recently, what is the reason for the achieved spot rates for Q3 being relatively lower for BW LPG Limited?

Kristian Sorensen: Yeah, I think well, it’s not I guess, our peers have to answer for their numbers themselves. But at least for us, when we guide on the Q3 numbers, it’s including both spot and the time charter portfolio. So it’s not pure spot. And as mentioned also to Climent earlier is that the time charter portfolio is affecting this number compared to the pure spot rate that you see in the markets. And of course, have the positioning, the timing effects and the fact that we also have a relatively busy drydocking agenda and scheme this year, which will impact guiding and the results going forward.

Operator: Thank you. We move on to a question from Peter on VLACs. To what extent are the VLACs affecting the VLGC market? And when do you expect to start seeing some scrapping?

Kristian Sorensen: The VLACs are currently, you know, as they are being phased in, you know, these are basically going to trade as far as we can see as regular VLGCs because the ammonia trade for these kind of vessels hasn’t materialized yet and has probably not gone materialize before we are well into the 2030s as it looks now. So we regard them as part of the, let’s say, conventional VLGC fleet in our market outlooks. And then there was another question, which was whether we start seeing some scrapping. Scrapping is typically taking place when the markets are really, really low.

These ships, when they go out, let’s say, the conventional trade, they’re typically when they reach, at least 25 years, they end up in captive trade, floating storage operations. And technically, these ships can last, you know, until they are 40 years of age basically, because there is very little wear and tear compared to a dry cargo ship, for instance. So we I don’t anticipate to see any scrapping activity picking up before the markets are at a very different level than what we see today.

Operator: Thank you, Kristian. We have another question in the chat from Olaf on contract extension. Do you have any plans to extend the contracts for the vessels you’re currently chartering in?

Kristian Sorensen: This is something we will decide on as we get closer to the expiry of these various contracts. So we will inform the market more on how we extend or choose not to extend these contracts as we move into the third and the fourth quarter.

Operator: Thank you. Another question from Greg on ton mile upside. Regarding ton mile upside from U.S.-China trade tensions, you mentioned that voyage patterns are reverting. Can you quantify in general terms how much of the tonne mile upside is still here still there today? Is it mostly still there or mostly gone?

Kristian Sorensen: This is a very good question, Greg. What we do see is that U.S. cargo flows into China have kind of returned to a certain extent. But the surge in U.S. cargoes heading into India has come off. So I think it’s it’s a bit too early to see whether there is actually a new trade pattern established between the U.S. and India, for instance, or if this was just a one off. So it’s hard to kind of quantify this. But as mentioned, we saw more than 1 million tons heading from the U.S. into India in the second quarter against less than 100,000 tonnes for the entire 2024.

But the and also a side effect of this, which is quite interesting, which we probably underestimated was that India, which over the last years has absorbed basically 50% of all the LPG exports from the Middle East was suddenly receiving less cargoes from the Middle East because the Middle East sent more cargoes all the way to China. So we need a bit more time, I think, to quantify these ton mile effects and how it really impacted the market.

Operator: Thank you. We have a question from Axel Styrman on Ethene. Do you have any comments to the optionality on Ethene LPG exports from the U.S. Gulf in 2025 and in 2026. Which share of Ethene LPG do you expect to be shipped from the expansions where there is such optionality?

Kristian Sorensen: Thanks, Axel. So we understand that from the Netherlands terminal, for instance, they will start up with LPG and then phase in the ethane as we get into 2026. We assess kind of we have a fifty-fifty split on that one. Enterprise, they have two expansions where one of them will eventually be ethane only. So I think there is good reasons to believe that, you know, a substantial part of the terminal expansion for energy transfer as well as enterprise will be designated for ethane capacity.

Operator: We have another question in the chat from Chandan on Panama Canal congestion. So he would like to know what is driving the containership congestion increase in Panama Canal. What do you think?

Kristian Sorensen: I’m not sitting close enough to the container market to give a kind of a qualified reply on this, but I suspect that it has something to do with the ongoing trade war, negotiations between China and the U.S. But the container traffic in and around the canal is steadily growing simply because also there are more ships in general on the water fighting for this very limited capacity, which the Panama Canal has to offer.

Operator: And final question for now in the chat before we can open up again, verbally as well is from John on the spot rates level. How do you look at the current freight market for VLGCs? Are spot rates of $70,000 a day a sustainable level, or do you feel there are some downside risk in the near to medium term? And how do you look at the traffic in Panama Canal, especially for containers into the second half of 2025?

Kristian Sorensen: Good questions. I think there is always a downside risk when you are at $70,000 per day in the market. But we do see also today, for instance, that ships are being booked around that level. So it seems like the market is able to absorb it and that the rates are sustainable. But I wouldn’t say that there is not any downside risk to this rate level. But we believe that the Panama Canal is definitely playing a vital role in driving these rates further up or down. The fundamentals are solid. So it’s not like we have changed any views on the fundamentals of the market. But the wildcard is the Panama Canal.

And as mentioned, we see the containers are taking up substantial and increasing part of that capacity over the last couple of weeks. So it seems like the situation, even though it’s it’s rapidly changing from one week to the other, it seems like the Panama Canal congestion is going to be playing a role in the market in our market going forward. I think that seems to be the case.

Operator: Thank you, Kristian. There’s no more questions in the chat right now, but we have John Dixon who raised his hand again. So please, if you wanna go ahead, John.

John Dixon: Kristian, just real quick. Looking to the fourth quarter, Samantha said and you all showed that you’ve you’ve booked about 30% of your available days into the fourth quarter. Obviously, the way I’m looking at that is that if those freight rates stay higher leading into the fourth quarter, I’m assuming that is gonna be reflected. I mean, obviously, you still have a lot of available days left to book. Is that kind of the way you guys are looking at it? Or what’s your perspective leading into that fourth quarter?

Kristian Sorensen: I think, John, the way to look at this is that regardless of how the market is performing the spot market is performing, we have this 30 odd percent of all the fleet capacity locked in at $45,000 per day thereabout. And this will obviously have an impact on our time charter equivalent for an income for that quarter. But the remaining 70%, are exposed to the spot market. So that’s something we are happy to keep for time being at least, if that kind of answered your question.

