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Operator: Welcome to the Brenntag SE 9M 2025 Results Call and Live Webcast. Please note that the call will be recorded. [Operator Instructions] I would now like to turn the call over to Thomas Altmann, Senior Vice President, Corporate Investor Relations. Please go ahead. Thomas Altmann: Thank you, Abigail. Good afternoon, ladies and gentlemen, and welcome to our earnings call of the third quarter 2025. On the call with me today are CEO, Jens Birgersson; and our CFO, Thomas Reisten. They will walk you through today's presentation, which is followed by a Q&A session. Our relevant documents have been published this morning on our website in the Investor Relations section, where the replay of today's call will be available. Allow me also to point you to our safe harbor statement which can be found at the end of the slide deck. With that, I will now hand over to our CEO. Jens, over to you. Jens Birgersson: Thank you, Thomas, and good morning to everyone out there. Just as a general remark out of experience is that getting the tech right can be difficult. So if you could help us by giving a feedback to Thomas and just give us a rating on how the sound quality is, it will be good because in the morning's call we did with the press, there were some corners where we were very hard to hear. So if you could get a status check on that from you after this call, and then we see if we need to change tech or do something to improve that. It's a great pleasure to speak with you today for the first time as the CEO of Brenntag. The last 2 months, I've been more or less traveling constantly around the group, spending time with between 100 and 200 customers and our teams out in the region and also the supply partners. And I started during the summer, obviously, to read up on the market and look into the business model of the company and the way we operate. In the last 2 weeks, I've been a little bit more in the headquarter, but a lot of time spent out there and kind of building the understanding of the company starting from the outside. Obviously, I have still a lot to learn, but I'm very, very happy with what I've seen in the beginning and the potential. And so I'm going to share that in mainly 2 dimensions, the short-term priorities and we will not go too much into strategy now. Maybe what -- obviously, it's very impressive to see the global scale and reach and the broad portfolio of the company. It is unknown when you step into a company like this to how much it actually touches everything around us. So that's impressive. But maybe even more impressive in this company, Brenntag, is the skill and commitment of our commercial teams around in the world and how they interact with our customers and supply partners. It is really great to see. And I think that perhaps that is the strongest -- the biggest strength of the company, actually, that we have this very unique culture in -- out in the markets in the front end. And I'm very pleased with that, and I'm very honored to join such a team. And it's great to see that we have that culture and not customer focus. All that said, my initial observations confirm the company's fundamental strength and you see a lot of potential. And if you look at the market, there isn't anything in the market helping. I think we are in the longest trough in terms of chemicals from the downturn after COVID, and yet we haven't seen an upturn. And yet, we are, in some extent, performing. It's not great, but compared to many other players in the chemical industry, the difficult times prove the ability of Brenntag what was our position in the value chain with our market position and value proposition and the way we run the business that we can actually do relatively well even in difficult times like this. And one of the winning recipes is obviously that we stay very close to the customers and understand their needs and keep delivering every day even in a difficult market. If we then look at the potential, for operational improvements and efficiency gains, I like -- I kind of stage a little bit of work in the company. My -- when you step into new business, which I've done before, I've been in the sector a bit before, but stepping into a new company, you need to separate a little bit strategy, changes to the strategy -- the company has a strategy, but changes to the strategy and what we do now, what are the immediate priorities to improve. And I put that on those slides, summed it up in the 3 bullets. So -- and the first one is sales. With the market conditions we have, I haven't said growth, I said sales. We can't control the market turnaround, but we can control how much effort we make on sale. And in some of the changes that we have announced, we are anchoring the company to make us -- make it easier for us from the top to bottom to be even closer to the market and to empower our local sales teams and driving growth by being close to the customer. And there are 2 maybe changes. The first one started already in the summer was that up to now, there was a track where we would split the company in 2 or the disentanglement. And there was an awful amount of internal focus to do that being done on systems or moving assets, shifting businesses. And that has been going on. And we have stopped that work. I've stopped at work. I see synergy of having one company. I see benefit of having scale, but we need to find it. We need to develop that. We need to get better of it. But shifting that internal focus to external is a sound step among other efforts to really make clear to the organization, but the core process of this company is to buy product and to sell it and all the things we do in between. And all the overheads and the support functions, we should all be geared towards supporting that sales. So that's the first priority. The second is lumped it under the words clarity and simplification. We have 2 strong divisions that each have their own distinct role, a market strength and also slightly different business model. You have discussed that before, so it's clear to you. But having the company set up with an intermediate 2 executive committees, then you have the local business units, the regional business unit and a very big central team has also implied very long decision lines with lots of steps, and I will say a bit too much bureaucracy and loss of speed. And what we're doing, if you have read press release or the stock exchange release is that we are removing this one layer and are now putting quite a bit of focus into reducing the number of steps in decision-making. And finally, we have execution. Top line is down, it's still down and the market is not good. And it's not a disaster at all the market, but it hasn't come around. But we need to execute in several ways. And one execution topic where we haven't done so well until now is to execute on cost reductions. There was a program announced 1.5 years ago, maybe a bit more. And we need to execute on a cost out because the mismatch between the cost structure and the increases we have had with these duplications of functions, management teams and the extra layer that has been introduced has come at a high price. And I think a time to reset that and start to work cost out and improve our competitiveness. So if we then go into those kind of headline focus areas on the short term, will we turn to the next slide, so just outline some of the actions, starting from left to right. I've already covered sales, and it doesn't mean I don't want to grow. It's just that the immediate action is to get people out on the ground and get the organization to back up the sales effort on the customer proximity and the customer closeness. And the good thing with that is that we have a culture and a crew in this company that really want to do this. So this is more of unleashing them and getting them back and stop focusing on splitting and allocating businesses and internal transfer cost and what have you. We still do that, but it's not a focus, so that's the left box. Second one on the simplification. We want to simplify how we make decisions, shorter change. I want smaller, more empowered teams, faster cycles and agility is an overriding goal with very clear ownership of the business. We don't run a matrix. I don't want to run a matrix. I want very straight lines out into the business. So what we are doing here is that we are putting together an executive committee where we will have all the business leaders. We will have 3 CEO, CFO, COO, HRO in there, so some functions that have consolidated. This might change over time. We will evolve this as nothing is static. And -- but it will mean that we have an executive team that has members in it, that are really sitting in the market, interfacing with customers every day. The German Managing Board that traditionally is seen as the highest level of management in the company, we are detuning that a little bit. It will be only Thomas and I in that. Surely, there will be decisions that have to be taken on that. But as I see it, the management team, the executive team, as the Executive Committee. And that means that the distance from the front end to me is going to be very short because I have a direct report in every market, and I will oversee that myself. And I'm convinced that will improve the hands-on operational management. And I think in the distribution business at the core is a very simple business. I mean we mustn't overcomplicate it. We need to roll up our sleeves and manage it and get things done with a minimum of overhead. And I think this structure will serve us better. I made 2 additions or announced 2 additions. The one is CHRO, a new HR Director. We haven't really had that in Brenntag and distribution business is a people business. She -- Francis joined us 1st of November, which is already here. And then on the operations, the goal we have is to build a world-class distribution company or distribution supply chain. And therefore, I've also recruited the COO, and he will report to me. He will be part of the EC, and he will join us latest 1st of April because I see a potential of the whole supply chain organization. And supply chain for us is basically from product into the system until it's delivered to the customer. With regards to the 2 divisions, we have one company, but we have 2 businesses. We have the Essential division and Specialty division. No change to that. That was good. It was healthy. It's different drivers for success. So we maintain that. And I value both of them. I want to grow in both of them. So there's no change to that. But I see the backbone and the scale of what we have, Brenntag has a lot of assets. We have a lot of good assets in the company. I want to leverage that scale in those assets for both divisions. And that's the change -- that's a big change compared to the discussion in the last couple of years. So when you look at the numbers, I admit the scale effects hasn't really come out, but Brenntag has grown. And some of you have pointed that out. I agree with that, and that's something we need to work on. But when you look at the potential of getting scale effects, they are there. We have some of it, but we can do more of that. So to sum up, I mean, we are not doing the split. And the reason is that the multiple differential between these 2, the value and the cost of doing it and the dissynergies, it doesn't make sense. I would also say on that note that, from an M&A perspective, I see a whole lot. I mean a key driver for top line, you have organic growth that we need to work hard on. But also acting as the consolidator of the industry, a lot of the targets. And I look just in these 2 months at 12 targets, very few targets are pure, pure, pure play. They have a little bit of both. And I think there is a risk with being too streamlined and too segmented that you lose a lot of M&A if you all the time have to divest one portion of the company you buy. And so I think that having both businesses in the company will also make it a little bit easier to find good targets, and we have a good pipeline of targets. So to sum up, we want to operate 2 market-leading divisions within one group, respecting the 2 business model, commercial focus in both. And then going after growth, doing normal strategy and implementation for those within the strategic framework we already laid out, and we will review it, of course, but we continue with that, but we do that with one backbone in terms of supply chain. It doesn't mean that all assets will sit centrally, not at all. We keep the assets out in the businesses, and they're going to also be devoted assets assigned to each one of them. And some are shared, some are devoted. And then third, on the execution. Execution is super important. And when I reviewed the historic initiatives that have been going on, I felt maybe we have done -- tried to do a little bit too much in parallel. So I want to move towards a more focused execution mode. And of course, with quicker and shorter decision-making changes, I'm going to keep our eyes on the execution, and that has already started. And I think that's incredibly important for us in order to deliver cost savings. We are looking as we brought in the stock exchange release into short-term and medium-term cost out. And the philosophy here will be that we start close to me. We start at the top. I have headquarter staff, I have functions. I want to reshape that into a small, much smaller team. And so that's the first stage, and we're already starting that, reducing headquarters and support function overheads. And then we will move out through other functions. And then as the COO arrive, we will get more and more close to the supply chain and all the action there. But basically, that's the staging that first remove overheads and duplication and slim that down. And then after that, we get on to supply chain and operations. But I need to do a little bit more work on that before we start. The other aspect of it with overhead has already started and is starting to roll out and being quite detailed as we speak. So that's the short to medium term. Then if we look at the long term, yes, we need to review the strategy. It doesn't mean we change all of it, but Brenntag has run in a certain way for more or less 150 years. And we have the 2 businesses now. We are doing a strategic review. It has started, and I will come back to that in the second half of 2026. One of the goals will obviously be to have the most competitive and scalable global distribution supply chain and to get back to growth, not only because it's a market that grows, but make us more capable of growing. But I will come back to that. Now the focus is on the immediate priorities that I outlined. If we go to the numbers on Slide 9, it is -- you have seen those numbers. You have read them. And I think that there is nothing in the macro environment that has really changed. The tariffs are there. We have the Chinese overcapacity coming in, in Europe, Latin America, South Asia, almost -- in 2024, it was 33 billion Chinese imports into Europe of chemicals and probably increasing this year. I haven't seen the numbers. So that competitive complication is here for the principals, maybe less of a problem for us. And then you still have the instability in the Middle East. We have the Ukrainian war, we have the trade tariffs. And we only have some countries that have put in tariffs to protect themselves in Mexico and the U.S. And so we see really an overflow in Europe. But again, we are relatively fortunate in the way we can handle that. It speaks to the business model of a distributor in this space. And if I were to look at the numbers, what numbers are -- yes, obviously, we are not overly happy with the numbers as such. We would like to get back to growth and have a better market. But I think some of the numbers worth emphasizing is that if we take the EBITDA margin that in -- with near 5% decline in the top line, that it only goes from 9.1% to 8.9% this year and that we have managed to get a bit more cost reductions into that to protect the gross profit decline and gross profit margin and most of all the EBITDA margin and EBITA margin. And when I compare that to the market, we have done maybe better than some other players that have maybe difficulties. So that's -- those are the positives, I would say, of those numbers. If you move to the slide of sales development, basically the same decline in both businesses. And regionally, we have now maybe we can see a slightly better volume in Material Science, but still strong competitive pressures. But otherwise, I would pretty much say that more or less, the markets are subdued on both sides of the business, both businesses. Going on to the regional development, Material Science here, volume-wise a little bit better maybe than some of the other businesses, but quite strong price pressure. And in Latin America, the growth is primarily due to the acquisition in Mexico. And apart from that, I would say anything is new on this. But if you take an example of Latin America to just give you a flavor, Brazil, Chile, Peru, Central America, Guatemala, heavily, heavily impacted by Chinese imports, Mexico not because they put tariffs and then you have other countries like Colombia, for example, that protect themselves a little bit more, the market more safe from Chinese import, and we see a better business. Argentina also doing a little bit better, but it varies a lot. But generally, you see all over in these regions, the impact of that. That said, we are navigating it, and we are handling it. And it's not a huge problem for us compared to some of the other players in our industry. Over to you, Thomas. Thomas Reisten: Thank you, Jens. And as well from my side, I wish you a good afternoon. So I would like to now look at the development of our income statement and this was a particular focus on our operating expenses and bottom line results. Our results are overall characterized by a persistently challenging market environment with muted customer sentiment and lower demand. We've generated an operating gross profit of EUR 947 million in the third quarter of 2025. Our operating expenses stood at EUR 617 million in total, which is a net cost decline of 1% compared to last year on a constant currency basis. This includes additional costs from newly acquired entities of EUR 10 million. Our cost containment program delivered EUR 45 million of savings this quarter, which is visibly reducing our underlying OpEx base. And this is EUR 30 million more than we delivered in the same period of last year. The positive savings effect demonstrates our strong commitment to cost control, Brenntag's ability to maintain cost discipline. It's even in a challenging business environment. We generated an operating EBITDA of EUR 330 million. It's down 6.7% year-over-year. And then the depreciation amounted to EUR 87 million. That's leading to an operating EBITA of EUR 243 million, which is 9.2% below last year's figure. Compared to the third quarter 2024, our operating EBITA was impacted by the following developments. First, FX effects reduced operating EBITA by EUR 14 million; second, acquisitions added EUR 5 million; and third, organically, the operating EBITA declined by EUR 29 million compared to the third quarter last year. The group EBITA conversion ratio stood at 25.7%. Looking at the EBITDA conversion ratio, that reached 34.9%. I'll now briefly comment on the development of special items below operating EBITA. In the third quarter, special items had a negative impact of EUR 17 million. This includes costs for our strategic projects in the amount of EUR 8 million, which are mainly related to severance and advisory expenses that also helped to achieve the desired cost reduction target. Furthermore, we incurred expenses for legal risks, which mainly are arising from the sale of talc and similar products in North America in the amount of EUR 16 million. And then lastly, other special items had a positive effect of around EUR 7 million. That's mainly related to insurance reimbursements in connection with the major fire at a warehouse site in Canada in 2023. Earnings per share were EUR 0.78 in the quarter, which is slightly lower than previous year's figure. Let us now have a look at the free cash flow development. Third quarter of 2025, we've generated a free cash flow of EUR 316 million as compared to EUR 247 million in the same period of last year. The decline in earnings was offset by slightly lower CapEx and the cash inflow from working capital compared to the prior year period. In the prior year period, we saw a slight cash outflow for working capital. Lease payments were also slightly lower compared to the prior period. And then our free cash flow demonstrates the resilience of our business and our countercyclical cash flow profile. The working capital turnover stood at 7.3x as compared to 7.7 in the third quarter of 2024. Leverage ratio, net debt to operating EBITDA stood at 1.9x. I would like to close now with the outlook for the remainder of the year. For the full year 2025, we specify our operating EBITA guidance towards the lower end of the range provided in July of this year. We expect the unfavorable euro-U.S. dollar FX trend continue, and we assume an average rate of EUR 1.16 for the fourth quarter of 2025. As mentioned earlier, the overall market environment continued to be characterized by a high degree of economic uncertainty. That's driven by ongoing geopolitical tensions and global tariff discussions. The noticeable slowdown in demand continued throughout the third quarter, and we expect a similar environment in the fourth quarter of 2025. At the same time, our results in the third quarter showcase our ability to seize business opportunities and to realize cost savings, despite the persisting macroeconomic challenges and the continued economic volatility. To further address the challenges ahead and to improve our performance, we have taken action to enhance agility and execution discipline, driving sales and efficiencies. This includes an acceleration of our existing cost containment program, as Jens has pointed out. A key element here is organizational complexity as well as simplifying and streamlining administrative processes. Our decision not to consider a full separation of Brenntag any longer further enables us to eliminate buildup duplications and overlaps within the organization. So with this, I would like to close the presentation, and I'm now very much looking forward to your questions. Operator: [Operator Instructions] Our first question will come from Annelies Vermeulen with Morgan Stanley. Annelies Vermeulen: I have 2 questions, please. So firstly, on the cost program. You've announced today that you're accelerating the cost containment program, including, I think, some additional headcount reduction. But overall, your cost containment target is unchanged for 2027. So could you quantify those headcount reductions? And will there be any additional restructuring costs as a result? And should we expect an acceleration in Q4 from the EUR 45 million of cost out that you did in Q3? And then second question, just on the divisional split. The messaging has been a bit mixed here over the years. You've announced today that this is no longer under consideration. But in the past, Brenntag has said that there was limited overlap between the 2 divisions and a split would make sense over time following a targeted disentanglement. So in your first few months with the business, what have you seen so far that gives you the confidence that this is the right decision permanently for the group and that the synergies between the 2 divisions are material enough to take a split completely off the table? Jens Birgersson: Thank you. So I take the second question. I'll comment the first before I hand over to Thomas. So on the headcount numbers, we have nothing to announce now. I don't feel -- our top priority is selling, simplification and then execute the cost-out program. But -- and that program has been there for a while. But we don't put a number on it, and we will probably try to avoid having a number. You will see how the cost is being reduced, and we have initiated discussions with Works Council and all the rest. And along the way, we will update. But I want to avoid to say this is the big headcount number and talk about that now. It's about getting cost out, but there's going to be reductions in many places. So maybe Thomas can comment the other aspects of that question, and then I'll come back to the split. Thomas Reisten: Yes. So as you will remember that we have actually been announcing in the past was the EUR 300 million cost reduction program. If you look at the first quarter, second quarter, third quarter delivery on that, we're actually now fairly well on track in order to deliver actually the savings that we've announced for this year. So the EUR 30 million achievement in the first quarter, EUR 30 million in the second, EUR 45 million now as a run rate in the third quarter. Remember, that was started already in the year before. So there was EUR 15 million in the same quarter of last year actually already. So firmly on track from that perspective, we had said as well that we will continue to incur restructuring costs. I mean overall, as one component of the costs that are actually one-off costs in order to realize that. We had said about EUR 300 million for the whole program to achieve the EUR 300 million run rate savings by fiscal year '27. So that's what we will continue to use in that context as well with headcount restructuring. Now obviously, and Jens has already commented on that, and I've commented here in this quarter again on the fact that we are accelerating and broadening the overall program. So that's what we are really driving and we will start to reduce complexity. We'll start to deduct layers and the context of the split, not continuing in terms of further splitting this, that will actually avoid that we have further duplication of resources, and we'll roll back on that as well on some of those resources that are duplicated. So -- and that is then in the end, leading to us being able to accelerate this program. Jens? Jens Birgersson: Yes. I'll come back to the other one. I don't know if it has been said that there weren't any synergies between the businesses because that also been a misstatement in that case or because there are clearly synergies between the businesses. It goes from the operation, it goes from the infrastructure, warehouses and even market access. Even if you have global sales forces, we are selling to the same. And then you have the whole multiple differential of the 2 businesses and the nature of the businesses with a relatively small Specialty business and the difficulty and the cost of splitting them and the extreme effort that went into that. And then finally, -- so if you're on top of that, would also get scale effects out of being an EUR 15 billion company with the overheads, the infrastructure, the assets and maybe having all these assets and utilizing them for both businesses, I at least couldn't see that it was a benefit to split. And it has been awfully difficult to try to make progress on it. And then finally, I would also -- when I look at it, see that there is an M&A runway where you have a lot of targets, there are a lot of companies that do a bit of both businesses. And I think also it's more difficult to find to pursue your role as the role we have as a consolidator of the industry if you are split because if you make acquisitions of these companies, you can either pretend that it's a pure play or you have to split it all the times to become a permanent company to split. So if we were only Essential company and we were acquired company, we keep finding Specialty businesses in there because most companies in the segment where we buy, they have naturally evolved into both businesses in the same as we did. So those would be my main arguments why it doesn't makes sense to split. Then the other aspect is to shift the focus from internal to out. We need to be out selling. And on top of that in the strategic review, if we can do a better job of getting scale effects out of this business, and I don't want to go too deep in that today, then I think there's a very strong case to have 2 businesses along backbone. Annelies Vermeulen: That's clear. And just for clarity, my comment was referring to -- in the past, the company has said that there is limited overlap between the 2 divisions. I wasn't referring to synergies. I think you've said in the past that actually, not many of your customers buy from both divisions, and therefore, the split would make sense. So that's what that was referring to. But thank you for the detail. That was clear. Jens Birgersson: If you take -- you have -- we have this peculiar situation that we buy and sell, of course, to our customers. So almost every customer we both buy and sell to. So that's one dimension. But then we also have that, yes, there are pure-play Specialty customers and pure-play Essential customers, but we have a lot of customers that buy from both also. Thomas Reisten: And then just to build on this point, as Jens has said as well, from a commercial focus point of view, obviously, we like the 2 different divisions in that context. It is about, on the one hand, avoiding some more of the duplication and avoiding actually some of the dissynergies that even actually some time ago had been announced that further split there actually will be some dissynergies of about EUR 90 million to EUR 120 million. And that's the point where we actually believe that we can leverage a joint backbone much better in order to serve both of the different business models from a commercial point of view. Jens Birgersson: Yes. Then there is another aspect, the definition of a Specialty business. There has been discussions about that. But within the Essentials, we also have vertical businesses focused on a business segment. If you take, for example, oil and gas, that's a big vertical for us. It's somewhere in between -- it's regional in this case, but you have a lot of domain competence to serve that segment. So you have it like a slide in the grid that we have in Essentials. So you have pure Essential, then you have verticals, data centers, for example, it's a vertical. You have electronics manufacturing, where we have both businesses servicing an end market in a vertical. And then you have the pure Specialty business, pharma or something like that. So it varies. But if you go into pharma, we are selling all the way out to commodity products into pharma too, but with different purities. So you have a lot of sliding definitions of Specialty and vertical. And I think to be really successful, you need to learn to master several of those models, if you want to keep wrong. Of course, there are some excellent pure plays out there, but I would expect if you open up the hood that you will see a lot of extras from the wrong business coming in through the acquisitions because that's what we found at least when we acquired companies. Operator: Our next question will come from Tristan Lamotte with Deutsche Bank. Tristan Lamotte: Two questions, please. First is, Jens, I'm curious, given you've just come in. EBITA is likely to be down about EUR 150 million this year or 14%. And that's despite a positive contribution from M&A. The negative FX impact there is large, but it's not the main driver. So in the organic decline portion, how would you kind of split that out? And how would you rank drivers like lower volumes versus lower pricing or the indirect effect of lower pricing? And maybe kind of linked to that, what do you think is the risk that this is kind of the new run rate, the new structural norm? Is this a cyclical low? Or is it something that will improve? Jens Birgersson: Yes. So on the specific numbers, I'm going to hand over to Thomas in a bit. I think we are on a -- I don't dare to say structurally low. It's kind of staying low. But I think if you start to get some growth in the end markets and a bit more volatility into it, we will do better. And as soon as we have the volume growth -- we actually haven't suffered so much on pricing yet. If you look at the average sales price, relatively small changes in price, but it's still a high pressure due to the Chinese aspects. And we, of course, do business with that too. We distribute those products, too. But then you have an average lower sales price when -- if the mix goes over there and that impact us. But I think if the market comes back to a bit of growth, then I think you're going to see a lot of good things. I don't think it's a permanent structure. Then, of course, you have some structural issues on top that we saw it overnight, Mexico put in tariffs. We have none of these issues. We have the massive difference of energy prices between Europe, maybe Germany, EUR 0.40, EUR 0.43 per kilowatt hour. China runs at maybe EUR 0.07 if you're a big principal and U.S. on EUR 0.12, EUR 0.13. You have these big competitive differences. But again, those differences, technically, it doesn't impact us so much because we are not a producer. So we are not suffering with this massive structural problem in the industry where we sit in the value chain. Maybe I hand over to Thomas on some of those more margin-related questions. Thomas Reisten: Yes. So I mean, you were alluding to, obviously, the specification of our guidance in that context. And I mean that we are now saying that we go -- that we take the guidance towards the lower end of the EUR 950 million to EUR 1.050 billion range. And I mean, what's behind that is that we continue to have volume pressure in the market. So the 3.6% actually volume reduction that we have seen in the quarter. And overall, actually, when you look at that as well, there's some pricing pressure still affecting sales then as well. Having said that, our margin management, so focusing on to the topic of GP per tonne leads to us still being able to hold the margins. So overall, we have seen that pressure continuing, and that was actually leading to the lower end -- towards lower end of the EUR 950 million to EUR 1.050 billion. If you think about the FX topic, so far, in the further quarter -- now in the third quarter, we have seen stabilizing towards what we have guided as well. So the EUR 1.16 is, as you will remember, the exact same number that we actually have seen as the basis for our guidance in the past. So the main differences are here on the commercial side of the business. Tristan Lamotte: And maybe second question. I'm just wondering, I know it's early days, but I'm wondering how you think about the company's strategy in China, given I think around 80% of the growth in chemicals according to some forecast is set to come from that region in the next 10 years. Is China likely to be a focus of the new strategy? And is it somewhere that you could focus on to drive growth? Or are there limitations to that? Jens Birgersson: I mean if we look at what we have done in China, we have done quite some investments in Essentials. And it's a topic of profitability and see what space we can have in the market. On the Specialty side, China is a very interesting market and the whole of Asia fundamentally is a majority Specialty market for us now. And then the strategy that one needs to figure out is what should be done on the Essentials in, for example, India and China going forward? In China, you have an underlying challenge when you get into that game with profitability in Essentials and you need to decide whether you're going to play that or not, challenging market. And then India is another one where you will, of course, have massive growth over the coming years, and you need to figure out what is the stake you're going to have in India. In almost any business, you would have liked to start quite far into India. We are not so far yet. So definitely, we need to look at that and decide what we do about it. But that said, we are in India. We are doing business in India. But we haven't done maybe a thrust into India yet, but that needs to be decided. And then I'm talking Essential. On the Specialty, we keep growing the business that we have done for several years. Operator: Our next question comes from Gaurav Jain with Barclays. Anil Shenoy: This is actually Anil Shenoy on behalf of Gaurav Jain from Barclays. Just one question from me, please. I was just wondering how are you thinking about the outsourcing trend of principals to distributors. I think previously, the previous management, of course, and even your competitors have mentioned that during a macro slowdown, principals tend to increase their outsourcing to a distributor. And are you seeing anything like that right now? Have you benefited from it by any chance? And sort of like a follow-up question to that. I saw that one of the companies Tate & Lyle, which is ingredients company, they acquired CP Kelco. And they mentioned that they are migrating some distributor -- distribution relationships to a direct service customer model as a part of its integration strategy. And apparently, they are increasing their revenue by 10% because of changing that. So how do we look at this? I mean is this a trend that can continue? And if so, would that be negative for the distributor companies? Thomas Reisten: Yes. So I'll start, and obviously, then I'll invite Jens to add up on that. But I mean, the overall trend that you're describing of outsourcing distribution by a chemical producer or a principal towards actually distribution, we see continuing actually to happen. So we have a number of sales agreements or distribution agreements where this continues as well and where we are actually winning those distribution deals overall. And as a consequence, that's actually where we do see the business continuing to grow as well. Now obviously, this is overshadowed, if you like, at this point in time by the weakness of the demand overall. But nonetheless, this trend continues to happen, and we are successful in winning such agreements actually on a continuous basis. So the reverse trend of that, you sometimes see, but the general strategy that actually we will win these games will continue. Jens Birgersson: And here, I can say, I've been -- on your question on outsourcing or in-sourcing going direct or not, with our biggest accounts, I'm talking like the 3 or 4 biggest ones, and it's a downturn. And we're talking here accounts that are multi-hundreds of millions. And I've been in those meetings. The team is growing together both ways. So that means we're selling more and they're putting more through us. And I think the philosophy we often see is taking the tail end, big accounts I want to have, and then they move up the tail end limit. I want to put more complete packages out to us. And we have a lot of work discussing these issues. So I will say you have both trends and then, of course, if they have big accounts where they can go direct, they like to do that and then leave the tail end to us. So we see both. But on average, the discussions I've been in has been putting more over to us. And there, my position has been -- let's do it in structured good steps so that we do it well because the biggest danger we have here is that when you take over a number of customers from one of these suppliers, if you make a bad job out of it, you don't manage to grow them. And so what we are sitting with now, where we have done some of these deals -- in spite of a declining market, we have almost made a point of trying to grow the volume so that they are happy with our performance. But it's super important that you take it with good structure, good team on it and make it a success. And I think as long as you do those shifts with success, you would get more. And if you miss it up, it stops. So that's what I see. And then you have really, really big principals that are looking into very big moves, and then you never know will it happen. And you also see quite a few principals that might not had it before, but now they have a global responsible person, a regional responsible person, but I meet mostly global responsible people for distribution, where you have much more strategic discussions. So that's certainly ongoing now, and it's due to the downturn, a lot more is on the table to deal with. Operator: Our next question comes from Chetan Udeshi at JPMorgan. Chetan Udeshi: My first question was just going back to the guidance. So you're saying lower end. Are you then happy with the consensus EUR 971 million? Or would you rather have people at lower end meaning EUR 950 million? Just curious on that. The second question was just on these cost savings. You've shown us this EUR 45 million of cost out. Is there some temporary nature within that? So I'm just curious if you've actually taken out bonus provisions that were taken in H1 and that's sort of amplifying, if you will, the cost takeout number in Q3 by any chance? Because I saw your personnel expenses, we were sort of run rating at something like EUR 365 million to EUR 370 million per quarter in H1, and now they are more like EUR 350 million. So I'm just curious if there is a bonus provision takeout, which is one-off in nature in Q3? And the last question was, can you remind us, you talked about no longer doing the split. How much duplication of cost do you have in the system today that can go away in the next 12 months as you no longer continue on that path of splitting the businesses into 2? Thomas Reisten: Okay. So 3 questions. First question on that was actually towards the guidance. Where would we then see this? Overall, if you look at it, what we have been guiding now, what we've been clarifying or specifying is that we see the range between EUR 950 million to EUR 1.050 billion coming in towards the lower end. That word is quite important. So it is not at the lower end. It is towards the lower end. Having said that, we do expect it probably more in the lower side of it. So towards the lower end, I think, captures it quite well in terms of number. There's a couple of things that obviously still are variable. So how is the demand going to develop? We will continue to take costs out, and that will actually take us to exactly that expectation that I've just been mentioning. So that's on the first question. On the second question, do we incur temporary reductions in costs because of adjusting the bonus provision? That is correct. So we do have bonus provision releases actually in our overall accounts. However, we do not count them towards the program of cost reduction. So when I am quoting EUR 30 million in the first quarter, EUR 30 million in the second quarter, EUR 45 million in the third quarter, this does not include one-off effects. That's in the element where we actually -- where I am talking about inflationary trends already in there as a counterbalance. So the inflation would be higher if we actually would not have actually such elements. So to summarize on that question, when we are looking at cost takeout, we are counting only topics that give us persistent and continuous cost reductions and not one-offs. So that's on the second question. On the split costs, overall, so as you will see that we have already across the business, actually, we continue to take out costs there. What has been announced in 2024 was actually that there are dissynergies to be expected between EUR 90 million and EUR 120 million. So that's a guideline for you to think about what costs would occur if you would have done the entire split. Not all of that has been now created in terms of duplication of costs because we have obviously not done the complete separation. So I think that gives you some good numbers actually to think about what -- in which direction this will evolve. Operator: Our next question comes from David Symonds with BNP Paribas. David Symonds: So the first question that I have, so Life Sciences gross profit per unit was described as meaningfully up for the first half, but only moderately up for the 9 months. Material Science moved from slightly up to slightly down. So could you talk about what changed quarter-on-quarter? Was it an intensification of Chinese competition? And are you seeing pricing pressure also in North America and EMEA? Or is it limited more to Lat Am and APAC? Second question, could you comment on the split of cost savings across the divisions? Because it looks like Essentials did a pretty good job on cost. I'm just wondering if it took a more than proportional split, i.e., more than 2/3 of the total. And then finally, one for Jens. Could you comment on the split of the sales force that you have at the moment in the Specialty division? Do you think it makes sense to -- I think the sales force was reorganized to be vertically aligned rather than regionally aligned. Do you think that split still makes sense? Or with the sort of reversal of the split of the company, could you look to merge things a little bit back towards salespeople covering both Essentials and Specialties by region? Jens Birgersson: So David, maybe I'll take the last one and then I'll hand over the first 2 ones. And I have maybe something to add on Material Science. But anyhow, no, so on the sales force, I mean, I must submit I never almost been in a company where you don't have verticals and regionals and where you have different sales forces. So how we want to run it? I think we have a pretty good setup. We have domain competence vertical sales forces in the Specialty businesses. But we also have that in some of the verticals where we specialize Essential people on the vertical. So that will remain. No reason to do that. And most of all, we don't want to do cost savings on that piece. We want to really make sure we invest in the sales. It's not increases. But when we reduce these costs, as I said, we take overheads. We want to keep that intact. And it's a good setup. But of course, we want to make sure that they stay focused on their job, but never forget that they have a sister and a brother that very often actually sell to the same logo so that we don't close that. On top of that, what we are running is that we have a global team that we can regionalize depending on the customer what they want for key account selling and then also buying the principals. So when we have our vertical business, the Specialty businesses, they take care of that. But there are some accounts where we have so big engagements that we need to set up global teams. And I would say those -- the 2 specialized -- the Essential regional sales force and the Specialty sales force, then we have the key account for the really big customers that we both buy and sell. And then the really big ones we buy from, they demand that we have global organizations. And whenever we step into that global organization, we end up having around the table both businesses with almost all of those logos. So you need to play all of those for, I would say, to sell. And we're going to keep that and refine it more. At the same time, as we get more team play between them without losing focus on the individual business. And I think that domain competence in the Specialty business is really one of the core things. You need to really nurture and build that. Otherwise, you won't sell anything. And of course, you need the mandate, which requires a massive amount of competence to secure the mandate. So we just keep building on what has been built in the last year. Over to Thomas on the other one. Thomas Reisten: So in general, if you look at the North America situation, and this is actually impacting as well Material Science and to a large extent, I mean -- but in the BES side, first, what we've seen is quite a bit of weakness in overall volumes. We have seen actually sales benefiting from slightly more stable prices in that context in the third quarter in North America. But overall, really the volume decrease has been affecting the gross profit overall. What we've seen as well is, and I've been commenting earlier actually on that, that the margin management has continued to help us. So on the gross profit per tonne, we actually see this slightly up across the North America region in BES. If you think about Material Science as a whole, then as well there, so gross profit per tonne in the second quarter has been slightly up. And whereas in the third quarter, it actually is slightly down. So that's the directional changes actually that we are seeing in that context. Overall, volumes remain actually; down in both the second and the third quarter. Talking about cost savings, overall, the cost saving initiatives are benefiting both divisions. So we see in both divisions that actually cost savings are being realized. We do need to continue to accelerate this, and that's what we have obviously committed to where we do see the potential to it. And then worthwhile mentioning too that on the BBS cost, so the central costs of the headquarter, we actually have seen quite a bit of progress and reductions on that already. And we will, as Jens has very much pointed out, continue to intensify that and actually create more savings in that space. So that's a rough direction of how the cost savings are actually affecting the different divisions. David Symonds: That's very clear. If I could just ask a quick follow-up to the last one on cost saves in specialties or sort of margin progression in specialties. What's the reason for the sort of worse margin progression in Specialty? Is there more pricing pressure on that side? Is it with the contract structures in that business? Is it harder to pass through some of this margin management action? Or what's -- what can you say on that, please? Thomas Reisten: So when you look at the overall development in the third quarter for BSP, then the volumes in BSP have actually reduced harsher than they have actually reduced in the U.S. That for sure is one of the drivers in that context. If you look at the overall margin management, they're actually doing quite well on this. So from a gross profit per tonne, we actually see a further improvement in that. But where we do see the main pressure in BSP is really on the volume side. Operator: Our last question comes from Nicole Manion with UBS. Nicole Manion: Just one on the change to the CapEx guide, please, July versus now, EUR 100 million difference. Can you walk us through the moving parts there? Apologies if I've missed something, but just given your existing CapEx up to this point in the year and the magnitude of that change, just any extra detail there would be great. Thomas Reisten: Yes, so what's important to understand there is that our general capital allocation guideline that we gave out, we obviously say that this is about EUR 300 million a year in terms of CapEx. Now what we have done as well is we wanted to specify towards the end of the year where we will likely end up. And this is just a general trend for the end of the year that at this point in time, we are seeing reductions in the overall CapEx spend, and we are expecting, as a consequence to come in around the EUR 200 million. Now important is the around. So it can go slightly above still at this point in time, but it's not a specific initiative that we are not executing. This is the overall just -- trend of just not having spent as much. Now we do, obviously, across the board, ensure that we are spending the money on the right projects. And that might have actually here and there as well slowed down some of the CapEx spend so that we are ensuring that we spend it on the right returning projects. Operator: This concludes the Q&A session. I will now hand back to Thomas Altmann for closing remarks. Thomas Altmann: Thank you very much, Abigail. So if there have been any issues from the sound quality, please let us know. Also after the call, you can just send me an e-mail or just send me a text message, then we'll make sure that we take consideration for the next call. And with that, we are coming to the end of the conference call. If you have further questions, please do not hesitate to reach out to the IR team. Our next interaction with the market will be with the full year '25 results, which will be published on March 12 next year. And with that, ladies and gentlemen, thank you very much for joining us today. Have a good day and good one. Thank you. Operator: This concludes today's call. Thank you, everyone, for joining. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. My name is Krista, and I will be your conference operator today. At this time, I would like to welcome you to the Circle Group -- Circle Internet Group Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to John Andrews, Vice President of Capital Markets and Investor Relations. John, you may begin. John Andrews: Thank you, operator, and good morning. I'd like to welcome you to Circle's Third Quarter 2025 Earnings Call. I'm joined by Jeremy Allaire, our Co-Founder, Chief Executive Officer and Chairman, and Jeremy Fox-Geen, our Chief Financial Officer. Earlier this morning, we posted our earnings press release and earnings presentation on the Circle Investor Relations website, investor.circle.com. A transcript of this call will be posted on that website once available. I do need to remind everyone that our earnings press release, presentation and this call contain statements that are forward looking. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified and some of which are beyond our control, you should not rely on these forward-looking statements as predictions of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur, and actual results could differ materially from those projected in the forward-looking statements. Information concerning risks, uncertainties and other factors that could cause these results to differ is included in our SEC filings. We will also disclose non-GAAP financial measures on this call today. Definitions of those non-GAAP financial measures and reconciliations to the most comparable GAAP financial measures can be found in the earnings press release and earnings presentation, which are posted on Circle's Investor Relations website, investor.circle.com. Non-GAAP financial measures should be considered in addition to, not as a substitute for GAAP measures. Now, I'd like to turn the call over to Jeremy Allaire. Jeremy Allaire: Thank you, John. I'm excited to talk with all of you today about our quarterly results and general outlook. But before I do, I want to talk about our broader vision for what is taking place in this market, a vision of an internet financial system that guides what we're building towards at Circle. Our vision from the beginning has been that a new set of open Internet infrastructure and open software infrastructure would collide with the global financial system and ultimately transform it. We are moving more and more towards that world and realizing that vision. What we are seeing emerge is the opportunity to build a full-stack Internet financial platform company with several platform layers. The first layer, blockchain networks are becoming foundational operating systems for economic activity on the Internet, what we call economic OSs for the Internet. These infrastructure layers will be part of migrating coordination, governance, value storage, financial contracts and other forms of economic intermediation into a software-powered and agentic economic system. This is an enormous platform and infrastructure opportunity that we believe is even larger than any past Internet platform technology. On top of these economic OSs is the second platform layer of digital assets. This includes stablecoins, Internet native digital assets based on protocols and applications and broader tokenization, including the tokenization of traditional assets and many other types of economic contracts. All of these digital assets will be built on the first layer of blockchain networks, the economic OSs for the Internet. This digital asset layer is fundamental to how economic value will be stored, transformed, transmitted and exchanged all around the world. On top of the blockchain and digital asset layers is the third layer, new application utilities that are built for the Internet economy, application utilities for payments, commerce, treasury management, capital formation, lending, governance and many other applications that are fundamental to economic activity. Full-stack Internet financial platforms are emerging, and Circle intends to be the leader in this space. With that backdrop, I want to discuss our latest results and our progress in expanding our platform and building towards the vision that I just described. In Q3, we saw very strong growth in our network. USDC in circulation grew 108% year-over-year to $73.7 billion. This is tremendous growth. And we're very proud that our growth also represents continued market share expansion. Moreover, the amount of onchain transactions using USDC grew 580% year-over-year to $9.6 trillion in Q3, underscoring the inherent and increasing velocity and efficiency of using USDC as a medium of exchange. This increasing velocity of money is a crucial feature of the Internet financial system. We had strong financial results in the third quarter. We realized $740 million in total revenue and reserve income, representing 66% year-on-year growth. Our adjusted EBITDA grew 78% year-on-year to $166 million, with a 57% adjusted EBITDA margin, a 737 basis point expansion. And we've delivered continued expansion in our platform. We launched Arc into public testnet in recent weeks with over 100 major participants. I'm going to talk more about that in a few minutes. We're also sharing today that we are exploring the possibility of launching a native token on the Arc Network, which we think could be an important component for driving utility, incentives, growth and governance of the Arc Network. We saw Circle Payments Network product expansion with multiple product releases and significant growth in transaction volumes, and we've continued to expand our stablecoin network across more chains with 5 new chain launches and 28 supported chains today, part of our deep commitment to maintaining a strongly market-neutral position. And adoption has been expanding across a range of use cases, industries and types of firms. Overall, the stablecoin market has continued to grow strongly, and Circle continues to gain share. On a year-over-year basis, stablecoins in circulation grew 59%. Because we grew faster than the overall market, Circle's share grew to 29% in the third quarter. Based on Visa's published analysis, stablecoin transaction volumes have grown approximately 130% year-over-year with USDC share expanding to 40% in Q3. And as you can see, the dollar stablecoin space remains a market with 2 leading issuers and a number of much smaller players as we continue to sustain our strong position despite increasing competition. At the heart of our competitive position are durable and powerful network effects that are anchored in several areas: the trust that we have enshrined in our infrastructure by being regulated, audited, public, transparent and compliant; the core liquidity infrastructure, our reserve infrastructure with systemically important banks and banking connectivity around the world providing at-scale minting and redemption. But also our broad distribution across blockchain networks and ecosystems, which has helped sustain the broader utility of our network. And we continue to innovate in product and technology and developer services which provides powerful infrastructure for application developers, financial infrastructure companies and others to build on. Crucially, we have been able to maintain our competitive position by being a market-neutral infrastructure that leading companies can build on top of. Our stablecoin network growth remains strong. As already noted, onchain transaction volume grew to $9.6 trillion in the quarter, up from $5.9 trillion in Q2. CCTP, our Cross-Chain Transfer Protocol is a key infrastructure in enabling capital efficient and secure transfers of digital dollars across blockchain networks, applications and services. CCTP volume grew approximately 640% year-over-year to $31.3 billion in Q3. And in fact, over the quarter of all bridged volume of all assets from major bridge providers that we track, CCTP represented 47% of all of that traffic. In October, it was over 50%. This is really key as we think about the expanding role that Circle can play in providing infrastructure that supports broader cross-chain interoperability for digital assets. We're continuing to gain share in digital asset trading markets as well. It's a key priority for us. And you see this in our growing share of spot trading year-over-year and then the ongoing expansion of USDC within perpetual markets, in particular, on platforms such as Binance, the world's largest centralized exchange and Hyperliquid, the largest decentralized exchange. From June 30 to November 8, we've seen our tokenized money market fund, USYC, more than triple in size to approximately $1 billion, making it the second largest TMMF in the world. This is an important part of our growth in tokenized collateral for digital asset markets. And use case expansion and adoption is growing. We're seeing adoption in capital markets, in payments, in the digital assets ecosystem with banking infrastructure providers and to provide dollar access around the world, including with leading companies such as Brex, Deutsche Börse, Fireblocks, Finastra, Kraken and Itaú, the largest bank in Latin America. These are all key use cases with industry-leading companies that chose to work with Circle and which will be important to the ongoing growth and adoption of our stablecoin network. While USDC and Circle's broader stablecoin network are central to our business today, we are continuing to expand our platform across key dimensions. Coming back to this idea of building a full-stack Internet platform company, Circle has been methodically building infrastructure that goes down the stack into the core network operating system layer with Arc and moving up the stack into the application utility layer with CPN. With Arc, we've just delivered a critical and significant milestone in recent weeks with the launch of the Arc public testnet. When we think about this layer of infrastructure, we really look at it as an operating system layer, an economic OS for the Internet. Over prior decades, there have been fundamental platform shifts for how software infrastructure supported growth in the utility of the Internet, the web as an OS for information and data, the evolution into mobile as an organizing operating environment, cloud as an operating infrastructure and then other core utilities such as social, search and commerce, helping to organize ecosystems, platforms and activity. And now we're seeing 2 new major operating system paradigms, AI platforms and blockchain platforms. With Arc, we've created something that is enterprise-grade and purpose built to bring stablecoin finance and real-world economic activity on chain. Our public testnet launched with over 100 world-class companies spanning every major category of the financial industry, major payments firms, technology companies, fintechs and broad support across the digital asset markets industry. From Apollo to AWS, BlackRock, HSBC, Mastercard, Standard Chartered, Visa and so many other tremendous firms who are testing, evaluating and collaborating with Circle as we seek to bring Arc to commercial mainnet launch in 2026. We've also been activating Arc across our entire Circle product suite, making it seamless for developers and all participants in the ecosystem to take advantage of this new infrastructure from Circle as they prepare for Arc mainnet. Our vision for Arc is of a globally distributed network with infrastructure operators all around the world, in every region of the world, from every economic system in the world. And we envision strong stakeholder incentives and governance to help drive the adoption and evolution of this network. Consistent with that thinking, Circle is actively exploring the introduction of a native token on the Arc Network. This is an exciting development that we're actively looking at, and we'll share more as we continue our exploration. We are also seeing strong early momentum for Circle Payments Network, and we have expanded the CPN product portfolio. We launched CPN Console which brings self-service operations to CPN members for onboarding, integration and operating payment flows on behalf of their customers. This will streamline our ability to bring more members and more institutions onto the network. CPN Marketplace itself has continued to expand as I'll talk about momentarily. And we launched a new capability called CPN Payouts, which is purpose-built for automated stablecoin payouts on CPN. We've seen a number of financial institutions enrolled on the network grow to 29. We've also seen more and more institutions that are actively engaged in eligibility reviews to integrate to our network, including 55 financial institutions. And the overall pipeline of financial institutions seeking to join CPN has grown to 500. Across these participants are global systemically important banks, payment service providers, cross-border firms, neobanks, digital asset firms and many others. We've continued to expand the markets where CPN is available with live flows happening across Brazil, Canada, China, Hong Kong, India, Mexico, Nigeria and the United States. And we expect upcoming launches for flows into Colombia, the European Union, the Philippines, Singapore, the UAE and the United Kingdom to name a few. We've also been seeing strong early adoption with rapid growth in CPN's monthly total payment volume from our first full month only 5 months ago to November 7, we've seen over 100x growth in trailing 30-day payment volumes. As of last Friday, annualized transaction volume based on trailing 30 days is $3.4 billion. We're excited about this expansion of Circle's platform, continuing to build out what we believe can be one of the most significant and broadly adopted Internet financial platforms in the world. With that, I'm pleased to turn this over to Jeremy Fox-Geen for the financial review. Jeremy Fox-Geen: Thank you, Jeremy, and good morning, everyone. 