John Dixon: It does, Kristian. Thank you. I and I appreciate it.

Operator: Thank you, John. Do we have any more questions? Either you wanna type it into the chat or raise your hand. We still have a couple of minutes left. Alright. If not, Kristian, you wanna provide a few closing remarks?

Kristian Sorensen: Then I think it’s time to round it off and say thanks to everyone listening in and for asking good questions. And we look forward to seeing you again in November. And in the meantime, we look forward to an exciting market development in the months to come. Thank you, everyone.

Operator: Thank you, Kristian. Thank you, Samantha. This will conclude our call. The call transcript and recording will be available on our website shortly. So thanks a lot for dialing in, and we wish you a very good rest of your day.

Image source: The Motley Fool.

Date

Monday, August 25, 2025 at 5 p.m. ET

Call participants

Chief Executive Officer — Fabien Haubert

Chief Financial Officer — Alicia Kelly

Operator

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Takeaways

Total revenue— driven by a 27% aggregate increase across four core verticals in the fiscal second quarter ended June 30, 2025.

Gross margin— Gross margin of 66.1% in the fiscal second quarter ended June 30, 2025, up 292 basis points from 63.2% a year ago, reflecting favorable product mix and cost optimizations.

Operating expenses— $5.4 million in operating expenses in the fiscal second quarter ended June 30, 2025, an 18% increase primarily attributable to one-time redomiciliation costs and strategic hires.

Operating margin— Operating margin of 10.1% in the fiscal second quarter ended June 30, 2025, expanding more than 200 basis points with operating income of $1 million, up 46%.

EBITDA— EBITDA was $1.1 million in the fiscal second quarter ended June 30, 2025, up from $846,000 a year ago, with EBITDA margin (non-GAAP) increasing by 161 basis points to 11.8%.

Net income— $1.2 million, or 5¢ per share, in the fiscal second quarter ended June 30, 2025, more than doubling from $493,000, or 2¢ per share, in the prior-year quarter (GAAP).

Cash and short-term deposits— $21.9 million, with no debt reported as of June 30, 2025.

EMEA revenue growth— 52% growth in the fiscal second quarter ended June 30, 2025, raising EMEA’s share of total revenue to 35%, up from 27% a year ago.

North America revenue growth— North America revenue increased 29% year over year in the fiscal second quarter ended June 30, 2025.

APAC region— APAC revenue decreased 47% in the fiscal second quarter ended June 30, 2025, due to a nonrecurring large contract recognized in the prior-year quarter.

LATAM performance— LATAM returned to growth in the fiscal second quarter ended June 30, 2025, with revenue up 26%.

Nonrecurring costs— One-time administration fees related to the company’s final legal redomiciliation to Canada.

Strategic investment— Expansion of the business development team and renewed focus on penetration in data center, utility, airport, and energy verticals.

Product innovation— Ongoing progress with multisensor technologies, targeting high-value solutions and reduced alarm rates.

Geographic revenue mix— North America at 53%, EMEA at 35%, APAC at 11%, and LATAM at 1% of total revenue in the fiscal second quarter ended June 30, 2025, compared to the prior-year quarter.

Summary

Management reported significant margin expansion in the fiscal second quarter ended June 30, 2025, reflecting a favorable sales mix and disciplined cost optimization. EMEA delivered notable growth, now comprising 35% of total revenue in 2025, attributed to both regional investments and vertical strength in energy and infrastructure.Senstar(SNT 2.98%) highlighted the impact of nonrecurring administrative expenses linked to the completed redomiciliation from Israel to Canada during the fiscal second quarter ended June 30, 2025. Strategic priorities include accelerated business development and innovation in multi-sensor technology as Senstar advances its competitive position. No financial leverage was present at quarter-end, providing flexibility for further investment or operational initiatives.

Fabien Haubert said, “Revenue for our four core verticals increased by 27% in aggregate year over year, leading to total consolidated revenue growth of 16.2% and robust expansion in both gross and EBITDA margins.”

Alicia Kelly stated, “the one-time administration fees were relating to consulting fees for concluding the final processes related to our Israeli entity. Now that we have completed the flip and we have redomiciled to Canada, there were a couple of outstanding activities that just needed to be closed up.”

Management identified broad-based adoption for security solutions in airports, data centers, and utility infrastructure, with broadening use cases beyond traditional perimeter defense.

Senstar is actively pursuing growth in noncritical infrastructure segments, including hospitals, educational institutions, and logistics facilities, leveraging technological differentiation.

Industry glossary

Perimeter Intrusion Detection Systems (PIDS): Integrated sensor systems designed to detect physical breaches along facility perimeters, leveraging technologies such as fence-mounted, buried, or free-standing sensors.

Multisensor: Security solutions combining several detection modalities (e.g., thermal, vibration, video analytics) for enhanced accuracy and reduced false alarm rates in perimeter monitoring.

Redomiciliation: The corporate process of changing a company’s home country or legal domicile to another jurisdiction.

Full Conference Call Transcript

Fabien will summarize key financial and business highlights followed by Alicia, who will review Senstar’s financial results for 2025. We will then open the call for a question and answer session. I would like to remind participants that all financial figures discussed today are in US dollars and all comparisons are on a year-over-year basis unless otherwise indicated. Before we start, I would like to point out that this conference call may contain projections or other forward-looking statements regarding future events or the company’s future performance. Statements are only predictions, and Senstar cannot guarantee that they will, in fact, occur. Senstar does not assume any obligation to update that information.

Actual events or results may differ materially from those projected, including as a result of changing market trends, reduced demand, the competitive nature of the security systems industry, as well as other risks identified in the documents filed by the company with the Securities and Exchange Commission. In addition, during the course of the conference call, we will describe certain non-GAAP financial measures, which should be considered in addition to and not in lieu of comparable GAAP financial measures. Please note that in our press release, we have reconciled our non-GAAP financial measures to the most directly comparable GAAP measures in accordance with Reg G requirements.

You can also refer to the company’s website at www.senstar.com for the most directly comparable financial measures and related reconciliations. And with that, I would now hand the call over to Fabien. Fabien, please go ahead.

Fabien Haubert: Thank you, Corbin. Thank you for joining us today to review Senstar Technologies’ second quarter 2025 financial results. We delivered strong second quarter results marked by the successful execution of our growth strategy and targeted investments to drive sales across our key verticals and geographies. Revenue for our four core verticals increased by 27% in aggregate year over year, which led to total consolidated revenue growth of 16.2% and robust expansion in both gross and EBITDA margins. Now moving on to a review of quarterly highlights. Revenue in the second quarter was driven by a well-balanced mix of products with notable vertical market strength from energy and corrections.

This result reflects the sustained customer demand and, when combined with our cost optimizations and focus on selling high-value-added solutions, drove a material gross margin expansion to 66.1% in the second quarter, comfortably above our targets. We are continuing to invest in technological innovation to protect our competitive positioning and fuel growth while diligently managing costs to deliver margin expansions and sustainable profitability. In the second quarter, operating expenses remained relatively stable as a percentage of revenue at 56% compared to 55% in the prior year quarter, despite an 18% increase in absolute terms. This operational leverage, combined with strong double-digit growth in revenue and gross profit, drove EBITDA to $1.1 million.

EBITDA margin expanded by 161 basis points to 11.8%. Net income increased significantly compared to the same period last year. In terms of the core geographic markets we served, Senstar’s global diversification continues to strengthen, with EMEA, North America, and LATAM delivering broad-based double-digit gains across our key verticals. In EMEA, the region is becoming a larger contributor to revenue and grew by 52% in the core second quarter while also gaining over 800 basis points in share of total sales. Our sustained investment in Europe over the previous years is coming to fruition, with the EMEA region now representing 35% of total revenue, up from 27% in the year-ago period.

The main verticals driving this record in the region include energy, particularly oil and gas, along with solar farms and electrical generation. In addition, there has been solid customer adoption in higher set value airport and data center infrastructure. In North America, which remains our largest market as a percentage of sales, revenue increased by 29% in the second quarter, mainly due to continued momentum in the correction and utilities verticals. North America delivered solid growth in the quarter despite moderate sales performance in Canada, declining slightly in the second quarter after a strong first quarter.

In the second quarter of this year, the Asia Pacific region faced a challenging year-over-year comparison against exceptionally strong growth of 135% in the prior year quarter, resulting in a 47% revenue decline versus the same quarter last year. The year-ago quarter included a large customer contract which did not repeat this quarter. Historically, APAC has been among the fastest-growing regions for Senstar, and we are continuing to experience strength from data centers, utility, and airport perimeter security solutions. In contrast, the LATAM region returned to growth in the second quarter with revenue increased by 26% compared to the year-ago period.

We attribute this turnaround to the successful execution of our strategy aimed at delivering industry-leading solutions to international markets, where security modernization is becoming an increasing priority. Looking at revenue contribution per vertical, our four key verticals grew 27% aggregate in the second quarter, driven primarily by strong performance in correction and energy. We are continuing to identify material growth across support growth opportunities, across renewable energy, data centers, and utilities, and Senstar is reinforcing its commitment to further penetrate those verticals and capture market share. In terms of product updates, technological innovation is the cornerstone of our strategy to strengthen our competitive positioning in the market.

We are continuing to make meaningful progress with multisensor, an important validation by our customers. Senstar is focused on delivering advanced and disruptive security solutions tailored to our targeted vertical markets. We aim to enhance security and operational efficiency by combining cutting-edge sensors with intelligence information management software. This strategy enables Senstar to grow its market share within core sectors while expanding its scope by offering differentiated, high-value solutions that sustain our growth margins of 60% and above. In addition, Senstar is actively working to broaden its addressable market by targeting the protection of critical points within noncritical infrastructure, such as hospitals, educational institutions, and logistic facilities.

Leveraging our unrivaled multisensor, we deliver unique performance by eliminating nuisance alarm rates, optimizing total cost of ownership, and significantly reducing installation and maintenance costs, unlocking opportunities in much larger market segments. Turning to other strategic initiatives, as discussed on the prior earnings conference call, we are pleased with the execution of our business development team following the addition of several key hires earlier this year. The team is now fully ramped and gaining traction with the core focus on driving growth through new customer acquisition and broader penetration within our core verticals.

Based on encouraging initial results, we plan to expand the team further to support the development of several large accounts and accelerate market share gain across high-potential sectors. In summary, our second quarter results demonstrate the resiliency of our business model, with continued momentum in both revenue growth and margin expansion. We remain focused on differentiating ourselves from the competition by investing in innovative security solutions for our international customer base. I want to express my gratitude to our employees for their strong execution of our strategy to grow our market share across key global verticals, to our valued customers for their continued partnerships, and to our shareholders for their ongoing support. Thank you for your attention.

I will now turn the call over to Alicia for a review of the financial results in more detail.

Alicia Kelly: Thank you, Fabien. Our revenue for 2025 was $9.7 million, representing a 16.2% increase compared to $8.3 million in 2024. The sales expansion was driven by holistic growth across our key geographic and vertical markets, with corrections, energy, and utilities serving as strong contributors. EMEA led the geographic regions with 52% year-over-year growth. New customer wins and increased cross-selling with existing customers drove the successful performance in the quarter, most notably in the energy, data center, and airport perimeter security verticals. The US followed with a 35% increase in revenue, fueled mainly by the continued demand in the corrections, energy, and utility industries, where customers are increasingly seeking innovative security solutions.

The LATAM region experienced an important inflection point in the quarter, with revenue increasing by 26%. As we have stated in the prior quarters, demand for security modernization in LATAM remains, and we continue to believe the region represents an important growth opportunity. The Asia Pacific region, on the other hand, experienced pressure in the quarter, with sales declining by 47%, primarily resulting from the phase-out of a customer contract that did not contribute revenue in the current quarter, in addition to the challenging year-ago growth comparison that Fabien discussed previously.

Similarly, revenue from Canada declined in the quarter due to normal quarterly fluctuations in the timing of contract awards, but we remain well-positioned to capture new projects through the remainder of this year. As mentioned in Q1, Canada was the strongest growing region with sales primarily generated by the corrections and energy sector segments. The geographical breakdown as a percentage of revenue for 2025 compared to the prior year quarter is as follows: North America, 53% versus 47%; EMEA, 35% versus 27%; APAC, 11% versus 23%; Latin America, even at 1%; and all other regions were immaterial for both periods. Second quarter gross margin was 66.1% compared to 63.2% in the year-ago quarter.