2025 continues to be a year defined by growth, and I'm pleased to report we continued this momentum in the third quarter, delivering strong financial results. I'll start by briefly recapping the fundamentals of our business and financial model. Stablecoins are a network business and successful networks are enduring and valuable. Our strategy remains to grow and deepen our network. We earn reserve income on the assets backing our stablecoins, and we incentivize strategic partners to grow distribution and our network. Over the last year, we have expanded our revenue lines and now earn other revenue from certain of our transaction flows and network infrastructure. And as an Internet platform business, we have a highly scalable model with strong inherent operating leverage. Let me now review the quarter. USDC in circulation was $73.7 billion at quarter end, more than doubling year-on-year and growing faster than the overall market. USDC held within Circle's platform infrastructure grew nearly 14x year-on-year to $10.2 billion at quarter end, representing 14% of total circulation as increasingly, we are seeing leading institutions build upon our platform. Reserve return rate was 4.15% for the third quarter, down 96 basis points year-on-year, reflecting the decline in SOFR during this period. Total revenue and reserve income increased 66% year-on-year to $740 million for the quarter as growth in USDC circulation was partly offset by that lower reserve return rate. Total distribution and transaction and other costs increased 74% year-on-year to $448 million. The increase was driven primarily by higher average USDC balances held on Coinbase's platform and other distribution incentives as we continue to build partnerships to drive growth and adoption. RLDC margin was 39.5% in the quarter, down 270 basis points year-on-year, but strengthening 133 basis points sequentially from the second quarter, reflecting the impact from growth with certain higher-margin products and partners. Other revenues, which are high margin and scalable, increased to $29 million from less than $1 million in the prior year, reflecting the new products and services launched since the second half of 2024. Subscription and services revenue was $23.6 million in the third quarter, primarily from revenue from our blockchain network partnerships. We added 5 new chains this quarter and 12 new chains this year. Transaction revenue was $4.7 million. Total revenue and reserve income less distribution transaction and other costs grew 55% year-over-year to $292 million. Adjusted operating expenses, which excludes depreciation and amortization, digital asset gains and losses and stock-based compensation grew 35% year-over-year to $131 million for the quarter, as we continue to invest in growing our platform and distribution at this pivotal time for our industry. Notably, this measure includes payroll taxes, which since our IPO also includes payroll taxes on stock-based compensation. These new payroll taxes on stock comp were $5 million in the third quarter. Adjusting for these new payroll taxes to make for a cleaner comparison, our underlying adjusted operating expenses grew 29% year-over-year. Adjusted EBITDA grew 78% year-over-year to $166 million, reflecting the strong operating leverage inherent in our model. Adjusted EBITDA margin expanded both year-over-year and sequentially to 57%. Let me conclude with a brief update on our outlook. We are at the beginning of meaningful shifts in the global markets for money, and we manage our business for long-term success. Moreover, several of our core performance drivers are visible to the market in real time. As such, we do not give detailed quarterly or full financial guidance. We do, however, provide full year guidance on certain metrics to help our investors better understand our expected performance. We will update this guidance when we expect our performance to materially deviate from that guidance. Our USDC circulation outlook is long term and through cycle and remains unchanged. We are increasing other revenue full year 2025 guidance to $90 million to $100 million as a result of strong subscription and services revenue in Q3 and underlying growth dynamics in transactions revenue. We expect RLDC margin to end the year around 38% at the high end of our range, reflecting strong on-platform performance. We are increasing our adjusted operating expenses for the year to $495 million to $510 million, reflecting growing investments in building our platform capabilities and global partnerships. This also reflects the impact from payroll taxes related to the potential future exercise of options by Circle employees. Overall, we've delivered a strong third quarter with meaningful growth and margin expansion. We're only just beginning to attack the opportunity before us and remain excited about our future. I want to thank the team here at Circle for your continued hard work and thank our investors and analysts for your support and engagement. With that, operator, we can now start the Q&A portion of the call. Operator: [Operator Instructions] Your first question comes from Pete Christiansen with Citi. Peter Christiansen: Really great trends here, pretty impressive, particularly with CPN. I want to double-click into some of the CPN results. How do you -- how should investors think about the pipeline developing here? You have 55 new partners in review, a huge pipeline of 500. How should we think about the conversion into full users? And then as a follow-up, if you can give us a sense of how Circle intends to monetize CPN whether directly or indirectly. Jeremy Allaire: Yes. Thanks for the question, Pete. This is Jeremy Allaire. Yes. We're very pleased with how CPN is progressing. Obviously, we announced it in the spring, we went online. We've seen really good traction. A couple of things I'd say. I think the first is we've really been focused on making sure that we've got great product and operations that we are confident in that can scale membership and activations. And so we've made a lot of progress there, and you're sort of seeing that in the results and some of the other data points that I shared. For us, this isn't all about total size of the number of members on the network, although we do expect to continue to grow the total size of the members on the network. But we're focused on adding markets, not just adding markets for the sake of saying, "Hey, we can flow money here and there." But adding quality participants, participants that have meaningful flows, participants that want the benefit of a multilateral framework like this, participants that have good reach into businesses, enterprises, consumer retail, et cetera. So sort of quality, not quantity, I would say. And ultimately, we want to make sure and this is part of the -- when we talk about eligibility and the eligibility reviews, we're looking at a lot of things. We're looking at how strong is their local liquidity against kind of local banking systems and currencies and their ability to meet the SLAs of the network and things like that. So we're underwriting for quality, operational capabilities and the like. And I think we're, again, very pleased with the progression and the progression of TPV, both the kind of monthly TPV and the annualized TPV run rate that we shared. Jeremy Fox-Geen: On monetization, just for the follow-up, I might add a couple of points. The first is to say we're focused now on growing the network. We're not focused on monetizing the network or extracting value. We want the network to grow so that it's creating value for all participants in an increasing way, and that's how networks grow and become valuable. Over time, there are many opportunities for very small fees, which benefit these new, more efficient Internet scale architectures. You want to charge much lower fees than traditional models and build businesses at much higher scale. Jeremy Allaire: I would just add very quickly, the members on their network can make money. This is -- these are flows where they have fees for their users and for the businesses that use this and for -- and obviously for ultimately the kind of currency flows that happen as well. And so this is, I think, an attractive platform that adds value to these members' products, services and offerings where they can certainly generate value, and we want to scale that up. So more to come there. I think we're excited about integrating Arc into CPN and kind of new infrastructure that can support these mainstream payment flows on the network. Operator: Your next question comes from the line of Jeff Cantwell with Seaport Research. Jeffrey Cantwell: I wanted to ask you on -- in October, Chris Waller from the Fed spoke at Payments Innovation Conference. And he said that this is a new era for the Federal Reserve and payments and that DeFi/crypto world is no longer on the fringes of the financial system and that the Fed intends to be an active part of that revolution. Curious what your reaction was to that. And do you think Circle has a seat at that table as the Fed starts -- likely starts to look more closely at crypto here? Jeremy Allaire: Yes. Thanks for the question, Jeff. So we're 100% in alignment with Governor Waller. And today, Circle's infrastructure, whether it be our stablecoin network infrastructure, USDC itself, our cross-chain infrastructure are actually fundamental to this onchain and DeFi based financial system that's emerging. And in fact, we maintain a very strong leadership position in the DeFi based onchain world. And I think our competitive strength there has grown over time. I think the bigger idea, which I think Governor Waller is getting at is that the ability to kind of take what we think of as the building blocks of the financial system and move those into code and smart contracts and tokenized assets that run on the Internet is like a wholesale architecture shift, and it represents a major change in the actual underlying design of the global financial system from digital cash instruments like stablecoin money to financial contracts and financial market primitives, all expressed in code and that is at the very heart of the thesis of Circle. We keep talking about building the Internet financial system. We believe there is a large-scale change and there will be this large Internet financial system. We see it already sort of forming today. And Circle intends to be the leading Internet platform company for this new Internet financial system age. So I think it's very encouraging that the leaders of central banks, that the leaders of global institutions are seeing this as well and are affecting policy, but also technology and business practices that are really aimed in this direction. Jeffrey Cantwell: Great. Appreciate that. And then a follow-up I had for you is you had 29% market share this quarter. Last quarter, you had 28% so share stepping up there. Do you mind just talking more about where the share gains are materializing for you guys? I'm curious if you're seeing any notable change in the U.S. demand for USDC in particular, post the passing of the GENIUS Act and whether that clarity has been helping out in any way with the share gains you're seeing here. Jeremy Allaire: Sure. I'm happy to take that. So we -- as noted, we saw very strong growth in Q3. I think that growth has come from, yes, the regulatory clarity, but also I think the overall just advancements in the technology and all of that combined is leading towards more market activity, more major financial institutions, payments firms, neobanks, large enterprises who are implementing stablecoin in their products and services. We mentioned a number of major firms that we saw in the quarter. And that -- so that is effectively a very strong set of tailwinds. And I think in a world where not just in the U.S. but in Europe, in Asia, in places like Hong Kong, UAE, where stablecoins are being regulated, the mainstream players who are coming in want to work with an infrastructure that has the trust, transparency, liquidity and compliance that a firm like Circle has. And so I think we've long held that kind of infrastructure approach as this becomes a mainstream phenomenon, not just because of regulation but because of the technology advantages that it would advantage Circle. And I think as you look at our share gains year-over-year and then the absolute growth in recent periods, I think it reflects that. Operator: Your next question comes from the line of Joseph Vafi with Canaccord Genuity. Joseph Vafi: Congrats on all the terrific progress. I was wondering if we could kind of drill down a little bit on Arc here. Number one, Jeremy, I'm pretty excited in your exploration of a native token here. Can you just double-click on that, what you're looking at, what would be some of the reasons you would move forward with it versus not and implications both ways? And then I have a quick follow-up. Jeremy Allaire: Yes, no problem. A couple of things. I think the first, and I mentioned this briefly in my comments as well, which is Arc Network is being designed and built in collaboration with a lot of major institutions. And you'll note, if you go and look at the actual Arc announcement, the range of financial infrastructure companies, global banks, firms in capital markets, asset issuers, asset managers but from all around the world, from Asia to the Middle East, to Europe, to the United States, to Latin America. And so one of the fundamental principles is we want a network that is distributed, that has operators from around the world, from different geographies and geoeconomic systems, and we want to create ways for those participants including the developers that build applications on Arc and the end users that are driving and growing the usage of Arc. We want to create stakeholder incentives, and we want to create governance methods for the evolution of the network. Now this is, I think, relatively common in the blockchain network space. But I think at this moment in time, when we're trying to bring together these mainstream companies and leading firms in the digital asset ecosystem as well, we really see the potential benefit of a native token for Arc that can provide utility for users of the network that can align incentives around the growth of the network, and that provides a concrete way for stakeholders to participate in governance around choices in terms of the technology and its upgrades, choices in terms of the expansion of the operators on the network as well. And so we're actively evaluating a token for Arc, and we'll share more about that as that comes together. But I think based on the Arc public testnet launch and the engagement we're seeing from developers already, we're really excited about this. We think it can be a critical infrastructure for Circle, but also a critical infrastructure for the entire global ecosystem that are trying to build mainstream scale applications on these networks and operating systems. Joseph Vafi: That's great. Really exciting. And then just what does the intersection -- I know it's early days, the intersection of CPN and Arc look like at this point or in the near future? Jeremy Allaire: Yes. So a couple of things. I think the first is that we have -- with Arc now in testnet, we are activating the Arc as an infrastructure in testnet across all of Circle's products and services. And so during testnet, we'll continue to make sure that everything is available. We just, I think, announced in the last day, our tokenized money market fund product USYC went live on Arc testnet. And so we want to make sure that, that full suite is there. And then secondly, directly to your question, we think that Arc Network can be a very important infrastructure for CPN, providing a best-in-class infrastructure with low cost, with settlement finality and ultimately with great FX infrastructure as well. You'll note in the Arc testnet announcement, there were a large number of non-dollar currency issuers launching on Arc testnet, and a number of those are already up and running on the testnet. And so whether these are yen or real or peso or Australian currencies, other currencies, we want to grow the number of local currencies, and that's important because if we can establish a seamless, real-time, atomically swappable currency exchange and embed that as a primitive that can be used by members on CPN, that could be a very powerful capability. And so Arc as a platform for stablecoin finance and Arc as a sort of enterprise-grade and regulatory-ready infrastructure for FIs aligns very well with the ultimate goals for CPN. So we -- at the application -- in other words, the application layer CPN is building on our stablecoin and digital asset network with USDC and EURC and USYC, and they're all able to build on and take advantage of our operating system with Arc. Operator: Your next question comes from the line of Devin Ryan with Citizens. Devin Ryan: A couple of follow-ups here. First, on the Circle Payments Network, obviously, great to see the momentum in the pipeline there up pretty materially from the last update. Just love to get a sense of kind of the catalyst to convert that pipeline kind of on the time line. If you can give us anything there, what may close over the next quarter or 2 versus what is kind of more initial exploratory phase? And then anything on partnership economics? And then as you do scale the pipeline, do you have the capacity? Or should we expect to see some more costs come in? Jeremy Allaire: I'll take the first part of that and have Jeremy Fox-Geen take the second part of it. Just in terms of the catalysts, I think building these kind of member-based payment networks is obviously always a classic chicken and egg, right? You want to make sure that you've got flows on both sides, and so a lot of our focus, as we have gotten this started is get those quality flows from originators in major markets to destinations around the world. And we're starting to see that. And I think that's showing up in some of the numbers that we've also shared. I think per my earlier comments, more and more firms who are involved in money movement, who are involved in cross-border money movement, whether they be banks or cross-border payments firms or even large enterprises that just deal with the complexity of how they collect and remit and move money for whether it's a creator or a supplier, all of those want to take advantage of the speed and capital efficiency and cost efficiency of stablecoin infrastructure. And so that's where we're seeing the catalyst. We're seeing the catalyst from established firms that are seeing that if they can internalize how they move money, it actually frees up capital, reduces the amount of collateral that they have to have. It creates more capital efficiency, and it can deliver a faster, better product user experience as well. So those are the kind of business motivators that people have, and I think, obviously, for us, we're very focused on making sure that we've got high-quality participants across the network so that by kind of to Metcalfe's Law, every new node on the network exponentially increases the value of the network. We want these FIs who are becoming members to immediately feel the benefits and the uplift that they get bidirectionally as well in using this network. So those are catalysts from a -- what are the business drivers for people who are coming on and the things -- the kinds of things that we're focused on as we evaluate onboarding new members. In terms of the kind of outlook for growth on that and/or partnership models and investments, I'll turn that over to Jeremy Fox-Geen. Jeremy Fox-Geen: Yes. Thanks, Jeremy. And first, just addressing the cost piece of your question. Obviously, as the network grows and accelerates its growth, so too are the cost inherent, for example, in onboarding those FIs through the risk and compliance reviews and ongoing monitoring and things like that. So yes, there will be more costs associated with that. It's kind of within our overall cost envelope. And as a technology company, obviously, we're building this in a very scalable infrastructure-driven way with sort of AI technologies built in wherever possible to ensure that as we scale and grow, we're not doing so by adding people, we're doing so in a very cost-effective, cost-efficient manner, which is very congruent to our sort of overall strong operating leverage inherent in every part of our model. Devin Ryan: Excellent. And then as a follow-up, obviously, as you're having more conversations with potential partners and customers and those are scaling pretty materially here, are you learning anything about kind of on the demand side, anything that could influence kind of the product road map from here? And then kind of tied to that, there's been a lot of M&A headlines in the space right now. So just if you can touch on kind of M&A conversations or interest at the moment or even kind of what [ surprises ] you. Jeremy Allaire: Yes, sure. So I would say a couple of kind of things thematically. I think a critical need that firms that are looking to build on stablecoin payments, they're looking for strong direct liquidity between the stablecoin and the stablecoin network and local markets. And so that's been a key focus for us basically ensuring that our liquidity network is as strong as possible. We mint and redeem at scale through major financial market centers around the world. We're increasing the number of significant banks that are kind of plugged into our infrastructure in these major markets. And sort of if you think about that, that sort of like the width and the efficiency of the pipes, how efficient and cost efficient is it to be able to move capital through those pipes. And so that's been a big differentiator for us. And I think we're now able to build on top of that these other abstractions, whether they be FX abstractions, settlement credit abstractions, the CPN orchestration coordination capabilities, and then obviously, for many of the firms who are -- this is new to them. This is -- there's the digital asset native ecosystem who are leaning in. And then there's all these firms that are new to this. This is really where technologies like Arc come in and a big motivator for us with Arc is we've looked for years at what does it take for a traditional FI or traditional enterprise to build an application, deploy it to use these networks and to do that in a simple, safe and well assured process as possible. So with Arc, for example, deterministic settlement finality in subsecond transaction costs of around $0.01. The fees paid on the network are actually in USDC and other stablecoins over time. And so confidentiality features, these are critical features that people need to make this work for them. And this is really the classic evolution from an earlier adopter set of technology infrastructure, an early adopter mentality, which has largely been focused on speculating and a mainstream scaling phase where the infrastructure needs to map to the mainstream needs. And I think those are the things that we're doing up and down the entire product stack, not just in CPN, but the entire product stack that we're building for all of these mainstream institutions around the world who are looking to build on this infrastructure. Jeremy Fox-Geen: And then just taking the M&A part of your question. When we've talked about M&A and our internal M&A strategy, right, we see M&A as -- and its use as accelerative to our core offerings. So we have offerings in the blockchain space, in the digital asset space and then in the application space on top of all of those with the Circle Payments Network. We've done 3 deals, closed 3 deals so far this year, and we would expect to continue to do M&A to accelerate within each of those spaces. We do not anticipate using M&A to diversify for diversification's sake. Jeremy Allaire: One last comment there is we've been building infrastructure in this whole space for a very long time. And so -- and there are other firms who want to be in the space but need to catch up. And so naturally, you're sort of seeing people who are trying to find teams and technology and other things out there. We've built everything that we do historically, more or less organically. As Jeremy noted, we've acquired IP and teams and others, and we'll continue to look at opportunities as noted. But we feel very good about our kind of innovation curve itself and our direct IP generation. We actually recently noted that we had 25 patents generated from the novel engineering and research and development of Circle. Operator: Your next question comes from the line of John Todaro with Needham. John Todaro: Congrats on the results here. I guess I have one and a follow-up. First, on the on-platform performance, I think we've been continuously pretty pleasantly surprised with the USDC on Circle platform here up to $10.2 billion. I'm just trying to frame this up. I would think most of this is for payments, cross-border money movement versus kind of crypto native. Any kind of maybe percentages or just framing that up and give us a little bit more color. Is that the right way to think about it that, that moves more towards some of the payment verticals versus some of the crypto-native stuff? And then I have a follow-up on Arc. Jeremy Allaire: Sure. So John, we don't break out the on-platform by, say, use case directly. But what I can say is for Circle, what we've been focused on is building partnerships with firms that want to build on top of our technology stack ideally end-to-end on our technology stack, taking advantage of our wallets, our Circle Mint, our core liquidity and increasingly these other developer services and infrastructure like CPN. So we've very much focused on firms that want to build on our infrastructure. And we focus on building partnerships with firms that are going to be growth oriented, meaning we want to have -- we want to do deals with and build strong economic relationships with firms who have a credible path to driving growth. And so those have been the focuses. And I think when we look at the partnerships that have helped us grow on platform, they all fit that criteria overall. And I think in some cases -- just to give you a little bit more color, in some cases, these are partnerships with firms that have tens or hundreds of millions of users, and those users are oftentimes in what I'll kind of call like financial super apps, where they offer wallets, they offer payments, they offer trading, investing and other things. And so we don't see through into the -- all of the behavior of their users and how much of it is for peer-to-peer transfers versus investments and other things as well. So -- but the nature of this is we're really going after partnerships with platforms that have good distribution and are growth oriented in what they can do with us. John Todaro: That's very helpful. And then my follow-up on Arc. As you mentioned, the fees are paid in USDC and other stablecoins and then also just those transaction fees are so de minimis. And I can't imagine a token would be for gas fees or anything of that like. You kind of framed it up as maybe like a governance token. Is that the right way to think about it? And I know it's early, but just maybe some more of the potential like economic accrual or utility outside of -- yes, I guess just what would the other potential utility be if it's not for the gas side? Jeremy Allaire: Yes. So a couple of things. I think as I said earlier, we're looking broadly at utility, economic incentives, stakeholder participation and governance across the full ecosystem that will engage with Arc. And we are exploring a token for Arc Network that aligns with trying to accomplish all those things. But there's not a lot more I can say right now. Certainly, as we continue this exploration, we'll be able to share considerably more assuming that, that continues to go well. Operator: Your next question comes from the line of Ken Suchoski with Autonomous Research. Kenneth Suchoski: I wanted to ask about the other revenue. I think subscription revenue stepped up nicely quarter-over-quarter. So how much of that is driven by adding the 5 new chains that you talked about versus some of the other recurring revenue sources. And then maybe on the transaction revenue within other revenue, I think that ticked down slightly quarter-over-quarter despite showing really strong growth across the various metrics. So maybe a little more detail on why the decline quarter-over-quarter? Jeremy Fox-Geen: Thank you for the question. There's a lot that goes on in this. So let me try and unpick some of the pieces. Yes, the sort of, as you said, strong growth in subscription and services revenue, primarily that is revenues from our blockchain network partnerships. As I think we said before, that revenue stream has 2 components that are upfront revenues from the various integrations that we do. And then there are ongoing revenues for maintaining those. Now the pace and progress of the upfront can depend upon a whole number of different factors. And so we've historically, and we'll do so, again, describe that business as lumpy. And so we had a very strong quarter, and we had a long pipeline of fees, and we've been working very, very hard to execute upon those. And so the upfront fees is the largest part of that bucket, but we're seeing strong growth in the underlying recurring revenues within subscription services, which we're very happy about. You note the decline in transaction revenues rightly from $5.8 million last quarter to $4.7 million this quarter, and then you comment on the underlying growth of so many other things. There's a wide variety of elements within transaction revenues. And yes, we are seeing strong underlying growth in many of them. The decline quarter-on-quarter is best thought of as a spike in the prior quarter, a spike in redemption revenues associated with our USYC tokenized money market fund product. After we have made that acquisition, we repositioned that product to be used as collateral within the digital asset markets. And through that repositioning, we saw a very large amount of redemptions, leading to a spike in redemption fees in the second quarter which masks the underlying growth trends in the other products and services within that. Notably, USYC itself has returned to growth. It has grown at 200% from the end of last quarter to today and now stands as the second largest tokenized money fund product in the world. Kenneth Suchoski: Great. That's helpful, Jeremy. And then for my follow-up, I wanted to ask about the implied 4Q guide just because we're getting a few questions on it. For RLDC, I think there's some assumptions we all have to make there. But I think to reach the full year guide that implies quite a bit of sequential step down in margins, maybe you could talk about what's driving the step down. We would have thought that the performance on Circle, on platform USDC and then some of the other revenue at a high margin that RLDC margins would actually improve over time. But maybe there's some dynamics in the market related to rewards and distribution costs. So any thoughts there? Any help there would be very helpful. Jeremy Fox-Geen: Thank you. And that's a great question. And again, I'm going to say there's a lot of different pieces moving around in the underlying there, which could -- can make it quite difficult to unpick. We're very pleased to have seen strong sequential RLDC revenues against a backdrop over the last few years of that declining. We've long said that networks have network effects, and we see this both in sort of growth of our off-platform USDC and in certain of our economic agreements. There can be some lumpiness within those, which kind of gets to the point on the guidance. On our philosophy to guidance overall, we've consistently said that we want to be as clear and transparent with you as we have line of sight into. So we take a sort of modestly conservative posture. We don't bake in everything we hope is going to happen or everything we're working on, and we're working on an awful lot of things. We bake into sort of our line of sight on what we feel confident that is going to be delivered, and we would always look to meet or outperform. Operator: Your next question comes from the line of Dan Dolev with Mizuho. Dan Dolev: So yes, overall, really strong 3Q. Kind of touching on that question from before. I mean, if the [ bull ] case is the TAM is growing and that could have set rate declines, you do seem to -- I mean you're talking about guiding down Q4 other income and expenses are rising. I don't think we've heard like a really good explanation. But maybe my bigger question is what would be the pushback to the skeptics in the industry who are saying, look, this is somewhat of a commoditized thing. I think even the networks are saying there's going to be a lot of stablecoins. Like what would make USDC win in this market long term? So maybe like a shorter-term question on this Q4 guide and then longer-term, more conceptual question would be great. Jeremy Allaire: Dan, this is Jeremy. Thanks for the question. I'll actually take the second part first. I think there's a fundamental misunderstanding in the market. And I think that there is a sort of -- there's a view that, hey, anyone can kind of pop out a stablecoin, and therefore, if it's a big company that pops out a stablecoin, that it's automatically going to be successful. We've actually seen the opposite historically. We've seen consortiums of major companies launch stablecoin products that effectively had 0 circulation. We've seen very large players with huge numbers of users, push, push, push on this to get very, very little traction. And I think the misunderstanding is that stablecoin networks are like other Internet platform utilities, meaning they have network effects, and those network effects come from the number of products and services and integrations to the network. And so if I'm building a product and I want to support stablecoin settlements and stablecoin payments, you're at a disadvantage if you don't support USDC because it has so much interoperability around the world. And we see that all the time. We see major B2B firms adding USDC as the payment option without a deal with Circle, without any relationship with Circle, they're doing it because it's got the most reach and interoperability. So there's sort of the network utility, that also ties to what I would describe as developer flywheels, which is developers want to build and integrate to things that are going to help them themselves provide utility directly to their users. And so the reach of the network and the utility of the network compound each other. And then the other piece, which is I think also not as well understood is that these digital currencies live and breathe by the liquidity that exists around them. And so we have focused years on building the best, most widely integrated liquidity network for USDC, primary liquidity in major banking systems around the world, as well as secondary market liquidity so that it exists on brokerages, exchanges, payment apps, wallets, through banks and others around the world. That primary and secondary liquidity is also something with network effects. If you want to do something and know that your counterparty is going to be able to be liquid in it and utilize it, that liquidity is really key. So those are big -- those are very big, I think, and very powerful network effects. And I think the last piece of this is that there are also important kind of regulatory and infrastructure moats that exist, which is that it's a huge undertaking to ensure that you are well integrated and supervised by central banking regimes around the world. And that's something that we've done the hard work on with over 55 licenses activated in more markets, bringing more markets online. And so the infrastructure from that, the risk infrastructure from that and then all these other network effects are really important. And I think it explains the fact that we have continued to grow at the pace we have, that the amount of growth we've seen in the onchain markets, in total transaction volumes and what Visa characterizes as "real payment volumes," we've grown, and we've grown our share and despite there being more and more players. And so I think as we look out over the next 1, 2, 3, 4 quarters, you're going to see a lot of noise from a lot of people who think, "Oh, I need to do a stablecoin." And I think you're going to be able to measure those every single day. And I would encourage people to measure the actual trading liquidity that exists in these other tokens, the actual number of wallets that hold these other tokens and the distribution that's there. And I think we're going to continue to see what we've seen. This is a winner-take-most market structure. It's not a winner-take-all market structure, but it's a winner-take-most market structure. And I think that the investments that you're seeing, and I'm kind of bleeding into maybe JFG's other part of your question, Dan, we are leaning into this. We're seeing growth in major platform developments that we think are critical to winning the Internet platform game in this space. And we're seeing a lot of commercial tailwinds all around the world in every region, commercial tailwinds because of the technology progress and regulatory clarity. And we want to make sure that we are stepping into that opportunity so that we can continue to be an outsized winner in this kind of upgrade of the financial system to the Internet. Jeremy Fox-Geen: Yes, thank you Jeremy. You hit on all the major points in there. Just one small follow-up on the piece about guidance. We are at the beginning of what can best really only be described as a megatrend, right? The growth and the building of the Internet financial system, bringing Internet capabilities and architectures into the world of money. And as you noted, Dan, right, the addressable markets here are huge. We don't give full year or quarterly financial guidance other than on a few key metrics for that reason. Whenever you see an exponential growth curve and you zoom into the detail, particularly at the early end of that curve, you see a lot of fluctuations and variations. And we think that those shorter-term fluctuations are best described as missing the forest for the trees if one was to overly focus on them. Dan Dolev: Really, really appreciate the perspective. I think it was very useful for investors too. Operator: Your next question comes from the line of Andrew Jeffrey with William Blair. Adib Choudhury: This is Adib Choudhury on for Andrew. Building out some prior questions, it sounds like maybe you're somewhat agnostic to a specific base case around USDC and focus more on distribution. But if you have to pick, I guess, what's the most imminent use case beyond crypto trading in your view? And what's sort of the near-term visibility you have around USDC for non-crypto activity taking off? Jeremy Allaire: Absolutely. Great question. So we are definitely not agnostic to the use cases of USDC. However, what we do often say is stablecoin money is increasingly a general purpose, general architecture form of money that is being used across a very wide range of use cases, everything from small agent to agent payments, to large capital markets transactions between major electronic markets firms, to everything in between. We're -- obviously, we're seeing major consumer retail acceptance platforms like Stripe and Shopify making an out-of-the-box feature for payment acceptance. But very specifically, to get to the heart of your question, [ Andrew, ] I think we are seeing growth in cross-border and international payments with stablecoins, that has been a driver for quite some time, and it continues to drive growth that led to us building out an entire new pillar of our business with CPN, where we're seeing mainstream flows, wanting to use this as a superior money movement system. And so that is very much a driver of activity and growth and partnerships when I look at the partnerships that we're forming around the world, there are many in that space. And we're even seeing some of the biggest systemically important banks leaning into that to actually improve upon the way in which they do their own international money movement. We're seeing large enterprises who are looking at internal treasury management and how they can move money across geographies and deal with collections and disbursements across global markets as a growth driver. And then we've talked in the past as well about sort of digital dollar as store of value. So we continue to see demand for both firms and households who want to hold USDC, and I think that if you look back at the GENIUS Act and really one of the goals that Secretary Bessent and other kind of, I think, promoters of that breakthrough in federal law, it really is about how do we kind of continue to export the dollar in these powerful ways. So we're certainly seeing those. And then I think we're also starting to see, and this is, I think, something to kind of watch this space closely is traditional financial markets embracing stablecoins. So traditional financial markets like clearing houses, derivatives exchanges that want to be able to use stablecoins as collateral for relative margin and for settlement as an improvement over the way that works versus the traditional banking system. So we're seeing that. We're seeing big pushes around that. We're seeing regulatory pushes around that. And you've seen us announce partnerships with the likes of Intercontinental Exchange, Deutsche Börse Group and others and that's something that we are pressing on. And related to that is essentially the number of traditional financial institutions that are launching smart contracts and digital tokens, i.e., tokenized forms of investment products that already exist. And virtually, every one of those products uses USDC as its primary cash leg and settlement leg. And so you have firms like a Zero Hash who works with us quite a bit. And they face off against a lot of these tokenized issuers, for example, and driving the use of USDC there. So it is diverse, but we are not agnostic. We are leaning into the places where we're seeing both the most immediate product market fit and traction. And then also the -- where we're seeing pull from the market to -- where parts of the market are really wanting to implement this infrastructure. And I cannot underscore how significant the GENIUS Act has been in terms of unlocking major institutions willingness to start embracing and using this technology. And there's a knock-on effect with regulators around the world who are also looking to conform and ensure that well-regulated issue products like USDC can work in their local markets as well, which is driving institutional access and demand in those global geographies also. Operator: Your next question comes from the line of James Yaro with Goldman Sachs. James Yaro: I just wanted to follow up on the prior question. I'd love to just get a sense perhaps quantitatively if there's any ability to contextualize how much USDC is being used in those use cases outside of crypto trading, DeFi and developing market access to dollars, specifically the 2 use cases, which you just talked about are payments and capital markets. So are we seeing -- is there any ability to sort of size how much is being used there and perhaps you can compare it versus the IPO? Or is this all on the comp? Jeremy Allaire: So there is certainly growth happening in these cross-border use cases. And in fact, I think there's some good third-party reporting on this. There's a third-party analyst firm Artemis which has recently published, I think, some of the best data on growth in business-to-business payments, international business-to-business payments and the growth through these periods, I think I don't know what the ending period. The ending period is pretty recent, is very strong. I think it's reflective of what we're seeing in the partnerships that we're forming in the cross-border related payment space. We don't break out across our entire -- the entirety of our transactions that, although almost by definition, CPN flows are that because of the construct of the product. But the uses of USDC in international settlements go well beyond what is happening just inside of CPN. So we don't break it out, but there are, I think, very good third parties who are looking across the entire ecosystem, not just Circle to size that growth and activation. James Yaro: Okay. I'd just like to touch on the potential that stablecoins could become interest-bearing in Congress' market structure bill. How should we think about the impacts on your business if interest were permitted? Jeremy Allaire: So I think the key issue here is specifically not that stablecoins would become interest-bearing, I don't think there's anyone who's looking at revising the GENIUS Act and the prohibition on stablecoin issuers being able to pay interest. I think what's that -- what's in discussion, I should say, in the market structure legislation is whether or not distributors of stablecoins, exchanges, brokerages, other wallet products have the ability to use rewards as an incentive for people to use stablecoins on their platforms. And that is permitted under the GENIUS Act, and I think there's a real push from other parts of the industry, not the digital asset side of the industry to amend not the GENIUS Act, but to provide provisions in the market structure bill, which would allow these stablecoin distributors to continue this practice of offering rewards. I think -- we think that the language in the GENIUS Act is very good. We think it creates a balanced approach here, and it keeps -- importantly, it keeps stablecoins considered as cash and cash equivalent instruments, which is vital from a financial markets perspective, from prudential supervisory perspective as well. But I think we also believe that there should be business model innovation in these kind of distribution platforms for how they engage with their customers. And so I think we're also supportive of the industry's view on that as well. Operator: Your next question comes from the line of Ken Worthington with JPMorgan. Kenneth Worthington: So you've announced a series of arrangements with high-profile financial institutions to utilize USDC, and I guess the fact that they're choosing USDC shows the power of your brand. What are you seeing in terms of the economics that they're asking of you? Are these new partners sort of getting full fare? Or are you seeing the power of the network, allowing you to negotiate better economics for you in these arrangements than maybe what you had seen in the earlier arrangements? Jeremy Allaire: Yes. It's a very good question, and it relates to something I shared earlier, which is that we have a very powerful global utility that, in some ways, people can't afford not to support and integrate with. If you're building a product that wants to be interoperable in this world, you need to support USDC. And if you need a -- if you want a product that can easily move value in and out, the liquidity of USDC is essential. So we do have, I think, as noted, very strong network effects. And when we think about partnerships, as I said earlier, we're very focused on -- we will invest in, so to speak, growth incentives with partners who can grow distribution. That's where we're focused. And so the fact that someone adds USDC support to their own product or service is not sufficient to get any economics. We need to see a real path, a win-win path where partners are going to lean in, they're going to prefer our platform and network. They're going to advance it. They're going to market it. They're going to drive measurable growth. And only when we see that, are we going to really step in and try and get economic incentives in place. And that's important. We want this to be win-win partnerships that drive value and growth for both of us. And we know today that our network and capabilities is essential for most products that are out there. And -- but at the same time, yes, we are trying to construct win-win partnerships with firms. But a very large number of the major brands that you see supporting USDC, there's not a direct economic incentive at all. These are just people who are choosing us because we are the most trusted, transparent, compliant, liquid, globally available in the world. Operator: Ladies and gentlemen, that does conclude our question-and-answer session. I will now turn the conference back over to John Andrews for closing comments. John Andrews: Great. Thank you, everyone, for taking the time to listen to us this morning. Obviously, the IR team here at Circle is standing by to engage with you in any follow-ups, and we wish you all a good day. Operator: This concludes today's conference call. Thank you for your participation, and you may now disconnect.
Operator: Good morning, and welcome to PROREIT's Third Quarter Results Conference Call for Fiscal 2025. [Operator Instructions] For your convenience, the results release along with third quarter financial statements and management discussion analysis are available at proreit.com in the Investors section and on SEDAR+. Before we start, I have been asked by PROREIT to read the following message regarding forward-looking statements and non-IFRS measures. PROREIT's remarks today may contain forward-looking statements about its current and future plans, expectations, intentions, results, levels of activity, performance, goals or achievements or other future events or developments. Forward-looking statements are based on information currently available to management and on estimates and assumptions made based on factors that management believes are appropriate and reasonable in the circumstances. However, there can be no assurance that such estimates and assumptions will prove to be correct. Many factors could cause actual results, levels of activity, performance, achievements, future events or developments to differ materially from those expressed or implied by the forward-looking statements. As a result, PROREIT cannot guarantee that any forward-looking statement will materialize, and you are cautioned not to place undue reliance on these forward-looking statements. For additional information on the assumptions and risks, please consult the cautionary statement regarding forward-looking statements contained in PROREIT's MD&A dated November 11, 2025, available at www.sedarplus.ca. Forward-looking statements represent management's expectations as of November 11, 2025, and except as may be required by law, PROREIT has no intention and undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The discussion today will include non-IFRS financial measures. These non-IFRS measures should be considered in addition to and not as a substitute for or in isolation from the REIT's IFRS results. For a description of these non-IFRS financial measures, please see the third quarter earnings release for fiscal 2025 and non-IFRS measures section in the MD&A for the third quarter of fiscal 2025 for additional information. I will now turn the call over to Mr. Gordon Lawlor, President and Chief Executive Officer of PROREIT. Gordon Lawlor: Thank you, Annis. Good morning, everyone, and welcome. Joining me today is Alison Schafer, our CFO and Corporate Secretary. Also joining us for the Q&A session is Zach Aaron, VP of Investments and Asset Management. I'll begin with an overview of our third quarter performance before turning the call over to Alison for a more detailed review of our financial results. The third quarter marked the achievement of a significant milestone for PROREIT and one of strategic importance. With the sale of 12 noncore retail properties in the quarter, we completed our transition to a pure-play industrial REIT, a goal we set for ourselves 3 years ago. At quarter end, our industrial assets represented 91.7% of our total GA and 89.4% of base rent. I want to commend our entire team for getting us here, which is the reflection of our collective focus and strong execution. Moving on to our third quarter financial performance. We delivered impressive growth across our key financial metrics, improved our balance sheet and further strengthened our foundation for future growth. Revenues and NOI rose significantly during the quarter despite owning 10 fewer properties than in the same period last year. We also benefited from a full quarter of contributions from the 6 industrial properties in Winnipeg, acquired at the end of Q2, which was synergistic to the assets we already held in Winnipeg and significantly increased our scale in the market. PROREIT is now among the top 3 industrial landlords in the city with 21 properties, 1.3 million square feet of GLA and 99.9% occupancy. We're also pleased to host an investor tour in Winnipeg on October 21 and 22. This provided us with the opportunity to showcase some of these properties, and we received very positive feedback from participants. Winnipeg's resilient economy and strong industrial fundamentals continue to reinforce our confidence in its long-term potential. Turning to portfolio transactions. As mentioned, we completed the sale of 12 noncore retail properties in the quarter for total gross proceeds of $51.3 million. This included 9 properties located in Atlanta Canada totaling approximately 221,000 square feet, 2 properties located in New Brunswick totaling approximately 50,000 square feet and 50% co-owned property located in Nova Scotia, totaling approximately 11,000 square feet. Net proceeds for these sales were used to repay related mortgages, credit facilities and for general corporate purposes. Subsequent to the quarter, we completed the sale of 1 noncore office property located in New Brunswick, totaling approximately 51,000 square feet for gross proceeds of $7.2 million and 1 noncore retail property located in Alberta of approximately 5,000 square feet for gross proceeds of $400,000. A few words on Atlantic Canada, which accounted for 45.4% of our base rent at quarter end. Our portfolio in this market continues to perform very well. The region is strategically positioned to benefit from record levels of major project investment today and in the future. In the city of Halifax, where we are among the largest industrial landlords by square footage, net rental rates grew by over 15% year-over-year in Q3 according to CBRE. The report also cites Halifax as a top-performing investment market across Canada with industrial assets generating the highest total return on investment. Turning now to leasing activity. Overall, we continue to experience healthy leasing momentum with attractive retail spreads across our portfolio. To date, we've renewed 74.8% of our 2025 GLA at an average spread of 34.9% and 54.8% of our 2026 GLA at an average spread of 33.4%. Key leasing highlights include the renewal of 45,000 square foot industrial lease in Moncton last August for a 5-year term and a 24% increase over expiring rent, a new 28,000 square foot industrial lease in Winnipeg starting in January for a 5-year term with base rent 12% higher than the previous tenant and 5 lease renewals commencing in 2026 with rent increases of 40% to 45%. These leases totaled 480,000 square feet, including 1 property of 155,000 square feet and 4 single-tenant properties at 325,000 square feet. These robust spreads continue to underscore the embedded value in our portfolio and the quality of the markets in which we operate. Portfolio occupancy was 95.8% at September 30, including committed space. As expected this quarter, our occupancy rate was affected by a specific vacancy. In July 2025, a 176,000 square foot single-tenant industrial property just off the Island in Montreal became vacant when the tenant decided not to renew its lease. We've since received interest from both prospective tenants and potential buyers. As mentioned on the last call, the property has significant upside with current market rents at double the rate of expiring rent per square foot. We'll evaluate these opportunities in due course. Excluding this vacancy, portfolio occupancy would have been 98.1% at quarter end. With that, I'll now turn the call over to Allison. Allison, over to you. Alison Schafer: Thank you, Gordy, and good morning, everyone. We are pleased with our third quarter results. Property revenue totaled $27.1 million, up 12.8% year-over-year despite owning 10 fewer properties. The increase is mainly driven by contractual increases in rent and higher rental rates on lease renewals and new leases. Net operating income, or NOI, was $17.1 million, an increase of 19.6% compared to last year due to these same factors. Same-property NOI reached $13.5 million, up 9.7% year-over-year, led by robust 10.5% growth in our industrial segment. The increase is due to contractual rent escalations, stronger renewal rates and higher rents on new leases. This is despite a decrease in overall average occupancy related to the vacancy Gordy mentioned. Funds from operations, or FFO, amounted to $8 million for the quarter, up 22.2%, driven by increases in contractual base rent, higher rates on renewals and higher rental rates on new leases. This was partially offset by an increase in interest and financing costs. Basic AFFO per unit increased by 7.2% year-over-year and basic payout ratio was 91.1% in Q3 compared to 97.7% for the same quarter last year. This improvement reflects the revenue drivers just mentioned and our ability to generate strong cash flows, offset by an increase in stabilized leasing costs and interest and financing costs. The weighted average capitalization rate for our portfolio remained stable year-over-year at approximately 6.7% at September 30, 2025. On the balance sheet, we continue to focus on reducing leverage. At quarter end, total debt, including current and noncurrent portion, was $531 million, down $30.1 million from the same time last year. Adjusted debt to gross book value decreased to 49.1% from 50.2% at the same time last year, supported by debt repayment and fair value gains on investment properties. In September, we refinanced the mortgage in connection with 4 50% co-owned industrial properties with 2 new mortgages totaling $64.3 million, bringing our portion to $32.1 million. The new mortgages mature in 2028 and 2030, respectively, and bear an annual interest rate of 3.99% and 4.2%, also, respectively. Our proceeds from the incremental financing were used to repay a portion of the revolving credit facility and for general corporate purposes. Looking at upcoming maturities, we have $6.2 million remaining in a mortgage maturity for 2025 with an interest rate of 4.6%. In 2026, we have $150.9 million in maturities. For 3 lenders totaling $127 million of the 2026 maturities, we have already been engaged with 2026 financing options. In 2027, we have another $48.7 million maturing, mainly tied to high-performing industrial assets in Burnside Industrial Park. The weighted average interest rate on these mortgages is 3.8% for 2026 and 4.8% for 2027. Finally, our distribution of $0.0375 per unit was maintained in the third quarter of 2025. That wraps up our financial review. Gordy, back to you for closing remarks. Gordon Lawlor: Thank you, Alison. As a pure-play industrial REIT, we're beginning a new and exciting chapter for PROREIT. On the marketing front, we've introduced the refreshed brand identity and tagline, Strong Foundations, Industrial Edge, which reflect both what we've built to date and where we're headed. Looking ahead, we'll continue to leverage our strong and focused platform while maintaining our disciplined balance sheet management. We also remain optimistic in pursuing accretive growth opportunities with about $30 million in room for new acquisitions at this point. Overall, we're well positioned to strengthen our standing as a prominent Canadian light industrial REIT and deliver long-term value for our unitholders. Thank you. Operator: [Operator Instructions] Your first question comes from Tom Callaghan with BMO Capital Markets. Tom Callaghan: I guess, first off, just congratulations on the completion there towards the industrial pure play this quarter. Maybe first question for me is just on your organic growth. Obviously, same-property NOI at 9.7%, very strong and I think accelerated every quarter this year. So just curious where you see that clipping along in the next few quarters. Gordon Lawlor: Tom, it's Gordy. So, I mean, we don't provide guidance per se, but we had expected mid- to high single digits for the year. So, we're there now. We have a large vacancy coming that's going to reflect Q4. But even with that, I think we're still going to be in the mid-single digits even for that quarter as we're looking now. So, I mean, we may end up 7%, 8% for the year overall, I think. And then as the cash flow rolls into '26 and we have some of this new '26 coming on, we see that proceeding. So, we're pretty positive about our same-store growth there for sure. Tom Callaghan: Okay. And maybe just following up on the vacancy there. Gordon, you alluded to a few different options in terms of potentially leasing to a few tenants or also some interest from potential buyers. Can you just give some incremental color there? Like are you further down the path on one versus the other? And just kind of broad time lines you're hoping to square that way? Gordon Lawlor: I mean we just kind of really -- I mean, it's been -- there's been a flyer out there for a bit, but we put a little bit of money into -- we did some paint. We did some work on the outside. We did -- cleaned up some of the landscaping and did some driveway and parking work there. So, it looks pretty sharp right now. So, we'll have a new flyer out and it's a for-sale flyer, but there's been interest in potential purchases as well. No offers really that way, just a few people kicking the tires. So, we're not really down the road on anything and leasing, we've got a leasing offer that came in just last week for almost half the building or over half the building depending on that. So, we just need to really assess what's what with that. We bought the building for $10 million. So, we have room to put some money into it for sure. It's just what's the easiest path between rent -- net rent that we can achieve versus if we have to split up the building or if there's a knockout sale bid, then we'll look at that as well. So, we're just kind of in the process of seeing where it goes right now. We're not in any hurry. We've [ plugged ] the market for a while here that this was coming. And again, I said we did some work on it. So, it's a pretty nice looking asset on the TransCanada Highway just set aside Montreal. So, we'll probably have some action on it in the next couple of quarters, I suspect. Operator: Your next question comes from Brad Sturges with Raymond James. Bradley Sturges: I guess maybe switching gears towards acquisitions. I know there might be maybe a small opportunity in Winnipeg still to do with -- coming from Parkit, but just what -- how is the acquisition pipeline looking in general? Is there more in the pipeline beyond that one asset from Parkit? Or how would you frame the third-party opportunity from other vendors as well? Zachary Aaron: Brad, it's Zach here. Yes, so we're -- so as we kind of discussed in Winnipeg, yes, Parkit has one remaining small 25,000 square foot cross-stock building in Winnipeg that we're likely to move into our portfolio sooner than later. We're just kind of working through that now. That would be kind of a small $5-ish million acquisition. Apart from that, some of the other things we're looking at right now, there's about a $12 million asset out in Moncton, a newer built asset with a long-term lease in place that we're just taking a look at that could be a fit in Moncton as well, no paper or anything like that yet. But just stuff that kind of sits in our backyard that could be a fit. Apart from that, there are some opportunities in Montreal and some other ones in Atlantic, we're looking at as well, some on-market, some off-market. That could be interesting for us, but we'll see. We're not in a rush if the opportunities don't make sense. Otherwise, it still feels pretty thin out there in terms of opportunities, especially those in the market. Not much has come to market in the last quarter or 2, and it doesn't seem like anything between now and the end of the year is going to hit the market as well. There's always off-market chats, but those usually don't go too far because it's still kind of that wide bid-ask spread. So overall, pretty thin in terms of interesting opportunities, but we have seen a few things that we'll continue to look at. Bradley Sturges: If the opportunities do come up, like what is the -- what's the capacity on the balance sheet today to pursue acquisitions? Is there a dollar amount you're comfortable investing in -- or where would leverage -- where would you be comfortable pushing leverage if the right opportunity came? Gordon Lawlor: Yes, Gordy. So yes, I mean, I mentioned it on the call, in the $30 million range, I think we're like [ 49.1 million ] or something right now. So we've got a room for $30 million, $35 million to get to the -- back to the $50 million again, which we're comfortable with. We don't need to push it for acquisitions or anything like that. It's just a result when we -- all that we've done for the year with the additions and the dispositions. When we sit at the end of the year is there's some interesting assets that we could do in the $30 million range, likely not going to get anything across the line this year, but working on now for next year. So that would be kind of the target. Dispositions, none. Basically, closing the loop on that effectively. I mean, $70 million sold this year, I've given the target, I think, from the beginning of the year, $30 million to $60 million. So, we achieved that, including a small office after the quarter. So yes, I mean, we've done that. For our strategy, those were a lot of good assets that we like. Unfortunately, it's just the nature of the business. And now we don't need to sell anything else. If there's opportunities that come, we'll look at them. Same with industrial with our partners. We're reviewing the portfolio. There may be a disposition, a small disposition with an industrial asset if it comes to fruition, if it doesn't fine. So yes, we're pretty complete on that basis. But if you thought maybe $30 million that we had room for, that probably -- we got all that lined up. That wouldn't be until Q2 if we achieved any of that. Bradley Sturges: Yes. And just a follow-up to that. Your target cap rate or going in yield if you were to transact is still kind of 6.5% to 7% at this Gordon Lawlor: point? Yes. I mean, 6.5% to 7% or more on between 4.25% to 4.75% depending on the asset. Look for a little bit of upside in the asset, obviously, and the kind of stuff that we have right now. Yes, that's it. As Zach said, it's just -- it's an interesting market as we end the year. I think there's still 25, 50 basis points spread between the bid and ask on some of these assets. So somebody has to flinch, so to speak. Operator: Your next question comes from Kyle Stanley with Desjardins. Kyle Stanley: You made great progress on the '26 leasing program so far. Just as we think about 2026, do you see any kind of remaining maturities presenting any risks? Would you say retention is probably likely to be pretty consistent in '26 as it's been in '25? And I guess just lastly on this '26 leasing front. The 33% spread that you've kind of successfully done so far, do you expect that to be kind of consistent with the remaining leases for the year? Zachary Aaron: Kyle, it's Zach here. Yes. So as of right now, looking at our 2026 maturities, there's no kind of sizable tenants that we're aware of today that we see coming due that we're concerned about vacating. I mean, obviously, that's still an option. We're just not aware of any of it today. And most of our more sizable tenants expiring in '26, we're already in contact with today, discussing potential deals. So hopefully, we're going to have even more momentum with some of these completed by our next call in Q4. Overall, I definitely see that kind of 30-ish percent spread staying pretty consistent when the remainder of our '26 expiries is mainly going to be our small bay Burnside portfolio and then really some small bay assets in Ottawa and Winnipeg. And just looking at our '25 results and where those markets are at today, we see no reason that those spreads aren't going to stay healthy like what we've achieved here in '25 so far. So, I think that kind of 30% number is a pretty good point to think through for '26 looking ahead. Kyle Stanley: Okay. Perfect. That's great color on that. As you look at your kind of '26 mortgage maturities, do you expect your -- the rate you can achieve being similar to that 3.99% or the 4.2% that you just did on the Q3 mortgages? Gordon Lawlor: So that was about -- 3.99% was a 3-year rate. So, I think that was about -- it was a bank cost of funds, but it was about 150 over. So that's pretty tight. 150 is pretty tight for us. Our budget has us in the 450 range, give or take, for our '26 budget and where we'll end up. That's basically $175 over the curve, which is close to 275, I think of 5 years. So yes, I mean, the 4.25% to 4.75% range and then depending with the $150 million, we're going to try to spread that a bit. That was a result of buying $300 million of assets in 2021 and putting 5-year money on basically all of it because that was the most efficient at the time. So, we'll try to spread that a bit, 3, 5, 7, 10. The curve is pretty steep between 5 and 10 right now. So, it has to make sense on the asset that we have. And not sure there's that much 7 or 10 money around. So, we'll have to look at that. So that's the strategy. We already ran numbers. I mean, plus or minus 25 basis points on those spreads doesn't affect our model significantly for '26. Kyle Stanley: Okay. And maybe just last one. You've highlighted in the past the enhanced defense spending and what that might do for some of your key markets. Just curious, at this point, have you seen that translate into more RFP activity or more touring activity, specifically as it relates, I guess, to Halifax and Ottawa? And would you say that it's impacted your leasing pipeline today? Would it be greater than it's been historically? Or -- just curious on how much that's contributing to things in the market today? Gordon Lawlor: Yes. I mean Zach can step in. I think it's more just like a general positive vibe about what's going on. Tenants are renewing, spaces are turning if they're not renewing. You have plus or minus tenants all the time looking. We sold the building in '25 opportunistically to a supplier with our JV partner that wanted to own their own building. The [ Tales ] lease that we have in [ Canada ] is 128,000 square feet, 15-year lease, that's for support of the Halifax contract. So, whether it's Halifax is booming with the $8 billion, I think increased spending across Canada here will just be helpful to the industrial sector overall. Operator: Your next question comes from Matt Kornack with National Bank Financial. Matt Kornack: Just quickly turning back to Saint-Hyacinthe, you mentioned kind of that the market rents are double in place. Should we assume kind of mid-single digits, I guess, for the outgoing rent? And then I think it was a July maturity. So, would you have had the full impact of that in this quarter? And then maybe secondary to that, I think you mentioned the Q4 vacancy. Is that this -- the impact of this in Q4? Or is that a new vacancy that you expect in your Q? Gordon Lawlor: No, it's the same vacancy. So, in July, the tenant was $4.50 net rent. So, when we say double, $9 seems a reasonable number. So, what happened in July they were $4.50 net rent and they wanted an extension. So, my friend Zach here said they can stay, but they had to pay market, which is $10 a month. So, they paid $10 net in July and then left at the end of July. So Q3 was affected maybe negatively by $150,000, $180,000. So, we'll have that full effect in Q4, though, that's the point. So, I don't know, say, $10 gross rent or whatever based on the old tenant, that would be the difference, I guess, from this time last year. Matt Kornack: And that $9 -- I mean, [ granted 20-foot ] cleared $19.75 vintage, but that $9 is well below kind of broader Montreal rent. So, is that product relatively attractive at this point? It seems like you're getting some interest, but it obviously wouldn't compete with like new modern oversupply stuff that's a bit further out. Gordon Lawlor: No. So Zach can highlight, I mean, that would quantify as a South Shore section basically, if you think of Boucherville and the other side off the island there, it's kind of South Shorish, but you're seeing deals at... Zachary Aaron: Yes. Yes. Just to add some color there, We've seen some recent deals in South Shore like Boucherville and [indiscernible] get done at 100,000 square foot range for $11 to $12 net rent similar kind of OpEx. So Saint-Hyacinthe at around $9, we think, is very competitive from a net rent and a gross rent perspective as well. And so, it just -- it's the size, obviously, 175,000, that's a large size, but we know we can demise that building into 2 or 3 units. And with the interest we have so far, we've had a few groups reach out and tour kind of for that base size of 50,000 to 100,000 square feet. So I can kind of see a situation where the building ends up getting demised to that 2 or 3 units, including with this one potential deal that recently came in that we're still evaluating. So you can see that at $9 and maybe even some room above that, but $9 feels like a comfortable number. Gordon Lawlor: Sorry, Matt, leasing half the building gets you flat to where we were before. Matt Kornack: Well, yes, and you mentioned you paid about $56 a square foot for it. So, I mean, presumably, fully leased at least double that, maybe more in terms of value. Is that fair? Zachary Aaron: I would say that's fair. Gordon Lawlor: Yes, yes, that's fair. I mean it could be a $23 million to $25 million asset. Matt Kornack: And then maybe just quickly in terms of the general dynamics that you're seeing. It sounded like you're seeing some optimism in tenancies. Has there been enough time relative to kind of what's going on in the trade environment where you're starting to see tenants that maybe put things on hold come back to the market? Or has it been pretty steady? I mean you guys have done pretty well from a leasing standpoint, but are you seeing positive inflection at this point? Zachary Aaron: Yes. It's still honestly hard to say. I would say there's definitely cautious optimism today in the last few months. But you speak with one broker and they'll say, yes, we're seeing a ton of new activity and you speak to another and they still say it's quiet. So, you kind of have to read in between the lines. But I've definitely noticed a few more deals get done recently, kind of at the 50,000 range and up in Montreal and the South Shore. So that's obviously positive. We're getting into late Q4 and going into '26, and so we're going to be a year into this environment. And just as I've kind of thought and spoken about before, I think groups are kind of just -- they kind of have to get off the pause mode one way or another and just kind of make a decision. And I think people have just gotten more comfortable and used to this new environment and maybe adapted their supply chain. So, I expect we will start to see some decisions being made in Q1 '26 as people kind of approve their '26 budgets and plans now, understanding this new universe. So, I think that should start to unlock some leasing activity, but time will tell still. Matt Kornack: Makes sense. And then just the last one for me on the accounting side. straight-line rent and amortization of deferred financing fees were up a little bit sequentially. Is that -- I understand straight-line rent moves around, but are those 2 this quarter pretty good run rate numbers for the future? Or is there anything onetime in either of them? Alison Schafer: Straight-line rent would definitely be fine for a run rate going forward. Obviously, we had the new properties come online at the end of June, which had an impact compared to the previous quarter. In terms of the amortization of deferred financing fees, a little higher this quarter given that we wrote off some balances related to the repayment of debt on the sales of property. So, I would just lower the run rate, I guess, for the amort from this quarter going forward. Operator: Your next question comes from Sam Damiani with TD Cowen. Sam Damiani: So Gordy, just on the comment about the $30 million to $35 million of acquisition capacity. So, are you basically comfortable with the REIT's leverage today? Or are you targeting that sort of 45% over time as I think was kind of once on the table? Gordon Lawlor: Yes. I mean, Sam, the 45% is on the table. Just the brutal reality of it is to get to that 45%, selling assets won't do it. Back in the old days when REITs could raise equity at prices that they like, you'd take a piece of your deal, whether it's the green shoe or what have you and then adjust your debt a little bit. So, our target is definitely 45%, but we're happy here operating at the 50% right now. And it would really be -- you get into some kind of creative transaction or something or JVs -- another JV deal or something that creates some excess cash for you that you weren't expecting, we'd use that to move to the 45%, but we're happy staying at the 50% right now. Sam Damiani: So Helpful. And I guess your comments about the -- I think the word of the transaction market, a little bit surprised me. Has it changed in the last few months? Gordon Lawlor: The -- like acquisition market? Sam Damiani: Yes, I think there was Zach's comments there about that. Gordon Lawlor: No. I mean I'll turn it back over to Zach. I think there seems like these off-market deals that they just are around, but they're like around forever. And then like the execution of deals where brokers actually get paid and they like this, there's not a lot of that. You just don't see a lot of it. So there's things around, but it just seems like everything is slow and Zach can... Zachary Aaron: Yes. I mean there's obviously been a few sizable, larger transactions in the GTA, like a 640,000 square foot cross-dock facility in Halton Hills. There was another massive one, I think, in Mississauga that transacted. So, like there's been a few of those that are big numbers, but that's only one deal, and those are more unique deals at the end of the day. In terms of those typical $30 million, $50 million opportunities, smaller portfolios, just haven't seen many of those around off late. And I think there's a number of reasons for that. So again, a lot of -- the way it kind of typically goes right now, you'll hear from brokers is a broker will provide someone with an opinion of value, either they'll say, we don't like that number, so we don't want to take it to market. But if you'll -- if someone comes off market, we're happy to talk about it. And then they come to you, they show you it, they kind of say, here's what they're expecting and you do your math and you're 20%, 30% below that number where you feel comfortable transacting. So, it definitely feels like we've done that exercise a few times over the last few months, looking at opportunities off market, and we're just -- we're not really that close. And we're just trying to be sensible in terms of the markets we're in and how we're underwriting. So, I think that's really the takeaway of what we're seeing. It's just a lot of off-market chats, but not much really transacting, at least not yet. Sam Damiani: That's helpful. And last one for me, just on the debt settlement cost. in the quarter, around $750,000. Is that related to the dispositions that closed in the quarter? And should we expect that to be basically 0 in Q4? Alison Schafer: Yes, Sam, it is completely related to the dispositions in the quarter, and we don't expect anything or anticipate anything in Q4. Operator: Your next question comes from Tal Woolley with CIBC Capital Markets. Tal Woolley: Just wanted to start on the Saint-Hyacinthe property. You talked about potentially putting it on the market versus trying to re-tenant it. I'm just wondering if you're seeing any trends as the market really -- the industrial market has really changed over the last 5 to 10 years and whether you're seeing more demand from potential occupiers to buy assets versus lease them? Or are there any sort of rules of thumb that we can use to think about these kind of assets going forward? Gordon Lawlor: I'll start and Zach can jump in. But I mean, we're not contemplating putting it for sale. What happens when you have single-tenant buildings with the brokers basically is you start to lease it and then somebody looks at the space and somebody walks in and they look where they could buy it. What's interesting is you get a premium, you generally -- Dream Industrial was on a panel recently or a little while ago. Some of their gains on their fair values on assets were sales to owner-occupied or that type of thing. You have some unique structures where owner-operator can get BDC loans up to 80%, 85% loan-to-value, things like that, that make it more interesting for them. So, we're happy with this building. And I mean, we're in the business of leasing industrial buildings, like this is no big deal to us from that standpoint. It's just if somebody comes with this -- you heard what we paid for it and somebody comes from -- with a bid that's double that or whatnot, makes an interesting person think about what can I do with that asset and can I redeploy the funds accretively. So that's really the driver on it. I mean, Zach, you haven't seen any significant sale leasebacks or anything else? Zachary Aaron: They try. They try. Yes, owner-occupier sales definitely became a trend over the last few years. And I think the main driver of that was attractive financing and for tenants who were kind of maybe being forced and their rents were going from $5 to $16 and on a 3-year deal and then have to face the uncertainty of what the rent was going to be in another 3 years, like the idea of going to buy their own asset and kind of take their real estate into their control. Given where the market is and just the general softening around general fundamentals for industrial nationwide, I think that's probably started to temper down a little bit, just as rental rates have come down, incentives have gone up kind of things. So, I think there's a better market for tenants than it was just a year or 2 ago. So, I think that kind of affects the owner-occupier market a little bit. Plus those transactions have generally been for much, much smaller assets like 5,000 to 25,000 square foot building, generally haven't seen it too often on 100,000, 150,000 square foot building, it's still a big dollar amount for an operating business that they may not want to take on. So, I don't really expect a big owner-occupier to come pay a huge premium for this. Obviously, it could happen, and there have been some kicks at the cans for it. But we have it on the market for lease. We have some traction on the leasing. And at the end of the day, we really want to keep this asset, lease it up and then go refinance it and take out some healthy equity to go do something else with that. So that's our preference, but we'll see what opportunities come forward. Tal Woolley: Got it. And then I guess just with the benefit of some time since the tariff announcement in April now, I'm just wondering if you could maybe like -- we talk to you once a quarter and you sort of give us an idea of what the feel is. But if you look back now over -- since April, did you really see much of an impact on leasing velocity related to tariffs? And then as we look out to 2026, you're going to see the free trade or the CUSMA renegotiation [indiscernible]. Do you expect to see any sort of shifts in leasing velocity next year when that starts to come up? Gordon Lawlor: I can give you kind of my thoughts just in general. I was turning more positive towards all of this that our friends on -- our government friends in Canada and the U.S. were going to come to some kind of conclusion on this to take uncertainty out of the market. That's what it is to me. It's like just let's take this uncertainty out of the market. If you're a smart operator and you know what the rules are, then you can play. Then our friend gets angry from an advertisement and everybody is back in their corners again. So that seems -- that's very frustrating to me. So, my concern is, I guess, where we are now and now you're rolling into '26, there's no impetus to solve all of this before opening up the bigger pot. So that's my concern that's probably different from 3 months ago. That said, we're not seeing any difference in the leasing or anything like that. It's just the robustness of it may still stay stale for another 6 to 12 months. That's a concern of mine, although we're not seeing it in our portfolio. Zach, I mean... Zachary Aaron: No. In our portfolio, which again, obviously, very much small, may, I think there's not as much sensitivity to the tariff stuff just because you're a 5,000 square foot tenant in Halifax isn't necessarily doing day-to-day export imports with the United States. So I think there's just more sensitivity to that to the larger 3PL, 100,000-plus square foot users who might be more exposed to that. And a lot of the bigger deals that kind of drive leasing velocity and big absorption numbers have been the 3PL companies in Canada over the last few years. And I think they've just been mostly on the sidelines, all of them. When they start to feel confident and the market is in a better shape and again, just more certainty, I think then you'll start to see those groups start to come back to the table and you look to get new space so they can then get new contracts. And if that comes back, then that will kind of really probably shoot velocity quite rapidly. And then on the flip side of that, the construction development market has come to a halt. Every quarter, CBRE is reporting less and less amount of square feet being built and the percent of build-to-suit projects instead of spec is going up every quarter. So, you are in a situation where, yes, demand has slowed and absorption is kind of steady right now, but the supply side is also going down pretty dramatically across the country. Maybe GTA is a bit of an outlier. There's still a decent amount of projects going on there. But in our markets, there's basically nothing. So, I think we -- I think that those bigger users need to get some more comfort before they start getting back into the leasing momentum. But in our portfolio, the small bay world, things continue to trickle along. Operator: There are no further questions on the phone line. And with that, ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great day. Thank you.