This 292 basis point margin improvement was primarily the result of strong expense controls, more favorable product mix, and component and design cost optimizations. Our operating expenses were $5.4 million, up 18% compared to $4.6 million in the prior year’s second quarter. The increase was primarily driven by one-time nonrecurring administrative costs associated with finalizing the corporate redomiciliation from Israel to Canada, as well as the addition of key personnel to keep our company headcount and targeted selling spend in core growth verticals and markets, with a positive offset from research and development investment optimization.

Strong revenue and a sizable increase in gross margin drove our operating income for the second quarter to $1 million, a 46% improvement compared to $700,000 in the prior year ago period. Operating margin expanded by over 200 basis points, reaching 10.1% in the quarter. The company’s EBITDA for the second quarter was $1.1 million compared to $846,000 in the second quarter of last year, with margins expanding by 161 basis points to 11.8% from 10.2% in the year-ago quarter. These gains underscore the operating leverage in Senstar’s operating model as we scale. Financial expense was $330,000 in the second quarter of this year compared to financial income of $103,000 in the second quarter of last year.

This is mainly a noncash accounting effect we regularly report due to adjustments in the valuation of our monetary assets and liabilities denominated in currencies other than the functional currency of our operating entities in the group, in accordance with GAAP. Net income attributable to Senstar Technologies shareholders in the second quarter was $1.2 million or 5¢ per share compared to a net income of $493,000 or 2¢ per share in the second quarter of last year. Added to Senstar’s operational contribution are the public platform expenses and amortization of intangible assets from historical acquisitions. The corporate expenses for the second quarter were approximately $865,000 compared to roughly $400,000 in the year-ago period.

Turning next to our balance sheet, cash and cash equivalents and short-term bank deposits as of June 30, 2025, were $21.9 million or 94¢ per share. This compares to $20.6 million or 88¢ per share as of December 31, 2024. The company had zero debt as of June 30, 2025. This concludes my remarks. Operator, we would like to open the call to questions now.

Operator: Thank you. We will now be conducting a question and answer session. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, while we poll for questions. Our first question is from Noam Nakash with IMA Value. Hi, guys.

Noam Nakash: Thanks for a great quarter. If you can elaborate about the one-time expense. What is the expense exactly, and if you can elaborate about the border control segment and biddings.

Fabien Haubert: Okay. If you agree, I am fine with starting with the border control before letting Alicia comment on the one-time expense. So border control is not one of our main target verticals, but clearly, as per the current situation where tension between countries is very high, yes, we are active in this sector. The main reason why we are not active in this vertical is that it is highly scalable because it depends basically on specific, I would say, on specific circumstances due to political, war, whatever scenarios. But, as far as we can contribute to make them safer, we are happy to technologically contribute to those, supporting our partners. I hope I answered your question.

So we cover this market without it being a fundamental of our verticals. Alicia?

Alicia Kelly: For the first part of your question, so the one-time administration fees were relating to consulting fees for concluding the final processes related to our Israeli entity. Now that we have completed the flip and we have redomiciled to Canada, there were a couple of outstanding activities that just needed to be closed up in order to finish with that legal entity.

Noam Nakash: Thank you very much.

Alicia Kelly: Thank you.

Operator: Thank you. There are no further questions at this time. Mr. Haubert, would you like to make your closing remarks?

Fabien Haubert: On behalf of Senstar Management, I would like to thank our investors for their interest and long-term support of our business. Have a great day.

Operator: This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.

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Date

Thursday, Aug. 21, 2025 at 10 a.m. ET

Call participants

Chief Executive Officer — Jeffrey Sanfilippo

Chief Financial Officer — Frank Pellegrino

Chief Operating Officer — Jasper Sanfilippo

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Risks

Jeffrey Sanfilippo noted, “our financial performance falls short of our expectations,” while explicitly citing external uncertainties including “tariffs, inflation, unpredictable commodity costs, and broader macroeconomic challenges.”

CFO Pellegrino reported a 29.5% increase in inventory value for fiscal Q4 2025 (period ended June 15, 2025), driven by higher commodity acquisition costs and a rise in finished goods.

Pellegrino stated, “Gross profit margin decreased from 20.1% to 18.4% of net sales for fiscal 2025,” mainly due to higher commodity acquisition costs across nearly all major nuts and ongoing competitive pricing pressures.

CFO Pellegrino reported that interest expense increased to $3.6 million for fiscal 2025 from $2.5 million for fiscal 2024, due to higher average debt levels.

Takeaways

Net sales— $1.11 billion in net sales for fiscal 2025 (period ended June 15, 2025), up 3.8%, primarily driven by the Lakeville acquisition; excluding the Lakeville acquisition, net sales remained unchanged for fiscal 2025.

Annual dividend— Increased 5.9% to $0.90 per share for fiscal 2025. A special dividend of $0.60 per share was also declared, both payable Sept. 11, 2025.

Quarterly net income— $13.5 million, or $1.15 per diluted share, for fiscal Q4 2025, compared to $10 million, or $0.86 per diluted share, for fiscal Q4 2024.

Full-year net income— $58.9 million, or $5.03 per diluted share, for fiscal 2025 (GAAP), versus $60.2 million, or $5.15 per diluted share, for fiscal 2024 (GAAP).

Total operating expenses (quarter)— Decreased to 10.6% of net sales (down from 13.1%) in fiscal Q4 2025, reflecting reduced incentive compensation, freight, warehouse, and marketing costs.

Sales volume— Decreased 5.9% in fiscal Q4 2025; the consumer channel declined 11.5% (including a 10.7% drop in private brands) in fiscal Q4 2025, offset by an 8.7% increase in commercial ingredients and an 18.7% rise in contract manufacturing volumes.

Gross profit margin (quarter)— Fell to 18.1% from 18.5% in fiscal Q4 2024, due to higher commodity costs, despite improved manufacturing efficiency and lower spending.

Inventory value— Increased $58 million, or 29.5% year over year, in fiscal Q4 2025, reflecting higher commodity costs and a rise in finished goods for seasonal demand.

Weighted average cost per pound— Rose 30.4% year over year for raw nut and dried fruit inputs across nearly all major nut lines in fiscal Q4 2025.

Branded product volumes— Down 19.7% in fiscal Q4 2025, including a 42.9% drop in pork belly harvest sales due to lost distribution in a non-food sector channel.

Private label bars— Down 17% in fiscal Q4 2025 volumes, reflecting the lapping of prior-year gains from a competitor’s recall and lost retailer distribution, partially offset by new customer wins.

Gross profit margin (annual)— Decreased from 20.1% to 18.4% for fiscal 2025, mainly due to higher input costs and competitive pricing pressures.

Interest expense— Increased to $3.6 million for fiscal 2025, up from $2.5 million for fiscal 2024, due to higher average debt balances.

Dividend consistency— Management confirmed this marks the fourteenth consecutive year of capital returns through dividends as of fiscal 2025.

Strategic initiatives— Significant investments in manufacturing capabilities and infrastructure expansion announced during the year are aimed at portfolio growth; further details promised in future quarters.

Summary

John B. Sanfilippo & Son(JBSS 0.31%) delivered record annual net sales (GAAP) in fiscal 2025 (period ended June 15, 2025) but reported full-year GAAP net income modestly below the prior year due to declining margins driven by higher input costs and competitive pressures. Management highlighted pronounced swings in sales volume by distribution channel in fiscal Q4 2025, with notable declines in consumer (down 11.5%) and branded product lines (down 19.7%), offset by growth in commercial ingredients (up 8.7%) and contract manufacturing (up 18.7%). A substantial increase in inventory value and raw material costs in fiscal Q4 2025 was attributed to rising commodity prices and strategic preparations for seasonal demand. Management signaled confidence in future growth through expanded manufacturing capacity and continued portfolio innovation while warning of persistent external risks such as tariffs, cost inflation, and macroeconomic volatility.

Jeffrey Sanfilippo said, “Although our financial performance falls short of our expectations, we gained positive momentum as the year progressed, highlighted by year-over-year diluted EPS growth of 49.6% in Q3 fiscal 2025 and 33.7% in Q4 fiscal 2025, respectively.”

Commercial ingredient and contract manufacturing volumes increased in fiscal Q4 2025, while consumer-focused channels contracted, signaling a strategic mix shift underway.

Management is “actively pursuing additional opportunities to grow sales volume across all three of our distribution channels,” while maintaining “disciplined cost management and driving further operational efficiencies.”

Innovations in product development and optimized pricing initiatives are underway specifically to address evolving consumer behaviors in value-centric segments and private label demand.

Industry glossary

Price pack architecture: Strategy of developing various product sizes and price points to balance value perception and profitability across channels.

Circana: Syndicated market data provider (formerly IRI and The NPD Group) furnishing category and consumption metrics utilized for channel analysis in the call.

Full Conference Call Transcript

Jeffrey Sanfilippo: Thanks, Latanya. Good morning, everyone, and welcome to our fiscal 2025 fourth quarter earnings conference call. Thank you for joining us. On the call with me today is Frank Pellegrino, our CFO, and Jasper Sanfilippo, our COO. We may make some forward-looking statements today. Statements are based on our current expectations and may involve certain risks and uncertainties. Factors that could negatively impact results are explained in the various SEC filings that we have made, including forms 10-Ks and 10-Q. We encourage you to refer to the filings to learn more about these risks and uncertainties that are inherent in our business.

Before we begin today’s call, I want to take a moment to honor the life and legacy of Matt Valentine, former president from 1995 to 2006, and member of the JBSS board of directors who passed away this week. Matt played a pivotal role in shaping the success of our company, working closely alongside our former CEO, Jasper Sanfilippo Sr., during some of the company’s most formative years. He was more than a leader; he was a mentor, a trusted adviser, a steady presence for so many of us. My brother Jasper and I were fortunate to learn from him, and his impact continues to resonate throughout our organization. We are deeply grateful for Matt’s contributions.

Our thoughts and prayers are with the Valentine and Carroll families. Turning to our results, I am proud of how our team navigated a challenging and constantly evolving operating environment through fiscal 2025. We responded swiftly and decisively to address short-term financial impacts while remaining focused on executing our long-range plan in spite of a challenging macroeconomic and consumer environment. Although our financial performance falls short of our expectations, we gained positive momentum as the year progressed, highlighted by year-over-year diluted EPS growth of 49.6% and 33.7% in the third and fourth quarters, respectively, and enhanced spending discipline and increased efficiencies in our operations.

We also increased our net sales to a record $1.1 billion, surpassing the billion-dollar mark for two years in a row. We continue to make significant investments in our manufacturing and infrastructure, laying the foundation for future profitable growth. In addition, we recently increased our annual dividend by 5.9% to 90¢ per share and declared a special dividend of 60¢ per share. Both dividends will be paid on September 11, 2025. This marks the fourteenth consecutive year of returning capital through dividends to our shareholders. I want to sincerely thank all our employees for their dedication, resilience, and hard work this year. Their commitment drives our success and positions us for a strong future.

Navigating a dynamic market landscape, across recent CPG earnings calls, three key themes have consistently emerged, each reflecting the evolving challenges and opportunities facing our industry. We recognize the importance of addressing these shifts head-on. Now we’ll share how our teams are actively managing change, responding to uncertainty, and positioning the company for continued growth and resilience in today’s complex marketplace. First, navigating tariffs and rising costs. In an increasingly volatile global landscape, tariff-related cost pressures continue to challenge manufacturers across the industry. At JBSS, we proactively monitor trade developments, material costs, customer pricing, and demand fluctuations through close collaboration among our procurement, demand planning, finance, marketing, and sales teams.