Mark Sclater: Good morning, everybody. Thank you very much for those of you that have come in person, and welcome to those on the phones. I thought I'd start by thanking our employees. The speed of change across Avon has been challenging at times but people love being part of a team that is up to something exciting. We've grown the company and EPS has doubled since 2023. We now have an exciting pipeline of new products, a solid balance sheet and more strategic options. We could only do all this with such a great team. We made excellent progress in 2025. Revenue and profitability grew rapidly. We've transformed every factory using our strengthened system. We reduced costs by closing our Californian factory. In 2025, we invested $14 million in R&D, most of it expensed, fueling a pipeline of innovative products and generating excitement amongst our customers. The order book and pipeline are both stronger than ever. We have a scalable platform facing into growing markets and we're firmly on track to exceed our revenue targets and reach our margin target range in 2026. I'll now hand over to Rich and he'll talk you through the numbers. Richard Cashin: Thank you, Jos. Good morning, everyone. So as you can see then, the headlines demonstrate another year of strong progress. As usual, all of the comparators will be on a constant currency basis. The order book at the end of 2025 has hit another record at $263 million, 16% higher than the prior year. This leaves us very well covered for FY '26 across both helmets and respirators. Revenue growth of 14% dropped through to strong adjusted operating profit, up 31% at $40.3 million. And my preferred area of focus, return on invested capital came in at 18.6% after significant progress was made reducing the average level of working capital tied up in the business. Cash conversion of 90% represents another good year even after a late burst in Q4 resulted in a high receivables balance as we crossed into FY '26. And the combination of all of these factors saw the balance sheet strengthen further with net debt leverage of below 0.9x despite considerable investment into the business during the year. Revenue growth, ROIC, cash conversion and leverage are now all better than our medium-term targets and operating margin is well on its way. Moving on to the P&L. Order intake in the year was very healthy at $352 million, giving a book-to-bill of 1.12. Orders were slightly lower year-on-year, reflecting very high call-offs against the U.S. Department of War helmet programs in '24 and a slightly lower share of IHPS awards in '25. The phasing of these call-offs will always be fairly lumpy in nature but the record closing order book of $263 million benefited from strong growth in Avon Protection, more than offsetting a modest decline in Team Wendy, largely reflecting the increased Department of War deliveries and the phasing of orders already mentioned. Revenue growth of 13.8% reflects a strong performance across the board with 16% growth in Avon Protection and 12% growth in Team Wendy. Operating profit of $40.3 million, over 30% above prior year levels, results in margin of 12.8%, an improvement of 130 basis points year-on-year and a helpful step on the road to achieving our medium-term objective of 14% to 16%. I will walk through an operating profit bridge shortly to pick out the key moving parts. Net finance costs reduced 16% to $5.4 million, driven by lower average net debt and the tax charge of $8 million represents an effective tax rate of 23%, which is roughly where we would expect it to stay absent further changes to the tax regime. This all adds up to adjusted basic EPS of $0.912 per share, an increase of 35% despite the step-up in tax from last year's 17%, which benefited from some one-off adjusting items. Avon Protection has had a tremendous year. Order intake up 18%, order book up 63%, revenue up 16% and operating profit margin up 160 basis points at almost 20%. This shows the ability of the business to lean into a strong demand environment and deliver profitable growth. The growth in orders and backlog has been largely driven by strength in international markets, offsetting a softer year in Commercial Americas following a particularly strong 2024. Ukraine-related demand now accounts for just $13 million in the backlog for delivery in FY '26. This may not repeat, but even after stripping this out, you can see that the order book has grown very well. Revenue growth was driven by Australian FM54 deliveries, strong demand for CBRN boots and gloves to NATO customers and some Ukraine support, coupled with another good year for rebreather deliveries. The excellent drop-through margin was helped by operational gearing, improving productivity and sales mix. Given the strength of the order book, Avon Protection is exceptionally well positioned to deliver further profitable growth in FY '26. Order intake in Team Wendy came in a little softer year-on-year, largely owing to lower receipts from the Department of War following very strong intake in '24. The backlog remains robust at around 1x sales with the strengthened product portfolio driving an excellent pipeline of opportunities as we enter FY '26. Revenue growth of 12% was driven by further growth in ACH II deliveries as we move towards full rate production, further aided by strong demand for bump helmets from a number of end customers, including the U.S. Air Force and Navy. Operating profit margin nudged forward from 4.6% -- to 4.6%, excuse me, from 3.9% in the prior year, which is a good improvement, but still some way off our medium-term ambitions. We are confident in further progress in 2026 as we demonstrate the sustainability of the production rate increases in Q4 and as the benefits of cost reduction following the Irvine site closure start to wash through. As a reminder, ACH II shipments, although driving top line growth, will remain dilutive at the gross margin level. We expect financial performance to accelerate through the year as we improve quality and productivity, which will skew Team Wendy operating margins towards the second half. Now as we move on to the usual operating profit walk for the year, starting with the $30.8 million jumping off point for last year after adjusting for FX. The first positive bar of $15.4 million shows the effect of the 14% revenue growth seen in the year, split roughly 2/3, 1/3 in favor of Avon Protection. Then you can see a further $7.6 million benefit through the combination of operational gearing, product mix and CI activities that have improved efficiency and reduced scrap costs. Note that as previously guided, there was a dilution effect of $2 million from growth in sales of the lower-margin ACH II helmet. There is a $7.1 million headwind from the step-up in investment in future growth, which includes increased sales and marketing, commissions, training and the increased net R&D charge to the P&L. There's a further $2.6 million headwind for increased comp, including share scheme costs. And I've also pulled out the $1 million drag on earnings from tariff costs and increased national insurance in the U.K. And then finally, the other bar of $2.8 million inevitably covers a multitude of things, but the big ones are increased travel, additional investment in IT and costs incurred in tidying up some of our back-office processes. Moving on to the cash flow statement. You can see that net debt ticked up by $6.6 million in the year. The big driver was the $12 million outflow in working capital as production rates in Team Wendy ramped up, culminating in very strong product deliveries in Q4. This resulted in a high receivables balance at the end of September, all of which has now unwound. The pension contribution of $6 million was as expected. And as usual, guidance on future contributions and other financial matters is provided in the appendix to the slides. Purchase of shares to fund discretionary comp schemes increased by $4 million to $9 million during FY '25, reflecting the increase in share price and the strengthening outlook. This prevents future dilution. It's worth pointing out that cash tax will remain lower than P&L tax for the next couple of years as we burn off historical tax losses. The big items to highlight on the balance sheet include inventory remaining broadly flat despite the 14% growth in revenue, resulting in improved inventory turns and the high receivables balance at the end of the year impacting the other current assets line. As already mentioned, this has now normalized following strong cash receipts in the first quarter. Despite the modest increase in net debt, the leverage ratio continued to improve, driven by the increased profitability of the business. Overall, average working capital returns, which is a measure I like as it eliminates the impact of period-end ROIC improved by 15%. The other item worth drawing to your attention is the further increase in the pension deficit or decrease, I think, in the pension deficit to $13.8 million, down from $17.2 million last year. This is due to our $6 million contributions, offset by modest asset underperformance. I've included the capital allocation slide in the deck again this time, reflecting a further reduction in the year-end net debt-to-EBITDA ratio, which is now comfortably below our target level of 1 to 2x. As Jos will cover shortly, we are expanding the revolutionize point of our STAR strategy to incorporate acquisitions as one explicit avenue to future growth, which, if executed thoughtfully, will present opportunities to deliver compounding shareholder returns. While we're still at the very early stages of developing this muscle, we felt it worthwhile to call out. And beyond that, the chart is essentially unchanged, highlighting the prioritization of organic growth and the progressive nature of the dividend. Moving on to transformation. It's worth highlighting that transformation costs came in a little higher than expected in FY '25, reflecting a crescendo in effort in second half activity as we aggressively ramped up production rates in Cleveland. As flagged when we launched the transformation project back in 2023, expenditure will fall significantly in FY '26 with the expected outlay of approximately $6 million linked to two specific projects. The first and already communicated is the completion of transition away from SAP in our Salem facility, which we expect to save us over $1 million per year. This is progressing well and will be complete by the end of the first half. The second and new project is a continuation of the functional excellence work stream with the focus on the way we deploy IT services across the group. We expect to invest up to $4 million of OpEx plus a little bit of CapEx in the design and execution of a new target operating model for IT, which we believe will deliver significant returns in a very short time scale. The investment will be completed in FY '26 and the overall project will have a payback of less than 24 months. This project reflects the end of transformation-related costs taken below adjusted operating profit. So finally, moving on to our expectations for the full year. We expect further good growth in helmet deliveries as we finish the ACH II ramp-up with additional growth coming from commercial and international markets. We also expect good growth in Avon Protection, underpinned by the robust order book in this business. These factors combined equate to high single-digit revenue growth at the group level. We expect the financial benefits of the transformation program to drop through this year with a modest weighting to the second half. Even after the additional dilution from the growth in low-margin ACH sales, we are confident that we can deliver our operating margin within our 14% to 16% target range. As highlighted on the previous slide, we expect transformation investment in FY '26 to drop to around $6 million and return on invested capital will continue to progress nicely. And finally, we expect cash conversion to remain above 80% with continued improvements in operating efficiency being partially offset by further investment in future growth. And with that, I'll now hand back to Jos to update you on the operational and strategic progress and focus for the coming year. Mark Sclater: Thank you very much, Rich. We continue to focus on delivering our STAR strategy, refining it each year with new initiatives. Our strengthened system has become a powerful engine for continuous improvement, and we still see lots of opportunity ahead. Much of our transformation program is complete with two newer projects running into 2026. The transformation program will finish in 2026 but the strengthened system will continue. Kaizen is forever, as we say internally. In advance, we're increasing investment into R&D, sales, marketing and people. 2026 will see our most ambitious new product development program yet. In revolutionize, we've been very successful in securing customer-funded development programs. This year, we're expanding revolutionize to include acquisitions. Our long-term vision is to compound shareholder value by complementing our organic growth with targeted acquisitions. We have the team, the capability and the business improvement system to extract value from acquired assets. That said, our immediate focus remains on organic growth. While acquisitions are part of our long-term strategy, we're not in a rush. We will wait until we find the right opportunities at the right price. As a reminder, this is our scalable business improvement system. The STAR strategy and objective setting process keeps our people focused on action. Our STAR Academy builds the capability of our people and the strengthened system enables us to continuously improve our processes, creating cash to invest into the front end of the business. During the year, we trained every employee on our strengthened system, developed 20 proprietary courses in our STAR Academy and took 30 of our senior employees to Japan for intense continuous improvement training. Another 20 people are going next week. We believe that improving our operating metrics ultimately drives growth and profit versus 2023, when we originally set out our ambitions, productivity has improved 28%, scrap has reduced 62% and inventory turns have improved 46%. But this is just the start. There is more to come. At the midyear, we highlighted the operational risk in Team Wendy associated with production ramp-up and the move from batch to flow manufacturing. This turned out to be prescient. The speed of the ramp-up was difficult. Yet as these graphs show, we are making progress. Over the summer, we tripled production on our Department of War lines as we implemented flow manufacturing. This demonstrates the potential of our new lines. We now need to increase production rates again on the ACH lines by another 50%, and we need to ensure we can deliver consistently every week. We are not out of the woods yet. We learned a lot over the summer and have used this to improve our strength and system. We learned that teams can go much faster than they think. We ran 14 improvement projects over 8 weeks. Leadership from the front is critical. We need to show people rather than just tell them. A line that flows can only run as fast as its slowest operation. The fastest way to speed up a line is to deeply understand each process and tackle the biggest bottleneck one at a time. Lines cannot be improved by sitting in an office. Change needs employee buy-in. We spent a lot of time explaining what we expected of our operators and training them on the strength of the system. From a strategic perspective, our aim is to make the most advanced and best looking helmets with the lowest lead times and cost of production. Avon Protection also made excellent progress as this slide illustrates. In the electronics value stream, which includes rebreathers, productivity increased 79% and scrap halved. In boots and gloves, production increased 47%, improving return on capital and helping us deliver on high customer demand. Both divisions have transformed every production line from batch to flow manufacturing. We've moved almost every single piece of equipment across the entire group, often more than once. You can see the scale of the change in this time lapse video of our U.K. site over the past year. One of the reasons that we're happy to share our strengthened system is that it's not about knowing what to do. It's about actually doing it. Real progress comes from making tangible change every week. That's what delivers sustainable benefits. Moving on to transformation. As you can see, most of our initiatives are nearly complete. We expect to see benefits this year and beyond. Just to pick out a few points. In footprint optimization, we closed a factory in California and built a new one in Cleveland. In operational excellence, we've transformed all four of our factories. In functional excellence, we've reduced costs and improved quality in the finance function and we have a plan to make IT more efficient. In commercial optimization, Stacy Stern, our new VP of Sales, has developed a strategy to improve our sales capability and we have more bid activity than ever before. We will also hold more marketing events where we arrange for our customers to shoot our helmets so they can see how good they are for themselves. 2026 marks an important milestone. The transformation phase we started in 2023 will end in 2026 as planned. During this phase, we've fixed a lot and have done much to improve the business. There's more to do this year but we are starting to get our heads up and look to the future as we move from the fixed phase to growth. Our markets are supportive. Defense spending is up, CBRN threats are growing and user numbers are increasing. We are investing more in innovation and are building a strong pipeline of new products, and we're not just reacting to demand, we're shaping it. We have a repeatable and scalable business improvement system that creates the platform for future growth, supported by a strong balance sheet and the potential for acquisitions. In Avon Protection, the order book is -- the order book of $117 million is up 63%. As you can see, both revenue and the order book are well diversified across customers and product lines. This year, we reached a milestone of $100 million of total orders under our NATO framework contracts to 16 countries for restorators, boots and gloves. Each country we win creates recurring revenue for the future. Beyond the order book, our pipeline of opportunities is bigger than ever. We have large potential filter orders from the U.S. Department of War and from the Middle East. Our MITR lightweight Half Mask and powered goggles were launched this year. We have opportunities for MITR sales with the special forces of 4 out of 5 of the 5 I's. This is important because regular forces tend to follow the lead of the special forces. In rebreathers, we won orders with Canada and 2 European Navies and have bid for 2 additional new navies. In addition, we're actively engaged with the U.S. Navy, U.S. SOCOM and the U.S. Marines on rebreather opportunities and expect to receive invitations to tender this year. In Ensemble, we have opportunities for our lightweight chemically resistant suit in the Middle East with NATO and the United States. Overall, our pipeline of opportunities is up considerably and we are going for some big pieces of business. We will not win everything. But with a weighted pipeline up more than 80%, we should continue to grow. We mentioned at our interims that we are working with the U.S. Marines to develop MITR further on a program called ENBD. Since then, we've been awarded another development program by the Department of War as part of their push to combat irregular warfare. The aim of this program is to develop a scalable tactical assault respirator, which they call STAR. I suppose I should be flattered that they've chosen to copy our acronym. STAR builds on the MITR platform and adds functionality and equipment. The exciting thing about STAR is that it has a very wide range of interested user groups, including the U.S. Special Forces, the Air Force, LAPD and the FBI. These programs will enhance the capability of MITR and develop it into a complete system that will create an entirely new market for us. In addition, we've achieved CE and NIOSH approval of the MITR Half Mask and particulate filter, which opens the U.S. Federal market to us. Interest in our EXOSKIN suit increased during the second half. We're optimistic that our lightweight, low-burden suit is what the users want. Two different versions of our EXOSKIN suits have been chosen by the U.S. Department of War for trials, which could lead to the sale of 700 suits. There is potential for a larger program beyond that but competition will no doubt be fierce. We've also won a key order with the Turkish MoD for a full ensemble system, including suits, boots, gloves, masks and CS-PAPR systems. This shows that our strategy to sell full ensemble packages meets the needs of our customers. So far, we're working with technology partners in this area, but there is potential for selective technology acquisitions to help us accelerate. We continue to launch new products to drive growth. This year, we'll launch the next-generation CS-PAPR. This has been trialed at several end-user events, and they love the way it helps enable them to escape from sudden high-threat situations by seamlessly switching to supplied air. We've also developed a new voice protection unit for our 50 series of masks, which we plan to start delivering in the first half. The new unit offers users improved functionality and less complexity. Looking further out, we're working on a new shallow water rebreather and expect to bid for funding to help us accelerate this program. We're also looking to exploit our new multilayer filter bed technology, which provides a far broader spectrum of protection than existing carbon filters. Team Wendy's order book of $146 million largely consists of next-generation IHPs, ACH and EXFIL for the Australian Defense Force. We saw good growth in the U.S. police and first responder market, which was up 15%. And we had another year of very strong demand for combat helm pads and liner systems. Our support for Navy for EXFIL bump helmets has also been a key driver of growth with over 25,000 helmets shipped to the U.S. Navy in 2025. These helmets offer enhanced impact and work with hearing protection, addressing long-standing gaps in legacy systems. The pipeline in Team Wendy is also promising. The EPIC helmet range has taken our leading military technology into commercial helmets. This has helped us win market share. Internationally, we're working with two militaries on new opportunities that look hopeful. We launched RIFLETECH in the first half and have seen encouraging early demand. It delivers elite ballistic protection and all-day comfort in a lightweight mission-ready design. The new pad system is so comfortable that during testing, one user forgot to take the helmet off at the end of their shift. Furthermore, I'm told that the first rule of being in the military is to look cool, and RIFLETECH certainly delivers on that. We've now shipped Rifle Tech to an international military, made our first e-commerce sales and sold units to U.S. police forces. This demonstrates that there is demand for a very high-end helmet in the market. In 2026, we'll launch our most ambitious development program yet with two new ballistic helmets built around our latest technology and our no through-hole attachment system. These will upgrade our range with higher protection at lower weight. We also plan to launch a new generation of bump helmets, offering leading protection and multi-certification to cover a broader range of user requirements. Together, these launches will increase our range into new markets and further differentiate Team Wendy from its competitors. We'll share more at the midyear. Meanwhile, demand for Integrated Head Protection continues to grow. In 2025, we secured a new Department of War funded program to develop a helmet that can withstand an even higher ballistic threat with integrated eye and hearing protection and night vision compatibility. This is important because it positions us well for the next generation of Department of war helmets. As you can see from this slide, we have achieved most of our goals that were originally set for 2027. The only exception is margin where our aim is to achieve our target this year. With regard to risk, we still need to increase production rates on ACH Gen II. We know how to do this, but there is a lot to do. Recruiting good people at the speed we need remains challenging. There is a risk of increased competition on the NextGen IHPS program with a new supplier potentially entering the market. This would take the number of suppliers from 2 to 3 with demand continuing to look strong. The government shutdown currently prevents the delivery of helmets to the DOW but does not slow production. We expect to see a temporary impact on working capital in the first half but no long-term impact. Looking at opportunities, we are bidding for several major U.S. and international programs, which are not currently in our forecast as timing is uncertain. There may be upside here but it's too early to tell for now. The strength of the system does have the potential to deliver higher margins than guided but we remain of the view that it's rare for everything to go right. To wrap up, nearly 2 years ago, we set out to transform the group through our business improvement system. The original transformation projects are largely complete. We've launched world-leading products and technologies and partnered on a record number of development programs, further strengthening our competitive moat. Our markets remain highly attractive with rising defense spending and a record order book backed by a robust pipeline of new opportunities. We have a scalable business improvement system, which is a powerful tool for improving businesses and generating shareholder value. In summary, we see opportunities ahead and believe that we have the people and the processes to realize those opportunities. Thank you very much for listening, and thanks to the guys in the room. We'll now open up for questions. Andrew Douglas: It's Andrew Douglas from Jefferies. I've got a few questions. I'll maybe go into two spots and come back later. On the IHPS, can you explain to us why there's new competition to the market? You've got two people who are doing a good job. Is the DOW wanting a third one? And if a third entrant does come to the market, is it not going to take them a while to get fully up to speed with FAT approval, ramp-up approval, et cetera, et cetera? Mark Sclater: Yes, it's a very good question. We asked the same thing. The answer is that Gentex was slow getting FAT. In fact, I think it failed that first time around. And as a result, the Department of War reached out to another company and asked them whether they have been interested for applying for FAT. Somewhat irritating that Gentex then did pass FAT but the other party was some way down the road of working how to build the helmet itself. So they are now in FAT. We don't yet know whether they're going to pass or not. It is a difficult technical challenge that helmet. And even if they do get FAT, one thing to get FAT is another thing to work out how to make it as we've discovered ourselves, it's quite tricky. But I think there is a possibility that we'll get a third player in the market, annoyingly nothing to do with us because we pass FAT first time around. Andrew Douglas: Second -- just I've got some for Jos, some for Rich. On the M&A side, where are we in terms of the pipeline? I mean it sounds to me like we're now thinking about it. Do we have a pipeline of -- I don't know how many companies you need in the pipeline, but do we have one and then you're trying to work your way through to figure out what's the best? Or do you know what you want to buy? It's a question of when it comes up and at the right price? Mark Sclater: I think it's early days. We are focused this year very much on organic growth and getting the margin into our range. We want to deliver on our promises before focusing on other things. I think this is the year where we'll start to get our heads up and look a bit more externally and go and visit more companies. But with M&A, you have to kiss a lot of frogs to find a princess. And it's going to take us a while to build up a pipeline of opportunities. I think the only potential exception to that is I think we've got a good set of partnerships for suits but there are some options there where acquisition might help us accelerate better than partnerships, but they'd probably be very small. Andrew Douglas: And then just a few quick ones for Rich. On the receivables, how much was it? And is that just a question of you delivering lots in the fourth quarter and get paid in the first quarter? Or is there something else going on? Richard Cashin: No, it was exactly that. So the overhang, $25 million to $26 million was $17 million, all owed by one customer and now all paid by set customer. Andrew Douglas: And then on one of the slides, you talked about a GBP 10 million benefit in '26 from transform basically finishing. Is that all in '26? Or is that an annualized number that we should think about by '26? Richard Cashin: It is an annualized number, but most of it will come from... Richard Paige: It's Richard Paige from Deutsche Numis. Three from me as well, please. Given what you've said on Q4, it sounds like there was not -- for want of a better word, not a scramble but quite a surge towards the end of the period. Could you just talk through a bit more what happened, please? I think you're on the ground lately. Mark Sclater: I don't know if you're set up for that. Yes. I mean the summer was pretty intense. I was actually in Cleveland for 2 months solidly on the factory floor for the entire 2 months. I actually spent the first 3 weeks in the paint booth trying to get that to working, which we did eventually do. We have an automated paint line, but it was not painting in an automated way to start with. After that, we just started debottlenecking the lines and knocking down problems one at a time. I think it was very intense. It was very tiring for people. There were a lot of 12-hour days. I'd say it was also very rewarding though because every week, we could see the production rates coming up and more helmets getting approved by the DoD. So -- but yes, it was a hard push for sure. Not for the faint-hearted and actually, you've given me the opportunity to thank all the team in Cleveland. I mean it was really hard work. It's not -- I mean, they probably don't -- I think they did love having the CEO there for 2 months, but probably in the first week, they say, "Oh my God." But we ended up creating a really strong team, and they work really, really hard. So I'm very grateful to them. Richard Paige: You've alluded to second half weighting for the year ahead. Could you just give us a little bit more flavor around that, please? Yes. Richard Cashin: I think we're trying to get the numbers. So we can come back to that. But the drivers for the weighting are twofold. So firstly, demonstrating ability to hit rate was the important thing for Q4 '25, which we did. In the first half of '26, two things need to happen. So firstly, we need to demonstrate to ourselves that, that rate we have hit is sustainable. And then secondly, as Jos mentioned in his slides, we've got to increase it again by another 50% on one of the helmet types. So there is still a lot to do. And of course we operate [indiscernible] margin level, it is helpful from an operational gearing perspective. So that clearly weights margin a little bit on in the first month, then great. But I don't think we will. I think it will take us the half. So maybe instead of 48%, 52%, think 46%, 54%. Richard Paige: My last one is a little bit selfish. I think of my Christmas stocking list, you've moved all of your facilities to flow manufacturing. In your own words, you moved almost every bit of equipment in the firm. What are you writing a book about, Jos? Mark Sclater: I'm not writing. We are going to -- I think we're going to do a second edition of the strength of the system just to put in some of the learning. So I think we should continuously improve it as we learn ourselves. It's one reason -- I've actually got a longer deck of what we learned over the summer in Cleveland that we've started training our people internally on you've just got one slide from it in this deck. But I actually do have a new mission. I don't think we're very good at helping our people transition from being technical specialists to leading teams. So I want to write a training program around that to help them kind of make that important career move from technical specialists to leader of bigger teams. We have had a number of people where I think we probably could have helped them more than we have done. So that's my next mission. Richard Paige: [indiscernible] Very grateful for having something to do to keep him busy in the afternoon. Toby Thorrington: Toby Thorrington from Equity Development. Question is all for Rich, I think. So good improvement in gross margin in the period. Scrap looked like a decent size. Scrap reduction looked like a decent sized contributor to that. If I read the chart correctly, scrap rates not much more than 1% now. Is there much more to come from that? And what's the gross margin outlook generally? Richard Cashin: That's 2 questions, that's cheating. I finished yet. On scrap, yes, there's plenty more to go. I mean, interestingly, I remember standing up here 2 years ago pointing out that we were scrapping $1 million a month in one of our factories. That $1 million has now gone down to $0.25 million, which is obviously great, but that's still $0.25 million a month that we're scrapping in that factory, and we've got 4 factories. So there's still plenty to go at on scrap. Gross margin improvements, we do expect that they will continue to come through. We've got the annualized effect of closing Irvine that we expect will come through in 2026 and a lot of that will come through in gross margin. The cost of doing business on an operating level in California is somewhat different to Ohio. So that will come through in gross margin. Going the other way, of course, as we increase ACH deliveries by another 50%, that will be dilutive to gross margin. But I expect to see good solid progression in '26. Toby Thorrington: Okay. And relatedly, but further down the P&L, I think SG&A increased more than revenue in the period but it's sort of consistently so first half, second half. Just what's behind that and the outlook again for that, please? Richard Cashin: Yes, that was the $7.3 million bar that I picked out in the operating profit walk. And I picked out because it's healthy SG&A, that's kind of investment in future growth. So you've got R&D in there. And don't forget, we capital -- we expense almost all of our R&D costs now. So every dollar we spend is an effective headwind in the year. But it's also sales and marketing. Jos called out the new appointee to head the sales team. The activity of taking helmets out to customers and shooting them or allowing customers to shoot them, that doesn't come for nothing. But it's an incredibly high-quality investment in our product. It allows customers to pick it up, play with it, see it, see what it's capable of and then buy it. So pretty good quality investment in SG&A. Actually, run rate SG&A, which is all the stuff that we've always done, came down year-on-year despite a 14% revenue growth. Mark Sclater: Yes. We have -- it's a good piece of analysis that we have a view that many companies are not thoughtful enough about reallocating resource. And what we've done is we've taken a lot out of what you might call the back office and operations. And then we've invested into the front end of the business, sales, marketing, bids. We've stepped our bids because we've got a lot more bids, so we had to recruit some people to support that and R&D. And that was always our intention 3 years ago to invest more into that area. Toby Thorrington: Sure. Okay. And final one, just on cash, I'm not sure whether transformation costs and cash out were aligned in FY '25. But is that -- will that be the case in FY '26, $6 million all in cash out? Richard Cashin: Yes. So '25, no, it wasn't aligned because $3 million of the transformation was accelerated depreciation, which is obviously noncash. We've now done with accelerated depreciation. So basically, all of '26, this $6 million will be cash. Andrew Humphrey: Andrew Humphrey at Peel Hunt. Just a couple. Just building on that question about investing for future growth. Clearly, the year ahead guidance includes a fairly meaningful step-up in self-funded R&D and CapEx. Sort of -- and that kind of seems to match up with the pretty kind of full list of bids and opportunities that you've outlined in the statement. Maybe can you tie those two things together? Does that kind of step-up in the money you're investing in the business kind of tie up to conversion of 50%, 75%, 90% of those opportunities? How should we be thinking about how that kind of gets toggled next year? I've got one more. Richard Cashin: Do you want to start on that? Mark Sclater: I think you go for that. Richard Cashin: I mean talking about the jump from '25 to '26 is actually quite hard because it's contingent on a lot of things happening that we don't yet know will happen. So it might be easier if we look at '24 to '25. The sort of things that we were investing heavily in, in 2024 included finalizing development of the Half Mask, sort of getting beyond 50% through the development of the goggle that go with the MITR system and essentially starting and finishing development of RIFLETECH. And all of those things have started to contribute to revenue in '25. So if you think about that linkage, that's quite important. The other thing I would think about is Avon Protection is an international business and has been for 20 years. So very significant sales outside of the U.K. and U.S. Team Wendy is not in that same situation yet. 90-something percent of everything that Team Wendy sells is inside the Continental U.S. with the balance really being the Australian Defense Force. If Team Wendy is to grow in the way that we think it is capable of growing, it needs to push its boundary into the Rest of the World, which requires investment. And so we've talked about investing in sales. We've talked about investing in marketing. A large part of that push has been building a sales team that's capable of addressing international opportunities. And that is a team that is qualified to talk to international customers in a language that they understand. U.S. Department of War customers have a very specific language. U.S. police forces have a very specific language. That doesn't always translate into international customers. Mark Sclater: I don't know whether this is answering your question, but there's obviously a bit of a -- there's a period where you have to develop a new product, which takes time, probably quicker on helmets than MITR, MITR took us about 18 months. Then there's a period where we have to seed the market, build the marketing materials, they have to assess it. That probably all takes you a year. We're starting to see RIFLETECH sales. We're starting to see a lot of interest in MITR but actually it's this year that the sales should step up on those. The new helmets we launched, I think they'll probably benefit us maybe the back end of this year, but probably the real sales are going to come next year, 2027 on those. Suits, we actually developed the suits maybe 2 to 3 years ago. We probably carried on refining them. They're probably the best. We would say they're the best chemical resistant suits in the world. They're way lighter than anyone else's. They're more breathable but it's taken us a long time to get the market to buy into the fact that they are an improvement over what's out there at the moment. And now suddenly, we're seeing customers super interested in them, but the sales at the moment are very small suits. So it's kind of all upside for us. And then the new -- the bid team we've got, again, we're bidding for a lot more of it, it's going to take us a while to see it. And the new international sales team in helmets, we're bidding for more there as well, but it's going to take a little while to come through. So this could be a year where we start seeing all the bidding activity from '25 coming through in 2026. You also asked about CapEx. I don't think we need a lot of CapEx this year. And the guys, we have a phrase internally of used wisdom before money. The area where we're absolutely stacked at the moment in addition to helmets is boots and gloves. We've got a very long order backlog. We bought 4 secondhand presses from another company that's sort of shrinking in the U.K. We're refurbing those. They cost us like $15,000 each. They're $250,000 new. So we've got basically no depreciation on them, so that should let us be very competitive. Andrew Humphrey: Okay. And maybe one more on U.S. government shutdown that you called out as a risk factor and particularly around the working capital impact. Like clearly, we're through a phase of that now and one would hope that kind of in the next few months, things will normalize. But have you sort of put that down as a risk with sort of half an eye on what may happen again in January? Or is that just that it kind of -- it all takes time to work through the system? Mark Sclater: Before the latest movement in the shutdown ending. But I would say actually, our program office was very helpful. We have a plan with them that we could actually carry on shipping ACH and carry on being paid for it even in government shutdown. So it was only IHPS where we were making but not shipping. Could we get another shutdown in January, perhaps, but we would expect that still to apply. So it would only be IHPS affected. The other thing that was quite interesting about the shutdown is our program offices did not shut down because they're essential. And perhaps more interestingly for us, the suits program with the U.S. DoD, they were furloughed, but then they came back and they issued the contracts and then they went back on furlough. So I guess what I'm saying is it's so important to the U.S. government that they actually took people off furlough to issue the contracts. Andrew Humphrey: Going back to the rebreather in the U.S., we had a deal a couple of years back in those big numbers. We've now got 3 customers would appear. Now it might be one customer in 3 ways. I don't know what 3 different customers -- so is the opportunity there as we kind of previously thought? And does that include the shallow water thing is that a non-U.S.? Mark Sclater: They're still refining their requirements. Some of them seem to want everything, something that does deepwater and shallow water. I think we're going to end up developing a shallow water variant. But the numbers are the same for the Navy and then Marines and Special Forces are on top of the original numbers but they are smaller. But you certainly look at 700 or 800 units, but we may not win. I think we're working with them closely and I've had a number of meetings with them so as the team. I'm sure our competitors are doing the same. Andrew Humphrey: Still down to 1 or 2 competitors? Mark Sclater: Still seems to be the same number of competitors. touch wood, we still haven't lost a bid but that could happen at some point. Unfortunately, it's a capitalist world, and we have competitors. Thank you for coming.
John: Good morning. Welcome to LifeWay Foods Third Quarter twenty twenty five Conference Call. On the call with me today is Julie Smolansky, president and chief executive officer. Bye now. Everyone should have access to the press release that went out this morning. If you have not received the release, it is available on the Investor Relations portion of LifeWay's website at www.lifewayfoods.com. A recording of this call will be available on the company's website. Before we begin, would like to remind everyone that the prepared remarks contain forward looking statements. The words believe, expect, anticipate, plan, will, and other similar expressions generally identify forward looking statements. These statements do not guarantee future performance, and therefore, undue reliance should not be placed on them. Actual results could differ materially from those projected in any forward looking statements. LifeWay assumes no obligation to update any forward looking projections that may be made during today's call except as required by law. All of the forward looking statements contained herein speak only as of the date of this call. And with that, I would like to turn the call over to LifeWay's president, chief executive officer, Julie Smolansky. Julie Smolansky: Thank you, John, and good morning to everyone joining us. As always, we greatly appreciate your interest in LifeWay Foods. I'm thrilled to announce yet another record breaking quarter for LifeWay Foods. This quarter significantly surpassed our previous high set in Q2 and further showcases our unique and powerful world as we continue to define our industry and deliver outstanding results across the board. Before diving into the details, I wanna applaud our incredible Likely team. Your relentless execution, innovation, and commitment to excellence are the driving force behind our consistently extraordinary results, and you continue to raise the bar every quarter. In the third quarter, we delivered record net sales of $57,100,000 a 24% increase year over year, and an approximate 29% increase on a comparable basis when adjusted for two strategic modifications to customer relationships that we initiated in late twenty twenty four to prioritize high value brand strengthening opportunities. This growth was entirely volume led and driven by the explosive demand for our flagship lightweight keeper and high protein lightweight farmer cheese. This growth is even more impressive when considering we delivered it on top of a strong 13% increase in 2024. This marks our twenty fourth consecutive quarter of year over year net sales growth. In other words, six full years of uninterrupted growth. To put that in perspective, year to date, we achieved net sales of a $157,100,000, which is an incredible 123% increase when compared to the same nine month period six years ago in 2019. We're consistently setting records at LifeWay and have been doing so for years. Our growth trajectory is consistent and sustainable, and it's accelerating strongly as we continue to cement our position as the undisputed leader in in Kefir And Help Drive Growth In The Functional Dairy Space. Our Outstanding Track Record Of Growth Recently Garnered Nationwide Attention As We Were Named To The Time America's Growth Leader 2026 list. We secured the thirty third position out of a 101 distinguished companies and ranked as the number two food and beverage company, highlighting our strong growth financial stability, and leading market performance. Our business is rooted in humble beginnings and has succeeded through resilience, community, and the unwavering belief that healthy food can change people's lives. This recognition is truly an honor. The lightweight portfolio is positioned at the intersection of numerous consumer including the demand for protein rich probiotic functional foods. Heightened awareness of the gut's critical role in overall wellness, and the rising prevalence of Americans on GLP one seeking nutrient dense foods that naturally support digestive health. As consumers have increasingly embraced the vast nutritional and gut health benefits of our delicious products, They are flying off the shelf faster and faster. Which is driving our surging product velocity. We are at the forefront of these trends, which show no signs of slowing down and we are investing heavily in our marketing efforts and manufacturing capabilities to support our accelerating velocities and comfortably meet the growing demand for the lightweight brand. Alongside our outstanding top line performance, we delivered meaningful growth across our core profitability metrics, Our gross profit margin in Q3 was 28.7% up an impressive 300 basis points from last year and up sequentially compared to our strong Q2 margin performance. This margin expansion reflects strong volume growth of our core LifeWay products, efficiencies aided by our Waukesha facility improvements and favorable conventional milk pricing. Selling expenses were $5,000,000, up slightly from last year as we continue to invest in marketing, sales activations, and retail expansions to heighten brand awareness and sustain our significant growth. Our sales performance in 2025 demonstrates that these investments are paying off. Product velocities are accelerating, We are driving trial, and our loyal customers keep coming back for more. Net income was $3,500,000 or 23¢ per basic and diluted share compared to $3 or 20¢ per basic and 19¢ per diluted share last year. This strong double digit growth on the bottom line further shines a light on our operational and our ability to seamlessly convert top line strength into profitable results. I'll now touch on ongoing modernization of our state of the art Waukesha facility. This strategic expansion continues to progress as planned, and we are on track to double manufacturing capacity and enhance our operation efficiencies by the 2026. In September, we completed the first step of our facility optimization with the successful installation of additional fermentation tanks, which are used to combine raw milk and the live kefir culture during the fermentation process to make our kefir. As for next steps, we have recently initiated critical infrastructure enhancements to our refrigeration capabilities and milk processing sys system with plans to break ground on the facility expansion in early twenty twenty six. We will realize the full production capacity benefits and including more than tripling our bottling speed upon completion of the project in 2026. Enabling us to meet the accelerating demand for our products while maintaining our exceptional product quality standards. To date, in 2025, we have invested over 9,000,000 in this project. And upon completion, we estimate the total and then investments of approximately $45,000,000 in capital expenditures. This expansion is a pivotal investment in LifeWay's future as we position ourselves to further capitalize on the rapid growth in functional dairy consumer for protein, and associated GLP one trends. Beyond our operational investments, simultaneously keeping a pulse on the consumer and their revolving case stay ahead of the curve on emerging trends. We recently announced MuscleMase, our revolutionary ready to drink functional beverage that delivers a powerful trifecta of 20 grams of protein, five grams of creatine, and our 12 live and active probiotic cultures. This product happens to the exploding creatine market which has seen significant triple digit growth at certain retailers in recent years and is notably serving a growing percentage of With this product, we are advancing functional nutrition by delivering performance, wellness in one convenient and delicious bottle, and we are extremely excited for it to begin shipping to retailers. Our first of its kind probiotic smoothies with collagen continue to perform very well and are resonating comfortably with the global growing global market for collagen, which is projected to exceed $8,000,000,000 by 2030. We are also expanding our brand reach through strategic partnerships that introduce LifeWay to new consumers through innovative product launches and experiential settings. Our trust your gut smoothie is an exciting collaboration with Joe and the Juice, bringing LifeWay Cafir to a wide audience of Gen z and millennial consumers and es across The United States. Our second partnership with Air One delivered a delicious love your gut pumpkin spice smoothie exclusively for the month of October Perfectly timed for seasonal wellness trends at LA's iconic wellness destination. I'm also excited to highlight LifeWay's nationwide sorority tour, We are currently connecting with young women across the country to introduce them to the brand and the benefits of gut health. The gut health blow up tour is yet another opportunity to build community and sample our core products and innovative keeper flavor fusions. With the next generation of lightweight keeper consumers. Our digital marketing strategy continues to launch LifeWay into the center of viral moments. Across TikTok and Instagram, millions of users are engaging with authentic customer stories about the daily wellness benefits that they're experiencing from life weight care, and we continue to expand our influencer partnerships to drive awareness of our product offerings, educate on their benefits, and showcase the rest with LifeWay Kefir and Farmers Chief. In stores, we continue to be strategic with our marketing dollars and our effectively driving velocities with high visibility programs that meet consumers at interrupted moments during their shopping experience. We also continue to expand distribution across our key product channels, We recently gained everyday placements at BJ's and are currently in rotation Costco in San Diego. Additionally, in Q4, we have visibility into a significant nationwide distribution expansion for our lightweight Farmers' Cheese as it continues to capture the attention of consumers nationwide. What we have accomplished is extraordinary, but our momentum is only in test intensifying. We're well on pace to deliver our strongest annual sales in the company history in 2025, and we're reiterating our target to achieve between 45 and 50,000,000 in adjusted by fiscal year twenty twenty seven? We are operating from a position of strength. Dominating the keeper category, heavily investing behind our key products and expanding into high growth adjacent, all while scaling profitability. With our improving production capabilities and our accelerating tailwinds behind consumer health and wellness, we are perfectly situated to sustain this remarkable momentum. The results speak for themselves. And we're on an incredible growth trajectory as we finish off 2025 and head into the new year. We remain committed to our mission of bringing best in class bioavailable probiotic and foods to our loyal and growing customer base. Thank you for your continued support, and we look forward to updating you on our continued progress when we report our fourth quarter and full year results in March 2026. I hope you all have a wonderful holiday season. Thank you.