While the environment remains complex, we’ve built a resilient framework to assess and manage our supply chain, helping us mitigate risk and maintain continuity. Our teams are responding with agility, leveraging sourcing flexibility, driving cost savings initiatives, and implementing selective price adjustments where appropriate. We remain transparent with our customers, providing regular updates, and offering tailored solutions such as reformulations, alternative ingredients, and optimized pack sizes to help manage costs without compromising value. Second, adapting to shifts in consumer behavior. In today’s environment, consumers remain highly value-conscious, making thoughtful decisions about their purchases. At JBSS, we stay closely attuned to these evolving behaviors through continuous monitoring of consumption trends across the nut, trail mix, and snack bar categories.

As inflationary pressure persists, our consumer insights play a critical role in shaping our innovation pipeline, ensuring that new offerings resonate with shoppers seeking both quality and value. Additionally, our advanced price elasticity models help us optimize price pack architecture and promotional strategies, allowing us to deliver compelling value while maintaining profitability. This is an important environment for private label programs. We are optimistic about expanding product portfolios with several of our transformational customers to meet shifting consumer needs. Third, driving growth through innovation and portfolio expansion. As evidenced by current market valuations, growth remains a top priority across the consumer packaged goods sector. In our company, we’re embracing this imperative with strategic investments designed to unlock new opportunities.

Earlier this year, we announced a significant investment and expansion in our manufacturing capabilities, an initiative that will enable us to broaden our product portfolio and better serve evolving consumer preferences. We’re energized by the potential these innovations hold and remain committed to transforming our business for long-term sustainable growth. We will share further details in the coming quarters as we ramp up for production. Looking ahead to fiscal 2026, we are focused on accelerating our volume growth by expanding on the success of our private brand bar portfolio, rebuilding our nut and trail business through price pack architecture, and innovation expanding our manufacturing capabilities.

We are confident we can continue to deliver strong operating results and create long-term value for our shareholders through the execution of our long-range plan. We are nuts about creating real food that brings joy, nourishes people, and protects the planet, and JBSS is executing on this mission. I’ll now turn the call over to Frank to discuss our financial performance.

Frank Pellegrino: Thank you, Jeffrey. Starting with the income statement, net sales for 2025 decreased slightly by 0.2% to $169.1 million compared to net sales of $269.6 million for 2024. The slight decline in net sales was due to a 5.9% decrease in sales volume or pounds sold to customers, which was largely offset by a 6% increase in the weighted average sales price per pound. The increase in the weighted average selling price primarily resulted from higher commodity acquisition costs for peanuts and all major tree nuts except for pecans. Sales volume declined for all major product types with the exception of peanuts, walnuts, and pecans.

Sales volume decreased 11.5% in the consumer distribution channel, primarily due to a 10.7% decrease in private brand sales volume. The private brand volume decrease was due to a 16.7% reduction in bar volume, mainly due to reduced sales to a mass merchandising retailer following an increase in bar sales from a national brand recall in 2024. Our strategic decision to reduce sales to a grocery retailer and lost distribution at another grocery retailer further contributed to the decline in bars volume. These decreases were partially offset by new bars distribution at two new customers.

Additionally, sales volume for other product types decreased 8.5%, mainly due to the discontinuation of peanut butter along with softer demand for snack, trail mix, mixed nuts, and almonds all at the same mass merchandising retailer driven by higher retail prices. However, decreases were partially mitigated by increased sales of walnuts and pecans at the same retailer. Sales volume decreased 19.7% for our branded products, primarily driven by a 42.9% reduction in pork belly harvest sales mainly due to lost distribution to a major customer in the non-food sector. Sales volume increased 8.7% in the commercial ingredients distribution channel, mainly driven by increased cinnabar volume to existing customers, which was first supplemented by an increase in peanut volumes.

Sales volume increased 18.7% in the contract manufacturing distribution channel, primarily due to increased granola volume processed in our Lakeville facility and snack nut sales to a new customer, and increased pan sales volume to a major customer also contributed to the overall increase. Gross profit decreased by $1.2 million or 2.4% to $48.8 million compared to the fourth quarter of last year, driven by higher commodity acquisition costs for nearly all tree nuts and peanuts. However, the impact was significantly offset by increased production volume, lower manufacturing spending, and improved manufacturing efficiency. Fourth quarter gross profit margin as a percentage of net sales decreased to 18.1% compared to 18.5% for 2024 due to the reasons previously mentioned.

Total operating expenses for the fourth quarter decreased $6.7 million compared to the prior year quarter, mainly due to lower incentive compensation expenses, along with reduced freight expense, lower third-party warehouse expenses, and lower marketing insight spending. These decreases were partially offset by a decrease in rent associated with our new facility in Humpy, Illinois. Total operating expenses for 2025 decreased to 10.6% of net sales from 13.1% for last year’s fourth quarter due to the reasons previously mentioned. Interest expense was $1.2 million for 2025 compared to $500,000 for 2024 due to higher average debt levels. Net income for 2025 was $13.5 million or $1.15 per diluted share compared to $10 million or $0.86 per diluted share for 2024.

Now taking a look at inventory, the total value of inventory on hand at the end of the current fourth quarter increased $58 million or 29.5% compared to the total value of inventories on hand at the end of the prior year’s comparable quarter. The increase was due to higher commodity acquisition costs across all major tree nuts as well as higher on-hand quantities of finished goods in preparation for anticipated seasonal demand. The weighted average cost per pound of raw nut and dried fruit increased 30.4% year over year, mainly due to higher commodity acquisition costs for almost all major tree nuts.

Moving on to year-to-date results, fiscal 2025 net sales increased 3.8% to $1.11 billion compared to fiscal 2024 net sales of $1.07 billion. Excluding the impact of the Lakeville acquisition, net sales remained relatively unchanged. Sales volume increased 3.4%, primarily due to the Lakeville acquisition. Excluding the impact of the Lakeville acquisition, sales volume decreased 1.7%, reflecting a 4% decrease in the consumer channel, which was partially offset by a 15.4% decrease in the contract manufacturing channel. Gross profit margin decreased from 20.1% to 18.4% of net sales.

The decrease is mainly attributable to increased commodity acquisition costs for substantially all major nuts, as well as competitive pricing pressures and strategic pricing decisions, which were offset by factors cited previously and improved profitability on bars due to manufacturing efficiencies. Total operating expenses for fiscal 2025 decreased by $10.2 million to $118.8 million compared to fiscal 2024. The decrease in total operating expenses was mainly driven by lower incentive, advertising, and consumer insight expenses. These decreases were partially offset by a one-time bargain purchase gain from the Lakewood acquisition, which did not repeat in the current fiscal year, as well as increases in wage and rent expenses attributable to our company warehouse.

Interest expense was $3.6 million for fiscal 2025, and $2.5 million for fiscal 2024. Net income for fiscal 2025 was $58.9 million or $5.03 per diluted share, compared to a net income of $60.2 million or $5.15 per diluted share for fiscal 2024. Please refer to our 10-K for additional details regarding our financial performance in fiscal 2025. Now I will turn the call back over to Jeffrey to provide additional comments.

Jeffrey Sanfilippo: Thanks, Frank, for the financial updates. Now let’s shift to consumption activity and category updates. I’ll share the category and brand results with you for the quarter. All the market information I’ll be referring to is Circana panel data, and for today, it is for the period ending June 15, 2025. When I refer to Q4, I’m referring to the thirteen weeks of the quarter, ending June 15, 2025. References to changes in volume are versus the corresponding period one year ago. For pricing commentary, we are using scan data from Circana, which includes food, drug, mass, Walmart, military, and other outlets, and we are referring to average price per pound.

We’re using the nut, trail mix, and bar syndicated views that category as defined by Circana. In the latest quarter, we continue to see modest growth in the broader snack aisle, as defined by Circana. Volume and dollars were up 13%, respectively. This is consistent with the performance we saw in Q3. In Q4, the snack, nut, and trail mix category was down 1% in pounds, which is consistent with Q3 performance. Dollars in Q4 were up 4%, versus 2% in Q3 as prices continued to rise. Prices rose 5% for snack nuts, with increases primarily in cashews, mixed nuts, and pistachios. Prices also rose 4% for trail mixes.

Fisher snack nut and trail mix performed worse than the category, with pound shipments down 17%. This was due primarily to declines in a major specialty retailer, as Frank mentioned, due to inventory changes and not repeating a promotion. Our Southern Style Nut brand pound shipment increased by 1%, driven primarily by growth in mass and e-commerce. Monkey Valley Harvest brand, which primarily plays in trail mix, was down 43% in pound shipments, driven by discontinuation at a national specialty retailer, despite strong performance in club, mass, and e-commerce. Money increases, including cocoa and some tree nuts, are resulting in higher prices for Orchard Valley Harvest.

We continue to focus on innovation and cost savings opportunities to mitigate this commodity pressure. Our private label consumer snack and trail shipments performed weaker than the category, with pound shipments down 8% versus last year, due to softness in mass as prices rise due to commodity pressures. We are actively working on cost mitigation solutions with our retail partners. Now let me turn to the recipe nut category. In Q4, the recipe nut category was down 1% in pounds and up 18% in dollars as prices for both walnuts and pecans continued to increase. This is an improvement in both volume and dollar performance, versus Q3.

Our Fisher recipe pound shipments were down 7% in Q4, with volume softness tied to increased cost of our commodities, and delayed shipments in e-commerce. Now let’s switch to the bar category. In Q4, the bars category continued to rebound as a major player continued to reenter the market after a major recall in 2023. The category grew 7% in pounds, and 8% in dollars. Private label was down 4% in pounds and 2% in dollars, as the previously mentioned national brand retook some of the share it lost to private label this past year. Our private label bar shipments were down 17% versus a year ago, as we lap significant growth from the national brand recall.

In closing, as we enter fiscal 2026, we have strong momentum and optimism as we continue to execute our strategic plan. We are actively pursuing additional opportunities to grow sales volume across all three of our distribution channels. We’re encouraged by early signs of success. At the same time, we remain focused on disciplined cost management and driving further operational efficiencies. That said, we recognize that significant external uncertainties remain, including tariffs, inflation, unpredictable commodity costs, and broader macroeconomic challenges. These factors will require us to stay agile and responsive as the year progresses. We’re committed to taking the necessary actions to deliver long-term sustainable growth, enhance our margins, and continue to create value for our customers, consumers, and shareholders.

And as I said earlier, while the company did not hit some of our financial performance goals in fiscal 2025, I am proud of what we did accomplish to transform our company. These achievements are a testament to the fortitude of our business model, the commitment of our people, and the mutual trust and depth of our customer and supplier partnerships. We are executing our growth strategies, implementing continuous improvement projects throughout the company to optimize our cost structure. We continue to invest in our brands, our capabilities, and our people to better service our customers and consumers and create value for our shareholders. We appreciate your participation in the call. Thank you for your interest in our company.

Natalia will now open the call to questions.

Operator: Thank you. As a reminder, to ask a question, please press 11 on your keypad and wait for your name to be announced. I would now like to hand the call back to Jeffrey for closing remarks.

Jeffrey Sanfilippo: We thank you for your participation in the call. We will be at next week’s investor conference in Chicago. We hope you will join us. Thank you.

Operator: Thank you. This concludes today’s conference call. Thank you for participating. You may now disconnect.

A judge on Wednesday rejected a Trump administration request to unseal transcripts from grand jury investigations of Jeffrey Epstein years ago in Florida, though a similar request for the work of a different grand jury is pending in New York.

U.S. District Judge Robin Rosenberg in West Palm Beach said the request to release grand jury documents from 2005 and 2007 did not meet any of the extraordinary exceptions under federal law that could make them public.

The Justice Department last week asked the judge to release records to quell a storm among supporters of President Trump who believe there was a conspiracy to protect Epstein’s clients and conceal videos of crimes being committed and other evidence.

In 2008, Epstein cut a deal with federal prosecutors in Florida that allowed him to escape more severe federal charges and instead plead guilty to state charges of procuring a person under 18 for prostitution and solicitation of prostitution.

Deputy Atty. Gen. Todd Blanche had asked judges in Florida and New York to unseal transcripts from grand jury proceedings that resulted in indictments against Epstein and former girlfriend Ghislaine Maxwell, saying “transparency to the American public is of the utmost importance to this Administration.”

Federal grand juries hear evidence in secret and then decide whether there is enough for an indictment. Experts say the transcripts probably would not reveal much because prosecutors typically try to present only enough material to get charges and don’t introduce the entire investigation.