Operator: Welcome to the Brenntag SE 9M 2025 Results Call and Live Webcast. Please note that the call will be recorded. [Operator Instructions] I would now like to turn the call over to Thomas Altmann, Senior Vice President, Corporate Investor Relations. Please go ahead. Thomas Altmann: Thank you, Abigail. Good afternoon, ladies and gentlemen, and welcome to our earnings call of the third quarter 2025. On the call with me today are CEO, Jens Birgersson; and our CFO, Thomas Reisten. They will walk you through today's presentation, which is followed by a Q&A session. Our relevant documents have been published this morning on our website in the Investor Relations section, where the replay of today's call will be available. Allow me also to point you to our safe harbor statement which can be found at the end of the slide deck. With that, I will now hand over to our CEO. Jens, over to you. Jens Birgersson: Thank you, Thomas, and good morning to everyone out there. Just as a general remark out of experience is that getting the tech right can be difficult. So if you could help us by giving a feedback to Thomas and just give us a rating on how the sound quality is, it will be good because in the morning's call we did with the press, there were some corners where we were very hard to hear. So if you could get a status check on that from you after this call, and then we see if we need to change tech or do something to improve that. It's a great pleasure to speak with you today for the first time as the CEO of Brenntag. The last 2 months, I've been more or less traveling constantly around the group, spending time with between 100 and 200 customers and our teams out in the region and also the supply partners. And I started during the summer, obviously, to read up on the market and look into the business model of the company and the way we operate. In the last 2 weeks, I've been a little bit more in the headquarter, but a lot of time spent out there and kind of building the understanding of the company starting from the outside. Obviously, I have still a lot to learn, but I'm very, very happy with what I've seen in the beginning and the potential. And so I'm going to share that in mainly 2 dimensions, the short-term priorities and we will not go too much into strategy now. Maybe what -- obviously, it's very impressive to see the global scale and reach and the broad portfolio of the company. It is unknown when you step into a company like this to how much it actually touches everything around us. So that's impressive. But maybe even more impressive in this company, Brenntag, is the skill and commitment of our commercial teams around in the world and how they interact with our customers and supply partners. It is really great to see. And I think that perhaps that is the strongest -- the biggest strength of the company, actually, that we have this very unique culture in -- out in the markets in the front end. And I'm very pleased with that, and I'm very honored to join such a team. And it's great to see that we have that culture and not customer focus. All that said, my initial observations confirm the company's fundamental strength and you see a lot of potential. And if you look at the market, there isn't anything in the market helping. I think we are in the longest trough in terms of chemicals from the downturn after COVID, and yet we haven't seen an upturn. And yet, we are, in some extent, performing. It's not great, but compared to many other players in the chemical industry, the difficult times prove the ability of Brenntag what was our position in the value chain with our market position and value proposition and the way we run the business that we can actually do relatively well even in difficult times like this. And one of the winning recipes is obviously that we stay very close to the customers and understand their needs and keep delivering every day even in a difficult market. If we then look at the potential, for operational improvements and efficiency gains, I like -- I kind of stage a little bit of work in the company. My -- when you step into new business, which I've done before, I've been in the sector a bit before, but stepping into a new company, you need to separate a little bit strategy, changes to the strategy -- the company has a strategy, but changes to the strategy and what we do now, what are the immediate priorities to improve. And I put that on those slides, summed it up in the 3 bullets. So -- and the first one is sales. With the market conditions we have, I haven't said growth, I said sales. We can't control the market turnaround, but we can control how much effort we make on sale. And in some of the changes that we have announced, we are anchoring the company to make us -- make it easier for us from the top to bottom to be even closer to the market and to empower our local sales teams and driving growth by being close to the customer. And there are 2 maybe changes. The first one started already in the summer was that up to now, there was a track where we would split the company in 2 or the disentanglement. And there was an awful amount of internal focus to do that being done on systems or moving assets, shifting businesses. And that has been going on. And we have stopped that work. I've stopped at work. I see synergy of having one company. I see benefit of having scale, but we need to find it. We need to develop that. We need to get better of it. But shifting that internal focus to external is a sound step among other efforts to really make clear to the organization, but the core process of this company is to buy product and to sell it and all the things we do in between. And all the overheads and the support functions, we should all be geared towards supporting that sales. So that's the first priority. The second is lumped it under the words clarity and simplification. We have 2 strong divisions that each have their own distinct role, a market strength and also slightly different business model. You have discussed that before, so it's clear to you. But having the company set up with an intermediate 2 executive committees, then you have the local business units, the regional business unit and a very big central team has also implied very long decision lines with lots of steps, and I will say a bit too much bureaucracy and loss of speed. And what we're doing, if you have read press release or the stock exchange release is that we are removing this one layer and are now putting quite a bit of focus into reducing the number of steps in decision-making. And finally, we have execution. Top line is down, it's still down and the market is not good. And it's not a disaster at all the market, but it hasn't come around. But we need to execute in several ways. And one execution topic where we haven't done so well until now is to execute on cost reductions. There was a program announced 1.5 years ago, maybe a bit more. And we need to execute on a cost out because the mismatch between the cost structure and the increases we have had with these duplications of functions, management teams and the extra layer that has been introduced has come at a high price. And I think a time to reset that and start to work cost out and improve our competitiveness. So if we then go into those kind of headline focus areas on the short term, will we turn to the next slide, so just outline some of the actions, starting from left to right. I've already covered sales, and it doesn't mean I don't want to grow. It's just that the immediate action is to get people out on the ground and get the organization to back up the sales effort on the customer proximity and the customer closeness. And the good thing with that is that we have a culture and a crew in this company that really want to do this. So this is more of unleashing them and getting them back and stop focusing on splitting and allocating businesses and internal transfer cost and what have you. We still do that, but it's not a focus, so that's the left box. Second one on the simplification. We want to simplify how we make decisions, shorter change. I want smaller, more empowered teams, faster cycles and agility is an overriding goal with very clear ownership of the business. We don't run a matrix. I don't want to run a matrix. I want very straight lines out into the business. So what we are doing here is that we are putting together an executive committee where we will have all the business leaders. We will have 3 CEO, CFO, COO, HRO in there, so some functions that have consolidated. This might change over time. We will evolve this as nothing is static. And -- but it will mean that we have an executive team that has members in it, that are really sitting in the market, interfacing with customers every day. The German Managing Board that traditionally is seen as the highest level of management in the company, we are detuning that a little bit. It will be only Thomas and I in that. Surely, there will be decisions that have to be taken on that. But as I see it, the management team, the executive team, as the Executive Committee. And that means that the distance from the front end to me is going to be very short because I have a direct report in every market, and I will oversee that myself. And I'm convinced that will improve the hands-on operational management. And I think in the distribution business at the core is a very simple business. I mean we mustn't overcomplicate it. We need to roll up our sleeves and manage it and get things done with a minimum of overhead. And I think this structure will serve us better. I made 2 additions or announced 2 additions. The one is CHRO, a new HR Director. We haven't really had that in Brenntag and distribution business is a people business. She -- Francis joined us 1st of November, which is already here. And then on the operations, the goal we have is to build a world-class distribution company or distribution supply chain. And therefore, I've also recruited the COO, and he will report to me. He will be part of the EC, and he will join us latest 1st of April because I see a potential of the whole supply chain organization. And supply chain for us is basically from product into the system until it's delivered to the customer. With regards to the 2 divisions, we have one company, but we have 2 businesses. We have the Essential division and Specialty division. No change to that. That was good. It was healthy. It's different drivers for success. So we maintain that. And I value both of them. I want to grow in both of them. So there's no change to that. But I see the backbone and the scale of what we have, Brenntag has a lot of assets. We have a lot of good assets in the company. I want to leverage that scale in those assets for both divisions. And that's the change -- that's a big change compared to the discussion in the last couple of years. So when you look at the numbers, I admit the scale effects hasn't really come out, but Brenntag has grown. And some of you have pointed that out. I agree with that, and that's something we need to work on. But when you look at the potential of getting scale effects, they are there. We have some of it, but we can do more of that. So to sum up, I mean, we are not doing the split. And the reason is that the multiple differential between these 2, the value and the cost of doing it and the dissynergies, it doesn't make sense. I would also say on that note that, from an M&A perspective, I see a whole lot. I mean a key driver for top line, you have organic growth that we need to work hard on. But also acting as the consolidator of the industry, a lot of the targets. And I look just in these 2 months at 12 targets, very few targets are pure, pure, pure play. They have a little bit of both. And I think there is a risk with being too streamlined and too segmented that you lose a lot of M&A if you all the time have to divest one portion of the company you buy. And so I think that having both businesses in the company will also make it a little bit easier to find good targets, and we have a good pipeline of targets. So to sum up, we want to operate 2 market-leading divisions within one group, respecting the 2 business model, commercial focus in both. And then going after growth, doing normal strategy and implementation for those within the strategic framework we already laid out, and we will review it, of course, but we continue with that, but we do that with one backbone in terms of supply chain. It doesn't mean that all assets will sit centrally, not at all. We keep the assets out in the businesses, and they're going to also be devoted assets assigned to each one of them. And some are shared, some are devoted. And then third, on the execution. Execution is super important. And when I reviewed the historic initiatives that have been going on, I felt maybe we have done -- tried to do a little bit too much in parallel. So I want to move towards a more focused execution mode. And of course, with quicker and shorter decision-making changes, I'm going to keep our eyes on the execution, and that has already started. And I think that's incredibly important for us in order to deliver cost savings. We are looking as we brought in the stock exchange release into short-term and medium-term cost out. And the philosophy here will be that we start close to me. We start at the top. I have headquarter staff, I have functions. I want to reshape that into a small, much smaller team. And so that's the first stage, and we're already starting that, reducing headquarters and support function overheads. And then we will move out through other functions. And then as the COO arrive, we will get more and more close to the supply chain and all the action there. But basically, that's the staging that first remove overheads and duplication and slim that down. And then after that, we get on to supply chain and operations. But I need to do a little bit more work on that before we start. The other aspect of it with overhead has already started and is starting to roll out and being quite detailed as we speak. So that's the short to medium term. Then if we look at the long term, yes, we need to review the strategy. It doesn't mean we change all of it, but Brenntag has run in a certain way for more or less 150 years. And we have the 2 businesses now. We are doing a strategic review. It has started, and I will come back to that in the second half of 2026. One of the goals will obviously be to have the most competitive and scalable global distribution supply chain and to get back to growth, not only because it's a market that grows, but make us more capable of growing. But I will come back to that. Now the focus is on the immediate priorities that I outlined. If we go to the numbers on Slide 9, it is -- you have seen those numbers. You have read them. And I think that there is nothing in the macro environment that has really changed. The tariffs are there. We have the Chinese overcapacity coming in, in Europe, Latin America, South Asia, almost -- in 2024, it was 33 billion Chinese imports into Europe of chemicals and probably increasing this year. I haven't seen the numbers. So that competitive complication is here for the principals, maybe less of a problem for us. And then you still have the instability in the Middle East. We have the Ukrainian war, we have the trade tariffs. And we only have some countries that have put in tariffs to protect themselves in Mexico and the U.S. And so we see really an overflow in Europe. But again, we are relatively fortunate in the way we can handle that. It speaks to the business model of a distributor in this space. And if I were to look at the numbers, what numbers are -- yes, obviously, we are not overly happy with the numbers as such. We would like to get back to growth and have a better market. But I think some of the numbers worth emphasizing is that if we take the EBITDA margin that in -- with near 5% decline in the top line, that it only goes from 9.1% to 8.9% this year and that we have managed to get a bit more cost reductions into that to protect the gross profit decline and gross profit margin and most of all the EBITDA margin and EBITA margin. And when I compare that to the market, we have done maybe better than some other players that have maybe difficulties. So that's -- those are the positives, I would say, of those numbers. If you move to the slide of sales development, basically the same decline in both businesses. And regionally, we have now maybe we can see a slightly better volume in Material Science, but still strong competitive pressures. But otherwise, I would pretty much say that more or less, the markets are subdued on both sides of the business, both businesses. Going on to the regional development, Material Science here, volume-wise a little bit better maybe than some of the other businesses, but quite strong price pressure. And in Latin America, the growth is primarily due to the acquisition in Mexico. And apart from that, I would say anything is new on this. But if you take an example of Latin America to just give you a flavor, Brazil, Chile, Peru, Central America, Guatemala, heavily, heavily impacted by Chinese imports, Mexico not because they put tariffs and then you have other countries like Colombia, for example, that protect themselves a little bit more, the market more safe from Chinese import, and we see a better business. Argentina also doing a little bit better, but it varies a lot. But generally, you see all over in these regions, the impact of that. That said, we are navigating it, and we are handling it. And it's not a huge problem for us compared to some of the other players in our industry. Over to you, Thomas. Thomas Reisten: Thank you, Jens. And as well from my side, I wish you a good afternoon. So I would like to now look at the development of our income statement and this was a particular focus on our operating expenses and bottom line results. Our results are overall characterized by a persistently challenging market environment with muted customer sentiment and lower demand. We've generated an operating gross profit of EUR 947 million in the third quarter of 2025. Our operating expenses stood at EUR 617 million in total, which is a net cost decline of 1% compared to last year on a constant currency basis. This includes additional costs from newly acquired entities of EUR 10 million. Our cost containment program delivered EUR 45 million of savings this quarter, which is visibly reducing our underlying OpEx base. And this is EUR 30 million more than we delivered in the same period of last year. The positive savings effect demonstrates our strong commitment to cost control, Brenntag's ability to maintain cost discipline. It's even in a challenging business environment. We generated an operating EBITDA of EUR 330 million. It's down 6.7% year-over-year. And then the depreciation amounted to EUR 87 million. That's leading to an operating EBITA of EUR 243 million, which is 9.2% below last year's figure. Compared to the third quarter 2024, our operating EBITA was impacted by the following developments. First, FX effects reduced operating EBITA by EUR 14 million; second, acquisitions added EUR 5 million; and third, organically, the operating EBITA declined by EUR 29 million compared to the third quarter last year. The group EBITA conversion ratio stood at 25.7%. Looking at the EBITDA conversion ratio, that reached 34.9%. I'll now briefly comment on the development of special items below operating EBITA. In the third quarter, special items had a negative impact of EUR 17 million. This includes costs for our strategic projects in the amount of EUR 8 million, which are mainly related to severance and advisory expenses that also helped to achieve the desired cost reduction target. Furthermore, we incurred expenses for legal risks, which mainly are arising from the sale of talc and similar products in North America in the amount of EUR 16 million. And then lastly, other special items had a positive effect of around EUR 7 million. That's mainly related to insurance reimbursements in connection with the major fire at a warehouse site in Canada in 2023. Earnings per share were EUR 0.78 in the quarter, which is slightly lower than previous year's figure. Let us now have a look at the free cash flow development. Third quarter of 2025, we've generated a free cash flow of EUR 316 million as compared to EUR 247 million in the same period of last year. The decline in earnings was offset by slightly lower CapEx and the cash inflow from working capital compared to the prior year period. In the prior year period, we saw a slight cash outflow for working capital. Lease payments were also slightly lower compared to the prior period. And then our free cash flow demonstrates the resilience of our business and our countercyclical cash flow profile. The working capital turnover stood at 7.3x as compared to 7.7 in the third quarter of 2024. Leverage ratio, net debt to operating EBITDA stood at 1.9x. I would like to close now with the outlook for the remainder of the year. For the full year 2025, we specify our operating EBITA guidance towards the lower end of the range provided in July of this year. We expect the unfavorable euro-U.S. dollar FX trend continue, and we assume an average rate of EUR 1.16 for the fourth quarter of 2025. As mentioned earlier, the overall market environment continued to be characterized by a high degree of economic uncertainty. That's driven by ongoing geopolitical tensions and global tariff discussions. The noticeable slowdown in demand continued throughout the third quarter, and we expect a similar environment in the fourth quarter of 2025. At the same time, our results in the third quarter showcase our ability to seize business opportunities and to realize cost savings, despite the persisting macroeconomic challenges and the continued economic volatility. To further address the challenges ahead and to improve our performance, we have taken action to enhance agility and execution discipline, driving sales and efficiencies. This includes an acceleration of our existing cost containment program, as Jens has pointed out. A key element here is organizational complexity as well as simplifying and streamlining administrative processes. Our decision not to consider a full separation of Brenntag any longer further enables us to eliminate buildup duplications and overlaps within the organization. So with this, I would like to close the presentation, and I'm now very much looking forward to your questions. Operator: [Operator Instructions] Our first question will come from Annelies Vermeulen with Morgan Stanley. Annelies Vermeulen: I have 2 questions, please. So firstly, on the cost program. You've announced today that you're accelerating the cost containment program, including, I think, some additional headcount reduction. But overall, your cost containment target is unchanged for 2027. So could you quantify those headcount reductions? And will there be any additional restructuring costs as a result? And should we expect an acceleration in Q4 from the EUR 45 million of cost out that you did in Q3? And then second question, just on the divisional split. The messaging has been a bit mixed here over the years. You've announced today that this is no longer under consideration. But in the past, Brenntag has said that there was limited overlap between the 2 divisions and a split would make sense over time following a targeted disentanglement. So in your first few months with the business, what have you seen so far that gives you the confidence that this is the right decision permanently for the group and that the synergies between the 2 divisions are material enough to take a split completely off the table? Jens Birgersson: Thank you. So I take the second question. I'll comment the first before I hand over to Thomas. So on the headcount numbers, we have nothing to announce now. I don't feel -- our top priority is selling, simplification and then execute the cost-out program. But -- and that program has been there for a while. But we don't put a number on it, and we will probably try to avoid having a number. You will see how the cost is being reduced, and we have initiated discussions with Works Council and all the rest. And along the way, we will update. But I want to avoid to say this is the big headcount number and talk about that now. It's about getting cost out, but there's going to be reductions in many places. So maybe Thomas can comment the other aspects of that question, and then I'll come back to the split. Thomas Reisten: Yes. So as you will remember that we have actually been announcing in the past was the EUR 300 million cost reduction program. If you look at the first quarter, second quarter, third quarter delivery on that, we're actually now fairly well on track in order to deliver actually the savings that we've announced for this year. So the EUR 30 million achievement in the first quarter, EUR 30 million in the second, EUR 45 million now as a run rate in the third quarter. Remember, that was started already in the year before. So there was EUR 15 million in the same quarter of last year actually already. So firmly on track from that perspective, we had said as well that we will continue to incur restructuring costs. I mean overall, as one component of the costs that are actually one-off costs in order to realize that. We had said about EUR 300 million for the whole program to achieve the EUR 300 million run rate savings by fiscal year '27. So that's what we will continue to use in that context as well with headcount restructuring. Now obviously, and Jens has already commented on that, and I've commented here in this quarter again on the fact that we are accelerating and broadening the overall program. So that's what we are really driving and we will start to reduce complexity. We'll start to deduct layers and the context of the split, not continuing in terms of further splitting this, that will actually avoid that we have further duplication of resources, and we'll roll back on that as well on some of those resources that are duplicated. So -- and that is then in the end, leading to us being able to accelerate this program. Jens? Jens Birgersson: Yes. I'll come back to the other one. I don't know if it has been said that there weren't any synergies between the businesses because that also been a misstatement in that case or because there are clearly synergies between the businesses. It goes from the operation, it goes from the infrastructure, warehouses and even market access. Even if you have global sales forces, we are selling to the same. And then you have the whole multiple differential of the 2 businesses and the nature of the businesses with a relatively small Specialty business and the difficulty and the cost of splitting them and the extreme effort that went into that. And then finally, -- so if you're on top of that, would also get scale effects out of being an EUR 15 billion company with the overheads, the infrastructure, the assets and maybe having all these assets and utilizing them for both businesses, I at least couldn't see that it was a benefit to split. And it has been awfully difficult to try to make progress on it. And then finally, I would also -- when I look at it, see that there is an M&A runway where you have a lot of targets, there are a lot of companies that do a bit of both businesses. And I think also it's more difficult to find to pursue your role as the role we have as a consolidator of the industry if you are split because if you make acquisitions of these companies, you can either pretend that it's a pure play or you have to split it all the times to become a permanent company to split. So if we were only Essential company and we were acquired company, we keep finding Specialty businesses in there because most companies in the segment where we buy, they have naturally evolved into both businesses in the same as we did. So those would be my main arguments why it doesn't makes sense to split. Then the other aspect is to shift the focus from internal to out. We need to be out selling. And on top of that in the strategic review, if we can do a better job of getting scale effects out of this business, and I don't want to go too deep in that today, then I think there's a very strong case to have 2 businesses along backbone. Annelies Vermeulen: That's clear. And just for clarity, my comment was referring to -- in the past, the company has said that there is limited overlap between the 2 divisions. I wasn't referring to synergies. I think you've said in the past that actually, not many of your customers buy from both divisions, and therefore, the split would make sense. So that's what that was referring to. But thank you for the detail. That was clear. Jens Birgersson: If you take -- you have -- we have this peculiar situation that we buy and sell, of course, to our customers. So almost every customer we both buy and sell to. So that's one dimension. But then we also have that, yes, there are pure-play Specialty customers and pure-play Essential customers, but we have a lot of customers that buy from both also. Thomas Reisten: And then just to build on this point, as Jens has said as well, from a commercial focus point of view, obviously, we like the 2 different divisions in that context. It is about, on the one hand, avoiding some more of the duplication and avoiding actually some of the dissynergies that even actually some time ago had been announced that further split there actually will be some dissynergies of about EUR 90 million to EUR 120 million. And that's the point where we actually believe that we can leverage a joint backbone much better in order to serve both of the different business models from a commercial point of view. Jens Birgersson: Yes. Then there is another aspect, the definition of a Specialty business. There has been discussions about that. But within the Essentials, we also have vertical businesses focused on a business segment. If you take, for example, oil and gas, that's a big vertical for us. It's somewhere in between -- it's regional in this case, but you have a lot of domain competence to serve that segment. So you have it like a slide in the grid that we have in Essentials. So you have pure Essential, then you have verticals, data centers, for example, it's a vertical. You have electronics manufacturing, where we have both businesses servicing an end market in a vertical. And then you have the pure Specialty business, pharma or something like that. So it varies. But if you go into pharma, we are selling all the way out to commodity products into pharma too, but with different purities. So you have a lot of sliding definitions of Specialty and vertical. And I think to be really successful, you need to learn to master several of those models, if you want to keep wrong. Of course, there are some excellent pure plays out there, but I would expect if you open up the hood that you will see a lot of extras from the wrong business coming in through the acquisitions because that's what we found at least when we acquired companies. Operator: Our next question will come from Tristan Lamotte with Deutsche Bank. Tristan Lamotte: Two questions, please. First is, Jens, I'm curious, given you've just come in. EBITA is likely to be down about EUR 150 million this year or 14%. And that's despite a positive contribution from M&A. The negative FX impact there is large, but it's not the main driver. So in the organic decline portion, how would you kind of split that out? And how would you rank drivers like lower volumes versus lower pricing or the indirect effect of lower pricing? And maybe kind of linked to that, what do you think is the risk that this is kind of the new run rate, the new structural norm? Is this a cyclical low? Or is it something that will improve? Jens Birgersson: Yes. So on the specific numbers, I'm going to hand over to Thomas in a bit. I think we are on a -- I don't dare to say structurally low. It's kind of staying low. But I think if you start to get some growth in the end markets and a bit more volatility into it, we will do better. And as soon as we have the volume growth -- we actually haven't suffered so much on pricing yet. If you look at the average sales price, relatively small changes in price, but it's still a high pressure due to the Chinese aspects. And we, of course, do business with that too. We distribute those products, too. But then you have an average lower sales price when -- if the mix goes over there and that impact us. But I think if the market comes back to a bit of growth, then I think you're going to see a lot of good things. I don't think it's a permanent structure. Then, of course, you have some structural issues on top that we saw it overnight, Mexico put in tariffs. We have none of these issues. We have the massive difference of energy prices between Europe, maybe Germany, EUR 0.40, EUR 0.43 per kilowatt hour. China runs at maybe EUR 0.07 if you're a big principal and U.S. on EUR 0.12, EUR 0.13. You have these big competitive differences. But again, those differences, technically, it doesn't impact us so much because we are not a producer. So we are not suffering with this massive structural problem in the industry where we sit in the value chain. Maybe I hand over to Thomas on some of those more margin-related questions. Thomas Reisten: Yes. So I mean, you were alluding to, obviously, the specification of our guidance in that context. And I mean that we are now saying that we go -- that we take the guidance towards the lower end of the EUR 950 million to EUR 1.050 billion range. And I mean, what's behind that is that we continue to have volume pressure in the market. So the 3.6% actually volume reduction that we have seen in the quarter. And overall, actually, when you look at that as well, there's some pricing pressure still affecting sales then as well. Having said that, our margin management, so focusing on to the topic of GP per tonne leads to us still being able to hold the margins. So overall, we have seen that pressure continuing, and that was actually leading to the lower end -- towards lower end of the EUR 950 million to EUR 1.050 billion. If you think about the FX topic, so far, in the further quarter -- now in the third quarter, we have seen stabilizing towards what we have guided as well. So the EUR 1.16 is, as you will remember, the exact same number that we actually have seen as the basis for our guidance in the past. So the main differences are here on the commercial side of the business. Tristan Lamotte: And maybe second question. I'm just wondering, I know it's early days, but I'm wondering how you think about the company's strategy in China, given I think around 80% of the growth in chemicals according to some forecast is set to come from that region in the next 10 years. Is China likely to be a focus of the new strategy? And is it somewhere that you could focus on to drive growth? Or are there limitations to that? Jens Birgersson: I mean if we look at what we have done in China, we have done quite some investments in Essentials. And it's a topic of profitability and see what space we can have in the market. On the Specialty side, China is a very interesting market and the whole of Asia fundamentally is a majority Specialty market for us now. And then the strategy that one needs to figure out is what should be done on the Essentials in, for example, India and China going forward? In China, you have an underlying challenge when you get into that game with profitability in Essentials and you need to decide whether you're going to play that or not, challenging market. And then India is another one where you will, of course, have massive growth over the coming years, and you need to figure out what is the stake you're going to have in India. In almost any business, you would have liked to start quite far into India. We are not so far yet. So definitely, we need to look at that and decide what we do about it. But that said, we are in India. We are doing business in India. But we haven't done maybe a thrust into India yet, but that needs to be decided. And then I'm talking Essential. On the Specialty, we keep growing the business that we have done for several years. Operator: Our next question comes from Gaurav Jain with Barclays. Anil Shenoy: This is actually Anil Shenoy on behalf of Gaurav Jain from Barclays. Just one question from me, please. I was just wondering how are you thinking about the outsourcing trend of principals to distributors. I think previously, the previous management, of course, and even your competitors have mentioned that during a macro slowdown, principals tend to increase their outsourcing to a distributor. And are you seeing anything like that right now? Have you benefited from it by any chance? And sort of like a follow-up question to that. I saw that one of the companies Tate & Lyle, which is ingredients company, they acquired CP Kelco. And they mentioned that they are migrating some distributor -- distribution relationships to a direct service customer model as a part of its integration strategy. And apparently, they are increasing their revenue by 10% because of changing that. So how do we look at this? I mean is this a trend that can continue? And if so, would that be negative for the distributor companies? Thomas Reisten: Yes. So I'll start, and obviously, then I'll invite Jens to add up on that. But I mean, the overall trend that you're describing of outsourcing distribution by a chemical producer or a principal towards actually distribution, we see continuing actually to happen. So we have a number of sales agreements or distribution agreements where this continues as well and where we are actually winning those distribution deals overall. And as a consequence, that's actually where we do see the business continuing to grow as well. Now obviously, this is overshadowed, if you like, at this point in time by the weakness of the demand overall. But nonetheless, this trend continues to happen, and we are successful in winning such agreements actually on a continuous basis. So the reverse trend of that, you sometimes see, but the general strategy that actually we will win these games will continue. Jens Birgersson: And here, I can say, I've been -- on your question on outsourcing or in-sourcing going direct or not, with our biggest accounts, I'm talking like the 3 or 4 biggest ones, and it's a downturn. And we're talking here accounts that are multi-hundreds of millions. And I've been in those meetings. The team is growing together both ways. So that means we're selling more and they're putting more through us. And I think the philosophy we often see is taking the tail end, big accounts I want to have, and then they move up the tail end limit. I want to put more complete packages out to us. And we have a lot of work discussing these issues. So I will say you have both trends and then, of course, if they have big accounts where they can go direct, they like to do that and then leave the tail end to us. So we see both. But on average, the discussions I've been in has been putting more over to us. And there, my position has been -- let's do it in structured good steps so that we do it well because the biggest danger we have here is that when you take over a number of customers from one of these suppliers, if you make a bad job out of it, you don't manage to grow them. And so what we are sitting with now, where we have done some of these deals -- in spite of a declining market, we have almost made a point of trying to grow the volume so that they are happy with our performance. But it's super important that you take it with good structure, good team on it and make it a success. And I think as long as you do those shifts with success, you would get more. And if you miss it up, it stops. So that's what I see. And then you have really, really big principals that are looking into very big moves, and then you never know will it happen. And you also see quite a few principals that might not had it before, but now they have a global responsible person, a regional responsible person, but I meet mostly global responsible people for distribution, where you have much more strategic discussions. So that's certainly ongoing now, and it's due to the downturn, a lot more is on the table to deal with. Operator: Our next question comes from Chetan Udeshi at JPMorgan. Chetan Udeshi: My first question was just going back to the guidance. So you're saying lower end. Are you then happy with the consensus EUR 971 million? Or would you rather have people at lower end meaning EUR 950 million? Just curious on that. The second question was just on these cost savings. You've shown us this EUR 45 million of cost out. Is there some temporary nature within that? So I'm just curious if you've actually taken out bonus provisions that were taken in H1 and that's sort of amplifying, if you will, the cost takeout number in Q3 by any chance? Because I saw your personnel expenses, we were sort of run rating at something like EUR 365 million to EUR 370 million per quarter in H1, and now they are more like EUR 350 million. So I'm just curious if there is a bonus provision takeout, which is one-off in nature in Q3? And the last question was, can you remind us, you talked about no longer doing the split. How much duplication of cost do you have in the system today that can go away in the next 12 months as you no longer continue on that path of splitting the businesses into 2? Thomas Reisten: Okay. So 3 questions. First question on that was actually towards the guidance. Where would we then see this? Overall, if you look at it, what we have been guiding now, what we've been clarifying or specifying is that we see the range between EUR 950 million to EUR 1.050 billion coming in towards the lower end. That word is quite important. So it is not at the lower end. It is towards the lower end. Having said that, we do expect it probably more in the lower side of it. So towards the lower end, I think, captures it quite well in terms of number. There's a couple of things that obviously still are variable. So how is the demand going to develop? We will continue to take costs out, and that will actually take us to exactly that expectation that I've just been mentioning. So that's on the first question. On the second question, do we incur temporary reductions in costs because of adjusting the bonus provision? That is correct. So we do have bonus provision releases actually in our overall accounts. However, we do not count them towards the program of cost reduction. So when I am quoting EUR 30 million in the first quarter, EUR 30 million in the second quarter, EUR 45 million in the third quarter, this does not include one-off effects. That's in the element where we actually -- where I am talking about inflationary trends already in there as a counterbalance. So the inflation would be higher if we actually would not have actually such elements. So to summarize on that question, when we are looking at cost takeout, we are counting only topics that give us persistent and continuous cost reductions and not one-offs. So that's on the second question. On the split costs, overall, so as you will see that we have already across the business, actually, we continue to take out costs there. What has been announced in 2024 was actually that there are dissynergies to be expected between EUR 90 million and EUR 120 million. So that's a guideline for you to think about what costs would occur if you would have done the entire split. Not all of that has been now created in terms of duplication of costs because we have obviously not done the complete separation. So I think that gives you some good numbers actually to think about what -- in which direction this will evolve. Operator: Our next question comes from David Symonds with BNP Paribas. David Symonds: So the first question that I have, so Life Sciences gross profit per unit was described as meaningfully up for the first half, but only moderately up for the 9 months. Material Science moved from slightly up to slightly down. So could you talk about what changed quarter-on-quarter? Was it an intensification of Chinese competition? And are you seeing pricing pressure also in North America and EMEA? Or is it limited more to Lat Am and APAC? Second question, could you comment on the split of cost savings across the divisions? Because it looks like Essentials did a pretty good job on cost. I'm just wondering if it took a more than proportional split, i.e., more than 2/3 of the total. And then finally, one for Jens. Could you comment on the split of the sales force that you have at the moment in the Specialty division? Do you think it makes sense to -- I think the sales force was reorganized to be vertically aligned rather than regionally aligned. Do you think that split still makes sense? Or with the sort of reversal of the split of the company, could you look to merge things a little bit back towards salespeople covering both Essentials and Specialties by region? Jens Birgersson: So David, maybe I'll take the last one and then I'll hand over the first 2 ones. And I have maybe something to add on Material Science. But anyhow, no, so on the sales force, I mean, I must submit I never almost been in a company where you don't have verticals and regionals and where you have different sales forces. So how we want to run it? I think we have a pretty good setup. We have domain competence vertical sales forces in the Specialty businesses. But we also have that in some of the verticals where we specialize Essential people on the vertical. So that will remain. No reason to do that. And most of all, we don't want to do cost savings on that piece. We want to really make sure we invest in the sales. It's not increases. But when we reduce these costs, as I said, we take overheads. We want to keep that intact. And it's a good setup. But of course, we want to make sure that they stay focused on their job, but never forget that they have a sister and a brother that very often actually sell to the same logo so that we don't close that. On top of that, what we are running is that we have a global team that we can regionalize depending on the customer what they want for key account selling and then also buying the principals. So when we have our vertical business, the Specialty businesses, they take care of that. But there are some accounts where we have so big engagements that we need to set up global teams. And I would say those -- the 2 specialized -- the Essential regional sales force and the Specialty sales force, then we have the key account for the really big customers that we both buy and sell. And then the really big ones we buy from, they demand that we have global organizations. And whenever we step into that global organization, we end up having around the table both businesses with almost all of those logos. So you need to play all of those for, I would say, to sell. And we're going to keep that and refine it more. At the same time, as we get more team play between them without losing focus on the individual business. And I think that domain competence in the Specialty business is really one of the core things. You need to really nurture and build that. Otherwise, you won't sell anything. And of course, you need the mandate, which requires a massive amount of competence to secure the mandate. So we just keep building on what has been built in the last year. Over to Thomas on the other one. Thomas Reisten: So in general, if you look at the North America situation, and this is actually impacting as well Material Science and to a large extent, I mean -- but in the BES side, first, what we've seen is quite a bit of weakness in overall volumes. We have seen actually sales benefiting from slightly more stable prices in that context in the third quarter in North America. But overall, really the volume decrease has been affecting the gross profit overall. What we've seen as well is, and I've been commenting earlier actually on that, that the margin management has continued to help us. So on the gross profit per tonne, we actually see this slightly up across the North America region in BES. If you think about Material Science as a whole, then as well there, so gross profit per tonne in the second quarter has been slightly up. And whereas in the third quarter, it actually is slightly down. So that's the directional changes actually that we are seeing in that context. Overall, volumes remain actually; down in both the second and the third quarter. Talking about cost savings, overall, the cost saving initiatives are benefiting both divisions. So we see in both divisions that actually cost savings are being realized. We do need to continue to accelerate this, and that's what we have obviously committed to where we do see the potential to it. And then worthwhile mentioning too that on the BBS cost, so the central costs of the headquarter, we actually have seen quite a bit of progress and reductions on that already. And we will, as Jens has very much pointed out, continue to intensify that and actually create more savings in that space. So that's a rough direction of how the cost savings are actually affecting the different divisions. David Symonds: That's very clear. If I could just ask a quick follow-up to the last one on cost saves in specialties or sort of margin progression in specialties. What's the reason for the sort of worse margin progression in Specialty? Is there more pricing pressure on that side? Is it with the contract structures in that business? Is it harder to pass through some of this margin management action? Or what's -- what can you say on that, please? Thomas Reisten: So when you look at the overall development in the third quarter for BSP, then the volumes in BSP have actually reduced harsher than they have actually reduced in the U.S. That for sure is one of the drivers in that context. If you look at the overall margin management, they're actually doing quite well on this. So from a gross profit per tonne, we actually see a further improvement in that. But where we do see the main pressure in BSP is really on the volume side. Operator: Our last question comes from Nicole Manion with UBS. Nicole Manion: Just one on the change to the CapEx guide, please, July versus now, EUR 100 million difference. Can you walk us through the moving parts there? Apologies if I've missed something, but just given your existing CapEx up to this point in the year and the magnitude of that change, just any extra detail there would be great. Thomas Reisten: Yes, so what's important to understand there is that our general capital allocation guideline that we gave out, we obviously say that this is about EUR 300 million a year in terms of CapEx. Now what we have done as well is we wanted to specify towards the end of the year where we will likely end up. And this is just a general trend for the end of the year that at this point in time, we are seeing reductions in the overall CapEx spend, and we are expecting, as a consequence to come in around the EUR 200 million. Now important is the around. So it can go slightly above still at this point in time, but it's not a specific initiative that we are not executing. This is the overall just -- trend of just not having spent as much. Now we do, obviously, across the board, ensure that we are spending the money on the right projects. And that might have actually here and there as well slowed down some of the CapEx spend so that we are ensuring that we spend it on the right returning projects. Operator: This concludes the Q&A session. I will now hand back to Thomas Altmann for closing remarks. Thomas Altmann: Thank you very much, Abigail. So if there have been any issues from the sound quality, please let us know. Also after the call, you can just send me an e-mail or just send me a text message, then we'll make sure that we take consideration for the next call. And with that, we are coming to the end of the conference call. If you have further questions, please do not hesitate to reach out to the IR team. Our next interaction with the market will be with the full year '25 results, which will be published on March 12 next year. And with that, ladies and gentlemen, thank you very much for joining us today. Have a good day and good one. Thank you. Operator: This concludes today's call. Thank you, everyone, for joining. You may now disconnect.
Operator: Ladies and gentlemen, welcome to the LEG Immobilien Q3 2025 Conference Call and Live Webcast. I am Mathilde, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Frank Kopfinger, Head of Investor Relations. Please go ahead. Frank Kopfinger: Thank you, Mathilde, and good morning, everyone, from Düsseldorf. Welcome to our call for our 9 months 2025 results call, and thank you for your participation. We have in the call our entire management team with our CEO, Lars von Lackum; our CFO, Kathrin Köhling; as well as our COO, Volker Wiegel. You hopefully realized that we changed the format of the presentation slightly. You have now a more condensed section in the front part of the presentation, and you have all information as in the past in the appendix. You find the presentation document as well as the quarterly report and documents within the IR section of our homepage. Please note that there is also a disclaimer, which you'll find on Page 2 of our presentation. And without further ado, I hand it over to you, Lars. Lars Von Lackum: Thank you, Frank, and welcome from my side as well. A brief overall comment and just repeating what Frank just said. All adjustments to our financial disclosure were made to present our financial updates in a sharper, more straightforward way and allow for a more focused discussion on the main levers of our business. You can still find all the details included in our financial disclosures so far in the new appendix of today's presentation. With this, I turn to the highlights slide. The key highlights and messages are certainly the following. After the first 9 months, we are fully on track for our 2025 guidance, i.e., we aim for an AFFO growth of 10% this year. For 2026, we guide for an additional growth of 5% in AFFO. We stick to AFFO as our core KPI, i.e., cash generation remains our core principle in this environment. At the same time, we have included FFO I as part of our guidance for 2026. We remain constructive on valuation and expect a positive valuation result of 1.5% to 2% for the second half of the year. Disposals remain one key lever to bring down our LTV to the target line of 45% in 2026. We have already sold more than 2,200 units for around EUR 100 million so far and remain very positive to see signings until year-end based on the current state of our sales pipeline. The last highlight for this quarter is certainly Moody's. Moody's just recently confirmed our Baa2 rating and revised our rating outlook to positive. We regard this as a recognition of our efforts to protect our balance sheet via noncomplex measures and the cash-focused steering of our group. Let me now move to Slide 6 and our financial highlights for the 9 months. We continue to show strong growth, which is driven by the seamless integration of the 9,000 units portfolio of BCP as well as by organic growth. Our net cold rent grew dynamically by 6.8% or EUR 44 million, respectively. Strong top line growth in combination with a tight cost control led to a strong EBITDA margin of 79.2% for the first 9 months. Based on that, we feel comfortable to reach the increased guidance for the EBITDA margin of 77%. The same holds for the AFFO, which we expect to come in between EUR 215 million and EUR 225 million. We are aware that the 3.1% like-for-like rental growth looks a bit lighter than our target range of 3.4% to 3.6%. However, we are very confident that we will reach the target range for the full year in Q4, and Volker will give you some more details on the reasons in a minute. Let's move on to Slide 7. For some of you, it might be a bit of a déjà vu as we have shown the same slide in our H1 call. We are of the opinion that this simple chart reflects our core KPIs and the thinking behind it in the most transparent way. We continue to believe in cash, i.e., cash remains king in the current environment. Therefore, AFFO remains our core KPI. At the same time, we never stop prioritizing profitability. Therefore, we are including FFO I additionally in our guidance. The impact of the drastically rising state budget deficits and rising debt ratios to interest rates is more than uncertain. The response of national banks to these fiscal situations is equally unknown. The few green shoots seen in transaction markets might continue to grow, but substantial risks remain. In this environment, we do not want to organically start to lever up by increasing investments. We have decided to remain in a fully self-financed position. We continue to spend more than EUR 35 per square meter. This is still one of the highest levels in LEG's history, excluding the peak years of 2020 to 2022. Therefore, we invest more than 40% of net rental income into our portfolio via maintenance or CapEx. We consider this to be significant, and those investments will support future rent growth. All of this is fully self-financed, and we do not need to take up additional debt. It is the most rational strategy to maneuver in this environment. We expect to achieve a further growth in cash generation, especially the 10% AFFO growth in 2025, and we guide for another 5% growth in AFFO in 2026. And with this, I hand it over to Volker for a detailed view on our operations. Volker Wiegel: Thank you, Lars, and good morning to everyone also from my side. On Slide 8, we provide more details on the rent growth per square meter realized in the first 9 months of the year. In-place rents per square meter increased on a like-for-like basis by 3.1% to EUR 6.99. The 3.1% can be broken down into 1.7% from rent payable increases, while modernization and reletting contributed 1.4%. The like-for-like rent growth was solely driven by the free financed units with an increase of 3.6%. At year-end, we will have achieved also here our target of more than 4%. The like-for-like vacancy rate according to EPRA definition, remained at a very low level of 2.5%. In 2026, we will have an adjustment of the cost rent again and accordingly, rent growth will gain momentum. We expect also bigger locations to see rent table updates like Gelsenkirchen, Duisburg and Düsseldorf in Q1 or early Q2. You have the list, as always, in the appendix on Slide 25. Let me now explain why we are so confident to reach our 2025 rental growth target of 3.4% to 3.6% despite having only reported a 3.1% increase as of Q3. Let's move to Slide 9. You can see the rent increases we put through in each quarter in 2024 and 2025. In Q1 2024, we put through strong rent increases. This was also a function of underlying rent table publications, reletting activity and modernization activity. After 3 quarters in 2024, we had implemented 87% of the rent increases realized until year-end. Contrary, in Q4 2024, the rent increase put through was rather low. This year, rent increases are split more evenly throughout the quarters. This is mostly due to the publication date of new rent tables. Given the previous year pattern, we will have a significantly stronger Q4 than last year, which will get us into the target range. Slide 10 gives you more insight into our investments. Here, we are also fully on track for our per square meter goal of more than EUR 35. Our total investments into the portfolio increased by 10% in the first 9 months of the year. The absolute amount was roughly EUR 292 million, which corresponds to EUR 26.16 per square meter. This per square meter investments increased by 6%. The fact that the portfolio size increased with the full takeover of the BCP led to a higher increase in absolute numbers than on a per square meter basis. The cap ratio remained unchanged. The recurring CapEx, which is relevant for the calculation of the AFFO increased by 7%. The decline in new construction investments is decisive for the lower growth rate in comparison to the overall investments and adjusted CapEx, respectively. Let me briefly comment on disposal on the next slide. We are satisfied with the progress if we consider the transaction markets activity, especially for bigger portfolios and volumes remain soft. In total, we did already sell around 2,200 units for around EUR 190 million so far. All of them have been transacted at or above book value. We expect more to come in, in coming weeks and expect transaction activity at our end to ramp up towards year-end. Rest assured that once we sign bigger deals, we would inform you via a press release to keep you up to date. And with that, I hand over to Kathrin. Kathrin Köhling: Thank you, Volker, and good morning from my side as well. Let me walk you through our AFFO development on Slide 12. In the first 9 months, the AFFO increased by 19.3% to EUR 181.3 million. This was mainly driven by higher net cold rents, whereas around EUR 20 million were due to organic growth. The acquisition of BCP contributed another EUR 37 million, offsetting the impact from disposals, which was EUR 13 million. Furthermore, we saw positive contributions from our value-add business and remained very cost disciplined in both operations and administration, which had a positive overall effect of EUR 7.1 million year-on-year. While the average interest cost in our group remained low at 1.59%, net cash interest in absolute terms rose by EUR 5.9 million as total debt has increased due to the consolidation of BCP and of course, also due to the general rise in interest from new financings. On the investments, the rise in spending is in line with our guidance. In terms of subsidies for the full year, we still expect to come out at the lower end of our original guidance range of EUR 20 million to EUR 25 million. In financial year 2026, subsidies should come down to around EUR 10 million, also due to the fact that there will be no more new construction activities. For more details, we provide an AFFO table in the appendix on Slide 16. Coming to Slide 13 and LEG's financial key figures. Following the EUR 400 million redemption of our convertible, which was due on September 1, all our maturities for 2025 have been addressed. And the same applies to all of our debt maturing in 2026. This includes the EUR 500 million straight bond, which represents roughly half of next year's maturities. As of today, we have a pro forma cash position of cash, cash equivalents, signed financing agreements, including prolongations and disposal proceeds of well above EUR 1 billion. This brings us well into 2027 when our next bond matures in November 2027. As usual, we present a detailed maturity profile for the next 10 years on Slide 31. At the reporting date and after the redemption of the EUR 400 million convertible bond, our liquidity position was EUR 448 million. Furthermore, we had and still have undrawn revolving credit facilities of EUR 750 million as well as an unused commercial paper program of EUR 600 million. Our average interest rate stood at 1.59%, nearly unchanged year-on-year with an average maturity of 5.6 years. The LTV stood at 48.3%, given that the dividend payout of around EUR 125 million took place in early July. Year-on-year, however, we stand at a minus 20 bps. We are now heading towards our LTV target of 45% set for next year. As usual, we provide important financing KPIs and bond covenants in the appendix on Slide 32. Of course, the ICR is next to the LTV, a very important KPI for us. Our bond covenant ICR slightly increased quarter-on-quarter and now stands at a very strong 4.5x. And all the other bond covenants are also with ample headroom. Very recently, Moody's confirmed our Baa2 rating and revised the outlook from stable to positive. And now I'd like to hand over to Lars for the guidance. Lars Von Lackum: Thanks a lot, Kathrin. Let me now come to our guidance for 2026. We expect the AFFO to grow by 5% on the back of a rent growth of 3.8% to 4%. So rent growth is to increase by around 40 bps over 2025 and reflects the positive contribution from the cost rent adjustment for our subsidized units. We expect the EBITDA margin to improve towards peak levels of 78% again. We continue to invest significantly into our portfolio, i.e., more than EUR 35 per square meter, so quite in line with this year's investment. On LTV, we expect to reach our target of around 45% in 2026. This will be driven by a mix of further valuation effects as well as disposals. Certainly, faster disposals can shift the time line forward by when we achieve the 45%. On this positive note, I come to the end of my presentation. We, as a team, are happy to answer your questions. Frank Kopfinger: Thank you, Lars. And with this, we begin the Q&A session, and I hand it over to you, Mathilde, to guide us through the Q&A. Operator: [Operator Instructions] The first question comes from the line of Marios Pastou from Bernstein. Marios Pastou: So I've got two questions from my side. So firstly, given your renewed confidence in achieving planned disposals and expectations to reach your LTV target next year, what drove your decision to remain focused on AFFO as your key earnings KPI rather than revert back to FFO I? And then secondly, on a similar topic, if I look at 2026 guidance, I see AFFO is up 5%, but FFO is flat to 1%, even though your investment plans are stable year-on-year. So what is driving the difference between these 2 growth trajectories? Lars Von Lackum: Marios, thanks a lot for your questions. So just to start off, so why have we decided to stick to AFFO instead of making FFO I again our core KPI? It is really the macro environment, especially the uncertainty around budget deficits from different states, including the German one. And I think we've seen during this year what the announcement of the new budgets being planned to be spent on infrastructure and defense did to the interest rate, especially long term. And those uncertainties are mainly the reason why we thought to be well advised to stick to our self-funded strategy. So we remain focused on AFFO and keep cash as our core metric going forward. So that is why we were sticking to AFFO, although we are expecting substantial additional disposals in Q4. With regards to the difference FFO I to AFFO, happy to hand over to Kathrin. Kathrin Köhling: Yes. So there is obviously a range that we are giving out for next year, and it's -- and the numbers on the FFO side are much bigger than on the AFFO side. So let's see how the ranges play out next year. And also please keep in mind that this year, we were still doing new developments on owned land, which ended up in the AFFO line and not in the FFO line. And as we are now done with our new developments, this will not take place next year. Marios Pastou: Okay. Very clear. So there's no specific adjustment being made between the 2 numbers that is causing this difference? Kathrin Köhling: No, we didn't change the KPI definition or anything else. Operator: The next question comes from the line of John Vuong from Van Lanschot Kempen. John Vuong: Just on the like-for-like rental growth guidance, it comes in higher next year, which I understand to be coming from the cost rent adjustment on subsidized apartments that happens every 3 years. Just try understanding the underlying trend of like-for-like, what's the impact of this adjustment to your like-for-like? Volker Wiegel: It's about 40 to 50 bps. John Vuong: Okay. That's clear. And then just correct me if I'm wrong, but the 2026 AFFO and FFO guidance are excluding any disposals, while the LTV guidance is including disposals. What's the rationale for this? Lars Von Lackum: As always, John, we will have not included any disposals because as long as we have not signed those, it would be just guessing. So therefore, from our perspective, it's not worthwhile now including disposals which have not been signed. Certainly, for 2025, also to be transparent, there will be no increase in really the transfer of ownership. So 2025 numbers will not be impacted by the additional sales expected for Q4 2025. John Vuong: So the 45% LTV that you aim to achieve in 2026, that's excluding disposals? Lars Von Lackum: No, it's including disposals, but those transfers of ownership signed in Q4 being transferred in 2026, certainly contributed to reduce LTV to 45%. Operator: We now have a question from the line of Bart Gysens from Morgan Stanley. Bart Gysens: Thank you for the very clear kind of expiry profile and cost of your debt. Can I just ask what is the cost of debt that you are assuming for 2026 in your guidance to get to this level of AFFO and FFO? Kathrin Köhling: While -- I'm happy to take your question. While I don't know how markets are developing next year, I can for sure tell you about the financing that we just did. So the financings that we -- where we already got the money, you already have in the 1.59%. The financings that are still outstanding and will come mostly in Q4 this year and Q1 next year are around EUR 600 million, and they are refinanced by 3.8% to give you an idea around that. And for the remainder of the year, of course, we will continue our opportunistic refinancing approach. So there will be more financings to come, especially when we regard what 2027 has in the basket for us. So -- but this will be totally dependent on market developments. Bart Gysens: But I assume that given you provide a guidance for '26, that implies a certain number that you've assumed what your debt will cost, right? And I appreciate that's a bit a range, but can you be explicit on what you think that number is to get to this range of FFO? Kathrin Köhling: I already gave you the biggest part of it, the EUR 600 million. And for the remainder, we, of course, have forward curves behind that. But I hope you understand that I'm not giving out exact numbers on specific line items of our P&L. Operator: [Operator Instructions] We now have a question from the line of Manuel Martin from ODDO BHF. Manuel Martin: Two questions from my side. Let's do it maybe one by one. The first one is on the upcoming disposals. Could you give us maybe some color on what could we expect in terms of how many disposals, where they are located, which quality so that we have a bit of impression of what could come there? That would be the first question out of two. Lars Von Lackum: Manuel, very happy to take that question. So certainly, we are currently in the midst of selling the plot in Gerresheim Düsseldorf, which we've bought from BCP. We made progress there. We have now a preferred bidder with whom we will approach the city of Düsseldorf. And that's certainly a substantial part of the disposals to be expected. Secondly, with regards to the BCP portfolio in the Eastern part of Germany, we made substantial progress across all 3 cities. So Halle, Leipzig and Magdeburg, we are in exclusivity there with different bidders, and we are hopeful to also sell half of the portfolio within Q4. And then there are other portfolio disposals across the current earmarked 5,000 units portfolio, which we are currently marketing, that will also contribute. So overall, expectation is that we are going to sign around EUR 100 million to EUR 200 million of additional disposals in Q4 until the end of this year. Manuel Martin: Okay. Okay. That's clear. Second and last question, the other side of the medal, in terms of possible acquisitions, do you see opportunities in the market? Or what's your feeling what could come in regard of acquisitions? And what would be possible for LEG given the high LTV? I could imagine that there might be also some constraints when it comes to acquisitions. Lars Von Lackum: Definitely, especially as we strive firstly to get LTV down now to 45%. So that will only be a small portion. Currently, we are only looking into bolt-on acquisitions in different locations, but it is nothing bigger what we currently plan with regards to acquisitions. If there might be an outwhelming opportunity, and that definitely will then include also equity with our depressed share price that might be quite a stretch. So our focus is currently on getting disposals done and perhaps realize the one or the other bolt-on acquisition, but not on bigger acquisitions so far. Operator: [Operator Instructions] The next question comes from the line of Kai Klose from Berenberg. Kai Klose: I've got one quick follow-up question. When you indicate the LTV to be at around 45% by the end of next year, could you indicate where you expect the ICR to land? Kathrin Köhling: Kai, thanks for your question. We are not giving out a guidance for the ICR for next year, but we're looking at the 4.5 where we are currently standing at, it's super strong. It might decelerate a little bit, but we are well above any numbers that we should worry about. So that definitely will be a strong number next year as well for us. Operator: Ladies and gentlemen, that was the last question. I would -- sorry to interrupt. We have a last minute registration coming from the line of Rob Jones from BNP Paribas. Robert Jones: Sorry, just two quick ones. Kathrin, just on the guidance, AFFO versus FFO. I appreciate that the FFO guidance range for '26 is wider. But why is it wider than the AFFO guidance? And then secondly, Lars, if I think about your assets that you've got marked for sale, I appreciate you're expected to make significant progress in Q4 this year with regards to some of those disposals. But if I take the 5,000 units and if you were able to sell them at your price expectations and let's imagine that asset values didn't move, can we get down to 45% LTV or if you've got either more stuff to add that needs to be sold to that disposal program? Or is it a case that if asset values are up a couple of percent next year, like they will be this year, then actually you get to 45% LTV anyway? Lars Von Lackum: Thanks a lot for your questions, Rob. I'll start with the second question. So with regards to the current assets, it is really that we -- for the time being, we are sticking to those 5,000 units. But as we make transparent, we will do a full portfolio review over the coming 2 months. And then certainly, we will earmark most probably additional units for sale. How much that will be? Let's wait and see how that portfolio revision will look like. But it might be that we are then also being willing to offer additional units. For the time being, we are currently marketing those 5,000 units and expectation is that we make strong progress on those within the next 6 weeks. Kathrin Köhling: With your first question on the wider guidance range on the FFO, this is, of course, due to the investments. And you know we are focusing on the AFFO. AFFO is also the basis for our dividend. So we really try to spend as much money as needed, but not spend more. And therefore, the capitalization ratio can vary a little bit between the years and depending on what we are exactly doing. So it's much harder to say where we will land up with the FFO when you're focusing on the AFFO. And therefore, we have the wider guidance range. Operator: We now have a question from the line of Jonathan Kownator from Goldman Sachs. Jonathan Kownator: Just following up on some of the nitty-gritty accounting. But just on subsidies, I understand that the amount you're guiding to EUR 10 million is going to be lower for 2026. You're also saying that you will have less work for your own balance sheet that you're doing. So how we expect the capitalization to evolve? And also, if you can give perhaps a bit more context on the subsidies, that would be helpful. Lars Von Lackum: Yes. So to start off with the second part on the subsidies, Jonathan, with regards to subsidies, nothing here is being impacted by new developments. As you know, we are finalizing new developments. And for those, certainly subsidy values become due as soon as you finalize that construction. So that will be lower next year and will certainly be a headwind which we need to cope with. So for overall this year, that's something like EUR 20 million, and it will be substantially lower next year. And that's with regards to 2026, certainly something which we need to cope with if we look into the subsidies on the one hand side, but also interest rates because you heard it from Kathrin that with regards to the EUR 600 million, which we are now drawing, that now kicks in. That's 3.8% instead of the current average yield of 1.6%. And that's certainly something which also is a headwind. And that is the reason why in combination with the uncertainty around the capitalization rate, we've been opting for a wider range for the FFO I EUR 475 million to EUR 495 million. Jonathan Kownator: And so just following up on that, your new development business, I think you've wind down essentially. So does that mean that the EUR 10 million in 2026, this is effectively the last year that you're getting these subsidies? Lars Von Lackum: So for new developments, it's the last year that we are getting subsidies for new construction. But certainly, with regards to all the work we are doing on the energetic side with regards to, for example, changing heat systems, heating systems from fossil-based to renewables, that certainly will have a subsidy impact, and that's something which we are expecting for next year to come. Jonathan Kownator: And so maybe let me rephrase. So for 2026, the EUR 10 million guidance you're giving, does that still include new development or then it's just about energetic modernization? Lars Von Lackum: 2026, no new developments. 2025 is last year of new developments, new developments with subsidies. Next year, no new developments anymore, Jonathan. Jonathan Kownator: Okay. And so are we expecting also the own work capitalized to drop then in 2026? Lars Von Lackum: I think you're making a reference to a line item, which is not being impacted by the new developments, but it's strongly impacted by our craftsman services units. So that is something which is not to be put in the same basket. Yes. Operator: The next question comes from the line of Nico Hagemann from Deutsche Bank. Nico Hagemann: In regard of the current selling of the Glasmacherviertel in Düsseldorf, I ask you to give us some color on this in terms of the competition of this deal? Lars Von Lackum: The competition is incredibly high. It took us 2 rounds to finally decide for one consortium. And with that, we are now approaching the city of Düsseldorf. So therefore, even if the city would not agree to the current consortium, which we do not have any indication as of today, meetings still need to take place, and there would be runners up also with competitive pricing. So therefore, we are confident to find a way to sell that plot over the coming weeks. Operator: Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Frank Kopfinger for any closing remarks. Frank Kopfinger: Thank you, and thanks for your questions. And as always, should you have further questions, then please do not hesitate and contact us. Otherwise, please note that our next scheduled reporting event is on the 5th of March next year when we report on our full year results. And with this, we close the call, and we wish you all the best and hope to see you soon on one of our upcoming roadshows and conferences. Thank you, and goodbye, everybody. Operator: Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.
Operator: Welcome to the RWE conference call. Michael Müller, CFO of RWE AG, will inform you about the developments in the first 3 quarters of fiscal 2025. I will now hand over to Thomas Denny. Thomas Denny: Thank you, Laura, and welcome and good afternoon from Essen. Thank you for joining RWE's 9 months Investor and Analyst Conference Call today. Our CFO, Michael Müller, will guide you through our key highlights and financial performance for the first 9 months and the outlook for the current year. And with that, let me hand over to Michael. Michael Muller: Thanks, Thomas, and also good afternoon to all of you. In the first 9 months of 2025, our portfolio has shown a strong financial performance. We have achieved more than 80% of our full year 2025 adjusted EPS target. In the U.K., we concluded the sale of a data center development project at a former RWE power plant site to a hyperscaler. The transaction was closed and the proceeds received in October. The book gain of EUR 225 million is reported as non-recurring in the Q3 2025 adjusted EBITDA of the Flexible Generation segment. This is the second such transaction with a hyperscaler. Last year, we sold a site in Germany to Microsoft. Both transactions demonstrate the value of RWE's existing sites. These sites can be used for data center development projects as well as for new battery storage facilities or gas-fired power plants. Our build-out program is progressing well with 11.4 gigawatts under construction as at the end of Q3. More than 2 gigawatts are scheduled to start operation by the end of the year. All of our offshore construction projects are well on schedule. In September this year, we entered into a long-term partnership with Apollo Global Management to secure funding for our 25.1% stake in Amprion. Apollo has contributed EUR 3.2 billion. It will be accounted for as equity and will further strengthen our balance sheet. As the amount will be invested into Amprion, the effect will roll off over time. The transaction allows us to benefit from future returns of Amprion's regulated grid business and provides us with flexibility going forward. We expect closing in the coming weeks. Our EUR 1.5 billion share buyback program is proceeding well. Currently, the second EUR 500 million tranche is ongoing and is expected to be finalized by the end of this year. We will launch the third tranche shortly thereafter. Since the start of the program, we have bought back 26.5 million shares at an average price of EUR 34. Our dividend target of EUR 1.2 for fiscal year 2025 is confirmed. Let's now take a closer look at the 9 months financials. As expected, adjusted EBITDA is lower due to normalized prices, weak wind conditions in Europe and the low trading result in the first half of 2025. In total, adjusted EBITDA came in at EUR 3.5 billion. In Offshore Wind, adjusted EBITDA was EUR 915 million. Earnings were below last year due to weak wind conditions in H1 and lower hedge prices. Q3 wind has been in line with expectations. Onshore wind and solar recorded an EBITDA of EUR 1.2 billion. This was mostly driven by capacity additions and higher hedge prices in the U.S. Year-on-year, we have added more than 1.5 gigawatts in the U.S. This was partly offset by weaker wind condition and lower hedge prices in Europe. Adjusted EBITDA of the Flexible Generation business was EUR 1.1 billion. As mentioned earlier, we recorded a non-recurring book gain from the sale of a data center development project in the U.K. In our operating business, we have seen lower earnings, reflecting normalized prices. Our Supply & Trading business showed a good trading performance in the third quarter after a low first half. The 9 months result stood at EUR 150 million. Other consolidation was EUR 111 million, reflecting a better-than-expected performance of Amprion. The year-on-year adjusted financial result improved due to an increase of capitalized interest during construction. In the first 9 months of 2025, capitalized interest amounted to EUR 570 million. Adjusted depreciation stood at minus EUR 1.5 billion and increased in line with our growth program. For adjusted tax rate, we applied the general tax rate of 20% for the RWE Group. Adjusted net income stood at EUR 1.3 billion, resulting in an adjusted earnings per share of EUR 1.76. The adjusted operating cash flow was EUR 3.9 billion at the end of Q3. Changes in provisions and non-cash items were driven by provision utilization and the non-cash earnings contribution of our at-equity stake in Amprion and KELAG, where the share of net income recorded in our EBITDA exceeded the dividends of those participations. Non-cash items also include the book gain from the sale of the data center development program in U.K., where proceeds were received in October. Changes in operating working capital were mainly driven by a decrease of inventory of gas and storage and trade receivables, partly offset by a decrease of trade payables. Net debt stood at EUR 15.7 billion. In the first 9 months, we have invested EUR 4.6 billion net in the growth of our offshore wind, onshore wind and solar and flexible generation businesses. Gross investments were offset by disposal proceeds such as from the sell-down of 49% of our 1.6 gigawatt Nordseecluster project and our 1.1 gigawatt Thor project. Other changes in net financial debt amounted to EUR 2.7 billion, mainly driven by timing effects from hedging and trading activities, new lease contracts and share buybacks. This was partly compensated by FX effects due to a weaker U.S. dollar. At the end of the year, we expect net debt to be around EUR 12.5 billion on the back of the Apollo transaction. Let us now take a look at our construction program. Our projects are progressing well. As we speak, we have 11.4 gigawatts of capacity under construction, diversified across technologies and regions. More than 2 gigawatts are scheduled to start operation by the end of the year, mainly onshore wind, solar, and battery projects. The construction program also includes more than 600 megawatts of U.S. solar and battery projects with attractive return profiles for which we took the investment decision in Q3. After the IRS provided clarity on safe harboring of tax credits, we see attractive investment opportunities on the back of the AI and data center-driven power demand growth in the U.S. However, we maintain our strict investment criteria. Tax credits and offtakes must be secured. All necessary permits must be obtained and the tariff risk must be mitigated. Our offshore wind projects are also well on schedule. At Sofia, our 1.4 gigawatt project in the U.K., all of the 100 foundations and more than half of the turbines are installed. We expect first power by the end of the year. Full commercial operation will be in 2026. Our offshore wind project 4, Nordseecluster A and OranjeWind are also making good progress and are well on track. For 2025, we confirm our outlook. With the strong 9 months results, we are now even more confident with our guidance. Adjusted EBITDA is expected to be between EUR 4.55 billion and EUR 5.15 billion. Adjusted net income will range from EUR 1.3 billion to EUR 1.8 billion and adjusted earnings per share between EUR 1.8 and EUR 2.5. The dividend target is EUR 1.2 per share for this year. And now let me hand back to Thomas. Thomas Denny: Thanks, Michael. Before we start with the Q&A session, let me announce our full year 2025 earnings presentation on 12th of March 2026. This time, we'll combine with a strategy update. And now let's start the Q&A session. Operator, please begin. Operator: [Operator Instructions] We'll now take our first question from Ahmed Farman of Jefferies. Ahmed Farman: Two from my side. I was wondering if you can give us a little bit more sort of color on how you're seeing this sort of opportunity that you highlighted sort of site sales, where are you getting most of these inquiries? Are you seeing more inquiries regionally where they are? And if there is also a different, I guess, business model to capture these opportunities in the sense of -- sorry, leasing and providing PPA contracts or signing PPA contracts as well. So just looking for a little bit more color on this and how you're sort of more strategically assessing this opportunity. Secondly, in the U.S., could you sort of help us understand if you are seeing -- started to see some benefits of, let's say, the power demand fundamentals in the U.S. in your business, be it in terms of higher power prices or repricing on open exposure for generation or if when you are now looking for incremental investments, are you seeing higher IRRs or NPVs on new CapEx project? I'll just be sort of interested in understanding how that sort of the market is evolving and what you're seeing there? Michael Muller: Yes, thanks for the question. Let's start with the data center topic. I mean, first of all, we do see demand pretty much across the countries in Europe. I mean, our sites are clearly in Germany, Netherlands, and U.K. And so we are currently actually working on more than 10 projects exactly in those countries. And as you said, the approach -- there can be different project approaches to those projects. I guess the most simple one is the one we did last year when we sold land to Microsoft. In this case here, it was actually a development project where you also engage into cleaning up the site, making sure there's a proper grid connection and also supporting in the permitting process. And then you can also go one step beyond that you combine that data center development directly with the PPA and that is indeed also something we are looking into. And then, yes, you also split it, you can then either take that as a one-off sell-down or you can do it with a lease over a tenor of time. I would say there are different approaches, and it very much depends then also on the individual projects, how you realize that. But it gives you kind of the broad variety of activities you can do. Worth mentioning that, obviously, the data center approach is one route. We do also see other routes like using existing sites for batteries. I mean, as we are currently doing with projects in Gundremingen or Lingen or some of the sites. So there are projects ongoing on that topic. And the other one is obviously also, I mean, we still hope to see auctions in Germany for gas assets. And here also clearly having sites with grid connection is an asset that we can build on. Coming to your second question on the U.S. I mean, first of all, we clearly see a demand, a strong demand for PPAs. And you did exactly the right split. So one is what about new projects. And indeed, if you have good projects at hand ready to be built, there is an attractive offtake market. And obviously, we are trying to leverage that also with better returns on projects. And the other one is where we also now see movement in the market that offtakers are also looking into contracting existing or recontracting existing assets. But as we always do, we only communicate things once we have really closed the deals as we also did this time with the data center deal. Ahmed Farman: Michael, if I could, sorry, just ask one quick follow-up. Is there a megawatt number that you -- or gigawatt number you could provide on, let's say, projects that are not under construction in the U.S., but that are, let's say, good projects ready, permitted, tax credit that could be deployed if the right economics were there? Michael Muller: I mean, look, that is effectively the pipeline we currently have. I mean, we said that as part of our investment program and capital allocation, we have planned for projects that clearly qualify until 2029 for tax credits. And yes, that's the number. Operator: Next question comes from Deepa of Bernstein. Deepa Venkateswaran: Maybe I can stay on the U.S. for the first question. Michael, I didn't hear your gigawatt number for the permitted grandfathered capacity. Could you share that? And from memory, I think you have 10 or 11 terawatt hours of merchant output in Texas. And previously, I think you always said that it wasn't attractive to contract them. But are you seeing that the economics for contracting these are improving? So that's my first question. And second one, just on AR7, any thoughts? I know some investors were a bit disappointed with the headline budget number, but we know the Secretary of State can keep into the bids and increase it. So what's the feeling that your team in the U.K. offshore team is telling you in terms of are they confident of getting something through because maybe 900 is a bit low. Michael Muller: Yes. Deepa, on the first question, you are right. It's roughly 10 terawatt hour that we have as merchant capacity in U.S. And that is the order of magnitude you're potentially talking about. But as I said, it's just a sentiment we currently see in the market. And obviously, we now need to look into closing exact deals. Second one on AR7, yes, to be very transparent, obviously, we are not happy with the low budget. And actually, we also believe that from a macroeconomic perspective, that's not the right thing to do. I mean, we see an increasing power demand on the back of data centers in the U.K. that will require additional generation capacity. We do believe there are attractive projects, and we also believe that offshore is clearly a competitive technology in the U.K. So we feel that this would be an ideal opportunity for the U.K. government to lock in a higher number of offshore projects. I mean, bearing in mind that 2 years ago, the auction completely failed. And last year, they awarded three projects, out of which one was withdrawn, one was an existing one, so also almost no capacity. So we believe this would be now a good opportunity. I mean, fortunately, the U.K. government does have the discretion to increase the budget once they have seen the bid. And now we need to see if they do that. I mean, on our bidding behavior, we mentioned that we have a quite substantial number of projects we could potentially bid into the auction. But obviously, we will also leverage the flexibility we have there and do decent bidding in that auction. Deepa Venkateswaran: Michael, you did not answer to my question on how many gigawatts you've grandfathered in the U.S. already under IRA? Michael Muller: Yes, we didn't -- so we didn't communicate a number, but we have sufficient capacity to build basically all the projects we have planned until 2029 in our pipeline. Thomas Denny: So keep aware, the capacity for the tax credit we have will not be the limiting factor. Operator: Our next question comes from Alberto Gandolfi of Goldman Sachs. Alberto Gandolfi: The first one is, is there a way you could tell us how many gigawatts you could be offering to data center developers, I guess, where you currently have power plants that either recently closed or you're about to close? And if you cannot tell us that, can you tell us how many gigawatts these 10 projects you are negotiating, Michael, perhaps would represent? And is the deal you announced today representative of what could be the valuation? I crunched some numbers and I may be totally off. So very happy to be proven wrong. But if I'm not totally off, did you just sell today this land and site and connection point and whatever at almost EUR 1 million per megawatt. The second question is, can you tell us what is your outlook for power demand in Central Europe and U.K.? We clearly have not seen power demand move yet. But with the rising penetration for EVs, air conditioning, data centers, now we're seeing all these announcements. Can you tell us what the outlook is for demand? And is there a sensitivity to FlexGen you can give us? I don't know, 2% demand per year is an extra EUR 500 million, EUR 600 million EBITDA, something like that. I'm clearly overly simplifying. Michael Muller: Yes, thanks for the question. I mean, obviously, I can't give you the exact number of the project, but I guess, a simple back of the envelope calculation. I mean, I talked about 10 projects. If you assume a similar size as the one we just sold, I think that's probably a good estimation of what potentially could be done. And I think the order of magnitude per megawatt is a fair estimate. But as I said, it very much depends on the concrete sites, how much you develop the project. Clearly, if you just sell land, it's substantially less. If it comes with further development activity, it does increase the value, and that's obviously what we are working individually on the projects. The second one, power outlook for Europe. I mean, look, the two drivers to look at is clearly AI and recovery of the industry. Let's start with the latter one. I mean, we all hope for a recovery, we are not currently seeing yet. So that will be the decisive factor. The second one is on AI. And I think that's the good news after we have discussed that multiple times in calls that we also do see demand for AI capacity in Europe. It's now the first time that we actually see deals being closed and also communicated. I mean, you saw Deutsche Telekom with NVIDIA and announcing a deal. Google yesterday announced one deal. So that's for me a clear sign that they are now moving forward into doing concrete investments, and that obviously will also drive the power plant demand. To give you an estimate, how much exactly the growth is and how much that would impact the return or the earnings of FlexGen, that's a tough one. I mean, look, I guess it's more when we discussed the income of flexible generation, it is fair to say that we see the earnings as quite stable because with an increasing tightness on the back of decommissioning of existing assets and also increasing power demand, there clearly is the need for firm capacity and flexible capacity to tap into that value pool. Operator: The next question comes from Harry Wyburd of BNP Paribas. Harry Wyburd: Two for me. So the first one is the development of Ahmed and Alberto's question, but very specifically focused on European baseload prices. So you mentioned in the U.S., and I think we're all more than aware that the supply and demand dynamics in the U.S. mean that PPA prices are running much higher than sort of implied forward curves. Fundamentals are very strong on round-the-clock prices. But what's your view on how specifically that plays out in Europe? And I'm talking baseload prices because obviously, here, we've got a lot more renewable supply. Would you expect to see a positive benefit or even an outright increase in European baseload prices, assuming the gas prices are flat from data center and industrial demand recovery? Or do you think we're better off looking at the kind of tree, I guess, that Alberto was mentioning on the FlexGen side, capacity payments, et cetera. So that's the first one. And then the second one, continuing that thread again, could you just help us understand a little bit how you could benefit from the German capacity market? We've obviously been very focused on the new build gas. But what's your latest view on how the capacity market will play out? What assets are going to be eligible? Any rough idea on how you think pricing might pan out versus the U.K. or even Ireland, where obviously the payments are massive? Michael Muller: Tough questions, Harry. Let's start with the baseload. I mean, fundamentally, it's very clear that data centers do come with baseload. So therefore, they should clearly have an impact on baseload prices. So that's very clear. Now in the end, I mean, I would say -- you probably have to look at that ceteris paribus because I mean, clearly, what is also important is how do gas prices develop, how do CO2 prices develop, but also how does the build-out of renewables happen. But ceteris paribus, if you assume in a model more data centers, yes, that clearly will bring up baseload prices. And it also will bring up prices for flexible generation because it is typically the few hours that are tight where you then will see the higher spikes of prices. So I would say it should impact both. Obviously, there will be some offsetting effects because clearly, with higher prices that will also then trigger more investments into batteries, flexible generation, or renewables. Yes. So there is some offsetting effect. But at the end, since we are in the business, that could also provide us with good opportunities. So long answer, I think that the whole development -- any growth in power demand is beneficial for our business model and therefore, beneficial. About the German capacity market, I mean, it very much depends on the exact design. But if you take a step back, again, this should be very positive for us because it provides a stable income basis for all our assets, as you see in the U.K. So it's kind of an underlying floor that enables to stabilize the earnings. And then the rest very much depends on the exact design. I mean all -- from European regulation, it needs to be technological neutral, which I think would be a good argument. And then it's clearly the question, how does it deal with new builds with kind of capacity where you need to do some investments to refurbish them and what does it do with existing assets. But I mean -- if you look at our portfolio, I mean, we have quite some assets with lower utilization. And obviously, for them, it would be attractive if they could bid into such a capacity market, plus it does provide upside for new assets. As we discussed, the sites that we have at hand are not just interesting for data centers, but also potentially for new assets such as flexible gas assets to be built. Operator: And our next question comes from Rob Pulleyn of Morgan Stanley. Robert Pulleyn: Yes, Rob Pulleyn from Morgan Stanley. Two further questions. Just going to shift gears from data centers as exciting as it is. And both of these are on nuclear actually. The first one is RWE owns about a stake in the uranium enrichment company, Urenco through its URANIT joint venture. Is there any potential to monetize this asset where the book value, I think, is only EUR 72 million and potentially through the sale of assets in the U.S., given the U.S. government labeled uranium as a critical mineral. And secondly, dovetailing back, we've spoken about German nuclear restarts previously and seems like the current German government is not following through on reviewing or this is likely, which I think we all acknowledge was the RWE position. However, in the U.S., we are seeing hyperscalers actually signing contracts to restart nuclear behind the meter. Would this be at all possible in Germany from your perspective? Michael Muller: Yes, Rob, thanks for your question. I mean, first of all, -- very fair question. I mean, first of all, clearly, the value of Urenco has increased lately because the demand for enriched material is increasing and so are the prices. And you also see investment opportunities into new enrichment facilities. So it is an attractive asset. Now the complexity here is that there are some contractual regulation around that one. So it's not as easy to just sell it. So if you find somebody for us to buy it at a good price, we're happy to sell it, but it looks very difficult because it's not really fungible. Having said that, if we cannot sell it, obviously, the asset as such gains in value because with higher incomes, dividends will grow over time, and that also contributes to our earnings and cash position. So we do believe it's an attractive asset. Unfortunately, it's not as fungible as we would like it to be. On nuclear, I think, first, to reiterate, no, we don't see nuclear to come back to Germany, and that's true for both things also behind the meter. So we don't see an application for behind the meter because, I mean, it would -- it's still -- in both cases, it needs the acceptance of politicians and the German public, and it also needs kind of reliability of a longer tenure on support for nuclear, which clearly is not -- is there in Germany. Operator: And our next question comes from Peter Crampton of Barclays. Peter Crampton: Only one question from my end. And it relates a little bit to your very strong kind of Q3 and obviously, EUR 225 million kind of book gain in FlexGen. We've seen the other consolidation division much better than guidance and also on the kind of financial expenses as well. Any particular reason why you haven't increased your 2025 guidance already? And that will be the only question. Michael Muller: Look, I mean, first of all, we feel very comfortable with the guidance. And as I mentioned, obviously, on the back of a strong Q4, that makes me even more confident, but you also have to be very clear, it's very much dependent on the weather in Q4. And obviously, in all our guidance, we assumed normalized winds for Q4. So far, October has been fine, but there are 2 more months to come. Operator: And now our next question comes from Peter Bisztyga of Bank of America. Peter Bisztyga: Just going back to the data center topic. Clearly, in Germany, you have disconnected a vast amount of nuclear and coal capacity from the bridge by the end of the decade. And I'm just wondering, have you got a sense today how much of that could be suitable to put load on to site data centers on? So that's my first question. And my sort of second question, actually just on the kind of behind-the-meter generation point. Wondering, actually, first of all, in Germany, for example, if the CCGT auctions don't quite meet up to expectations or not big enough in size, do you see an opportunity to build behind-the-meter gas generation for data centers that could at some point in the future be cited on your grid connection points? And I guess a similar question in the U.S. Could you build gas generation on your existing grid interconnection points and potentially service data centers from those? Michael Muller: Yes, Peter, thanks for the question. I mean, first of all, on the nuclear side, I mean, with nuclear sites, it's more a longer-term perspective because if you have decommissioned a nuclear site or if you have stopped commercial operation of the nuclear site, the decommissioning process requires you for continued operation for quite some time until you have all the nuclear rods out of the containment. So clearly, for the first 3 or 4 years, you need to be fully connected to the grid. So therefore, it takes some time until really that -- the grid capacity becomes available, yes. So that's a little longer process. Yet, obviously, you can use some of the lands and sites. I mean, as we do in Gundremmingen, which is a former nuclear site, -- and I mean, in Bieblitz, we also built a gas assets formally. So there are some opportunities. And obviously, coal assets, yes, that's something you can clearly do. So I can't give you a gigawatt number here, but especially the coal sites are attractive with that respect. Talking about the behind-the-meter topic, I mean, I would answer that twofold. One is clearly, a gas asset without support from a capacity market is not a new build. It's not economic currently. That's also why we believe that auction is required to get new capacity into the market, yes. It's different for existing assets, as I answered previously. So if you have an existing asset and a capacity market would give you additional funding to keep it in the market, that is kind of attractive. But for new assets, they need a proper capacity remuneration to be economic. And that's the same for behind the meter and then also regular assets. In the U.K. -- in the U.S., it's slightly different, especially since there is the large demand by some of the data center providers to go for baseload. And indeed, we are currently looking into options to potentially also provide smaller gas assets to complement our renewable generation, but that's still early days. Operator: And our next question comes from Piotr of Citi. Piotr Dzieciolowski: It's Piotr Dzieciolowski from Citi. I have two questions, please. So the first one I wanted to ask you about the Amprion performance, which is booked in the other division. I believe it is performing much better than the regulatory framework would suggest based on the book value. So can you please explain what is -- why is this performance so much better? And how will this effect be reversed in the future years? So that's question number one. And the second question, I wanted to ask about the progress on adjusting your merchant offshore portfolio. We talked a lot about the demand for, and so on. So like how does this affect your ability to sell a contract power on the long-term basis for the merchant projects you are building in Denmark and Germany? Michael Muller: Yes. Let's start with the merchant offshore. I mean, clearly, that is helpful. I mean, you know that we still have some of our projects where we want to contract them pre-COD. And that -- these are exactly the discussions that are ongoing, and we are optimistic and then clearly that additional demand does help in the marketing of those assets. On Amprion, I mean, look, I can't go into the details. That is something you also then need to discuss with the Amprion management on the numbers. But it's clear that they are performing better than in the plans, and that is also by optimizing the grid build-out, but also optimizing kind of the regulatory returns they have on the assets. Operator: [Operator Instructions] And we'll now move on to our next question from Ingo Becker of Kepler Cheuvreux. Ingo Becker: Michael, on your data center remark that apparently, all else the same, if you add more demand, prices should rise. Apparently, there are secularities in the real world and particularly in the power system, and I would be interested to see how you think all of this will play out. Also wondering, you said we're looking for the economic recovery as a main driver. But if the economy then finds itself in an even higher energy environment, that surely will have a political side who have started to emphasize this also with the latest monitoring report. So just curious what your thoughts are on this. And the second question would be, to the extent you can comment on this, given apparently that things are moving and changing, how you think your CapEx plan and mix might be adjusted or changed going forward, perhaps with a directive indication to -- for the post '27 period? Michael Muller: Ingo, thanks for the question. Let's start with the easier one on the CapEx plan adjustments. I mean, Thomas already announced that in Q3, we will use the full year numbers to also give some more light on our strategy, give a strategy update. And clearly, capital allocation and CapEx will be a focus of that discussion. So sorry about that to make you wait until those numbers because I think by then, we also have more clarity on some of the other topics, hopefully also on the German gas assets and then provide a complete picture here. The other question you raised around that circularity, yes, fully right. I mean, there is some repercussions. But talking about German industry, I mean, first of all, the current situation in the German industry, honestly, is not purely an energy price topic. I mean, yes, there are some industries that are impacted by power prices. But I do also know from some of my peers that at the current prices also with some of the support, energy prices are not kind of the issue. There are other issues that also need to be addressed. I think it's more important that going forward, the status is kept. So that's the question of can we keep free allocation? What about the releases on taxes? Does that stay? So it's more keeping the status quo, which in the end is then also required for longer-term investment decisions. But I think there are also other questions that are more decisive for industry that's like productivity of Germany, labor force, these kind of things. So yes, there is some effect of power prices, but clearly not the only one. I mean, the other one to bear in mind, if you look also at our offtakes, we talked about PPAs. I mean, especially in Germany, the industry is also a potential offtaker. And we believe that also securing long-term PPAs is a good way for industry to lock in attractive power prices also in the -- for a longer turnover. So we do believe that if there's more optimism, that should also help us to contract more PPAs and by that, also then facilitate that. Operator: There are no further questions in queue. I will now hand it back to Thomas for closing remarks. Thomas Denny: Great. Thank you all for dialing in. Thanks for the good discussion this afternoon. Looking forward to seeing many of you during our London roadshow next week and the rest of this year or elsewhere in the world in the coming months. Have a great rest of the day, and bye-bye.
Operator: Good morning, ladies and gentlemen, and welcome to the Humacyte's Third Quarter Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I'll now turn the call over to Tom Johnson with LifeSci Advisors. Please go ahead. Thomas Johnson: Thank you, operator. Before we proceed with the call, I would like to remind everyone that certain statements made during this call are forward-looking statements under U.S. federal securities laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially from historical experience or present expectations. Additional information concerning factors that could cause actual results to differ from statements made on this call is contained in our periodic reports filed with the SEC. The forward-looking statements made during this call speak only as of the date hereof, and the company undertakes no obligation to update or revise the forward-looking statements, except as required by law. Information presented on this call is contained in the press release we issued this morning and in our Form 10-Q, which after filing may be accessed from the Investor page of the Humacyte website. Joining me on today's call from Humacyte are Dr. Laura Niklason, President and Chief Executive Officer; and Dale Sander, Chief Financial Officer and Chief Corporate Development Officer. Dr. Niklason will provide a summary of the company's progress for the third quarter and recent weeks, and Dale will review the company's financial results for the quarter ended September 30, 2025. I will now turn the call over to Dr. Niklason. Laura? Laura Niklason: Thank you, Tom. Good morning, everyone, and thank you for joining us for our third quarter 2025 financial results and business update call. I'm pleased to report that our third quarter was a productive period for Humacyte and continued execution of our commercial launch with Symvess and also with advancement of our other bioengineered vessel programs. During today's call, I'll review progress across our commercial and development programs before turning the call over to Dale for a review of his financial -- of our financial results for the third quarter. Beginning with our commercial launch of Symvess, we're pleased by the traction we continue to gain in our interactions with surgeons and hospitals. To date, 25 hospitals and/or health care systems have completed the Value Analysis Committee, or VAC process and have approved the purchase of Symvess. Since these VAC approvals include multi-hospital networks, approvals obtained thus far represent 92 civilian hospitals now eligible to purchase Symvess. An additional 45 VAC committees at hospitals or health systems are currently conducting reviews of Symvess. Along with the progress in VAC reviews and approvals in the third quarter, product sales improved to $703,000, a significant increase over the $100,000 that we reported last quarter. Our active engagement with surgeons and clinicians continues to grow, and we're observing an increased number of hospitals placing orders and reordering Symvess. This active physician engagement is complemented by our steady drumbeat of strong publications that support Symvess and our technology platform. As you know, in July, we announced that Symvess had been awarded the Electronic Catalog, or ECAT listing approval from the U.S. Defense Logistics Agency, which provides the Department of Defense and other federal agencies with access to manufacturers and distributors' products. ECAT approval make Symvess available to health care professionals treating military service members, veterans and other patients receiving care at military treatment facilities and the U.S. Department of Veterans Affairs Hospitals. Since obtaining ECAT approval, we recorded our first commercial sale to U.S. military facilities. And we have great interest in improving medical options available to health care professionals who are treating military personnel and their families, and we look forward to advancing our discussions with additional DoD-affiliated hospitals. Our commercial rollout of Symvess was supported by the recent publication of 3 studies demonstrating the potential of this product in vascular trauma. First, the publication entitled Bioengineered Human Blood Vessels To Treat Hospital-acquired Vascular Complications was published recently in the Journal of Vascular Surgery. This publication describes the outcomes of using Symvess in the treatment of arterial injuries that are sustained in the process of medical care rather than injuries that are sustained in the community. Complications of surgery and vascular procedures, including iatrogenic injuries, planned oncologic tumor resections and what have you, are increasingly common in modern medical care and comprise up to 30% of patients requiring vascular injury repairs. Harvesting of autologous vein to address these consequences and complications produces additional injury for the patient and suitable vein may not always be accessible. This publication describes the outcomes of patients with hospital-acquired iatrogenic injuries or complications of vascular surgery procedures, which was a subgroup of our V005 pivotal Phase II/III clinical study that we conducted in the U.S. and Israel. At the end of an average follow-up of 23.3 months, 92% of the patients retained secondary patency or had blood flow in the conduit. None of the patients suffered an amputation, and there were 0 infections of Symvess. Patients experiencing hospital-acquired vascular complications represent an important subset of vascular trauma patients, and it's gratifying to see that the outcomes in this study show that Symvess can provide limb salvage and durable potency. Another publication in the Oxford Academic Journal Military Medicine described positive long-term results from our humanitarian program using Symvess to treat wartime vascular injuries in Ukraine. This publication reported on 17 patients suffering combat-related extremity vascular trauma from gunshot wounds, blasts and shrapnel. Up to 18 months -- after up to 18 months of follow-up, physicians observed 0 deaths, 0 infections and 0 amputations in these treated patients in Ukraine. Furthermore, Symvess had a high potency of 87.1% and no instances of immunologic rejection. These outcomes demonstrate the long-term durability of Symvess in the treatment of real-world combat injuries. And finally, the Trauma Surgery and Acute Care Open Journal published results of a new study comparing clinical outcomes of Symvess to those resulting from autologous vein in the treatment of extremity arterial trauma. This analysis leveraged data from 2 clinical trials, Humacyte's Phase II/III V005 study and the humanitarian V017 study in Ukraine and match Symvess patients in those trials to patients who had suffered similar injuries and who were previously treated with vein. The matching patients who were previously treated with vein were obtained from the PROspective Observational Vascular Injury treatment, or PROOVIT registry, which is the world's largest vascular trauma database. The comparison between Symvess and vein outcomes found that patients who were treated with Symvess had statistically similar outcomes to patients from the PROOVIT registry who received autologous vein. Secondary patency for Symvess versus the autologous vein group was 91% versus 97.7%. The amputation rate was 7.5% versus 8.2%. The conduit infection rate was 1.5% versus 0%, and the death rate was 4.5% for both groups, respectively. There were no significant differences that were noted between the 2 groups for any of these outcomes that were assessed. The use of autologous vein to repair an injured blood vessel is the current standard of care because it offers excellent long-term patency and low infection rate. However, in many cases, suitable autologous vein may not be available due to extreme limb damage, prior surgeries or poor vein quality. Even when available, harvesting the vein is a time-consuming procedure and may not be an option for patients with severe traumatic injuries. We believe that the results of this study underscore Symvess' potential as a much needed effective and life-saving alternative as a treatment for patients where autologous vein is not feasible. We're very pleased with these study results. And as Symvess is increasingly adopted by surgeons, we're confident that we will continue to see the benefits of this product validated by further research. In addition, we have another publication of the long-term results of Symvess in vascular trauma in a civilian setting that will be forthcoming soon. I'll turn now to the program that is our next priority, which is dialysis access. Positive 2-year results from the V007 Phase III trial of the ATEV in dialysis patients were presented last weekend at the American Society of Nephrology's Kidney Week 2025, which is the premier nephrology meeting. The ATEV demonstrated superior duration of use over 24 months as compared to autogenous fistula in high-need subgroups that have historically poor outcomes with AV fistula procedures. The significantly longer duration of ATEV use over 2 years in patients with this high unmet need could greatly reduce reliance on catheters for dialysis access, which are a major cause of complications, morbidity and costs for dialysis patients. Women and men with diabetes and obesity make up more than half of the dialysis access market and are historically underserved by the current standard of care. It's been known for decades that women, in particular, suffer low rates of fistula maturation, lower rates of fistula maturation than do men, but a lack of better alternatives has limited progress for these patients. We believe that the efficacy and safety results in this subgroup, combined with the approximately 50% failure rate of fistulas in this subgroup, makes women and high-risk men an important population for Humacyte to target. We look forward to publication of the results from the V007 Phase III trial in a major peer-reviewed medical journal. Before we file a supplemental BLA for the ATV and dialysis access, our plan is to complete a prespecified interim analysis of the currently ongoing trial, which is the V012 Phase III trial, which is being conducted in women on hemodialysis. The V012 trial compares the ATEV to women receiving fistula for hemodialysis access. A total of 109 patients have been enrolled to date in the V012 Phase III clinical trial, and an interim analysis is planned when the first 80 patients reach 1 year of follow-up, meaning that the interim analysis results should be available around April of 2026. Subject to those interim results, our plan is to submit a supplemental BLA in the second half of 2026, including data from V012, which is ongoing and the V007 Phase III pivotal study in order to add dialysis access as an indication for the ATEV. Finally, I'll briefly discuss one of our earlier-stage programs that we're also very excited about, our coronary tissue engineered vessel, or CTEV, for use in coronary artery bypass grafting, or CABG. Positive results of a preclinical study evaluating the CTEV as a coronary artery bypass graft in a nonhuman primate model were published in September of 2025 in JACC Basic Translational Science, which is a specialist journal launched by the Journal of the American College of Cardiology. In this study, the CTEV was observed to sustain blood flow, recellularize with the animals host cells and remodel to bring the diameter of the CTEV in line with an animal's native coronary artery. We are on track with our plan to advance CTEV into first-in-human study in CABG in 2026. We have filed an IND with the FDA for the CABG indication. And if successful, the CTEV would be the first novel conduit to be tested in CABG in the U.S. in decades. Before turning the call over to Dale, I'll mention last the expansion of our intellectual property estate and the grant of a new U.S. patent covering the composition of a bioengineered esophagus. This new patent provides protection into 2041 for key structural and mechanical attributes for an esophageal replacement, including size, strength and methods of production. Our tubular prosthesis patent family now encompasses granted claims for the composition and methods for engineered trachea, engineered urinary conduits and engineered esophagus. So our third quarter has been very productive for Humacyte as we've continued to grow our commercial launch and continue to publish strong supportive data for our vessel Symvess in multiple indications. We also look forward to continuing to share our progress going forward. And with that, I'll now turn the call over to Dale for a review of our financial results and other business developments. Dale Sander: Thank you, Laura, and good morning, everyone. Revenue for the 3 months ended September 30, 2025, was $0.8 million, of which $0.7 million related to U.S. sales of Symvess. The remaining $0.1 million resulted from a research collaboration with a large medical technology company. Revenue for the 9 months ended September 30, 2025, was $1.6 million, of which $0.9 million related to U.S. sales of Symvess and $0.6 million resulted from the research collaboration. There was no revenue either for the 3 or 9 months ended September 30, 2024. Cost of goods sold were $0.3 million and $0.6 million for the 3 and 9 months ended September 30, 2025, respectively, which includes overhead related to unused production capacity that was recorded as an expense in the applicable periods. There was no cost of goods sold for either the 3 or 9 months ended September 30, 2024. Research and development expenses were $17.3 million for the 3 months ended September 30, 2025, compared to $22.9 million for the prior year period and were $54.7 million for the 9 months ended September 30, 2025, compared to $67.9 million for the same period in 2024. The decrease in research and development expenses for the third quarter of 2025 compared to 2024, primarily related to the capitalization of material and overhead costs associated with the commercial manufacturing of Symvess and cost reductions implemented during the quarter ended June 30, 2025. The decrease in research and development expenses for the 9 months ended September 30, 2025, compared to 2024 resulted primarily from decreased material costs as the company began capitalizing expenditures for inventory following the commercial launch of Symvess, combined with the winding down of certain clinical trial programs, partially offset by higher noncommercial production runs. Selling, general and administrative expenses were $7.6 million for the 3 months ended September 30, 2025, compared to $7.3 million for the prior year period and were $23.6 million for the 9 months ended September 30, 2025, compared to $18.4 million for the same period in 2024. The increase in 2025 expenses compared to the prior year periods resulted primarily from the U.S. commercial launch of Symvess in the vascular trauma indication, including increased personnel expenses. Other net income for the 3 months ended September 30, 2025, was $6.9 million compared to net expense of $9.0 million for the prior year period. And other net income was $61.3 million for the 9 months ended September 30, 2025, compared to other net expense of $41.5 million for the same period in 2024. The increase in other net income for the 3 and 9 months ended September 30, 2025, compared to the prior year periods resulted primarily from the noncash remeasurement of the contingent earn-out liability associated with the company's August 2021 merger with Alpha Healthcare Acquisition Corp. Net loss was $17.5 million for the 3 months ended September 30, 2025, compared to a net loss of $39.2 million for the prior year period and net loss was $16.0 million for the 9 months ended September 30, 2025, compared to a net loss of $127.8 million for the same period in 2024. The decrease in net loss for the 3 and 9 months ended September 30, 2025, compared to the prior year periods was primarily due to noncash remeasurement of the contingent earn-out liability described previously, combined with current period decreases in operating expenses and a decrease in loss from operations. We had cash, cash equivalents and restricted cash of $19.8 million as of September 30, 2025. In addition, subsequent to September 30, 2025, we completed the sale of common stock and warrants that added an additional net proceeds to our cash position of approximately $56.5 million. As will further be discussed in the 10-Q to be filed later today, we believe that gives us cash runway exceeding 12 months from today's date. Total net cash used in operating expenses was $78.9 million for the first 9 months of 2025 compared to cash -- net cash used of $71.5 million for the first 9 months of 2024. The increase in net cash used for operating activities during the first 9 months of 2025 compared to the prior year resulted primarily from the buildup of inventory associated with the commercial launch of inventory, partially offset by our reduced loss from operations. With that, I'll turn the call over to Laura. Laura Niklason: Thank you, Dale. With our strong commercial execution, our promising pipeline programs and our dedicated team, we remain committed to delivering truly transformative regenerative medicine solutions to improve patient outcomes. We believe that we are positioned for growth and value generation in the remainder of 2025 and beyond. Thank you all for joining us today. Operator, we're now ready to take questions. Operator: [Operator Instructions] Our first question comes from the line of Matt Miksic with Barclays. Sneha Muthe: This is Sneha on for Matt Miksic. We wanted to ask -- one of the first questions we just kind of wanted to ask was, in Q2, you mentioned that 12 of the 45 hospitals had initiated the VAC process and now you said that 16 had started ordering. How many of those that have started ordering have begun the reorder process? And have you disclosed that data? Laura Niklason: We have not disclosed that data previously, but I believe the majority have reordered. Sneha Muthe: Okay. And then just as a quick follow-up. Now that you have this new data from the trial for 007, how does that change your view for the potential for Symvess in dialysis? Laura Niklason: Well, we believe that the very strong results in duration of usability in these subgroups of patients with a high unmet need going out to 2 years is very, very strong data. Most studies in dialysis access have follow-up time periods of a year. So showing continued sustained benefit in these high-need subgroups going out to 2 years versus the gold standard of current care, we believe is very important. And we believe it will be a strong support when we eventually file our supplemental BLA application in dialysis access. And again, these subgroups are not small. It's -- if you combine all women with men having these risk factors, it's more than half of the dialysis population. Operator: Our next question comes from the line of Ryan Zimmerman with BTIG. Iseult McMahon: Laura, this is Izzy on for Ryan. Congrats on all the progress this quarter. Just to start out on the launch that you -- the progress with the launch so far. Out of the units that you've been purchased, I was curious what is -- or how many of those have been used versus what are initial stocking orders at these hospitals? Laura Niklason: It's very hard to answer that question succinctly. What I can tell you and what we've messaged to the market before is that, initial stocking orders range from 1 to 3 units. There are a couple of hospitals who are ordering on an as-needed basis, although that's less common. Typically, what we're starting to see with usage and repeat usage is that, as hospitals use the vessel and then they come down to their par, then they will reorder when they hit their -- when they fall below their par level, whether that's 1 or 2 or 3 units. So we have been -- again, we've been getting good feedback from surgeons as far as how happy they are using the product. Surgeons tell us that it's easy to handle and that they're pleased with its function in the OR. I would also say, although you didn't ask this question, that we have several presentations on the function of our vessel that are being presented at the VEITH meeting, which is the large annual vascular surgery meeting in New York every year. Those presentations are going to be coming online next week. Iseult McMahon: That's helpful, Laura. And I believe last quarter, you called out the fact that the price has come down for Symvess. I was curious what benefits you've seen from that, if it's accelerated any of the adoption or if it even decreased the time it's taking for these hospitals to get through their VAC approvals. Laura Niklason: Yes and yes. Yes. The market is price sensitive now. That's certainly true. As we've discussed before, in the post-COVID era, hospitals are looking much more closely at budgets. And so, the price sensitivity is something that we found to be important. With this lower price point, what we've seen is that, hospitals are moving through the VAC process quicker. There are some hospitals and groups of hospitals that did not consider us at our original price point. But with further discussions on price, they've now reinstituted the VAC process, and so that has