Epstein, a wealthy financier, years later was arrested in 2019 on federal sex trafficking charges, and Maxwell was charged with helping him abuse teenage girls.

Epstein was found dead in his cell at a federal jail in New York City about a month after he was arrested. Investigators concluded he killed himself. Maxwell later was convicted at trial and sentenced to 20 years in prison.

The case attracted attention because of Epstein and Maxwell’s links to famous people, including royals, presidents and billionaires. It also led to some of the biggest conspiracy theories animating Trump’s base.

The furor over records has been stoked by the Justice Department. In February, far-right influencers were invited to the White House and provided with binders marked “The Epstein Files: Phase 1” and “Declassified.” The binders contained documents that had largely already been in the public domain.

The department on July 7 acknowledged that Epstein did not have a list of clients. It also said no more files related to his case would be made public.

A two-page memo that bore the logos of the FBI and Justice Department, but that was not signed by any individual, said the department determined that no “further disclosure would be appropriate or warranted.”

White writes for the Associated Press.

NEW YORK — A Justice Department request to unseal grand jury transcripts in the prosecution of chronic sexual abuser Jeffrey Epstein and his former girlfriend is unlikely to produce much, if anything, to satisfy the public’s appetite for new revelations about the financier’s crimes, former federal prosecutors say.

Attorney Sarah Krissoff, an assistant U.S. attorney in Manhattan from from 2008 to 2021, called the request in the prosecutions of Epstein and imprisoned British socialite Ghislaine Maxwell “a distraction.”

President Trump “is trying to present himself as if he’s doing something here and it really is nothing,” Krissoff told the Associated Press in a weekend interview.

Deputy Atty. Gen. Todd Blanche made the request Friday, asking judges to unseal transcripts from grand jury proceedings that resulted in indictments against Epstein and Maxwell, saying in a statement that “transparency to the American public is of the utmost importance to this Administration.”

The request came as the administration sought to contain the public outcry that followed its announcement that it would not be releasing additional files from the Epstein inquiry despite previously promising it would.

Epstein killed himself at age 66 in his federal jail cell in August 2019, a month after his arrest on sex trafficking charges, while Maxwell, 63, is serving a 20-year prison sentence imposed after her December 2021 sex trafficking conviction for luring girls to be sexually abused by Epstein.

Krissoff and Joshua Naftalis, a Manhattan federal prosecutor for 11 years before entering private practice in 2023, said grand jury presentations are purposely brief.

Naftalis said Southern District prosecutors present just enough to a grand jury to get an indictment, but “it’s not going to be everything the FBI and investigators have figured out about Maxwell and Epstein.”

“People want the entire file from however long. That’s just not what this is,” he said, estimating that the transcripts, at most, probably amount to a few hundred pages.

“It’s not going to be much,” Krissoff said, estimating the length at as little as 60 pages “because the Southern District of New York’s practice is to put as little information as possible into the grand jury.”

“They basically spoon-feed the indictment to the grand jury. That’s what we’re going to see,” she said. “I just think it’s not going to be that interesting. … I don’t think it’s going to be anything new.”

Both former prosecutors said that grand jury witnesses in Manhattan are usually federal agents summarizing their witness interviews.

That practice might conflict with the public perception of some state and federal grand jury proceedings, where witnesses likely to testify at a trial are brought before grand juries during lengthy proceedings prior to indictments or when grand juries are used as an investigatory tool.

In Manhattan, federal prosecutors “are trying to get a particular result so they present the case very narrowly and inform the grand jury what they want them to do,” Krissoff said.

Krissoff predicted that judges who presided over the Epstein and Maxwell cases would reject the government’s request.

With Maxwell, a petition is before the U.S. Supreme Court, so appeals have not been exhausted. With Epstein, the charges are related to the Maxwell case and the anonymity of scores of victims who have not gone public is at stake, although Blanche requested that victim identities be protected.

“This is not a 50-, 60-, 80-year-old case,” Krissoff noted. “There’s still someone in custody.”

She said that citing “public intrigue, interest and excitement” about a case was probably not enough to convince a judge to release the transcripts despite a 1997 ruling by the 2nd U.S. Circuit Court of Appeals that said judges have wide discretion and that public interest alone can justify releasing grand jury information.

Krissoff called it “mind-blowingly strange” that Justice Department officials in Washington are increasingly directly filing requests and arguments in the Southern District of New York, where the prosecutor’s office has long been labeled the “Sovereign District of New York” for its independence from outside influence.

“To have the attorney general and deputy attorney general meddling in an SDNY case is unheard of,” she said.

Cheryl Bader, a former federal prosecutor and Fordham Law School criminal law professor, said judges who presided over the Epstein and Maxwell cases may take weeks or months to rule.

“Especially here where the case involved witnesses or victims of sexual abuse, many of which are underage, the judge is going to be very cautious about what the judge releases,” she said.

Bader said she didn’t see the government’s quest aimed at satisfying the public’s desire to explore conspiracy theories “trumping — pardon the pun — the well-established notions of protecting the secrecy of the grand jury process.”

“I’m sure that all the line prosecutors who really sort of appreciate the secrecy and special relationship they have with the grand jury are not happy that DOJ is asking the court to release these transcripts,” she added.

Mitchell Epner, a former federal prosecutor now in private practice, called Trump’s comments and influence in the Epstein matter “unprecedented” and “extraordinarily unusual” because he is a sitting president.

He said it was not surprising that some former prosecutors are alarmed that the request to unseal the grand jury materials came two days after the firing of Manhattan Assistant U.S. Atty. Maurene Comey, who worked on the Epstein and Maxwell cases.

“If federal prosecutors have to worry about the professional consequences of refusing to go along with the political or personal agenda of powerful people, then we are in a very different place than I’ve understood the federal Department of Justice to be in over the last 30 years of my career,” he said.

Krissoff said the uncertain environment that has current prosecutors feeling unsettled is shared by government employees she speaks with at other agencies as part of her work in private practice.

“The thing I hear most often is this is a strange time. Things aren’t working the way we’re used to them working,” she said.

Neumeister writes for the Associated Press. AP writers Eric Tucker and Alanna Durkin Richer contributed to this report.