reopened other doors. And the VAC process tends to be moving a little bit more quickly. So this is still a process that takes time. And once the VAC approvals are obtained, then there's a 1- or 2- or 3-month contracting process that happens with each hospital. So there is a time factor here, but we've definitely seen an acceleration, both of VAC submissions and also an acceleration to time for approval. Iseult McMahon: That's helpful. And if I could squeeze in just one more for Dale. I believe you guys have called out some cost savings initiatives that have been put in place for '25 and '26 for about $50 million in total savings. I was curious if you're still feeling comfortable with this level or if we should expect any changes as we start to think about next year. Congrats again on the progress. Dale Sander: Thanks, Izzy. And no, absolutely, we are seeing those savings. Obviously, as part of the kind of the formal GAAP reporting out of our financial results, we compare to the prior year. But if you just compare our expense levels to last quarter, we're seeing those drops already. Research and development in the second quarter was $22 million. We've dropped that to $17 million, so almost $5 million reduction in R&D there. SG&A costs were pretty flat, maybe $200,000 down. So our operating expenses quarter-over-quarter were reduced by about $5 million. So we are already experiencing those cost reductions and expect those to continue out and achieve that full $50 million in cost savings that we targeted when we announced our second quarter results. Operator: Our next question comes from the line of Josh Jennings with TD Cowen. Joshua Jennings: I was hoping that just -- you guys have generated some strong supportive evidence for Symvess in the vascular trauma indication. And it sounds like this question has already been answered, but how impactful has that been just in terms of getting that processes started and then moving through the process? And just remind us, if you would, just how real-world outcomes are going to be tracked? Is there a post-approval registry study, and I think it will take some time for that to formulate. But when could we see any results from any registry -- real-world registry outcomes? Laura Niklason: Yes, Josh, those are good questions. Thank you. So the steady drumbeat of publications that have been coming out and frankly, are going to continue, has certainly been helpful in terms of providing additional assurance to surgeons as we speak to them at hospitals. Our initial endpoint for the V005 and V017 studies was at 30 days. And so, having these long-term outcomes that are now out in the public domain that we can share has been very powerful in terms of bringing surgeons on board. So -- and again, we're going to continue to lean into that. And your second question, I'm sorry. Joshua Jennings: Just about the real-world outcomes and how those are being tracked and what's the process there and... Laura Niklason: Sure. So there is a post-approval study that we've agreed to with the FDA as part of our FDA approval in trauma since we're a first-in-class product. So this will be a follow-up registry study in 100 trauma patients following at least 100 patients for at least a year. We have not kicked that trial off. In fact, we're continuing discussions about the specifics of the trial design with the FDA. The FDA has been a little bit slower in part because of the shutdown and some other changes. And so, we're still working through that. But we expect to kick off this post-marketing study sometime in the first half of 2026. And we expect data to come out from that 6 or 12 months after that. It certainly won't be a full data set, but there will be some information forthcoming. But frankly, I think that there will be more information forthcoming just from individual surgeon publications and reports on their experience, whether it's case reports or short series. And some of that, we're even going to see at the VEITH next week. Joshua Jennings: Excellent. And I wanted to ask about Symvess in the AV access indication. Congratulations on the 2 results presented at ASN. In terms of the BLA process and this interim analysis, I mean, should we be thinking that if the interim analysis for the first 80 patients in V012 kind of those results mirror the 1 and 2 results in females from V007 that the package will be robust enough for the FDA to consider approval? Laura Niklason: Yes, we believe so. I mean, the way we would approach this is that the LEAD study would be the study in women, the prospective head-to-head randomized study versus fistula in women. If we met our endpoint at the interim analysis, this would be a very strong indication of superiority of our vessel compared to the gold standard fistula in dialysis. So we would then lead with that publication and the V007 data, which includes data from all comers, as you know, but which has an important subgroup analysis in women and high-risk men, we anticipate that would be supporting data. So this would then be 2 prospective studies, basically, of course, pending the results of the V012 analysis, of course. But in that situation, we would have 2 prospective randomized studies supporting the same message in these patient subgroups. Operator: Our next question comes from the line of Jason Kolbert with D. Boral Capital. Jason Kolbert: Congrats on all the progress in transitioning to being a commercial entity. I'd like to just ask you a little bit about what's involved in transitioning the sales force as you start looking towards hemodialysis and essentially the work you're doing now kind of creating the awareness in the marketplace, how do you transition that into the commercial opportunity for dialysis? Laura Niklason: Thank you, Jason. That's a great question. So as your team probably knows, we've done the initial launch in trauma with a fairly small sales force, about 12 agents who are out in the field in different territories that are essentially high-value territories with large metropolitan areas and a lot of trauma centers. We are looking -- as we've messaged to the market, we're looking at strategically adding a small number of additional sales representatives in other geographies right now. We're in the process of doing that. But again, as we've mentioned, there's only about 3,000 vascular surgeons in the United States. And it's -- as we continue our sales efforts during 2025 and then through 2026, we anticipate having touch points with a large fraction of these surgeons. The vascular surgeons who perform trauma operations are the same surgeons who also perform dialysis access operations. And so, the visibility with this surgeon cohort, we think is going to be tremendously supported by our trauma efforts in 2025 and 2026. That said, if the results in V012 are positive and if we file the supplemental BLA in the second half of 2026, we would aim for approval sometime in early 2027. And by that time, we would probably bring on an additional sales force. This would not be a huge sales force, and we haven't given specific numbers, but there might be -- I'm making this up. There might be another 10 or 20 reps because we would be targeting the same surgeons, but we would be targeting additional call points because dialysis access is primarily an outpatient procedure. It's the same surgeons, but it's slightly different facilities. Jason Kolbert: Yes, that makes a lot of sense. Can you talk also a little bit just because I'm fascinated by it, work you're doing towards the virtual -- well, the actual replacement of esophagus, trachea and the urinary conduit, how did those programs proceed? And how aware are you of all the prior data done by companies like Harvard Apparatus almost a decade ago? Laura Niklason: Yes. So these other indications are indications that Humacyte has sought intellectual properties on and obtained intellectual property. I would say we do not have active preclinical programs advancing those indications right now. Frankly, we're going to up-prioritize that as our revenues increase and as our cash position improves. But right now, we're not doing active studies there. But, of course, from my long-standing work in this field, I'm very aware of the Harvard Apparatus outcomes and some of the problems that have occurred with esophagus and with airway replacements, very aware of those. Those are clinically challenging environments. And some of the earlier failures of other technologies, I believe, were driven by, frankly, a failure to consider the proper design criteria for the implant. I would hope that as we continue to develop these products in the future that we would make better conduits. We would have -- meet better design criteria, but we'll have to see. Operator: Our next question comes from the line of Bruce Jackson with The Benchmark Company. Bruce Jackson: I wanted to follow-up on the NTAP submission. Have you reconsidered the strategy? And is there a plan to resubmit it? Laura Niklason: Yes, Bruce, thank you for that. We've considered this carefully, and we've actually opted not to resubmit for the NTAP in trauma. The decision by CMS that our conduit in trauma is not novel was obviously very surprising for us as we messaged to the market last quarter. And in reviewing sort of their thinking that the CMS took a very reductionist approach to this and said, because we are a conduit that conducts blood, we are not novel because there are other conduits that conduct blood. We decided that it was probably not a good use of our resources to go back at that again. Instead, as you know, we have had some price reductions actually from around the time of the NTAP decision. And the reduction in price has helped to drive activity in the market. So we don't really see the -- we don't see it as a good use of effort to reapproach NTAP at this time. Dale Sander: Bruce, another consideration is that, out of the vascular trauma patients, only about 4% are covered by Medicare. So that was another consideration. Bruce Jackson: The other question I had was around the -- just some anecdotal information about the reorders and the marketing efforts. So in the multi-hospital approvals that you've gotten, have you seen additional hospitals ordered the product? And in the hospitals where you are selling right now, oftentimes, there's a single surgeon who is your champion who does the initial implants. Have you seen any expansion beyond your initial implanting physicians? Laura Niklason: We have. We have in a couple of the hospitals, I don't want to name them specifically, but in a couple of trauma hospitals we have seen usage beyond our initial champion. As it is with any new surgical product, as you know, there's typically a lead champion who will use and reuse. And then as his colleagues see those outcomes, they will continue to adopt. So we have seen that in several hospitals. As far as the hospital systems, when we get a VAC approval for a hospital system, there's still individual contracting that we must do with each individual hospital. So while having a blanket VAC approval helps with an important step in that process, we are undergoing contract negotiations right now in multiple hospitals that are covered by some of these chains that we've gotten approvals in, if that makes sense. Bruce Jackson: Yes, that does. Operator: Our next question comes from the line of RK with H.C. Wainwright. Swayampakula Ramakanth: Laura and Dale, congratulations. A couple of questions from me. The first one being, how do you initiate your conversations and maintain your conversations on value proposal to the folks on the VAC committees? And what are the things that resonate with them, especially when you had to still dislodge the autologous vein grafts? That's question number one. And the second question, Dale, it looks like there's some good operational excellence being done here. So you reduced your cash burn. Is this the new, I mean, cash use expectations from here onwards? And also with the $76 million in the bank now, how long of a runway are you going to have? And does that include the BLA submission for the dialysis indication? Laura Niklason: So I'll take the first question with regard to the value proposition to VACs and hospitals. As you know, RK, or you may remember, we published a Budget Impact Model in March of this year in the Journal of Medical Economics. That Budget Impact Model contemplated our initial list price of $29,500. And in that model, we showed that by virtue of decreasing amputations and conduit infection relative to plastic grafts, but also relative to other types of grafts like CryoVein and xenograft, because we decreased those complication costs, we actually came in cheaper even at our initial $29,500 price point. With the reduction in price point, that economic argument becomes even stronger. And so, when we lay that out to VACs, it is compelling. What we see, though, is that, some hospitals are -- there are -- because of changes in Medicaid, I will say that there are some hospitals who are -- despite the compelling Budget Impact Model, occasionally, hospitals will still look at just the initial acquisition price and say, even if it's going to save us money in the longer term, I have to think about what I'm spending today. And so, there is still -- in some hospitals, there is still some pushback. But the majority of cases -- in the majority of our VAC submissions, those are now going through successfully. I think because these arguments around decreased cost of amputation, decreased cost of infection are really driving home, especially at our new price point. Dale Sander: Yes. Regarding spend levels, I mean, obviously, quarter-over-quarter, we've reduced expenses quite a bit. I think both operating expenses and loss from operations have come down by about $5 million. Going out, I think we expect SG&A to be somewhat constant. I think we'll continue to see some reductions in the R&D area. As will be further disclosed in our 10-Q filed probably later today, we expect that the cash on hand, based on how we expect to operate, takes us beyond 12 months from where we are today. And in terms of what milestones that means as part of your later question, we believe that takes us past having the interim results from our V012 study in dialysis. And based upon those results, taking us past the BLA filing in dialysis and also taking us past the commencement of human testing in a cardiac bypass graft surgery. So it takes us past some -- and there'll be a lot else happening in the company also, but it certainly is sufficient to take us past some very key milestones. Operator: Ladies and gentlemen, we've come to the end of our time allowed for questions. I'll turn the floor back to Dr. Niklason for any final comments. Laura Niklason: Thank you very much. We really appreciate the time that our investors and our analysts have taken to catch up with us on our call this quarter. We've continued to execute on the goals that we've said we would execute on. We've continued to expand our commercial launch, and we're continuing to get traction in the clinical marketplace as surgeons continue to use our vessel in trauma. So we're very excited with our progress, and we look forward to catching up with you again next quarter. Operator: Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Good day, and welcome to The Dixie Group, Inc. 2025 Third Quarter Earnings Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I'd like to turn the call over to the Chairman and Chief Executive Officer, Dan Frierson. Please go ahead, sir. Daniel Frierson: Thank you, Melissa, and welcome, everyone, to our third quarter earnings conference call. Our safe harbor statement is included by reference both to our website and press release. For the third quarter of 2025, the company had net sales of $62,379,000 as compared to $64,877,000 same quarter of 2024. The company had an operating loss of $2,025,000 compared to an operating loss of $2,107,000 in the third quarter of 2024. The net loss from continuing operations in the third quarter of 2025 was $3,998,000 or $0.28 per diluted share. In 2024, the net loss from continuing operations for the quarter was $3,729,000 or $0.26 per diluted share. Third quarter sales got off to a slow start as a result of headwinds in the housing markets tied to high interest rates and high housing prices. Despite a slow start to the quarter, we saw a strong rebound in sales for September, giving us momentum as we entered the fourth quarter. The average weekly order entry rate for the first month of the fourth quarter was 12% above the average weekly order entry rate in the third quarter and close to last year's level for the same period. At this time, I will turn the meeting over to Allen, who will review our financial results. Allen Danzey: Thank you, Dan. The lower sales volume in the first part of the third quarter resulted in gross margins that were less favorable than what we had seen in the first 2 quarters of this year. They were still slightly favorable to the prior year at 24.8% of net sales compared to 24.6% in the third quarter of 2024. Year-to-date margins were still very favorable to the prior year-to-date September at 27% compared to 25.7% in the prior year. Our selling and administrative expenses were $1.2 million or 6.8% below the same quarter of the prior year, and they were 2.5% lower on the year-to-date. We've had significant reductions in selling expenses, particularly related to samples and marketing, and they were partially offset by higher legal expenses. Other operating expenses of $1 million in the third quarter included lease income net of the related expenses, estimated legal costs and other miscellaneous expenses. Our interest expense on the year was $5.4 million compared to the 2024 year-to-date interest expense of $4.8 million. We had higher internal interest rates and amortization of financing fees throughout the year that contributed to that difference. The net loss on the quarter was $4.1 million compared to a net loss of $3.9 million in the prior year. Fiscal year-to-date September, we had a net loss of $4.6 million compared to a net loss of $5.8 million in prior year. Looking to our balance sheet, our September month end receivables of $26.3 million was up from our seasonally low year-end balance of $23.3 million, and that increase was driven by the comparatively higher sales volume in that latter period. Our net inventory balance at the end of the third quarter was $68.5 million compared to a net inventory balance of $76.8 million in the third quarter of the previous year. We had a planned reduction of inventory in the fourth quarter of last year, and we continue to manage inventory at the lower levels while maintaining our service to our customers at a timely level. Accounts payable and accrued expenses were $44.1 million compared to $36.8 million in the same period of the previous year as a result of extended terms and timing of payments that were due. Net property, plant and equipment decreased by $3.5 million from our prior year-end. This included $3.9 million in depreciation year-to-date. Year-to-date capital expenditures have been $446,000. We plan to hold capital expenditures under a maintenance level of approximately $800,000 for this year, and depreciation is expected to be $5.1 million. The debt on our balance sheet decreased by $916,000 from year-end. Our senior debt balance net of restricted and unrestricted cash on the balance sheet at the end of the third quarter was $45.8 million. That's a $4.2 million reduction from that same total at prior year-end. Our balance for term debt decreased by $4 million from year-end. At the end of the quarter, borrowing availability under our new senior credit facility was $10.9 million, which was subject to a $6 million excess availability requirement. Our investor presentation is available on our website at dixiegroup.com. Dan? Daniel Frierson: Thank you, Allen. For the past 3 years, the supply of available housing has not kept pace with household formations, which has created a shortage of supply. Consequently, the flooring industry has been impacted by low home sales and consumers postponing large discretionary purchases. Housing turnover has a dramatic impact on the flooring industry. Residential remodeling is the primary driver of our sales as flooring is often replaced before a home is listed for sale or just after a home is purchased. Over the last 3 years, the soft floor covering industry has been down approximately 30% in units. To mitigate the impact of floor business, we have curtailed capacity and significantly lowered costs. Over the 3-year period, including this year, we have lowered costs by nearly $60 million. This has been accomplished by restructuring our operations and reducing costs in almost every phase of our business. In preparation for next year, we have developed an additional profit improvement plan of $10 million, which will be 90% in place by the end of the year. We have also continued to minimize capital expenditures and closely manage our working capital. As a result, in the last year, we have lowered our net debt by over $12 million. Obviously, tariffs have been a major area of concern for our industry and industry generally. Since we produce most of our products domestically, it has less impact on our company than some others. We have monitored these actions closely and have initiated price increases to mitigate the impact of the tariff increases when appropriate. We have also increased prices in the fourth quarter on all soft floor covering product as has most of the industry, which will have a major impact on our financial results next year. For the third quarter and for the first 9 months of 2025, our year-over-year soft surface net sales were down less than 1%, outperforming the industry, which we believe was down closer to 4% in the quarter and 6% for the first 9 months. Our commitment to the luxury end of the market has enabled us to continue to outperform the market during these difficult times. A key growth segment has been our DuraSilk, SD collection, which has shown strong growth and gained share of the polyester market. Our high-end carpet segment also had positive growth in the quarter for both nylon and decorative products. Building on this momentum, in the third quarter, we introduced 2 new DuraSilk polyester carpet styles and 6 new decorative carpet styles. In our hard surface segment, our fabric of wood is a highlight with net sales increasing over 17% year-over-year for the first 9 months. While our TRUCOR segment declined for the quarter, our TRUCOR Prime WPC collection showed positive signs as the market is shifting toward WPC. While market headwinds persist, especially within residential housing and consumer confidence, our team remains committed to high-end customer service, design-focused product introductions and operational excellence. Our continued focus on cost reductions and operational efficiency will be instrumental in navigating industry challenges and driving improved profitability in future periods. Subsequent to quarter end, as we said in our press release, the company has entered into a memorandum of understanding to settle 2 of its PFAS-related lawsuits, and the company has obtained an agreement in principle to be dismissed without prejudice from a third PFAS-related lawsuit. An estimated liability for the proposed settlement was recorded within the third quarter results, and the legal expenses associated with these cases are included in our administrative expenses. The proposed agreements are subject to certain conditions and final negotiations with the plaintiffs in these matters. Looking forward, we're optimistic that declining interest rates, along with the wealth effect from higher home prices and the stock market should positively impact floor covering purchases. At this time, we'll open the meeting for questions. Operator: [Operator Instructions] Our first question comes from the line of Mike Hughes, private investor. Michael Hughes: First, on the price increases. I think the price increases on the imported goods were implemented on September 30 and then the nylon polyester freight on October 20. So I assume there was not really any impact on the just reported quarter. Could you maybe help us quantify the impact from those 2 actions on the fourth quarter and then into next year? Dan, I think you mentioned that it could have a materially positive impact. How would you define materially positive? Daniel Frierson: First of all, we have had several increases on imports. We had one earlier in the summer in addition to what you outlined there as the first Liberation Day tariffs were implemented. Overall, the impact will be somewhat muted in the fourth quarter, as you pointed out, they're going into effect in the October, November time frame. And by the time you receive orders, ship the products and so forth, there is a lag. So I would say in the fourth quarter, there will be a relatively small impact, but major impact next year. And we think the impact will be somewhere in the $6 million range. Michael Hughes: Okay. Great. Great. And then you've already addressed this to some extent, but some of the bedding and furniture players said business was pretty good in the September quarter through Labor Day and then it kind of softened. You're saying that you've experienced something a little bit different. So your business actually -- did it strengthen in October? Or how did it perform in September and then into October? Daniel Frierson: Mike, first of all, we tend to be a little different from some other people in our industry and in some other home furnishings businesses. The second and fourth quarters tend to be our best quarter. And in the high end, particularly, you begin to see a buildup of orders in September typically, which manifests itself in higher sales or shipments in October and November than slowing down in December. But our October business, I think as we outlined there, our run rate is some 12% over the third quarter, run rate and very close, very similar to what we experienced a year ago. Michael Hughes: Okay. Good. And then the $10 million in cost takeouts that you referenced on today's call and in the press release, that's incremental beyond what you've done so far, correct? So that would be a benefit for 2026 versus '25 of $10 million. Is that -- I just want to clarify. Daniel Frierson: That is incremental from cost reductions previously, but that includes the $6 million of price increase. Allen Danzey: And it's a year-over-year incremental improvement. Michael Hughes: Okay. And then the other operating expenses of roughly $1 million, is that related to the legal settlements? Allen Danzey: As we mentioned, we did record an estimate to the other operating expenses based on having reached some agreements here. Prior to this, we were not able to estimate the cost of this. These agreements are still under negotiation and subject to certain conditions, but they certainly are not final at this time. And there is obviously some confidentiality involved in that, but we're happy to be reaching the stage we're at, and we look forward to some conclusion on these lawsuits. Michael Hughes: Okay. So I'll ask a little differently. So there's another operating expense item in the September quarter of roughly $1 million. Is it fair to think that, that will not recur in the December quarter? Allen Danzey: There is certainly an understanding that a portion of that would not be recurring, yes. Michael Hughes: Okay. And then last item, can you just speak to liquidity and your comfort level if let's say that mortgage rates stay where they are for the next, I don't know, 12 to 18 months, are you still comfortable with your liquidity where it stands today? Or would you take additional actions on that front? Allen Danzey: We are -- as we talked about on the debt level, we're pleased to have been able to manage certainly within the operating cash flow and maintain our debt levels and actually reduce those over time period. But as you mentioned, everything is unpredictable out in the market right now. We're happy with the momentum we've seen here coming out of the third quarter and into the fourth quarter. But we -- as Dan mentioned, first quarter is a seasonally low period for us. So we're keeping an eye on that and we'll be looking at opportunities for financing additional availability of funds coming from additional financing to help give us a cushion through that period. Michael Hughes: And is there any additional land that can be sold off at this point or sale leasebacks or anything like that? Allen Danzey: Yes, we do have opportunity with several property locations that we are considering and looking at those opportunities as well as some equipment financing and just seeing what presents the best terms and amounts for us. Operator: [Operator Instructions] Mr. Frierson, I'm seeing no other questions at this time. I'll turn the floor back to you for final comments. Daniel Frierson: Thank you, Melissa, and thank you, everyone, for being on the call. We appreciate your interest. We are mighty glad to get the PFAS lawsuits the rearview mirror and look forward to a better fourth quarter. Thank you very much. Operator: Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Good afternoon, everyone, and a warm welcome to the Verbio earnings call for the first quarter of the fiscal year 2025, '26. Today's speakers are Olaf Troeber, CFO of Verbio; and Alina Kohler, Head of Investor Relations and Corporate Strategy. They will walk us through the company's performance, touching on key milestones and current market trends. But before we dive in a quick housekeeping note. The conference is being recorded. [Operator Instructions] Let me pass the word to Ms. Kohler and Mr. Troeber. The floor is yours. Olaf Troeber: Thank you, Harald, and good day, everyone. Welcome to Verbio's earnings conference call. We will be discussing our first quarter 2025, '26 financial and operating results. I'm also delighted to welcome Alina Kohler, Head of Investor Relations, who is joining me today. Slide, please. Yes, we've got a bit of a problem with the slide, give me a second. We are there. Okay. So for that one, we achieved a record biodiesel production in our first quarter. Biodiesel production reached close to 167,000 tonnes and the capacity utilization rate was close to 94%. Meanwhile, ethanol production grew by 10% year-on-year to 154,000 tonnes. This was purely driven by the ramp-up in Nevada and efficiency gains at our ethanol plant in South Bend, Indiana. Biomethane production grew by 24% year-on-year, also thanks to Nevada. Our EBITDA increased strongly to EUR 15.4 million from minus EUR 6.6 million. The year-on-year increase was driven by the main segments. Higher coproduct revenues and favorable developments in commodity forwards and ForEx valuations supported our results. The North American business also contributed positively produced developments, as outlined before. The increase in net debt primarily reflects negative free cash flow stemming from reduced operating cash driven by working capital and investments in our strategic projects. The working capital effects mainly reflect a lower reduction in receivables and a decrease in payables, both related to cut-off date effects. The strategic investments in the amount of around EUR 20 million include investments into the specialty chemicals unit here in Bitterfeld as well as inventory production plant in South Bend, Indiana. Overall, the development of net financial debt is in line with the planned temporary cash outflows related to inventory changes and the investment program. The equity ratio remained at 58%, and well, it's -- hence, it's at a comfortable level. Overall, these results are reassuring. We haven't fully reached our goals yet but the progress towards Q2 strengthens our confidence in the path ahead. Next slide. Here, you can see our gross margin per tonne of liquid fuels versus the sales volume weighted reference spread. Yes, but the spread is basically the difference between the biofuel price and the feedstock cost per tonne of biofuel. Overall, and that shows the capabilities of Verbio. We achieved a greater premium versus the market in Q1 '25, '26 compared to Q4 the previous year, '24, '25 and Q1 last year. This was supported by co-product revenues and the nonrecurrence of inventory write-downs and lower cost and net realizable value impacts. Our coproducts generate additional value and reduce the effective cost base compared to producers of the main product alone. Year on -- yes, quarter-on-quarter, Verbio also benefited from positive market momentum that gives you a sense of our position in the market. Let's now move on and see how the segments performed. I will begin with a quick overview of EBITDA development across the quarters. What stands out, again, is that a Biodiesel segment shown as the dark green bar continues to deliver strong earnings support. This increase in EBITDA to EUR 22.6 million in the Biodiesel segment was primarily due to an improved gross margin. Also, we managed to cut our losses by more than half in the Bioethanol and Biomethane segment to minus EUR 9.5 million, which is represented by the light green bar. Year-on-year, this has been driven by the positive development in North America. Earnings below the gross margin improved mainly because last year's negative effects from the weak U.S. dollar, open commodity positions did not reoccur. Quarter-on-quarter, one-offs, including write-downs on inventory, which had discussed during our earnings call in September did not repeat. The other segment shown in the green, which harbors our logistics and trading activities reported an EBITDA of -- can you mute? Alina Kohler: Oh, sorry. Olaf Troeber: I will repeat it. So the other segments shown in the green, which comprise our logistics and trading activities reported an EBITDA of EUR 2.3 million and reflects, in particular, the positive development of our commodity forward contracts. Now let me hand over to Alina, and I will be back to give you the financial outlook later on. Alina Kohler: Thank you, Olaf, and apologies for the microphone again. And good afternoon to everyone else. Let me walk you through the segment performance, focusing on how things have developed quarter-over-quarter. In the Biodiesel segment, which I want to start with, as you should see on the slide, can we please? Yes. There we go. Thank you. In the Biodiesel segment, we have generated revenues of EUR 244 million in the first quarter which is in line with the previous quarter or Q4, as you can see in the chart on the left side. Our production volumes increased slightly while sales volumes, which are not depicted here in the chart, remain stable. This underpins the steady market demand that we're seeing for our product as well as our consistent operational performance. Our EBITDA also grew quarter-over-quarter, thanks to a slight improvement in the gross margin. And now let me give you some more market context, and we will have a look at the reference charts. Does that work? There we go. There, we have it. On the left, you can -- apologies for the technical issues we're having here. On the left, you can see the biodiesel spread chart, which shows the difference between biodiesel prices and rapeseed oil prices per tonne of biodiesel. And as you can see, the spread has widened during our first quarter. On the right side of the slide, we show how the biodiesel and rapeseed oil prices have driven this development specifically. As always, and we mentioned that during each conference call, we have these charts do not reflect our sourcing strategy but rather give us a good indication of how the broader market has moved. We -- on the other hand, we typically purchase our rapeseed oil 2 to 3 months in advance. That's just as a heads up. So with that, let's move to the Bioethanol and the Biomethane segment. We recorded an increase in revenues to EUR 191 million, which is a new quarterly record for us. And this record has been driven by an increase in sales volumes, specifically for biomethane. On the slide, we usually say RNG, which is short for renewable natural gas, and the recovery in the markets. So the biomethane production actually also reached a new record at 336 gigawatt hours for the first 3 months and this is a utilization rate of 68%, whereas the production volumes for bioethanol fell slightly in comparison with our last quarter so Q4 due to maintenance work we had to do here in Europe. Overall, our bioethanol utilization stood at 77%. The significant increase in earnings that you can see in the chart on the right side is primarily driven by the positive development in North America and the nonrecurrence of one-off items, which Olaf had just discussed a minute ago. Let us now move to the reference graphs. And here, it's a bit more interesting than what we've seen with the biodiesel. So again, the reference graph, they illustrate how ethanol market spreads have moved and what has been driven that price-wise. Like with biodiesel, they don't mirror our exact purchasing or our feedstock strategy. We show wheat on the slide, but mostly, we can also use corn, for example, or triticale, anything that's available and that comes cheaper than wheat in -- due to availability, for example. So this is rather indicative for the market. Looking at the price chart on the right, you can see that ethanol prices actually jumped during our first quarter, but wheat prices fell slightly, thanks to a strong harvest. So this move in ethanol prices was likely due to short-term imbalances in the market. However, looking ahead into 2026, the fundamentals should also remain strong for ethanol. A key factor here that we're seeing is the transposition of RED III in the Netherlands, which restricts the use of denatured ethanol. So what is denatured ethanol? Denatured ethanol is ethanol that is treated with additives to make it unfit for human consumption. Undenatured ethanol, on the other side, is pure ethanol, and that's what's typically produced here in Europe. So that's also what we produce here in Europe. By restricting denatured ethanol, the regulation reduces the supply that's available mainly from North America, which then helps support the ethanol prices in Europe. European producers like us also benefit from higher import duties for undenatured ethanol, which then limits the competitiveness of ethanol imports and strengthens the domestic market prices. So overall, all of these factors should create a favorable market environment as we had into 2026. Coming now to the U.S. market, you will find some similar -- sorry, there we go. Coming out to the U.S. market, you will find some similar charts as ethanol prices bounced back by about USD 0.30 per gallon, which is roughly EUR 80 per tonne in August and September from the summer lows that have -- we have been seeing specifically in our Q4. The increase was supported by tighter supply, and you can see this increase in the chart on the right-hand side. Meanwhile, the corn prices stayed relatively low, thanks to good weather also and larger yields. Hence, quarter-on-quarter, market spreads improved strongly, as you can see on the chart on the left-hand side again. So year on the year, the market spreads were nevertheless slightly behind as the summer market remained below its usual seasonal pickup, which also carried into our first quarter or calendar Q3 and that we had discussed in a bit more detail in our last earnings call. So with the fall maintenance done now and peak summer driving also behind us, ethanol prices are now closer to historical levels again. So last but not least, let me now turn to the GHG quota price development. Here we go. And here, you can see that prices have increased over time. Much of the movement that we have witnessed has been driven by news and discussions around the RED III transposition in Germany. Since the first draft was released at the end of June, we have seen an increased market activity and further policy clarifications have then strengthened the confidence in the sector. One of them being the ministerial agreement that has been reached confirming that double counting will now be eliminated. This change is actually like really a positive step for the market, especially combined with the restriction of the production of -- protection of trust, excuse me, which we call the [Foreign Language] here in Germany. Also, as some of you may have already seen in the news, the adoption of the new draft in the cabinet has been delayed multiple times now. But importantly, ministries still expect retroactive application. And while these delays have temporarily shown activity -- sorry, slowed the activity in 2025, which we see here in the graph which was just shown there, the 2026 demand has particularly remained very strong, and prices only know one way and that is up. It's also encouraging that a new draft version has been leaked, which also some of you might have seen, I think it has -- it was covered in the press also on Monday, which we actually overall feel very positively at this time. And now with that, I hand back to Olaf for the financial outlook. Olaf Troeber: Thank you, Alina. Well, let's come to our guidance. It might disappoint some of you, but our guidance remains unchanged. We expect to achieve an EBITDA in the high double-digit million range in the financial year, '25, '26. I'm not going to walk through the detailed assumptions, which we already discussed during our full year earnings call 6 weeks ago. The strong bioethanol market works in favor, but we are still early in the year and eagerly awaiting the German decision regarding the RED III. While overall, the preliminary information will look promising, as discussed by Alina, we don't want to get ahead of ourselves. And I believe you got the message and the message is clear. The next is the improved results and lower investments compared to the previous year are expected to lead to at least a balanced free cash flow and a moderate reduction in net financial debt year-over-year as outlined in the September call. CapEx is under tight control as we have demonstrated this quarter, working capital will be optimized through the year. And now with this, we would like to open the line for the Q&A. Thank you. Operator: Thank you for these insights, and we will now move on with the Q&A session. [Operator Instructions] So let's dive in. And we go for the first question. Olaf, Alina, how are the new contract negotiations going? If we see the development of the GHG quotas, shall we expect that the EBITDA will increase significantly in Q1, Q2 and 2026? Olaf Troeber: Well, we concluded a few contracts already at market prices, but the large chunk of agreements will be done beginning of December, rather mid-December or concluded beginning December, mid-December. And EBITDA increase -- well, I outlined it with my comments regarding the guidance. We are rather a little bit more on the cautious part. What I can say, overall, the downside risk is reduced, the upside potential has been increased. But so far, we stick with our guidance. Operator: That's said, I mean the next question is going into the similar direction. The guidance is conservative. Are we expecting adjustments in the EBITDA to the levels of EUR 120 million to EUR 160 million? Olaf Troeber: No further comments. Operator: No further comments. So for the time, there's no further question in the line, but I can see that somebody is typing. So let's wait a moment. And let's have a look on the U.S.A. and the business there. Can you provide more color on the outlook in the U.S.? And what assumptions underlying your current forecast for market pricing and earnings? Olaf Troeber: So Alina? Alina Kohler: Yes. I think most important is the utilization at Nevada because that's, in the end, driving our increase in EBITDA year-over-year in North America. And with that, we stick to what we have said just in our last earnings call that we still expect the full utilization in Q4, and we're on track to reach that. We have actually a very good utilization at this point of time. In terms of market pricing, we have looked at historical data there and are pretty much on par with historical margins. Operator: And still waiting for the next questions. And here we go. Can we run through the potential impact on this year's guidance if bioethanol spreads stay at this level? Olaf Troeber: Well, I mean that's a simple mathematic calculation. We provide the volumes we produce per quarter and per year and then simply multiplied by the increase we have seen the last 6 weeks. The point is why I'm stressing this that we are not going to adjust our guidance. The year has 52 weeks. And we are seeing just 6 weeks now elevated bioethanol prices. And if this is going forward, we, of course, have to adjust our guidance. But for the time being, we had 6 weeks of elevated bioethanol prices or bioethanol rather -- bioethanol margins. But we also had 2 weeks of compressed or lower biodiesel margins. So right now, as I pointed out, the downside risk decreased and the potential -- upside potential increased, that's all. Operator: Thank you for answering this question. Maybe let's have a look again to the Nevada plant. How is ramping up going on? And is it almost to its peak levels of 90%? Olaf Troeber: Well, I had a call -- first of all, Alina already provided some color on this one. I had a call yesterday with Dr. Lüdtke in Nevada, he is on the path. So we are in the -- yes, as we planned. We reached the 80% already of capacity utilization, not on an hourly basis rather on a daily, and now we are getting to a weekly basis and peak capacity utilization was temporarily also exceeding the 80%, but not for a longer time. So nothing of concern right now. And I hope that we really achieve the 100% stable capacity utilization beginning of spring, summer next year. Operator: Thank you for answering this question. Moving on to the next one. In which area are you currently focusing your management capacities, in particular? Which areas require your greatest attention and where should we, as investors, focus our attention in particular? Olaf Troeber: Well, we clearly communicated our focus. Our focus is on the -- yes, more or less stable production with respect to the existing plants, also capacity -- increase in the capacity utilization of our German plants, getting more out of the raw materials. So it's all what you can do on a common basis without facing larger investments. With respect to the U.S., we also clearly communicated that our focus is on making our investments profitable. So the main focus is right now on Nevada but not reflecting the South Bend ethanol plant. So it's really focus on these ongoing process. I forgot one. It's the ethenolysis plant in Bitterfeld. So we are also making progress there. And yes, as Alina outlined, we also had a larger chunk of investments there already. And I'm quite confident that we complete the investment mid end of next year and then starting with the ramp-up phase. What you should have in mind as an investor, well, it's always the RED III development quota prices. We are quite dependent. We had a cautious planning regarding the quota prices. So if they may go up substantially, there is an upside potential. Also what one of the investors mentioned before, the margins with respect to bioethanol remain that high. I don't expect it. But if they remind that high, that would also have a positive impact. And with respect to the U.S. business, well, as long as you stay within our plan, then everything is fine. Operator: Let's have a closer look to the U.S. activities. How smoothly are your U.S. operations running at the moment? And do you anticipate any technical challenges in the upcoming winter period? Olaf Troeber: Well, we managed last winter quite nicely. We had some minor technical issues, but the plant was running through the entire winter time, both South Bend and Nevada. So with increased production, you produce more heat. So the likelihood of facing any technical issues will decrease, but you never can be certain. I mean, there might be a [ metal ] hitting one of our facilities or whatever. But really, the likelihood is small that something might happen. Right now, we are making progress, everything maybe at a lot of people there taking care of all the insulation of all the external heatings. So from a common perspective, the plant should be safe. So that's U.S. Operator: Speaking about the U.S., what are the current share -- what's the current share in the European markets, speaking in percent, of U.S. ethanol imports, which might be diminished next year? Olaf Troeber: We have a figure... Alina Kohler: I don't have it on top of my head, but volumes that came from the U.S. to Netherlands for around 450,000 -- sorry, 450 million tonnes and -- sorry, 450,000 tonnes. And Netherlands in the U.K., we're the only markets that could receive denatured ethanol here in Europe. Operator: Okay. Moving on to India. Could you say a few words about the market there? What's going on in India and your activities? Olaf Troeber: Well, nothing substantial. Nothing changed substantially in India. We are collecting the straw, we are producing the biomethane capacity utilization has increased a bit. We are positive on EBITDA but still not there where we would like to be. So no negative -- I would say no negative news from India, all with respect to India. Operator: Okay. Quite quick answer. Let's move on to the next question. Rapeseed oil prices have risen sharply since June 2025. Do you see any risk to EBITDA for Biodiesel segment? Olaf Troeber: I mean if you would go back a little bit in the presentation, you can see that we are talking about spreads. It doesn't matter if the rapeseed oil price increases, doubled whatever, you're always talking about a margin. And if I have the figures in mind correctly, then the rapeseed oil price right now is approximately EUR 1,080 or EUR 1,090 per tonne and the biodiesel IME price is EUR 1,240. So it's a good margin. And we're just talking about margins and not a price development of one lag of our spread. So the margin is okay, regardless where the raw material price is. Operator: Okay. Thank you for this. The next question. Let's have a look. There we go. Within the next 3 years, does Verbio plan to invest in a new plant in other countries outside Europe? Olaf Troeber: Yes, we would like to. But as outlined before, we currently, we focus on our current projects. It doesn't make sense to have so many projects not completed. So we focus on Nevada. Here, the ethenolysis plant and just keep in mind, there's also a plant in South Bend where we face a larger investment with respect to the biomethane facility. So the answer right now would be no. We are not going to purchase another plant in somewhere else. Operator: Okay. Thank you. And let me check the question. Olaf Troeber: But still it depends on the price. Operator: Of course. There get -- so another question, but thank you for the information, Olaf and Alina. And as far as I can see this could maybe conclude our session for today if there are no further questions coming in. But I can see again that somebody want to type. There we go. Let's open the topic with the RED III. How important is RED III for Verbio's outlook and which parts of the framework, do you expect to benefit your business the most? Olaf Troeber: Alina? Alina Kohler: Yes. So most important is the fraud prevention. And we have the inspection of plants also outside of Europe in the new draft, but also the old draft, which is very important, then what we had highlighted in the call as well is the abolishment of the double counting, which has always been a good idea, like Claus also mentioned during our last call, but unfortunately, the way that it was implemented hasn't been exactly going how it was planned. And then what's also important for us is the [indiscernible] that's going away, which is not part of the RED III, but it comes together as a package basically. And all of those things that really help the fraud to stay out of the biofuels market is what's important for us. Of course, the mandate itself is critical but it's very ambitious anyways. And then in the new draft, they have even higher the mandate. So that's why we are like very optimistic going forward. Operator: Okay. Thank you for this answer. And as far as I can see, there is no further question. And so I guess this concludes our call today. Just waiting a brief moment. Olaf Troeber: Well, on just a side note, maybe one other investor is still eager to type a question. So what I would like to summarize is simply, we had now many, many quarters of headwind. And I'm happy or a little bit relieved that we face now a decent tailwind for our business and just wait a little bit, give us the chance to demonstrate what we are capable of. I think the Q2 should be a good quarter. So look forward and see how it might affect our guidance later on, but not now. Any questions, Harry? Operator: No, no further questions, but I guess there were some good and final remarks, I would say. So thank you all for the insightful questions, and a big thank you to Alina and you, Mr. Troeber. To all participants, we appreciate your time and the interest in Verbio, and we kindly ask you to share your feedback with the company, so a short e-mail has been sent to your Inbox for this purpose, and we really would appreciate if you give us a feedback. And with this, I want to say goodbye from my side, but I'm now handing over back to you for some final statements, Alina, Mr. Troeber. Olaf Troeber: Well, I already made my final statement. I really appreciate you guys listening to our conference call. Also, thanks for the questions. And Harry, really thank you. Much appreciate your support, the completed work here, managing, moderating, everything. So I wish everyone a good day, hopefully, a sunny day, and then move forward. Thank you. Alina Kohler: Thank you.
Operator: [Interpreted] Thank you for joining today's. We will be starting our financial announcement. So I'd like to first ask CFO, Hagimoto-san to talk. Then next, I'd like to hand it over to CEO to talk about the direction and the core businesses for TIS. So followed by that, we will move to the question and answer. And we will take 60 minutes for the combined presentation and the Q&A. We have simultaneous translation in Japanese and English. You can see both of them. [Operator Instructions] We'd like to ask you some asks before we start. We will be talking about the projection of the future businesses, all of which comes with uncertainties or risks. Please the actual results may be different from our projections that we'll be presenting today. With that, I'd like to ask Hagimoto to be talking about our financial results. Hagimoto, would you please go first? Jin Hagimoto: Yes. I'm Hagimoto, the CFO. Let me walk you through the highlights of our financial results for the second quarter of the fiscal year ending March 2026. I'd like to talk about our second quarter. This is our highlights. We continue to benefit from favorable business environment. Our revenue for the first half reached a record high of JPY 534.9 billion. In particular, demand in North America remains strong, resulting in an 8% decrease in revenue on a local currency basis. Operating profit, adjusted operating profit and profit for the period, all reached record highs for the first half. In addition to increased revenue, profits are growing at a pace that exceeds revenue growth; driven by global pricing measure and appropriate cost control. In light of the current business, we have revised our full year guidance announcement in May. We have upwardly revised revenue and adjusted operating profit, reflecting the strong fundamentals and changes in foreign exchange assumptions due to yen depreciation. On the other hand, we have incorporated temporary costs related to the strategic initiatives such as acquisition-related expense and continuous portfolio reviews into our operating profit. I will explain the details later. Next slide. Moving on to our P&L performance. Revenue was driven by C&V and TBCT companies. Despite negative currencies impact, revenue for the first half reached a record JPY 534.9 billion. Operating profit and adjusted operating profit both grew faster than revenue, reaching record highs of JPY 1.0 billion and JPY 114.4 billion, respectively. From the second quarter, tariff impacts began to materialize, but profit growth was achieved mainly through pricing measures and appropriate cost management. Next slide, please. Since the year-on-year OP variance analysis for the second quarter reflect the same trend as the first half, we will provide further details on the next slide. OP variance analysis for the first half is this. Overall increased sales driven by a continued demand expansion contributed to profit growth. G/P improvement -- increment by sales increase led by overseas TIS, especially in North America and by plasma business and Global Blood Solutions gross margin price. Pricing measures in the C&V contributed significantly to profit growth, though positive effects were partially offset by tariff inflation and mix effects. SG&A increased by business expansion, remaining within expected levels. Research and development decreased slightly year-on-year, partially due to last year's impairment losses on capitalized R&D. Foreign exchange impact negative both on flow and stock basis compared to the previous year. Next slide, please. Let me now explain results by companies. Please note that revenue by region slide, which was previously shown earlier is now placed and comes after the revenue by company slides. First, the Cardiac and Vascular Company. Revenue grew by 8% on local currency basis with strong global performance centered in North America. TIS and Neuro grows, while Cardiovascular also achieved high single-digit growth in local currency, driving overall company performance. Although Aortic experienced supply issues with surgical vascular products during the first quarter, revenue rose due to recovery trends from the second quarter and strong progress in expanding sales of hybrid products. Operating profit improved by 2 percentage points to 27%. Pricing measures, profitability improvement measure and a review on how profitable regions have contributed. FX stock impact was negative, resulting in a slight decrease in margin compared to the first quarter, but fundamentals remain solid. Next slide, please. Next is our TMCS Medical Care Solutions Company. Revenue for the first half increased, driven by growth in Pharmaceuticals. This growth reflects the impact of delivery timing shift in certain areas of the domestic CDMO business being recovered in the second quarter, along with continued strong performance of projects overseas. Hospital Care saw a temporary revenue decline due to last year's business transfer and ongoing supply issues for some products. Pricing measures started in April are progressing very well. Profit growth was supported by recovery in Pharmaceuticals. Next slide, please. Continuing to TBCT, the Blood and Cell Technologies Company. Revenue grew significantly in Plasma Innovation and Global Blood Solutions. Rika deployment to existing customers were completed in the first quarter and operational optimization will continue. Core business is progressing as expected. In Global Therapy Innovations, revenue increased due to growing demand for cell collection in cell and gene therapy, especially in the U.S. along with replacement demand for certain devices. Profit increased, led by improved profitability from higher sales of Rika. Next slide, please. And this is our revenue by region. In the Americas, demand expansion continued with double-digit growth in local currency. All companies showed strong growth with TIS and Pharmaceuticals and Global Blood Solutions serving as key drivers of global revenue. In Europe, stable growth in TIS and Neuro, and strong performance of PLAJEX drove Pharmaceuticals segment growth. In Japan, Pharmaceuticals contributed to higher revenue, supported by the recognition of delivery timing adjustments in CDMO during the second quarter. Neuro sustained its double-digit growth trend in C&V. In China, Neuro maintained strong growth, supported by the successful expansion of sales channels under VBP, resulting in higher revenue. In Asia, C&V achieved revenue growth, while Hospital Care, Pharmaceuticals and Global Blood Solutions posted declines in the first half due to delay in tender timing. Next slide, please. Now regarding our guidance revision. To begin, we will explain the assumptions underlying the revision of our guidance focusing on two major points. First, regarding the fundamentals of our existing businesses. As we shared in the first half results earlier, the second quarter remained strong. Thanks to continued robust demand and the successful implementation of proactive pricing measures. We expect profit increase of JPY 10 billion compared to the figures announced in May. This effectively offset the anticipated JPY 10 billion negative impact from tariffs for the current fiscal year. In addition, we have reflected changes in foreign exchange assumptions due to the continued depreciation of the yen, resulting in an increase of -- expected increase of JPY 10 billion in AOP for existing businesses. Separately, we have factored in temporary costs related to the [indiscernible] further growth, including acquisition and continued portfolio optimization into this year's guidance. Next slide, please. Further details on division. Based on the assumptions earlier, we have revised our full year guidance announced in May by upwardly adjusting revenue and adjusted operating profit and downwardly adjusted operating profit. The guidance excluding the impact of the acquisitions announced this year is also presented at the slide. On this basis, both revenue and profit for the full year are revised upwards. And both revenue and the profit were adjusted. Here is the details why company, C&V and TBCT reflects strong performance with upwards revision of both revenue and profit. Of course, C&V continued robust demand in North America and pricing measure will remain key drivers in the second half. TBCT continues to be driven primarily by plasma innovation. However, due to higher-than-expected collection efficiency with Rika, turnover of disposable products in the second half is expected to fall slightly below plan. Accordingly, production adjustments are scheduled for the second half, while the efficiency improvement supports our solid foundation for long-term growth. Conversely, TMCS has been revised downward in profit mainly due to acquisition-related expenses. We have also included OrganOx performance from November onward with cumulative 5 month revenue projected at JPY 9 billion and adjusted operating profit at JPY 1.3 billion. Next slide, please. Let us now explain the revision of adjusted operating profit. Overall, we have revised the initial guidance from JPY 240.0 billion to JPY 221.5 billion. Strong fundamentals and effective cost control have offset the JPY 10 billion negative impact from tariffs. In addition, we have reflected the positive impact of favorable exchange rate compared to the initial guidance. We have also incorporated as well the investments, including the capital expenditure for the Leverkusen Plant as well as the contribution from OrganOx acquisition. Details of the adjustment items that account for the difference from the operating profit will be presented on the next slide. Adjustment items have increased by JPY 20 billion from the initial guidance of JPY 20 billion to JPY 40 billion, with two main components accounting for the increase. The first is acquisition-related expenses, including costs associated with the OrganOx acquisition and amortization of acquired intangible assets totaling approximately JPY 9 billion. The second is costs related to portfolio review, clearly all of the expenses arising from the revision of exclusive distribution agreement relative to TIS business also totaling about JPY 9 billion. We continue to conduct strategy business reviews to support further growth. The other costs were not included last year due to the ongoing discussions and initial requirements, but the efforts to portfolio optimization will remain our priority going forward. Next slide. Lastly, as we have consistently continued, we are on track to deliver the three financial goals outlined in GS26 revenue growth, operating profit percent and capital efficiency. Although acquisition-related and onetime expenses will be incurred this fiscal year, the operating profit percent for FY 25, excluding these costs based on our existing business is 18.6%. Our business fundamentals is solid, and this momentum will remain unchanged next year. We will continue to make proactive investments to drive future growth, ensuring the achievement of GS26 and further enhancement of core value. This concludes my remarks. Thank you very much for your attention. Unknown Executive: [Interpreted] I'd now like to hand over to CEO, Mr. Samejima. Hikaru Samejima: [Interpreted] Hello. I'm CEO, Samejima. And today, I would like to talk about the strength and future outlook of Terumo's core business, the TIS division, which continues to drive robust growth and lead the company this fiscal year. And in particular, I would like to focus on our imaging strategy. And finally, I'll provide an update on the acquisition of OrganOx. Despite the impact of PCI market maturity, the TIS division continues to deliver high single-digit growth. This growth is underpinned by the stable performance of Access products, which account for half of our revenue. And in the Therapeutics segment, products such as Therapeutic Lesion Access, namely PTCA guidewires and microcatheters are contributing to this momentum. And as you can see, Access and TLA, these fundamental device groups, make up more than 80% of our sales. And this is a key differentiator from our competitors, enables us to maintain a unique position and achieve sustainable growth. Here are the highlights of the TIS growth strategy on this slide. In the Access market, we will continue to strengthen the #1 position that we have built and maintain mid-single-digit growth. And as the second pillar, TLA products will achieve high single-digit growth by expanding market share in addition to overall market growth. And beyond these existing drivers, I would like to highlight Imaging as the third growth area. Imaging usage has been increasing in recent years in Europe and the U.S., and Terumo will deliver double-digit growth by introducing a unique new product, the Dual Sensor System. So first, let me reiterate the strengths of the TIS division that are common to both Access and TLA products. The first is our core technology, advanced manufacturing capabilities. Our hydrophilic coating, which enables smooth maneuverability inside blood vessels is one of the technologies that physicians have trusted for many years. In addition, the precise engineering of each component ensures ease of use and reliable device control, supporting seamless procedural flow. Interventional procedures are largely invisible to the naked eye, and the subtle tactile differences that only the physician can sense are the true source of TIS' unique strength. The second is consistent large-scale multiproduct manufacturing. Our scale advantage creates a barrier to entry that competitors cannot easily overcome, delivering price competitiveness. Furthermore, by producing high-quality products with uniformity and minimal variation, we provide physicians with the confidence that using Terumo products will deliver a familiar feel in daily clinical practice. Beyond simply supplying products, we have pioneered the radial approach and promoted its value. Through a comprehensive product lineup that enables same-day discharge and appropriate use training, we support safer and more efficient hospital operations. By delivering our unique technologies and operational expertise as part of our solution platform to clinical settings, we transform what are generally considered commodity products into high-value offerings. This is exactly the fundamental strength of the TIS business and the foundation of Terumo's leadership. The Access and TLA demands present significant potential for future growth. For Access products, the main intervention market is expected to continue growing at mid-single digit, and Terumo aims to solidify its presence through the further adoption of the radial approach. Moreover, Access devices are widely used beyond the main segment. The trust earned through high-quality devices developed for the intervention market has made Terumo a preferred brand. And as the number of cases in these domains increases, there are opportunities to use Access products, which will expand even further. In the TLA product group, which is essential for delivering stents and coils to the lesion site for treatment, Terumo has now established itself as category leader. By steadily increasing the market share of wires and microcatheters across various treatment areas, we have achieved a growth rate that exceeds overall market growth. These products, which are used routinely in large volumes, clearly showcase the strengths of the TIS business that I have been emphasizing. The growth potential of TLA products is my next point. The key lies in expanding the product lineup and broadening both business domains as well as geographic reach. Through continuous innovation, we respond to evolving treatment trends and develop products that meet clinical needs, supporting daily procedures and therapies. We also accelerate growth by quickly capturing market opportunities beyond existing areas. In recent years, catheters have been increasingly used in MSK embolization, which is a treatment for chronic pain such as joint pain. And this market is expanding very rapidly. The future market size is estimated to exceed $500 million, and Terumo has already secured a significant share with microcatheters, positioning us for continued growth. From a regional perspective, introducing products into Asia and Latin America offers even further opportunities to achieve growth. Now let's move on to the third growth driver, the Imaging segment. The global imaging market is expanding, driven mainly by the U.S. and China, and it is expected to reach USD 1.3 billion by 2031. This growth is supported by accumulated evidence that using imaging improves outcomes in interventional procedures. In the U.S., imaging guiding PCI has recently achieved the highest recommendation level, which is Class I, evidence Level A, and major medical societies this year. And furthermore, the increasing adoption of atherectomy and IVL devices has reinforced the need for imaging assessment of calcified lesions. The penetration rate of imaging in PCI in the U.S. is projected to rise to 56% by 2031, making imaging a high potential area that is now the tipping point for significant growth. Terumo has been competing to lead the Imaging segment for the long term. In Japan, imaging is used in more than 95% of PCI cases and Terumo holds an overwhelming market leadership with a share exceeding 50% in this home Japan market. Terumo's strength in Imaging lie in three key areas. The first is superior catheter deliverability. Secondly, clear high-resolution images. And thirdly, simple, speedy operability. As the global market expands, the fact that Terumo imaging is the top choice in Japan, the country which is most experienced with imaging, represents an immense value. Currently, two modalities are available for imaging: IVUS, which uses ultrasound; and OCT/OFDI, which uses near infrared light. IVUS excels at assessing the overall condition of the vessel and is suitable for cases with large vessel diameters, but it is less effective for examining microstructures. But on the other hand, OCT or OFDI offers high-resolution imaging, making it ideal for evaluating stents and microstructures, and is particularly effective for calcified and bifurcation lesions. However, it has limitations in visualizing the entire vessel and requires a blood flush using contrast agents. In clinical practice due to cost constraints, in most cases, only one modality can be used, leaving physicians unable to view both images even when they want to. To address this challenge, Terumo has developed the Dual Sensor Systems or DSS. This innovative system features a catheter equipped with both IVUS and OFDI sensors, enabling simultaneous acquisition and output of two images. By leveraging the strengths of both IVUS and OFDI, DSS allows for a more accurate depiction of intravascular conditions. Its value lies in supporting the realization of the optimal treatment strategy for any case. This is DSS' highest value. And with DSS, the step of deciding which modality to use disappears. Physicians can compare both images side by side to make the best treatment decisions possible. And at a time when Imaging market is poised for significant expansion, Terumo takes on the challenge with DSS. With the launch of DSS in Japan and the U.S., Imaging sales are expected to grow to more than 3x their current size by 2031. In Japan, we will leverage our established market position and begin introducing DSS at facilities with high appetite for this technology. By pricing DSS above the current standard of IVUS to reflect its added value, we can drive growth. At the same time, we aim to quickly accumulate clinical data in the U.S. to establish meaningful evidence of DSS' clinical significance. In the U.S., meanwhile, as a new market entrant, we will take a phased approach to market introduction. By combining Terumo's proven imaging strength track record with the unique value of dual technology, we will steadily build a loyal customer base. Additionally, we are preparing to integrate AI technology to enhance software capabilities and tailor solutions to meet the precise needs of users in the U.S. Beyond Japan and the U.S., demand for imaging is expected to rise globally and Terumo Imaging holds significant potential for rapid growth through further geographic expansion. The TIS business has long been a core driver of Terumo's growth, and that role will remain unchanged. We see further growth opportunities in Access and TLA, where we already have established strong positions. On top of this solid foundation, the launch of DSS will bring a new level of evolution to the business. Of course, we are also looking ahead to expanding into therapeutic product areas, including strengthening our pipeline through M&A. And by adding DSS to our portfolio, we will create synergies with therapeutic products and further enhance Terumo's presence in endovascular treatment. Finally, an update on the acquisition of OrganOx, which was announced in August this year. And as stated in our recent press release, we successfully completed the acquisition of OrganOx on October 29. First of all, regarding our recent performance for calendar year 2025, revenue is expected to reach up to $120 million, which represents approximately 70% growth over last year. This reflects continued strong demand driving high growth. So the market expansion, specifically the increase in liver transplant procedures enabled by the adoption of NMP technology, combined with metra's rising market share quarter-after-quarter, underscores the strong momentum. And these results validate the high expectations for organ perfusion technology in metra's proprietary innovations. Since NMP was approved in 2021, the use of cardiac death donors has rapidly increased, driving a rise in liver transplant procedures, a trend that will continue this year. NMP also enables planned transplant surgery, significantly improving quality of life for medical terms. Looking ahead, transplant numbers will keep growing. And as NMP becomes the standard method for liver preservation, it means more precious organs can reach patients on waiting lists. The growth potential for metra is enormous, as discussed previously, and OrganOx is to reach a scale of around JPY 100 billion in revenue over the next 10 years. Moreover, as transplant volumes increase, more potential patients will be added to waiting lists. This represents a major step toward turning hope into reality for all of those suffering from liver disease. In the NMP market, metra also holds a strong competitive advantage. As mentioned in our previous briefing, real-time monitoring enables quantitative assessment of organ function, improving utilization rates of donated livers. Additionally, the ability to preserve organs with a simple operation is a major differentiator, and its automated control function reduces the burden on clinical staff. This automation also allows flexible transport options, enabling customized services tailored to each case. By selecting the optimal service for each case, preservation and transport can be achieved with minimal resources, delivering significant cost benefits. Even when offering a full package service that includes transport, OrganOx maintains its price competitiveness, which has steadily driven market share growth. So finally, let's look at -- let's talk about synergies. metra supports the preservation of liver function by perfusing the organ with an oxygenated, temperature-controlled perfusate containing blood delivered through a centrifugal pump with precise flow control. Terumo has long supplied all these key components, the centrifugal pump, oxygenator, heat exchanger and reservoir under the CAPIOX brand. And in addition, anticoagulants and other drugs are administered via syringe pumps, which are also one of Terumo's strengths within its TMCS infusion management business. When you break down metra's structure, it becomes clear that it is built on perfusion technology that Terumo has cultivated for many years. By combining the technologies of both companies, we can unlock the potential for next-generation perfusion solutions that are even more innovative and competitive while also improving profitability through cost synergies from component integration. OrganOx is highly innovative and poised for growth. But by leveraging Terumo's platform, its growth and next-generation device development opportunities will expand dramatically. Terumo is adding a new frontier in perfusion to its portfolio and is thoroughly committed to becoming a global top-tier company. Thank you for your attention. Operator: [Interpreted] [Operator Instructions] Together with Hagimoto-san, I must tell you Otaka-san from Corporate strategy to be answering question. I'd like to first direct Kohtani-san from Mizuho to ask first question. Motoya Kohtani: [Interpreted] Yes. This is Kohtani speaking from Mizuho Securities. So let me just ask few questions since this opportunity in a vision. First question about DSS. I think it's about JPY 10 billion, mostly in Japan, but it's going to go up to JPY 30 billion. And I was quite surprised because this was much bigger than what I was expected. As you said, there was a good reason for that ASC, LTM guideline has been revised in 2025, Class A in 2025. In Europe, the class adjustment change was held back in 2024. The IVUS and the OCT is slightly higher, but both of them are going to be guided to be used in both. But my question is for IVUS and OCT, you can just do it because it's already been approved. It's already been -- reimbursement is already taken care of in the U.S. But this is one single catheter. So new code or maybe new code or national coverage determination, maybe not to that extent. But you, I guess, take new Medicare code. How am I assuming how this is going to progress? Or IVUS/OTC, I don't think none of the competitors have that product. I just want to clarify if that's -- so that's my first question. Hikaru Samejima: [Interpreted] That's right. That as you pointed out, existing IVUS or ODI, OTC, the price point is higher than that. That will be our pricing strategy, premium price. But with that, you'll be launching both in Japan and the U.S. in the near future. And one sensor with the two devices, there's nothing like that. I mean who has the manufacturing capability to produce that, it's very rare to find a company who has that capability. It goes back to a high quality, the manufacturing process. This is going to be big barrier entry to that. So I think going back to Slide 10, I want to clarify. You will do the OTC by making sure that you are going to clarify all of it which is written here. Motoya Kohtani: [Interpreted] My second question about the OrganOx. So 120, I was quite surprised by number. NMP today is becoming widely adopted. I guess that number is quite high driving big contribution to this target. But my question, for the next several years, NMP will keep becoming bigger. But after that several years, the growth will become saturated. What are the things that you are doing to prepare for that time in liver cancers, for example? Implant standards have changed in Japan, doesn't change much in the U.S. How are you going to address that? Downstage of a cancer is another one. Microcatheter of your product has a perfect match. Are you going to be running trial to that? So let me just ask a question about the growth after plateauing in several years potentially. And in September, OPP licensed in Florida state where OPP investigation will start there. There is an article written about that. Is there any impact from that or expected impact coming from that? Hikaru Samejima: [Interpreted] Well, that's right for liver implant. NMP will be driving, especially for the donor whose heart stopped working. That will be the growth driver for the next several years like you have implied, and that's exactly right. So after that, I talked about it last time, then we are going to plan to get into the other organs and also somebody who cannot be registered for the implant, but somebody who is having damaged liver. Because by doing so, somebody with the patients that can be addressed with the pipeline to help somebody with the proper fragmented livers. And the supply was a bottleneck in the past. So the registration as a recipient requires very high demand. So even as your liver is damaged quite heavily, you couldn't go -- become registered as a recipient. Those number of population will go up. So that will also drive the market growth. By combining these three, we are quite confident OrganOx is expected to grow in the long run to come. Motoya Kohtani: [Interpreted] And HIS investigation, Florida state any impact? Should we expect an impact coming next year? Hikaru Samejima: [Interpreted] Well, there was some impact more in the short term, but liver implant will be saving patient life. That value is absolutely strong. That hasn't changed. So this impact only range to be short term. Mid to long term, organ implant is actually a very strong growth driver in a long run. Operator: [Interpreted] Mr. Yamaguchi from Citigroup Securities. Hidemaru Yamaguchi: [Interpreted] Hello, this is Yamaguchi. Can you hear me? Hikaru Samejima: [Interpreted] Yes, we can hear you. Hidemaru Yamaguchi: [Interpreted] Well, in your explanation, you were looking at Imaging, the MSK. I think that was one thing you mentioned, MSK. And I'd just like to ask you for your current initiatives around that. And you put some mention about what are your expectations in this for going to market. Hikaru Samejima: [Interpreted] I will respond to your question. Yes. Well, when -- currently, we are -- whether we are proactively approaching this at the moment, we're not so aggressive. But on the other hand, the Access or TLAs, the high quality that we have, we are -- and today, I mean, MSK was given today as one example today, but there are guidewire and microcatheters are used in many other domains, and the perception of that is getting wider and wider. So I think rather than us aggressively going to market here as with our catheter intervention, it's different to that. It's a departure from that, but it's starting to take off. And our fundamental Access and our TLA, which will continue to grow in the mid- to double-digit growth, I think, will be one factor in that. Hidemaru Yamaguchi: [Interpreted] Well, one thing within the financial results, you mentioned that the revision of TIS. I think from last year, that's been in motion since last year. So overall, I mean, it came up several times throughout the presentation. But -- so have you gone over the mountain already for TIS or what is in terms of the financial results? Could you just give -- I felt that it featured quite prominently in the results. Kojiro Otaka: [Interpreted] Thank you. I will just -- these were a one-off expense that I -- so I will respond to your question. Whether -- I think Hagimoto will address the future prospects of that from now on. So let me just explain, first of all, the slide that I'm showing you here. As you can see on this slide, for TIS, the portfolio change in the middle was Orchestra Bio. We have also put a press release about this, but we have this exclusive distribution agreement with them. And we decided to review the exclusive distribution agreement with them. And so there had been some, and it is the same for the -- while maintaining the relationship with them and maintaining the preferential position. It's a JPY 30 million fund in terms of -- and in terms of the market cap, that's been taken into account as well. But we have put that in for our guidance for the end of the full period. Jin Hagimoto: So let me give you a bigger picture view of this. On this occasion, regarding operating income, we gave some guidance regarding operating income, and we made some adjustments to that based on the information we currently have. And there may be some structural reforms going ahead and several other -- some lawsuits that are in process. So it's hard to give an absolutely setting stone guidance in terms of amounts. But the portfolio review that we are aggressively promoting at the moment, that will continue. But for the current fiscal year, these are accurate guidance as provided in these results. So I would hope that you would take those as face value. Operator: [Interpreted] I'd like to ask Nomura Securities, please. Takahiro Mori: [Interpreted] This is Mori speaking from Nomura Securities. I hope you can hear me. Operator: [Interpreted] Yes. We hear you. Takahiro Mori: [Interpreted] About JPY 5 billion for Leverkusen. Is this a onetime? Or should we expect that to come again? What's happening in Leverkusen? What kind of cost we should be expecting from that? Kojiro Otaka: [Interpreted] I will take this question. So Leverkusen, JPY 5 billion in the second half, that we are expecting that to be posted in the second half. And our projection for now, this is a JPY 3 billion growth. So that transaction was JPY 10 billion assets. The JPY 70 billion -- the depreciation of those assets is JPY 1 billion. And we have a lot of great talent in the company. We have retainment talent costs, JPY 800 million. And maintenance of equipment, some of the costs are PMI-related in all EUR 3 billion, JPY 5 billion to be posted on second half. The impact of the cost after that PMI cost is up partially, so it's not going to be doubling as not simply as that. But we are going to be expecting some depreciation talent costs in the next financial year as well. Takahiro Mori: [Interpreted] My second question is about OrganOx driving -- expected to drive the high growth, but the supply do not make sense in terms of the presentation. But centers, how many capacity, how many headcounts in terms of doctors? How those centers can we recruit more people? So how is the demand side? How long it will take to keep that full capacity that you're expecting? Hikaru Samejima: [Interpreted] Well, to that question, so the medical practitioners capacity is your question, how much do we do. We don't have a quantified assessments, we haven't done that yet. But what we can do is after adoption of NMP, everything before that, was very emerging practices like the -- registered, you have to do the implement -- within several years, the daytime, they are busy with the other, and the hospital needs to call up the doctors in the middle of the night. But now they can do it for 24 hours. They can do the plans. So it will be given more leeway for medical practitioners. So right now, we believe that lack of resource is not going to be a problem. But we will check the data, and we will get back to you after checking some of the clarifications and get back to your question. Takahiro Mori: [Interpreted] Well, it's been already several years since NMP started. So I thought maybe the initial impact is going to be go down. That was my concern that this is going to be reduced quickly. Operator: [Interpreted] UBS Securities, Yoshihara-san, please for the next question. Tomoko Yoshihara: [Interpreted] This is Yoshihara here from UBS Securities. Thank you very much for today. So for OrganOx, I would like to ask about the amortization. I think it was on Page 16 of the presentation, and it says provisional at the moment. But if I -- the amount of this is core intangible asset amortization, I would understand. So this is provisional in brackets for the amortization of intangible assets. So I just wanted confirmation on where possible of what is meant by provisional there. And hypothetically, it seems that there's such a large difference in between the revenues for the OrganOx, there was a minus including this disposal of intangible assets. So I just want to know if my presumption is correct regarding the organOx. Kojiro Otaka: [Interpreted] Thank you very much. I will respond to your question. So for the OrganOx costs here, there are two types here. One is the PMI-related costs which are JPY 4 billion -- sorry, JPY 1 billion in the first half, which is a temporary. And for the depreciation and the amortization of intangible assets, this will come in the -- it says provisional a tentative in brackets. In the first half, we think it would be JPY 4 million -- in the second half, sorry. And this is -- for next year, these will fully come online. And well, the goodwill and the intangible assets and so on. The impact of these, I think, will be limited. And so the outlook for the second half. Once these are fully established and set in stone, I will then make another announcement once these are no longer provisional, but set in stone. Tomoko Yoshihara: [Interpreted] So for OrganOx margins from now into next year, will they not differ so much for the core business? What will those look like? Kojiro Otaka: [Interpreted] Well, regarding the business for OrganOx, we intend to expand it in future going forward. So in line with our business expansion, I think incomes, revenues will definitely expand in line with that. Tomoko Yoshihara: [Interpreted] Understood. My second question is regarding Rika. I think in Hagimoto-san's presentation at the beginning, I might not have understood this correctly, but it's disposables where the demand was lower than expected. Is that correct? And so I wondered if the production amount was slightly down. Is that correct? So as a result of that, from the second half onwards, the Rika business, as you start to monetize that more, I believe that there may be some time lag due to that lack in demand for disposables. And from the next period, in coming period, will that have any impact on your profit in the next -- in the upcoming quarters. Could you let me know regarding that? Kojiro Otaka: [Interpreted] Thank you very much for your question. Well, for the TBCT domain profit, I think the operating profit ratio is improving. So the monetization of Rika is definitely on the up as per the figures provided. And looking ahead now, I think -- well, it's slightly ironic, but the Rika is -- the plasma demand is definitely increasing. But our disposable sets compared to expectations, the demand is going slightly down, ironically, when the demand for plasma is going up. So I think in the second half, the production adjustments would be made under our current plan. So in the second half, yes, to an extent, the income, the revenue from disposables may be slightly lower than 50%. There is certainly that possibility. Tomoko Yoshihara: [Interpreted] So just to confirm that, is that for the production? Kojiro Otaka: [Interpreted] So plasma demand itself will grow from now on, definitely. So we will implement production adjustments. And from next year, we expect it to improve to its current levels after the production adjustments. Operator: [Interpreted] I'd like to ask Tony Ren from Macquarie to ask a question. Tony? Tony Ren: [Interpreted] Tony Ren from Macquarie. Just a couple of quick ones from me. So first of all, actually, both of them are related to TMCS business. So the first one is about the German Leverkusen losses. How long do you think it will take for you to stop the losses at that factory to turn it around? Jin Hagimoto: [Interpreted] So thank you for the question. So in terms of the running costs, as Otaka has mentioned, we are looking at somewhat of a $30 million on a semiannual basis. This cost, we do not project will be going down anytime soon. So the overall profitability when that will be coming will depend on how soon, how fast we can get the contract from the pharmaceutical companies. So currently, many of the major pharmaceutical companies, we are in discussions. And based on the input from all the teams of pharmaceutical and our organization, they are mentioning that there is a strong interest from the major pharmaceutical companies to be able to utilize the location within the European region. So at this point in time, our outlook for the profitability contribution is not within the GS26 period. We do foresee that within the next midterm projections, it is going to become improvement of the contract situation. We will be able to utilize the manufacturing plants. Therefore, contribution profit basis should be in the midterm of the next midterm strategy period. Tony Ren: [Interpreted] Receiving our regulatory clearance typically takes about 2 years or so, right? You probably also need to do some fixing up at the factory. So we are probably looking at, at least, 3 years from now? Jin Hagimoto: [Interpreted] Yes. So the overall facility itself is, of course, we have done our due diligence and have determined that it is a high-quality manufacturing facility already. So there are some investments that we will need to make to bring it up to sort of a thermo standard level of the quality, but we do not see any kind of issues in getting the regulatory approval. So as you mentioned, there are going to be some lead time required to get the regulatory approvals. But whether we can get the approvals, we feel very strongly that there is no obstacle in getting the approvals for that location. Tony Ren: [Interpreted] Very good. My second question is about the -- also in your CDMO business, your LEQEMBI autoinjector. The CDMO revenue related to the LEQEMBI autoinjector. Do you book it in Japan? Or do you book it in other geographic regions? Kojiro Otaka: [Interpreted] So based on our contract with Eisai, we do have the shipment in the Japan area. So we will consider the revenue within the Japan region. Operator: [Interpreted] So I think JPMorgan Securities, Saito-san please. Naoko Saito: [Interpreted] Hello. This is JPMorgan Securities, Saito. Well, in the second quarter, looking at the effect of the tariffs. And I think could you just delve a bit more into the 3 months in the second quarter? Kojiro Otaka: [Interpreted] So I will respond to your question regarding that. So the effects of the tariffs in the 3 months in the second quarter, I think it would have been JPY 2.5 billion in impact, but the prices were -- we had strong price effects as with the first quarter. And we made JPY 4 billion in profit, which was way beyond the impact of the customs. And in terms of inflation, there were some effects from inflation and tariffs impact, but we rebounded from that and have surpassed the negative effects of the tariffs and the inflation. Naoko Saito: [Interpreted] Thank you. Well, from the next period, next year onwards, some price rising effects will come into play. Is that correct? Kojiro Otaka: [Interpreted] Well, I think it tends to our pricing strategy in terms of the customs and so on. When we do recontracting, we will aim to have some price rising. And from next year onwards, we hope that those -- at the time of contracting, price rises will continue to come into effect. Naoko Saito: [Interpreted] I understood well. So just a very precise point. But for SG&A, I'd just like to ask for sales, general and administrative expenses, I believe that you shifted offices to a new office this year, your headquarter is changed. And next year onwards, will that play out this year, or will that continue to have an impact into next year? Kojiro Otaka: [Interpreted] Well, for SG&A, I think it has been managed within the trend of net sales or net revenues. And so there is very, very small diminutive impact. But it will, however, be well controlled within the scope of revenues. Naoko Saito: [Interpreted] So my second question is regarding the Plasma Innovation business. I think the second quarter, Rika devices were at full pace. And the net sales from facilities, the volume of disposables reached a peak in the second quarter, I understand. Could you just -- I think in the lower half, I believe the production is going to go down, but have we already reached the peak of full production in the second quarter for Plasma Innovation devices? Kojiro Otaka: [Interpreted] Yes. Well, yes, we are already in the full peak of that. So we have a full tilt in the second quarter. You are correct in your assumption. Operator: [Interpreted] Thank you very much. We are getting close to time to finish. I'd like to make sure if there are anybody else physically here in this room or somebody will see any other questions. Well, it seems like there was no more questions today. We'd like to finish Q&A session here. So with that, we'd like to close our Terumo Inc., March 2026 in the third quarter financial presentation. We'll be closing the session. Thank you very much for your time today. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]
Operator: [Audio Gap] comments made on this call may include statements that are forward-looking within the meaning of securities laws. These forward-looking statements may include, without limitation, statements related to anticipated industry trends, the company's plans, prospects and strategies, both preliminary and projected, the size of total addressable markets or the market opportunity for the company's products and services, the company's expectation for future development, regulatory approval, timing, commercialization and the market for cell and gene therapies and the anticipated adoption of the company's products and services for use in the delivery of gene and cell therapies, and management's expectations, beliefs, estimates or projections regarding future revenue and results of operations. You are cautioned not to place undue reliance on forward-looking statements, which speak only of the date on which they were made. Actual results or trends could differ materially. The company undertakes no obligation to revise forward-looking statements for new information or future events. For more information about the company's risks and uncertainties, please refer to the company's filings with the SEC, including the company's recent filings on Form 8-K, Form 10-K and Form 10-Q. All the company's filings may be obtained from the SEC or the company's website at www.clearpointneuro.com. I'll now turn the call over to Joe Burnett, Chief Executive Officer. Joseph Burnett: Thank you, Paul, and thank you to all of the investors, partners and analysts joining us on today's exciting call. 2025 continues to be a strategic transformation for ClearPoint Neuro. Over the past few years, we have built an incredibly strong foundation for this company through new product development, biopharma partner acquisition, modernization of our quality system and manufacturing, global regulatory approvals, expansion of our commercial reach and reliable funding from capital markets. We built this foundation from the ground up and expanded our strategy through our 4 pillars of growth: biologics and drug delivery, neurosurgery navigation, laser therapy and access and in achieving global scale. In 2025, we have now exited that funded and foundational phase, and we have entered 2 new chapters of ClearPoint, which will continue to be our guiding strategies over the next decade. The first strategy phase, which we refer to as fast forward, involves ClearPoint launching new, unique and disruptive products into 4 existing markets that total more than $1 billion in aggregate today. Here, we will continue to earn market share each year and offer a credible path to cash breakeven and meaningful profitability. The second strategy phase, which we call Essential Everywhere, involves ClearPoint building a new $10 billion-plus addressable market in the neuro drug delivery hand-in-hand with our pharma partners. Here, the complete ClearPoint ecosystem, including our team, will play an essential role for predictable quality drug delivery at high-volume specialized treatment centers around the world. These next 2 chapters, one where we penetrate an existing market and one where we build a new one, will take place in parallel, leveraging the same product portfolio, the same operational infrastructure and the same commercial channel to allow us to achieve global scale. I am therefore thrilled to announce the merger agreement that was just signed, whereby ClearPoint Neuro will acquire IRRAS with the target closing date in the coming weeks. This is an incredibly exciting merger of 2 like-minded companies who have been successful not only in product development and regulatory approvals, but also in completing some of the hardest work in medical technology, which is bringing cutting-edge products to market, establishing a sales channel, generating clinical evidence and building an installed base of early adopters. We both expect to be leaders in the neurosurgery market and have a very similar razor-razorblade business model. The IRRAS team should be congratulated on developing the IRRAflow platform and generating an estimated $9 million run rate with a September year-to-date growth rate of 83% and gross margins in the mid-50s today. We are in a very similar stage of growth and feel like the 2 teams have a lot in common. We plan to integrate swiftly, and we look forward to welcoming IRRAS to the team once the merger formally closes. There are 3 important strategic rationales that make the IRRAS team and portfolio a perfect fit for this next phase of ClearPoint Neuro. First, the IRRAflow catheter, a proprietary disposable dual lumen catheter, will immediately give ClearPoint access to a large existing market in the treatment of intracerebral hemorrhage, chronic subdural hematoma and other conditions requiring intracranial fluid management. It is estimated that these clinical presentations represent up to approximately 400,000 procedures annually in the United States alone and close to $0.5 billion existing market opportunity, which ClearPoint now gains access to. Second, the design of the indwelling and flexible IRRAflow catheter provides us with a launching point for the design of longer duration infusion cannulas that may open up additional biopharma partners, especially in the oncology space, who often require a device that allows multiple infusions over an extended duration, potentially in an outpatient setting. Our goal is to become a true one-stop shop for cell, gene and other therapy delivery that are directed by our same biopharma and neurosurgery call points. Third, the combined entity is expected to immediately gain operational scale with an expansive commercial team, including marketing, sales and clinical specialists that will now include more than 40 added professionals across the United States. This merger with IRRAS will deliver a new pillar of growth for the company and is expected to extend our lead in neuro drug delivery. I will now turn the call over to Danilo to discuss the Q3 financial update, after which I will spend time detailing the next steps of this 2-part ClearPoint strategy. Danilo? Danilo D’Alessandro: Thank you, Joe, and thank you all for joining us today. Let me start by giving some further details about the proposed merger and the key transaction terms. Upon closing, ClearPoint Neuro will deliver a closing consideration of $5 million in cash and 1,325,000 shares of ClearPoint Neuro's common stock, subject to customary working capital adjustments. The agreement also provides for ClearPoint Neuro to pay a revenue share on net sales of certain IRRAS products above defined annual thresholds for the year 2026 through 2028. The closing of the merger is subject to a number of conditions, including approval of the transaction by IRRAS shareholders, and the closing is expected to be completed in the fourth quarter of 2025. In parallel with the signing of the merger agreement, we entered into an agreement to access an additional $20 million in funding under our existing note financing arrangement with Oberland Capital, conditioned upon the closing of ClearPoint Neuro's transaction to acquire IRRAS Holdings, Inc. and other customary closing conditions. We expect to use the additional funding to support integration activities, enhance working capital and fund the new growth initiatives for our combined business operations. Now looking at the third quarter 2025 results. Total revenue was $8.9 million for the 3 months ended September 30, 2025, in comparison to $8.1 million for the 3 months ended September 30, 2024, which represents 9% growth versus the third quarter of 2024. As a reminder, our revenue is made up of 3 components: biologics and drug delivery, neurosurgery navigation and therapy and capital equipment and software. Biologics and drug delivery revenue includes sales of disposable products and services related to customer-sponsored preclinical and clinical trials utilizing our products. Biologics and drug delivery revenue stayed relatively consistent at $4.4 million in the third quarter. Service and other revenue increased $0.7 million due to new studies performed for our partners in the 3 months ended September 30, 2025, offset by a decrease in product revenue due to timing of the pharmaceutical partners' clinical and preclinical trials. Neurosurgery navigation therapy revenue consists of commercial sales of disposable products related to ClearPoint Navigation System, our SmartFrame OR product and PRISM Laser Therapy disposables. This revenue segment grew 20% to $3.4 million for the third quarter, driven by higher sales of PRISM Laser Therapy and the introduction of our 3.0 operating room navigation software. Capital equipment and software revenue, consisting of sales of ClearPoint navigation hardware and software in the PRISM Laser System and the related services increased 25% to $1 million in the third quarter from $0.8 million for the same period in 2024. Gross margin for the third quarter 2025 was 63% as compared to a gross margin of 60% for the third quarter of 2024. The increase in gross margin was primarily due to higher margins on service revenue and mix of products sold. Research and development costs were $3.5 million for the 3 months ended September 30, 2025, compared to $3.3 million for the same period in 2024, an increase of 4%. The increase was due primarily to higher product and software development costs. Sales and marketing expenses were $3.8 million for the third quarter compared to $3.5 million for the same period in 2024, an increase of $0.3 million or 8%. This increase was mainly due to additional personnel costs as we expand our commercial reach to support and accelerate our product launches. General and administrative expenses were $3.6 million for the third quarter compared to $3.1 million for the same period in 2024, an increase of $0.4 million or 14%. This increase was mostly due to higher headcount costs, professional fees and IT costs. With respect to our cash position, as of September 30, 2025, we held cash and cash equivalents of $38.2 million compared to $20.1 million as of December 31, 2024, with the increase resulting from the net proceeds of the note payable and stock offering of $32 million, partially offset by the use of $11.8 million in cash for operating activities. With that, I'd like to now turn the call back to Joe. Joseph Burnett: Thank you, Danilo. Now one part of the commentary that I want to make sure is clear from the financials is the impact that the transition to our new ClearPoint controlled CRO facility in Torrey Pines had on the quarter. First, our overall revenue growth for the quarter was lower than in prior quarters, but the source of that reduced growth rate came from the fact that the same team that would normally be supporting biopharma studies and our partner drug pipeline was temporarily reprioritized to transition out of the prior facility and to open the new facility. This effort includes a onetime and significant coordination of moving people and equipment, setting up standard operating procedures and then obtaining all of the necessary certifications with appropriate federal and state agencies. The fact that our lease was signed in June of this year and in just 3 months, we were already certified and running preclinical studies for our partners is a huge testament to the capability, effort and focus of this team. We expect that the biologics and drug delivery pillar will return to double-digit growth here in the fourth quarter and accelerate further in 2026 and 2027 as we are already bidding on large partner studies for the coming years. Now let's dig into our 4-pillar growth strategy a bit further. And I will start with one important note for those of you who have been following our 4-pillar mantra since we started about 8 years ago. We will be adjusting the definitions a bit given the announced acquisition of IRRAS and our 2-part strategy that we have transitioned to here in 2025. Pillar #1, we now define a little differently, and we call it pre-commercial biologics and drug delivery. We have renamed this segment because we want to differentiate between the future commercial drug delivery market that is still in its infancy with the current and existing pre-commercial drug delivery market that ClearPoint Neuro has access to today. We estimate that this pre-commercial market is approximately $300 million annually across preclinical studies and services, co-development contracts and clinical trial products and support for our more than 60 biopharma partners. Today, we have less than 10% share of this existing market with plenty of room to grow. Pillar #2 is also defined a little differently as we now call it neurosurgery navigation and robotics. This is reflective of our recent announcement of plans to enter into the cranial robotic space and to become the only company that would offer one preplanning and software workflow that could be deployed by surgeons using 3 different techniques: one, single-use frames in the MRI; two, single-use frames in the operating room with CT; and three, multi-use robotic systems that guide other ClearPoint products to target. This strategy is important for both our biopharma partners and neurosurgery customers. For biopharma, we plan to solve a commercial problem. Pharma companies prefer not to be overly prescriptive in the way that our cannula is navigated to the target and want to provide some level of flexibility to surgeons, so they can use a technique they are familiar with. However, pharma also realizes that this crucial surgical technique will never become fast, efficient and predictable if they allow hundreds of different navigation options without some level of consistency. Think of a lean manufacturing line with pods all around the world. There is a huge benefit to each one of those pods doing the same procedure with the same technique and the same equipment. Our navigation strategy will enable one preplanning software and one step-by-step workflow to always be used, but the surgeon will still maintain choice across our 3 hardware solutions, finding a balance between control and flexibility. For surgeons and hospitals, we plan to solve a slightly different problem, which is that of time and training. There are many different ways to perform both cranial and spinal navigation surgery, and the market is incredibly fragmented across multiple companies and products. For a hospital to invest not only their capital, but also their training time of their staff, they need to make sure that the technology is versatile and can be applied widely. Again, enter ClearPoint, where we plan to have the best cranial navigation platform uniquely positioned to support biopharma, but also capable of standard minimally invasive cranial procedures like deep brain stimulation, lead placement, biopsy sampling, laser ablation therapy and stereotactic EEG. The hospital team will be able to learn a single software interface and deploy that across pretty much all cranial procedures, including the new cell and gene therapy procedures that are coming. We believe this is an efficient and productive investment of their time. Our goal is that every hospital can choose their favorite corporate partner for spine procedures, but that they will prefer the unique ClearPoint solution for their cranial procedures. In fact, our vision is that one day to have a dedicated ClearPoint room for those cranial patients. We believe that the Neurosurgery Navigation and Robotics segment represents an existing market worth more than $125 million. And again, ClearPoint has less than 10% share today and plenty of room to grow. Pillar #3 remains unchanged and focuses on laser ablation therapy and access products, including OR and MRI Power Drill components for cranial procedures, applicator introducers and cranial access bolts. We estimate this total existing market to be in excess of $75 million, and you guess it, we have less than 10% of the market today and plenty of room to grow. Finally, for our anticipated Pillar #4, which we will begin with the planned closing of our acquisition of IRRAS in the neurocritical care space. This pillar will be named cranial irrigation and aspiration. As detailed in today's press release, the IRRAflow system is used today to treat patients with intracerebral hemorrhage, chronic subdural hematoma and other conditions requiring intracranial fluid management. The IRRAflow platform is unique and potentially disruptive today in that it enables both irrigation and aspiration of these fluids in a controlled systematic way. This technology has been evaluated in multiple peer-reviewed articles, highlighting the device's clinical advantages, including reduction in catheter occlusions, the potential to reduce infection rates and shorter treatment times, which may equate to lower hospital costs as well. Today, we estimate the existing market for this intracranial fluid management space to be in excess of $500 million, and we estimate that the IRRAflow system currently has less than 5% market share today and plenty of room to grow. I think you can sense a theme building for this initial fast-forward strategy. We are talking about an expected aggregate $1 billion-plus existing market where we currently have less than 5% total market share, and we have plenty of room to grow into it. It is important to note that we believe the portfolio we have available today and the pipeline of products we plan to launch in the next few years are capable of increasing our share and delivering that growth. In pre-commercial biologics and drug delivery, we expect to participate in numerous new and larger clinical trials alongside our biopharma partners as well as increase our preclinical capacity, begin doing higher-value GLP studies and provide additional services at the cow to serve our pharma partners more comprehensively. In neurosurgery navigation and robotics, we will continue the full market release of our 3.0 software into the operating room. And we anticipate the launches of our next-generation DUET Frame, our 4.0 Harmony software and our robotic platform, all against the backdrop of a much larger sales organization and global regulatory approvals. In laser therapy and access, we will continue the full market release of the PRISM system, which now includes 1.5 Tesla labeling, and we'll plan for the releases of the 4.0 Harmony software, compatibility with our robotic system, CE mark expansion and an MRI conditional velocity drill to speed up procedures inside the MRI suite. In our anticipated fourth pillar, cranial irrigation and aspiration, we will continue to leverage the peer-reviewed clinical data that highlights the use of the IRRAflow system now with a much larger ClearPoint sales organization, and we'll also add our cranial access bolt, a more intelligent system control software and a forward tunneling device in the next couple of years. And we were able to do all of this using our much larger combined sales organization of more than 50 commercial team members and an existing installed base of more than 150 combined customers after the anticipated closing of the IRRAS acquisition. If we can grow our share of this combined and existing $1 billion market by just a couple of percentage points each year, then we can achieve 20% overall share, a $200 million revenue run rate at 70% gross margins and a meaningfully profitable business. And remember, this does not include arguably the largest opportunity that we have in front of us, which is the commercial cell and gene therapy delivery. This is part 2 of our strategy, which we call Essential Everywhere and involves building a new multibillion-dollar market around our ClearPoint drug delivery ecosystem, which is commonly referred to as the gold standard in this space. We have worked very hard over the last decade and have built a significant head start. When these cell and gene therapies are launched, we expect to offer not just a single product, but rather a complete drug infusion ecosystem, including co-labeled cannulas and routes of administration that are written into the label of the drug itself, flexible navigation platforms that include MRI guidance, CT guidance and robotic guidance, AI predictive modeling and monitoring software to ensure efficient high-quality infusions, and in delivery. We did the same way across these specialized treatment centers, so we increase quality, lower costs and make these procedures more predictable. When these cell and gene therapy programs achieve FDA clearance and CE mark approval, our team will have already been working with these partners for years in advance. We will no longer be viewed as only an extension of their development team, but as an extension of their commercial team as well. In some cases, our products will be sold directly to hospitals, but in other cases, we believe our products may be sold directly to our pharma partners and then provided as a kit to the hospital alongside the drug. This way, the pharma partners can ensure supply and consistency of these essential products and can even maintain an inventory of their own to further derisk their drug delivery supply chain. Many of our existing partners, including uniQure, Blackrock, AskBio and Aona have all updated patients and investors on their progress over the past few months. We obviously must let our partners take the lead for any updates on the status of their programs. However, we continue to work side-by-side with them as we navigate the clinical regulatory pathways and prepare for eventual commercialization. Now let me provide a bit of perspective on this market. We are effectively pre-revenue in this phase as there is only one available neuro gene therapy that is approved in the United States and the European Union. The drug is, in fact, co-labeled with the ClearPoint SmartFlow cannula and is designed to treat a very rare childhood disease called AADC deficiency syndrome. Nonetheless, this is a very important strategic proof point of our capability even if this rare disorder is a smaller revenue opportunity and is just getting started. As you are aware, we are now supporting more than 20 different clinical indications across our entire portfolio, which include more than 30 million existing patients in the United States alone. That is often too large a number to make meaningful, so let's get a little bit more specific. Let's forget about the 60-plus partners that we have today, and let's focus only on the 9 that are now working with the FDA through the expedited review process. Also, let's forget about the 20-plus total indications, and let's focus only on the 7 indications that are currently accepted under FDA expedited review, meaning they are the furthest along in the neuro regulatory pathway. These indications under expedited review include AADC deficiency, Hunter Syndrome, Huntington's disease, drug-resistant epilepsy, Parkinson's disease, frontotemporal lobe dementia and Friedreich's Ataxia. They have a total patient population of approximately 2.1 million patients diagnosed and symptomatic here in the United States alone, where our commercial infrastructure is the strongest. Now if we only looked at a fraction of our partners and only looked at a fraction of our partner indications that are under FDA expedited review and only looked at the United States where our commercial team is the strongest, and then we only treated 1% of the patients that could potentially benefit from these therapies each year, we anticipate that this would amount to approximately 20,000 annual procedures or about the same number of DBS, laser ablation and stereotactic procedures performed annually. At current ASPs used in the clinical trials, this would equate to approximately $300 million of additional annual revenue if you believe those assumptions. While the drug development and regulatory process have proven to be inherently hard to predict, our strategy is built for this uncertainty as number one, we do not have the same binary risk as pharma because we have a portfolio of multiple partners, multiple indications and often redundancy with multiple partners that are pursuing the same indication. Number two, while we might not have the largest per patient revenue upside as the cell or gene therapy drug itself, we also do not have the high cost of executing the clinical trial for the therapy. In fact, we are able to sell investigational products and generate revenue during the preclinical and clinical trials themselves. And number three, we have the benefit of a parallel device strategy that is generating revenue today and as discussed earlier, has a credible path to profitability. Our long-term vision is to have these 2 strategies merge together into a company generating $500 million a year in revenue with a single commercial and operational infrastructure generating scale. This is the path that we are on, and we have an incredible team here at ClearPoint that plans to see it through. Now instead of looking to the horizon, let's quickly look at the steps directly in front of us. Although there are still many moving parts, including the CAL expansion status and the completion of the IRRAS merger and planned integration this year, we are narrowing our full year 2025 revenue forecast to between $36 million and $38 million, which is still within our prior guidance. We also currently expect total revenue of the merged companies in 2026 to be between $54 million and $60 million, but we will provide an additional update in mid-January after we have closed the IRRAS transaction and integrated the 2 commercial teams together. With that, I would now like to open up the call to any questions. Operator: [Operator Instructions] Our first question is from Frank Takkinen with Lake Street Capital Markets. Frank Takkinen: Congrats on the agreement in the quarter. It sounds like a lot of exciting developments. I was hoping to start with one on market sizing around the neurocritical care market. I heard the comments around $500 million market, 400,000 procedures. Maybe just bring us a little bit deeper into that, if there's any subsegments you can talk to, where you think you can focus, how much of that market you can penetrate over time? And then it would be interesting to also hear about competitive landscape, what you're going up against and how you feel the device will fare in the marketplace? Joseph Burnett: Yes, absolutely. Thanks for the question, Frank. Yes. So when we think about the U.S. market for this neurocritical care, we're talking more specifically about where these external ventricular drains or EVDs would be located. It's a market that's pretty much looks like it did 20, 30, 40, 50 years ago with a very underserved population and a very simple solution today, which is effectively a gravity drainage system to pull excess blood and clot out of the brain. And in many cases, surgeons will inject a bolus of some kind of antibiotics or anticoagulant drug like TPA to go ahead and break up the clot and facilitate the drainage a little bit more. Despite all this time passing, there really hasn't been that much innovation in that sector. And IRRAS is a company that has really decided to focus and provide a truly next-generation and disruptive solution there. So what the IRRAS system can do is not only drain the system actively or drain this excess fluid out of the brain actively, but it also aspirates by providing a continuous flow into the brain that would allow the surgeon to administer saline to break up the clot or to administer any of those other drugs that I mentioned. So I think about 75% of estimated use cases involves the delivery of some type of drugs into the brain as well. So the early peer-reviewed data and registry data that's been performed seems to show that by doing this type of active irrigation and aspiration, that facilitates the early release of patients by a significant margin. It seems to reduce the amount of clogging, which is one of the most annoying things neurosurgeons have to deal with when an EVD clogs in the middle of the night and they're the ones that are on call that has to deal with it. It seems to trend towards fewer shunt placements. And there's a meta-analysis going on right now of all of the published data, which I think will provide some very, very interesting insights on the technology. So when we think about anything an EVD might be worked for, this is where we're going to start operating. And we estimate there's probably around 400,000 or so EVD type procedures that are here in the United States and obviously, more globally. Now this is a premium product, so the ASP is higher than a typical EVD system would be. So you could argue the market should be higher than maybe that $500 million number here in the U.S., but we're really just getting started, and we haven't begun the integration yet. So we're trying to err on the conservative side. Frank Takkinen: Got it. Very helpful. And then I was hoping to ask one about the pro forma business that you laid out $54 million to $60 million revenue guidance for next year. Maybe help us understand kind of what portion of that is related to ClearPoint versus IRRAS here for 2026? And then as a second part to that, how should we think about gross margin profile and burn profile? Joseph Burnett: Sure. Yes. I think our -- I think we mentioned in the commentary that the IRRAS gross -- I'll start with gross margin. The IRRAS gross margin is closer to that mid-50s range. And as you heard from Danilo's comments, the ClearPoint gross margin in the quarter is around 63% Obviously, both companies are still subscale. We've got a lot of additional product we could put through our factory today. And I think the eventual consolidation, given that IRRAS is based here in San Diego, and we would plan to bring the facilities together would actually immediately increase margin just on the simplest form. But at scale, there's no reason to believe that IRRAS would be any sort of drain on our current gross margin trajectory. And we feel, given those assumptions I mentioned in that sort of pro forma estimate of gaining 2% share each year kind of thing, we could -- we believe that we have a clear path to 70% plus gross margins across both sides of the portfolio. And the IRRAS system itself, as I mentioned, it is a razor-razorblade system. So there is a capital component. However, more than 90% of the revenue from IRRAS at least today is on the disposable side. So we imagine that the capital component is probably going to be trending down from 10% to 9% to 8% to 7% over the years as well. Frank Takkinen: Okay. And then... Joseph Burnett: What was the first part of that question? Yes. Frank Takkinen: Just any thoughts around kind of burn profile and then of that $54 million to $60 million break out ClearPoint versus IRRAS? Joseph Burnett: Yes. Danilo, do you want to cover the kind of the cash burn side? Danilo D’Alessandro: Yes. So Frank, we were going to have obviously some integration costs in the first quarter. We estimate the burn to be in the single digits, mid- to high single digits in the first year. And obviously, as we grow and combine the entities, we expect to reduce that burn meaningfully and significantly over time. So we may have just some additional integration and transaction costs here in Q4 and Q1. But other than that, we should work swiftly to reduce the burn of the combined entity. Frank Takkinen: Okay. Joseph Burnett: And Frank, one way to think about the commercial side of things is that we were going to have to expand our commercial footprint to prepare for not just our own sort of device growth, but also prepare for these larger clinical trials and eventual commercialization of cell and gene therapy. So we were going to continue to do some of the hiring into that commercial organization. Now it's as if we get a huge bolus of that personnel all at once, along with another product that helps support the cost of that personnel. So I think our individual hiring plans will actually flatten out compared to the growth that we would expect in the future. So it's almost like we're getting some of these people a couple of years early. So that's where a lot of the burn will come from. Frank Takkinen: Got it. That's helpful. And then if I just have one more on the current quarter. Congrats on getting the CRO site set up and launched. Maybe talk through potential orders in that space. It sounds like you're already having some of those conversations now, but magnitude, how large could those orders be and when could they come? Joseph Burnett: Yes. So there's sort of 3 vectors of growth that we expect to get out of the new facility. One is a simple one, which is just excess capacity. We were only able to do smaller studies at our prior facility because we were effectively leasing space inside of another CRO that was dedicated to the neuro work that we were doing. We currently -- in the new facility, we estimate that we could do studies that are 4 to 5x the size of the largest study we did in the past. So if we were doing work in the past, maybe our largest pilot studies would be 1.5. I don't know that we did any individual ones more than $2 million at the old facility. Here, we are bidding on projects that are $5 million, $10 million, even $10-plus million for a single study. And that's a combination of the study being larger as well as our plans to be performing GLP studies. We believe we've got a lot of the kind of the paperwork and standard operating procedures in place, and we should be fully functional and able to execute our own higher-margin GLP studies next year, which is kind of like a more -- think of it as a more rigorous testing protocol that's used for FDA and CE mark submissions. So those are 2 -- 2 of those vectors of growth. Again, one is higher capacity; two is higher value GLP studies. The third one is with the excess space that we've got as well, we're going to continue to add additional sort of services to handle our pharma partners a little bit more comprehensively. So these could be imaging technologies. These could be hostology (sic) [ histology ] technologies. We've got a few additional ones that we're looking at as well. So we're not ready to unmask the entire plan at this point. But certainly, by early in Q1, I think the vast majority of our pharma business are going to be able to sort of appreciate everything that we can bring with the touch of it all being neuro focused with ClearPoint expertise. Operator: Thank you. There are no further questions at this time. I'd like to hand the floor back over to Joe Burnett for any closing comments. Joseph Burnett: Well, thanks again, everyone, for joining today's call. This is an incredibly exciting time for our company. We have a clear vision, a comprehensive strategy, a competitive portfolio and the right team in place to not only win in all 4 markets that we play in today, but to also prepare to become essential and everywhere as we get ready for the commercialization of neuro cell and gene therapies in the coming years. Thank you, and good night. Operator: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Good day, and welcome to the Acumen Pharma Third Quarter 2025 Conference Call and Webcast. [Operator Instructions] As a reminder, this call may be recorded. I would now like to turn the call over to Alex Braun, Head of Investor Relations. Please go ahead. Alex Braun: Thanks, Michelle. Good morning, and welcome to the Acumen conference call to discuss our business update and financial results for the quarter ended September 30, 2025. With me today are Dan O'Connell, our Chief Executive Officer; and Matt Zuga, our CFO and Chief Business Officer. Matt and Dan has some brief prepared remarks, and then we'll open the call for questions. Joining for the Q&A session, we also have Dr. Jim Doherty, our Chief Development Officer; and Dr. Eric Siemers, our Chief Medical Officer. Before we begin, we encourage listeners to go to the Investors section of the Acumen website to find our press release issued this morning that we'll discuss today. Please note that during today's conference call, we may make forward-looking statements within the meaning of the federal securities laws, including statements concerning our financial outlook and expected business plans. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Please see Slide 2 of our corporate presentation, our press release issued this morning and our most recent annual and quarterly reports filed with the SEC for important risk factors that could cause our actual results to differ materially from those expressed or implied in the forward-looking statements. We undertake no obligation to update or revise the information provided on this call or in the accompanying presentation as a result of new information or future results or developments. So with that, I'll turn the call over to Dan. Daniel O'Connell: Great. Thanks, Alex. Good morning, everyone, and thank you for joining us today. In the third quarter, we continued our track record of operational execution on 2 fronts: the steady progression of our Phase II ALTITUDE-AD trial and the generation of additional nonclinical data supporting our Enhanced Brain Delivery or EBD program. Our core hypothesis remains that synaptotoxic A-beta oligomers play a pivotal role in the development of Alzheimer's disease, and as such, stand as a highly attractive therapeutic target for safe and efficacious treatment of AD. ALTITUDE is investigating sabirnetug, our humanized monoclonal antibody with high selectivity for A-beta oligomers. Sabirnetug's selectivity for toxic oligomers is central to why we believe it could unlock potentially greater clinical efficacy and improved safety relative to antibodies targeting amyloid plaque. We've made rapid progress in the substantial 18-month study. Some of the 542 participants enrolled in the trial are already beginning to complete the placebo-controlled phase with the first participants scheduled to be dosed in the open-label extension as soon as today. In the open-label extension, all participants have the opportunity to receive sabirnetug at 35 milligrams per kilogram every 4 weeks for up to 52 weeks. The OLE represents not only our commitment to the participants involved in ALTITUDE, but will also provide us with valuable long-term safety and additional efficacy data to supplement the broader data package supporting sabirnetug. Based on our strong execution, we continue to expect top line results for ALTITUDE-AD in late 2026, inclusive of the key efficacy and safety measures. For our EBD program, we recognized for some time that pairing a differentiated A-beta oligomer-directed cargo with a validated blood-brain barrier carrier technology could offer an attractive next-generation product opportunity in Alzheimer's. As you heard on our Q2 call in August, we announced a strategic collaboration, option and license agreement with JCR Pharmaceuticals to develop an Alzheimer's disease product combining our A-beta oligomer selective antibody expertise with JCR's transferrin receptor targeting blood-brain barrier technology. As part of this effort on the cargo or effector side of the construct, we are evaluating sabirnetug and other oligomer selective antibodies from our library, including an antibody we're calling ACU234 that may have even greater selectivity for oligomers over monomers as compared with sabirnetug. For the carrier portion, we're exploring both single chain and variable heavy domain antibody constructs from JCR's extensive TfR targeting libraries, which we consider cutting-edge approaches in the BBB space. The program is progressing nicely, and we expect to present mirroring data using some of our constructs at upcoming medical conferences. We continue to anticipate a nonclinical data package, inclusive of a nonhuman primate study in early 2026, which will inform our decision to advance up to 2 development candidates under our exclusive option agreement with JCR. Finally, I would like to highlight the addition of Dr. George Golumbeski to our Board as Chairman. With his addition, the Board has increased to 8, and George brings more than 30 years of experience in the biotechnology industry and is a highly recognized and experienced biopharma leader with a strong track record in business development, licensing and strategic initiatives. His deep expertise aligns well with our current goals as we continue to advance our ongoing Phase II trial and EBD program to drive value for shareholders and Alzheimer's patients alike. And with that, I'll turn the call over to Matt for the financials. Alex Braun: Matt, I think you might be on mute. Matt Zuga: Yes. Apologies. Thank you, Dan. As a reminder, our third quarter 2025 financial results are available in the press release we issued this morning and in our 10-Q we will file later today. As of September 30, we had $136.1 million in cash and marketable securities on the balance sheet, which is expected to support our current clinical and operational activities into early 2027. R&D expenses were $22 million in the third quarter. The decrease over the prior year was primarily due to a reduction of CRO costs associated with the ALTITUDE-AD clinical trial, for which we completed enrollment in March 2025 following dosing of the first patient in May 2024. G&A expenses were $4.5 million in the third quarter. The decrease primarily due to reductions in legal fees, audit and other accounting services expenses and recruiting expenses. This led to a loss from operations and a net loss of $26.5 million in the quarter. 2026 will be a very exciting year for Acumen. We are confident in our strong execution of ALTITUDE-AD, and we look forward to sharing top line results in late 2026. Our EBD program also offers optionality and further unlocking the potential of targeting synaptotoxic A-beta oligomers for improved outcomes in treating Alzheimer's disease, and we will have more to share on that in early 2026. Through this two-pronged approach, we remain dedicated to delivering potential next-generation treatment options for the benefit of patients, caregivers and shareholders. And with that, we can open the call for Q&A. Operator? Operator: [Operator Instructions] And our first question comes from Jason Zemansky with Bank of America. Jason Zemansky: Congrats on the progress. Two, if I may, please. Can you disclose what you're looking for in the early transferrin data in terms of a go/no-go decision? I mean, what does it take to feel confident the delivery mechanism is efficient enough? And then maybe secondarily, can you talk a little bit about the evoke trials, the Novo studies of Wegovy in Alzheimer's? And if it's positive, how does that impact the space and your approach? Daniel O'Connell: I'm actually going to invite Jim Doherty, our Chief Development Officer, to comment actually on both of those questions. I think Jim is a good source of response. James Doherty: Yes, happy to, Dan. As we think about the EBD program, we do see an awful lot of opportunity and potential by really being able to increase the penetration of sabirnetug or sabirnetug-like antibody in the brain. And there's not an absolute number that we think about as a target for the fold increase that we're looking for or something like that. But I can certainly tell you, as we look at the profile of sabirnetug, we remain very confident in sabirnetug's overall profile, and we're excited about where we are in Phase II. So as you think about a next-generation approach, we're really just looking at enhancing the overall profile for sabirnetug. So given the relatively low penetration of any monoclonal antibody into the CNS, a moderate increase in exposure level could have beneficial effects in multiple different dimensions. And we see opportunities when it comes to efficacy, when it comes potentially to safety, given the findings so far with monoclonal antibodies being used with EBD for Alzheimer's disease, and even for things like drug delivery when it comes to total volume delivered and things like that. So as we think about it, we're looking for a meaningful increase in the overall exposure. And we can achieve that at relatively low levels because of the potent effects of sabirnetug already. On the evoke side of things, we are watching -- as with everyone else, watching very closely to see what's happening with the GLP-1 studies from Novo. We think the science is really pretty interesting and it's certainly an evolving space and clear that improving metabolic profile overall is having effects in a number of different patient populations. And I think there's really good science behind the concept that improved metabolic profile could have a real effect for Alzheimer's patients. So we're interested to see the outcomes. I think the key questions always come down to, in a specific trial, how well the agent is going to be delivered into the CNS? And I think that's a fair question for evoke and evoke+. But we're just really glad to see activity going for other complementary mechanisms of action in treatment of AD. It's clear that there are a lot of patients who need help, and I think some of these other alternative approaches could be interesting to pair with amyloid approaches like sabirnetug. Operator: Our next question comes from Tom Shrader with BTIG. Thomas Shrader: You made an interesting comment about possibly replacing sabirnetug with something that's more oligomer focused. Maybe you can outline your thoughts there because what the shuttles allow you to do is remove plaque safely. So the other approach is to use something that's more plaque focused, because if you can do it safely, you might as well. So I'm just curious the thoughts of insiders. And then for early data for the shuttle, is the sense that the -- it's all about anemia. Is the sense that the anemia goes entirely with the shuttle domain so that your anemia should really be based on data from your partner? Or is the anemia potentially also related to the actual payload, your actual antibody? Daniel O'Connell: I'll make a quick comment and then Jimmy might like to add on it. I think one of the important facets of the JCR collaboration was for us to explore diversity of constructs. And so that's really where -- we're not seeking to replace sabirnetug, but we're looking to explore what other possibilities exist as we sort of work through this discovery phase effort. So I think that's the principle at play in terms of things beyond sabirnetug. So we think that's an interesting -- gives us some redundancy and diversity in that early-stage program. And so far, we're seeing some interesting results and are excited to complete the data package by early next year. Jim, do you want to take the other question from Tom on anemia and how we're thinking about epitopes and selectivity? James Doherty: Yes, happy to, Dan. Tom, we, as well as others, are really excited about the technology, and I think it's -- there's a lot of opportunity. It really comes down to framing it the way Dan's framed it earlier in the call around the combination of cargo and carrier. So obviously, the final product is going to have elements of both, but that also means that your overall profile is going to be dictated by the components. So when you think about things like the risk factors, I mean, the risk factor for ARIA that has been associated with transferrin-based approaches comes with the technology. So no reason for us to think that the profile to date with sabirnetug shows any sign of such considerations, but it certainly is the case with the technology. So our ways of thinking about it are at the moment, we are very much focused on understanding what the combination of pairing a monoclonal A-beta for soluble oligomers with transferrin. So as we do testing for individual constructs, we're looking at the risks or potential for seeing anemia-related effects with the constructs. But we do think that it's likely -- if we see anything like that, the contribution will be coming from the transferrin-based construct. Ultimately, at the end of the day, this is why you do testing and select a particular candidate molecule to sort of maximize benefits and minimize risks. But from first principles, that's our thinking and that's where the expectation would be, is that it would be a risk carried by the transferrin technology. And part of the reason that we selected JCR as a partner is they've got a track record in the clinic of being able to minimize that risk with their constructs. Operator: Our next question comes from Geoff Meacham with Citi. Unknown Analyst: It's Ross on for Jeff. We had a question on the nonclinical data package. Specifically, we're curious what data we could expect to see and specifically in regards to what biomarkers you would be looking at. Daniel O'Connell: Jim, you want to take that? James Doherty: Yes. Yes, as we think about data package, I guess there's a couple of ways that we think about that. One would be the data package that goes into a candidate selection decision which we're targeting for the early part of 2026. And there, you can expect to see a number of preclinical studies looking at both the target profile for the new construct. So we want to make sure that the sabirnetug-like profile that we have is not negatively impacted by adding the cargo and the carrier construct. And then, of course, we're also very much interested in the impact of the carrier construct on PK profile, both looking at the increase in brain penetration, but also looking at the pharmacokinetics. That is one place where there is diversity from candidate to candidate. So we'll be looking at PK profile. We'll be looking at binding to oligomer and other A-beta targets. And we'll be looking at some murine animal models as well to see if we can see profiles consistent with what we've demonstrated to date with sabirnetug. So that's the -- and of course, very importantly, we'll also be including a primate PK study because, of course, the murine stuff is very important, but no substitute for looking at what's happening in the primate brain, especially with the transferrin receptor constructs, which the primate version of transferrin is a little different than the murine. So that's how we're thinking about delivery of the package for selecting a candidate to move forward with. The program moving forward after that, we benefit very much from the fact that sabirnetug is currently in the mid-stage clinical trials. And we've spent, as you know, a lot of effort in understanding biomarker profiles for the original sabirnetug. And so we see a real opportunity as we go into early phase clinical developments to build off of that. And so what you'll see is a lot of the same biomarkers that we've looked at in the sabirnetug program. So thinking about the plasma-based biomarkers, looking at A-beta 40, 42 levels, looking at pTau levels, including pTau217, and then also including the downstream synaptic markers like neurogranin and VAMP2. And really, it gives us a lot to build on from our lead program to be able to understand how the carrier-enhanced sabirnetug program is doing. Operator: Our next question comes from Paul Matteis with Stifel. Matthew Ryan Tan: This is Matthew on for Paul. Congrats on the progress. I guess on the shuttle program, I was wondering will these candidates -- will both candidates be advanced in unison? Or is there a chance of advancing one and then waiting for the ALTITUDE results before advancing the other? And in terms of selecting the other non-sabirnetug candidate, other than specificity, were there other things you considered that might be optimized? Daniel O'Connell: I think it's too early for us to say whether we'll be advancing 1 or 2 and which of the 2 might move forward. So I think this is going to be data dependent in early '26. I do think we're looking at a combination of factors around the sabirnetug, the 2, 3, 4. I mean we're still generating more data around selectivity and other properties, but are intrigued to think that there's other profiles even still beyond primary sabirnetug that could be candidates for further development. Operator: Our next question comes from Pete Stavropoulos with Cantor. Unknown Analyst: This is Samantha on the line for Pete. Congrats on the progress. So my first question, I know we're about a year or so away from ALTITUDE data, but I'm wondering what your current thinking is in terms of the bar and what's the minimum you'd like to see out of this study to move forward from both a clinical scale perspective and biomarker data? And then I just have a quick follow-up. Daniel O'Connell: Jim or Eric, do you guys want to provide a primary response on that? James Doherty: Yes. So let me start, and I'll invite Eric to jump in. Great to hear from you, Samantha. And I think the answer to the question is this is -- we talk a lot about testing the oligomer hypothesis, and we think for a lot of reasons, there's a vast amount of evidence that speaks to oligomers having an important role in the pathophysiology of Alzheimer's disease. And I think our Phase I data so far supports that. But the value -- the key value in the ALTITUDE study is it's the first true demonstration looking at clinical scales. And so obviously, the major impact for the study is to understand the effect on those clinical scales. So we're, of course, looking for a clear and demonstrable effect when you come down to change from progression rate. But we're also going to be looking at what the overall impact of that is and looking at the effects of sabirnetug on multiple scales. So we certainly have -- iADRS is our primary, but there are a number of scales that are going to go into that. And really, in addition to just looking for a clear signal, we're going to be looking for what's the type of response in those various scales. And I think the same kind of thing around the biomarker work. We're very excited with the biomarker signals we're seeing after 3 months of dosing from the INTERCEPT study. And so this gives us much more data over a much longer period of time with an 18-month primary endpoint. So that's kind of how we're looking at the readout itself. But let me turn it over to Eric and see if he has any other color that he wants to add. Eric Siemers: Yes. Well, it's a great question. Because at the end of a study like -- a fairly large Phase II study like ALTITUDE, it's really a matter of safety and efficacy. And as Jim mentioned, our primary outcome is the scale called the iADRS, which is a combination of cognition and function. So that's going to be our primary outcome in terms of efficacy, although, as Jim mentioned, we've got a lot of secondary measures in there, too. And then you have to combine that with safety. And it's the 2 of those in combination that give you the therapeutic index. And in a study as large as ALTITUDE with 542 people, you really can get a sense of what that therapeutic index is. Now beyond that, as you know, in our Phase I study, we actually had some, I would say, fairly impressive biomarker responses, which really tells us not only do we have target engagement in terms of binding to oligomers, but we're also having effects on the downstream pathology in Alzheimer's disease. And of course, we'll look for those kind of biomarkers in ALTITUDE. But based on the fact that we saw those even in our small Phase I study, I think that could give us a real potential for being differentiated from other treatments. Operator: I'm showing no further questions at this time. I'd like to turn the call back over to Alex Braun for closing remarks. Alex Braun: Thanks, Michelle, and thanks to everyone who tuned in today to listen to our Q3 update. We are always available at the company for any further questions. So please don't hesitate to get in touch. With that, have a great day. Operator: Thank you for your participation. You may now disconnect.
Millicent T.: Good evening and good morning, and welcome to Tencent Music Entertainment Group's Third Quarter 2025 Earnings Conference Call. I'm Millicent T., Head of IR. We announced our quarterly financial results earlier today before the U.S. market open. The earnings release is now available on our IR website and via Newswire services. During today's call, you'll hear from Mr. Cussion Pang, our Executive Chairman; and Mr. Ross Liang, our CEO, who will share an overview of our company's strategies and business updates. Then Ms. Shirley Hu, our CFO, will discuss our financial results before we open the call for questions. Before we continue, I refer you to the safe harbor statement in our earnings release, which applies to this call as we make forward-looking statements. Please note that we will discuss non-IFRS measures today, which are more thoroughly explained and reconciled to the most comparable measures reported under IFRS and our earnings release and filings with the SEC. [Operator Instructions] And please be advised that today's call is being recorded. With that, I'm very pleased to turn the call over to Cussion, Executive Chairman of TME. Cussion, please. Kar Shun Pang: Thank you, Millicent. Hello, everyone, and thank you for joining our call today. In the third quarter, we delivered another set of strong financial results, underpinned by the well-rounded performance of our online music business. Our ongoing innovations across content, services and live experience continue to fuel steady growth in our subscription business, while pushing momentum in non-subscription revenue, particularly in concerts and artist merchandise. Backed by our strong financial position and operational excellence, we are posted to further broaden our music service, unlock new growth opportunities and create greater value for artists, partners and users across the entire music industry. Now let me share some highlights from this quarter. First, we further enriched our content coverage to include more offerings in different music genres and languages. For example, in Pop music, we renewed the contract with dramas, a leading Korean naval and partnerships with [indiscernible] studio strengthening our collection of top hits. To better serve users' passions for game-related music, we partnered with Tencent Games to coproduce Atlas of Tomorrow, [indiscernible] the 10th anniversary theme song performed by JJ Lin for Honor of Kings performed as the final at the Honor of Kings' 10th anniversary co-creation night, the song quickly garnered over 600 million social media mentions within 2 weeks of its release, engaged 280 cultural and tourism authorities nationwide, standing out as one of the year's most impactful game soundtracks. We also collaborated with Blizzard Entertainment for the first time and introduced 50 original soundtracks from iconic game titles, including World of Warcraft, [indiscernible] and Hearthstone. To further Enrich Anime and K-pop music categories, we established strategic partnerships with renowned Japanese ACG label, King Records and Korean Label Serial, offering popular Anime songs and OSTs from his dramas such as Boys Over Flowers, [Heirs] Second, during the quarter, we successfully staged several large-scale international concerts and events, extending our reach beyond borders to tap into the international market opportunities. A prime example is the concert tour that we hosted for leading Korean artist, G-Dragon. G-Dragon 2025 World Tour, Ubermensch, building on our success in the second quarter. This time, we put on 14 additional show of shows for him across 6 cities, including Sydney, Melbourne and Kuala Lumpur, drawing over 150,000 attendees. The popularity of the tour lead to acceleration of live concert revenue growth, demonstrating our strength in delivering world-class entertainment experiences. Our annual flagship TMEA concert was another success and highlight for the quarter. The event featured 35 different artists and groups and drew more than 10,000 attendees, underscoring its strategic importance as a well-anticipated premier gathering within the music industry. Building on the momentum from TMEA, this year, we broke new ground and introduced another flagship concert IP, TME Live International Music Awards, TIMA, to celebrate the achievements of international artists and showcase their talents. The inaugural TIMA featured 22 global renowned artists and groups from China and a number of Asian countries, including famous [indiscernible] SMTR25, the 2-day events immersed over 20,000 attendees in a vibrant atmosphere. We also organized and delivered several major concert tools for well-known artists like [indiscernible] The success of these shows illustrates TME's strength and impact in [bottling] artist fan bases, especially through interactions with younger audience. For instance, in Guy's most recent shows in Chongqing, through integrated online and offline promotional resources, we helped him attract more than 40,000 attendees, up from 10,000 in a single event in the third quarter. This marked a successful upgrade in concert scale, moving from arena level to stadium level. Together, these remarkable events have laid a solid foundation for TME to continue to grow at scale as we further build out our performance pipeline, we are confident that there will be more exciting opportunities home and abroad to deliver large-scale and immersive live music experiences for users. Third, we continue to break new ground with artist partnerships, providing them with holistic support and leveraging our increasing promotional capability to enrich artist-centric offerings. For instance, during the quarter, we partnered with Tencent's hit title, Crossfire to produce new song COPDD by seamlessly integrating this song into the game ecosystem and allowing users to earn in-game items through listening task. We amplified its impact. The track sold to #2 on the QQ Music New Song chart within 2 days of its release. As another example, in this quarter, we premiered Lejiang's new digital album Rock the Heavenly Palace together with collectible cart packages. This innovative approach not only boosted participations, but also lead the album to rank among the top of the 2025 bestseller charts. The production and release of Bai Lu's first physical album, My Odyssey, featuring 2 distinct version designs marked another success. The album earned strong acclaim from fans and achieved outstanding sales performance. All of the above examples illustrate the power and flywheel of our content and platform dual engine, supported by our massive user base, fueled by expanding content ecosystem and constant innovation, we have reinforced the virtuous cycle, allowing us to design diverse services to address users' needs with user interactions deepening and community engagement strengthening, it boost the reach of quality content on our platform, and attracts more attention from artists and labels, both home and abroad, fueling the sustainable growth of our ecosystem. Last but not least, on ESG, for 7 consecutive years, we have proudly won the Music Garden Space Public Welfare Program, partnering with singers and teachers to support music education in rural areas. This year, we invited WeSing users to redeem their points accumulated through incentive [ads] to directly support the program, sparkling greater users' interest. Over 380,000 participants took apart. Looking ahead, we will continue to leverage our dual engine strategy, explore new opportunities and expand our reach. Building a seamless [ribbon] all-in-one music service platform for music lovers. Now I would like to hand it over to Ross for a deeper dive into our overall platform development. Ross, please go ahead. Thank you. Liang Zhu: Thank you, Cussion. Hello, everyone. Our music ecosystem continued to strive in the third quarter, benefiting from our profound user insights and operational excellence. As we focus on enhancing the value proposition for user, this quarter, we achieved a steady growth in [indiscernible] penetration and ARPPU. We are also building a diversified product portfolio catering to different user cohorts to effectively expand our platform's reach to a broader audience. To this end, our commitment to harnessing AI to elevate users' experiences continue to import us to remain at the forefront of delighting music users. First, on system integration, we were among the first to support Apple's Liquid Glass mode in iOS '26 and introduced Liquid Glass themes and players on Android for optimized visual effects and better interactions. We also fully adapted our app for HarmonyOS with core music features now largely aligned with what we offer on Android. Second, we upgraded player interactive features and AI-powered functionalities. For example, we embedded more enlighting designs and tokens on the playback page, creating delightful thread across new touch points, which also proved effective in new song promotions. We also pioneered multimode sound transition feature, Automix, offering seamless remix and a more immersive streaming experience. To effectively deepen engagement, we expanded our AI-powered [lyrics] card feature, newly covering over 200 leading artists. The card collecting process is full of [threats ] and fun, driving sharing among users and increased user activeness. Our upgraded AI assistant allows users to generate a personalized playlist with just one type or easily create their own original music. This has significantly lowered the barrier to creative expression and helped increase content consumption through recommendation. We are here to serve and delight. As a result, users can unlock additional tools to and perks from our multipoint membership offerings, whether a freemium user, a deeper value add member or a standard subscriber. We provide a different services to cater to the distinct needs of users. In fact, recently, we started to see an increasing values of freemium users upgrading to add members, which also led to increased time spent. For those looking to experience the [IRT] made service, our SIP offers an unparalleled range of freemium features, which have been crucial in driving SIP adoption rate and average spend. Its penetration and ARPPU expanded both year-over-year and quarter-over-quarter as we introduced new privileges and innovative services that strengthened its value proposition and inspire the music appreciation in new ways. A new highlights to share. First, Premium Sound qualities remain our key draw for [indiscernible] as we accelerated its results. QQ Music newly introduced DTS Booming External Speaker became the top convention driver among audio qualities. Viper Ultra Sound 2.0 Kugou Music with its improved sound quality, sound [clarity] and reduced data usage also proved to be highly effective in retaining [SVIP] loyalty. Second, our insight into content and user propelled us to provide creative offerings, which in turn helped boost [SVIP] uptake. For example, the digital album, an integral part of our content ecosystem remains effective at [SVIP] commission. Members highly appreciate their privileges access to digital albums alongside limited edition, collectible [NFC] cards. Notable collaborations this quarter include [indiscernible] self-titled Japanese EP, which significantly boosted [SVIP] commissions. Another example is Starlight cards. In the third quarter, we rolled out new Starlight cards featuring popular artists such as Fiona Sit, Asper, Idol, and Things in Times [Shinei Nouzen] which instantly became a big draw. We have also expanded artist partnerships to include more international musicians, including [indiscernible] Japan's [indiscernible] Western artist [Jake] replicating our success domestically. We recently expanded our Starlight card offerings to the Hong Kong and Thailand market through our music platform [indiscernible]. Third, we rolled out several target initiatives to reinforce the artist fan connection and strengthen user loyalty through [bubble]. We expanded our artist rotors by onboarding over a dozen musicians from domestic labels such as Huxia, [NexT1DE] and [Ride] giving more fans the chance to interact directly with their favorite artists online. This in turn attracted broad, broader user base. We leveraged AI to further localize the bubble features and functionalities, leading to improved user retention. The new and upgraded features include in-app translation and speak to text capabilities empowered by large AI models as well as desktop [short cars] for quickly and spontaneous access. We also launched limited edition budgets to celebrate key artist moments such as new sound release, birthdays and debut anniversaries. This compliment by [indiscernible] perks helped strengthen emotion ties between artists and fans, resulting in improved retention and engagement. In summary, we are pleased with the progress we have made in enhancing the value of an increasingly diverse user base. Moving forward, we remain committed to further enhancing our core strength and platform efficiency. We are well positioned to continue to shape the industry from music creation to enjoyment. With that, I would like to turn the call over to Shirley, our CFO, for a deep dive into our financials. Min Hu: Thank you, Ross, and greetings, everyone. Let me now turn to our financial results. In Q3 2025, our total revenues grew 21% year-on-year to RMB 8.5 billion, marking the highest revenue growth since Q1 2021. This was resulted from continued growth momentum in music subscriptions, together with robust growth in offline performances, advertising services and artist-related merchandise sales. Online music revenues grew over 27% year-on-year to RMB 7 billion. Music subscription revenues grew 70% year-on-year to RMB 4.5 billion in Q3 2025 driven by continued growth in monthly ARPPU and subscriber base. Monthly ARPPU reached RMB 11.9 this quarter compared to RMB 10.8 in the same period of last year, primarily driven by expansion in SVIP membership program. This quarter, we continue to broaden and strengthen the SVIP benefits. For example, QQ Music newly introduced the DTS Booming External Speaker and we expanded Starlight cards with more popular artists, both are features to drive SVIP adoption. Additionally, our multiprolonged membership offerings across ADS membership, standard memberships and SVIP membership also contributed to improved user engagement and conversation. All of these efforts have laid down the foundation for the health growth of our subscription business. Advertising revenue continued its strong growth trajectory on a year-on-year basis, primarily driven by more diversified product portfolio and innovative [ad] formats such as ad-supported model. Offline performances and artist-related merchandise sales delivered triple-digit year-on-year revenue growth this quarter in Q3. We successfully hold multiple concerts, both domestically and internationally. In overseas market, we hosted 14 shows for G-Dragon across 6 cities, achieving robust ticket sales. In domestic market, we successfully hosted concerts for high-profile artists such as [indiscernible]. In addition, we provided a concert-related merchandise sales during the concert, which opened more artist connection opportunities and in turn, contributed to the revenue growth in artist-related merchandise sales. Social entertainment service and other revenues were RMB 1.5 billion, down by 3% year-on-year. Our gross margin in Q3 2025 was 43.5%, up 0.9 percentage points year-on-year. The increase was mainly attributable to strong growth in music subscription and advertising revenues alongside a lower revenue sharing ratio in social entertainment services. At the same time, new growth areas such as off-line performances and artist-related merchandise sales have lower gross margin. The revenue mix shift may cause gross margin fluctuations in different periods. Diversification in revenues offers the possibility for further growth in our revenue and gross profit and help us cultivate a more comprehensive one-stop music services ecosystem. Moving on to operating expenses. They amounted to RMB 1.3 billion, representing 15.5% of our total revenues in Q3 2025 compared with 70.4% in the same period of last year. Selling and marketing expenses were RMB 216 million, up by 18% year-on-year, primarily due to higher content promotion expenses and channel spending. We keep monitoring market conditions and increase spending as needed with financial discipline. General and administrative expenses were RMB 1.05 billion, up by 5% year-on-year, primarily due to growth in employee-related expenses. Our effective tax rate for Q3 2025 was 70.7% and remained relatively stable compared with ET in the same period of 2024. We accrued withholding income tax of RMB 118 million this quarter. For Q3, our net profit increased by 29% to RMB 2.2 billion and net profit attributable to equity holders of the company increased by 36% to RMB 2.2 billion. Non-IFRS net profit increased by 28% to RMB 2.5 billion and non-IFRS net profit attributable to equity holders of the company increased by 33% to RMB 2.4 billion. Our diluted earnings per ADS this quarter was RMB [1.38] up by 37% year-on-year. And the non-IFRS diluted earnings per ADS was RMB 1.44, up by 33% year-on-year. As of September 30, 2025, our combined balances of cash, cash equivalents, term deposits and short-term investments were RMB 36.1 billion as compared to RMB 34.9 billion as of June 30, 2025. This combined balance was impacted by the repayment of USD 300 million for the same year unsecured lots in Q3 2025 and it was also affected by changes in the exchange rate of RMB to USD at different balance sheet dates. Looking forward, we will put more efforts in IP cultivation and self-product content while keeping product innovation to foster a vibrant and comprehensive music ecosystem. With solid growth in our core business and increased product diversification such as offline performance and artist-related merchandise, we are well positioned and are confident in the high-quality growth of our business. This concludes our prepared remarks. Operator, we are ready to open the call for questions. Millicent T.: [Operator Instructions] And the first question comes from the line from Morgan Stanley, Liu Yang. Yang Liu: I would like to ask about the fourth quarter this year and the 2026 outlook for the business. Unknown Executive: [Interpreted] Thank you so much for your questions. And with our holistic high-quality growth strategy, we delivered another quarter of strong results on both of the top and the bottom line. We continue to lead the industry in music consumption and creation, and we are confident to deliver good results. On the music subscription side, our multipronged membership offerings lead to better caters to users' diverse needs. Number of paying users and ARPPU grew steadily, while user retention and time spent remained healthy. SVIP penetration and ARPPU increased year-over-year and quarter-over-quarter. In addition, I would like to point out that the newly launched ad memberships also gained momentum, which will help us to unlock greater value from the freemium users as well. On the non-subscription side, our One Stop music entertainment service platform will continue to drive users demand and business growth. First, on the advertising side, our diversified and innovative ad formats continue to create value for advertisers and users. So it will continue to drive steady business growth in quarter 4. Second, on the fast-growing live concerts business, we have already achieved a significant breakthroughs [found] and aboard, which will contribute to a triple-digit year-to-year revenue growth. Last, on the fan-based economy, we have explored a variety of new product combinations and service formats, which will effectively helping artists and music labels to further unlock commercial value. So in short, for the year 2025, we remain hopeful to deliver strong performance of our online music services to further driving good revenue and profit growth of the company. Looking ahead to 2026, we are committed to implement our platform and content ecosystem dual engine strategy. With the strong foundation that we have built together with the new initiatives, we expect sustained healthy growth in our music subscription business, although at a slightly slower rate given its high base. Non-subscription businesses contribution to the group performance will continue to increase and is expected to grow faster than the subscription business. Millicent T.: And then the next question comes from Goldman Sachs, Lincoln. Lincoln Kong: A very solid quarter in the third quarter. So I just want to quickly touch on the industry landscape here, especially for the music streaming business. I think recently, there is a bit of a market concern [indiscernible] over some music app competition in terms of the faster MAU ramp-up or potential high budgets for purchase of music content. So I just want to wonder management thoughts, do you see anything changed in terms of the competition landscape at all? And also our strategy to further enhance our leadership in terms of the content differentiation, our user mindset and overall service offering to consumers. Unknown Executive: [Interpreted] well, thank you very much. Thanks for your question. Regarding the competition, I think we still have the same competitors in the music industry and including Soda Music as well as NetEase music and also Soda Music and the [indiscernible] music. For sure, we also noticed the growth from Soda music. [Interpreted] Well, for TME, we always believe the competition is normal, and this is also what we see from the past to now. And this year also marks the 20th anniversary of QQ Music. And along the way for our development, we have already encountered many competitions. Regarding the competition, I'd like to touch upon platform and content, the 2 perspective. Regarding the platform, I think for music application is still a traditional business. And the business is based on the streaming business, where traditionally, we do have the recommendation, where our asset management maintains that same and most important and critical user experience for us regarding the streaming business. I think our competitive edge still rests with our music library, along with the user asset management that has been accumulated for so many years. But at the same time, you can also see that TME still lead the industry regarding the sound quality and sound effect, where we also continue to provide the sound quality, the lossless sound quality to the market. We also continue to engage with the high sound-quality equipment for music fixtures, including the HiFi and continue to engage the earpiece and the loud speaker high-quality sound effects, fixtures and equipment to further extend our content coverage. Where you can see, besides those basic products within TME, we have already further extended our business to provide a more enriched and diversified music experience to our users. Especially from our recent performance on the Starlight Card, along with our user badge as well as Bubble, we do have the e-app audience and the fans interaction, which will yield very positive results, which are not exist for any other competing products. Where at the same time, regarding the social entertainment business and our leasing product still show great potential and advantage regarding commercialization and rather have the Earth-Like or a okay events, which also yield very positive results. This can also help to consolidate our transitional business advantage. Well, I think a majority of people just pay attention to the changes on our mobile applications, where for any music product, you have to still keep an eye on the user rate as well as content coverage on multiterminal and multi-devices. You can say that at our PC end, and we still have a huge subscriber base. And also for the in-car service, we have a very high penetration ratio especially recently, we're actually leading the music publications by working with Harmony OS. You can see based upon our product innovation, optimize user experience and continued innovation and we'll still be able to pioneer and lead the market development. Regarding the patent or the copyright for TME, we always provide the most complete and high-quality application content in the whole industry. Besides releasing different genre of the songs, the most important thing we did for the past few years is continue to engage and cocreate many different musical content with music creators in our industry. Besides working for different genres of the songs, and recently, we also started to follow and work with Tencent Games and Tencent Video to create their top-notch IP for the co-creation of the OST songs. So you can see that our cooperation with Tencent Games and Tencent Video, and actually delighted the user and also be quite popular among the user, where more importantly, we continue to afford the comprehensive partnership with our partners, not only for the traditional song cooperation, but also for the co-creation of the content, including the Earth-Like concert as well as the fan-based economy, and we also made multiple extensions of collaboration with the partners. What we do is to provide the most comprehensive and high-quality content to our users. So you can say that now we do have the well-established platform with very robust content creation. We are adopting the 1 body with 2 wing strategy. That is indeed our largest competitive edge and the differentiation compared with other competitors, and we're also going to continue to integrate the platform and content for further development. That is also good for our IP protection and also continue to drive the subscription business development, which will be ultimately positive for our future business growth. So indeed, the industry is facing furious competition, but we're still very confident for our future development. Millicent T.: And the next question comes from Alicia Yap from Citigroup. Alicis a Yap: Congrats on the solid results. I have a question regarding the music concert. So can management share with us what would be your 2026 pipeline for the music concert. So how should we be thinking about modeling the revenue growth from music concert merchandising and also the digital album sales because -- so what are the challenges and opportunities on pursuing music concerts business and also to ensure the sustainable steady long-term growth? Unknown Executive: [Interpreted] And you see that for the Earth-Like performance or concert, this is actually a commitment for TME to go for, and we also have a long-term investment for that, especially for the past few years, I will just share with you what we did from a few perspectives. First of all, regarding the artist tour and we still organize the top artist tour for the most popular artist in our industry, where at the same time, we also invite the top artists to come and to stage the Earth-Like concert, where internally, we also have our own proprietary IT, including TMEA as well as TIMA. So for TME, we did a comprehensive resources investment and substantial resources allocation to make sure we continue to advance the Earth-like performance. Actually the Earth-Like performance not only help us to build our experience, but also continue to further debate with our partners. For example, in the prepared remarks, I have already mentioned what we do for G-Dragon, the South Korean artist. We have stage, he's on an Asia Pacific region tour. And that this can actually help us to further accumulate experience, but at the same time, it also hit a great success in Asia Pacific region. And such experience from the tour events can also be replicated and introduced into other large-scale Earth-Like concert and performance. So we are very happy and satisfied with what we have been achieved. Can say that besides organizing more top artists for tours and performance and we're also going to leverage our own proprietary IP, including TMEA and TIMA to continue to improve our performance in organizing the Earth-Like performance and concert. This also showcases our unique advantage because TME will be able to integrate our online and offline music resources and continue to further deepen our collaboration with the musical ecosystem. In that way, we can also make sure that our audience will enjoy a high-quality music experience and that can also become our competition advantage and differentiation. So by organizing such top artists performance, we also hope that we will provide more performance privilege as well as privilege to the fan-based economy to our user. This can also help to promote the SVIP subscription business development, where at the same time, we will be able to provide our users a more comprehensive and immersive experience by staying with TME. Well regarding the fan-based economy, and we also continue to further improve our service to the fan groups and community by providing the primary privilege to them, which has proven to be very popular among our fans. For example, I have already shared with you the G-Dragon Asia Pacific tour. The merchandise sales from that tour proved to be quite successful. This is also what we continue to do by providing the primary privilege to our users. Millicent T.: And the next question comes from Jefferies and Thomas Chong. Thomas Chong: My question is about our subscription services. Given that we have been strengthening our ARPPU growth, while we are maintaining our steady net adds. I just want to get some color with regard to how we should think about our 2026 growth driver for the subscription services. How should we think about the growth momentum for ARPPU and net adds? I'm just wondering if we are seeing the competitive dynamic environment in terms of the competition. Would there be any changes in terms of the growth driver, ie., we launched more lower-priced packages to drive the subscriber growth and the ARPPU may not be as fast as what we previously expected. And on the other hand, when we look into our SVIP subscribers and the penetration, can management talk about the goal in 2026? Unknown Executive: [Interpreted] Regarding our overall target for 2026, I think we're still going to register a very steady growth for the subscriber base. And it may -- regarding the growth driver, it may come in from the following aspects. First of all, still leveraging the high-quality content for business groups. We're still going to provide the high-quality content by working with our IP partners to continue to provide the high quality and unique content to our users. Well, the second growth driver may come from the content privilege because starting from 2026, we're going to export the new boundaries besides the traditional music content, we're also going to pursue the boundary for the Starlight Cards, the Earth-Like concert as well as the merchandise, because my colleague used to mention with regarding the content, we not only do the music content, but also continue to develop all the peripherals for merchandise to continue to pursue a sustainable business growth. Another key growth driver for the subscription business will be raised with the functional privileges, including the sound quality, sound effect, the ringtone editing as well as the AI-empowered sound writing. This can actually be the differentiated function we offer to the market. So generally speaking, we're still going to continue to consolidate and innovate on both content and the functionalities. In that way, we will be able to further grow the size of our subscription business and also achieving ARPPU growth. You can say that regarding the second part of your question, the low-priced package, and this is not something new to us, and we have already seen such thing for many years. And especially, we have already been prepared for that especially, you can see the freemium model, and that is a model we have started from 3 years ago. So you can see that from the fundamental business logic and regarding how we consider the growth of the user, we, first of all, have the free-to-use service user and then they go for ad-supported mode and then we do have the regular user, and then they will be upgraded to SVIP. It's a multi-prolonged membership in order to help to further grow our user size. You can say that, especially for ad-supported mode, even if it is also being provided by other competing products in the market. But if you take a look at the commercial data, especially the monetization efficacy of a single DUA actually makes the TME triumph other competitors. So in other words, we already have a very good experience in balancing between commercialization efficiency and user retention. We're responding to the final part of your question that is regarding to SVIP, and I think I have already said that in the prepared remarks, SVIP continues to be a critical part of our business. And for the penetration ratio and ARPPU for SVIP, they're still growing or even commented a good growth as what we expected. Well, regarding the year of 2026, I think the key driver for SVIP, besides providing the subscription and high-quality content, we're also going to have and forge comprehensive partnership with our IP partners to continue to drive SVIP risks. Millicent T.: And the next question coming from Maggie Ye from CLSA. Yifan Ye: This is regarding the gross profit and gross margin. So in light of the potential revenue mix change, thanks to very robust growth in off-line performance as well as artist-related merchandise. How should we think about the profitability of these initiatives and their impact to our overall trend in gross profit as more as margins? Unknown Executive: [Interpreted] From what we see now regarding our online music business, and we still maintain a continued growth for subscription business and advertisement business. But from the content cost structure and efficiency side, we continue to do the optimization. And I truly believe our subscription and advertisement business growth will continue to benefit the GP margin. But for sure, as you may notice, advertisement business, we're in kind of seasonalities and first seasonalities were indeed bring the fluctuations to the GP margin. You can say that we continue to drive the development of applied performance as well as to grow the merchandise for audit, and we will need to make further investment on the audit-related IP, then in the initial stage of the business development, it will indeed have some negative impact on the GP margin. Well, as you can see that for those businesses, it can actually help to take care of the users' diversified musical needs and the consumption values from a single user will surely be more elevated. While at the same time, we also provide comprehensive music service, along with the copyright and the Artist IP in order to further improve the efficiency of the cost. Well, for the long run, we hope our investment will help to drive the effective growth in both revenue and gross profit as a whole. At least from what we see now in Q4 of this year, there will still be continued growth for the monthly revenues for both the advertisement business and the subscription business. Where we are approaching to the end of this year, the contribution from the sales of the Earth-Like events as well as the artist related merchandise will contribute that to the overall revenue. So in that reason, the Q4 GP margin would be elevated compared with Q3. We look into the year of 2026. And as we continue to build our confidence over the subscription business and advertisement business, along with investments in the Earth-Like events, along with the artist, the merchandise, our revenue or the revenue may differ or fluctuate due to the seasonality reason. But overall speaking, we're still very confident for our 2026 revenue growth and Q3 margin growth. Profit margin growth. Millicent T.: So thank you, everyone, for joining us today. If you have any further questions, please feel free to contact our IR team. And this concludes today's call. Thank you very much again, and look forward to seeing you on next quarter. Goodbye. Unknown Executive: Thank you. Goodbye. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]
Operator: Thank you for standing by. My name is Carly, and I will be your conference operator today. At this time, I would like to welcome everyone to the Hyliion Holdings Third Quarter 2025 Conference Call. [Operator Instructions] Thank you. I would now like to turn the call over to Greg Standley, Chief Accounting Officer. Please go ahead. Greg Standley: Thank you, and good morning, everyone. Welcome to Hyliion Holdings Third Quarter 2025 Earnings Conference Call. On today's call are Thomas Healy, our Chief Executive Officer; and Jon Panzer, our Chief Financial Officer. A slide presentation accompanying this call is available on Hyliion's Investor Relations website at investors.hyliion.com. Please note that during today's call, we will be making certain forward-looking statements regarding the company's business outlook. Forward-looking statements are predictions projections and other statements about anticipated events that are based on current expectations and assumptions as such are subject to risks and uncertainties. Many factors could cause actual results to differ materially from forward-looking statements made on this call. For more information on both factors that may cause the company's results to differ materially from such forward-looking statements, please refer to our presentation and press release as well as our filings with the Securities and Exchange Commission. You are cautioned not to place undue reliance on forward-looking statements, and we undertake no data to update this information unless required by applicable law. With that, I now turn the call over to Thomas. Thomas Healy: Hello, and thank you for joining us for Hyliion's Third Quarter 2025 earnings call. I'm joined today by our CFO, Jon Panzer. We're excited to share the significant progress we've made this quarter with the KARNO Power Module, along with the growing customer interest and market demand we're seeing for our technology. I'm pleased to share that the KARNO Power Module is now performing at a level that meets the key performance needs of our early customers. On our previous calls, we outlined several system enhancements that were in development. and I'm happy to share that those improvements have delivered meaningful gains across multiple performance areas. Throughout today's call, we'll review the performance metrics that matter most to our customers, including dispatchable power, reliability, emissions and outline where we stand on each as we begin entering the next phase of KARNO deployments. I'd like to start by directing your attention to the slides accompanying today's presentation. The first slide outlines the key performance targets that our early customers need and where we now stand against each of those benchmarks. As you'll see, we've reached a performance level that meets or exceeds these thresholds. I'll start with the power output and efficiency, which is where we saw the most significant improvement this quarter. As we shared previously, the regen component of the KARNO core had been underperforming relative to our expectations. Over the past few months, we implemented the redesigned regen and as anticipated, is delivered a material improvement in both power and efficiency. We are now achieving more than 200 kilowatts of mechanical power and north of 150 kilowatts of electrical power generation, meaning the system now meets the power needs of our initial customers. In the months ahead, we'll continue to implement small design refinements that are expected to further improve electrical output and overall system performance. These refinements are anticipated to bring electrical power generation to 200 kilowatts as we move into commercialization next year. Next, I'd like to highlight an important regulatory milestone that was achieved this quarter. Through our internal testing, we have confirmed that the KARNO Power Module can meet the extremely stringent air quality standards established by California's South Coast Air Quality Management District which are among the toughest in the nation. While running on natural gas, the system achieved NOx levels below 2.5 parts per million in carbon monoxide in the low single-digits parts per million, performance that far exceeds compliance thresholds and was achieved without the use of any exhaust after treatment. In addition, we are pleased that the U.S. Environmental Protection Agency recognized the advanced nature of our technology and determine that the KARNO Power Module is not classified as an internal combustion engine under existing federal regulations. This determination means that our system will not require traditional federal engine permitting and will instead only be subject to local air district authority oversight. It's a major step forward that removes a significant regulatory hurdle and allows customers to move more quickly towards deployment as most other technologies are subject to both federal and local air permitting requirements. Now shifting to reliability. This quarter, we reached another significant milestone with one of our KARNO Power Modules completing more than 100 days of operational testing on a customer unit without any unplanned hardware-related downtime. While the system wasn't operating continuously during that period, it underwent extensive run time across a wide range of load conditions and hundreds of start-stop cycles. These results give us a high degree of confidence in the underlying architecture and its ability to deliver the low maintenance operations that customers value. Finally, we demonstrated the KARNO Power Modules ability to seamlessly switch between fuels while operating under load. In a recent demonstration, the power module alternated between natural gas and propane without any interruption in power delivery, automatically adjusting performance in real time. This capability highlights the true fuel flexibility of the KARNO architecture and its ability to switch fuels while in operation without impacting performance. As a reminder, the KARNO technology will be capable of operating on more than 20 different fuel types, including natural gas, propane, diesel, hydrogen, ammonia, JP-8 and many others, providing customers with unmatched adaptability across energy sources. During the quarter, we deployed a power module to begin our UL certification process which is an important step that many of our customers expect before large-scale commercial deployments can begin. I'm pleased to report that the UL process for the KARNO Power Module is progressing well and is on track for completion in the coming months in parallel with deployment of systems to field trial locations. We've completed and passed UL testing requirements for the linear electric motor. And notably, it passed every test on the first attempt. Our UL certifier stated that this was the first time that he had ever seen a component achieve full compliance on the initial try, which speaks to the robustness of the design and the tremendous work of our engineering team. During the build of the UL power module, our team identified several opportunities to enhance the design of both the high and low-voltage assemblies. We made the decision to implement those updates immediately rather than to deploy the unit and retrofit them later. While that choice caused some short-term adjustments to our delivery schedule, it ensures customers receive the most compliant and reliable product from the start. Next, I'd like to share the latest with our customer deployment plans. Similar to the approach we previously shared, some customer units will first operate at our Cincinnati and Austin facilities in a controlled environment where we are doing integration and demonstrations requested by the customer. We presently have multiple customer units in the structure in Cincinnati with more planned before year-end. From there, these systems will be transitioned to customer sites for permanent operations. Other units will go directly to customer sites. We initially projected 10 early adopter units, followed by design refinements as needed based on customer feedback and system performance. We're currently building these units and aligning deliveries with customer schedules and their timing needs. These deliveries are expected to be made during the remainder of this year and in the early part of 2026. One of our early adopter customers has experienced delays in their project build-out and has shifted their project time line into 2026. As a result, we plan to utilize a couple of these early units as demonstration systems for additional customer showcase opportunities. We'll deploy these units at various customer sites with a particular focus on data center applications and third-party demonstration centers. This strategy will help us gather further product validation and increase our visibility. We expect deployments to continue at a steady pace as we progress towards full product commercialization in 2026, demonstrating the KARNO Power Modules operational performance, reliability and scalable production capacity. Beyond that, while we anticipate continued growth in R&D-related revenue, we are not yet providing detailed guidance for 2026. Customer interest in the KARNO Power Module remains very strong, and we continue to introduce new customers to the technology every month. These customers are not only seeking reliable power generation capacity, but also the differentiated attributes that set the KARNO system apart, including its ability to operate on multiple fuel types, improved resiliency, power density, low maintenance design and high efficiency. To date, we've executed nonbinding letters of intent with customers representing nearly 500 KARNO Cores. Based on current demand, we anticipate being supply constrained for the years ahead as interest in the system continues to grow across multiple sectors. We're also deepening our engagement with the U.S. military as they explore broader use cases where energy security and reliability are mission-critical. As part of our existing R&D contract with the Navy, we plan to deliver additional KARNO Power Modules and Cores in 2026 for specialized testing required for shipboard use. Our team recently visited the first autonomous Navy vessel that will be powered by KARNO Cores. That ship is currently undergoing sea trials and is planned to be outfitted with its initial KARNO units in 2026. The ship is designed with numerous engine bays and is capable of housing multiple megawatts worth of KARNO Cores for that ship's power needs. This is an especially exciting program given the Navy's significant power requirements and the unique advantages the KARNO system offers in delivering efficient and low maintenance onboard power with an excellent thermal and acoustic footprint. Next, I'd like to share an exciting update in the nuclear space. Hyliion has engaged in an exploratory agreement with one of the leading organizations in the small modular reactor or SMR sector, to evaluate how our KARNO technology can be paired with next-generation nuclear systems. SMRs generate heat that is traditionally converted to electricity through a steam turbine. Since the KARNO Power Modules fuel source is heat, we're exploring the potential of replacing the steam turbine with a KARNO Core to generate electricity more efficiently. While this collaboration represents a longer-term opportunity, we believe it is an important step in exploring now given the growing interest and investment we're seeing in the nuclear energy space. Lastly, I'd like to touch on some important developments we're seeing in the data center space. NVIDIA recently published a technical report outlining that the next generation of data centers, particularly those supporting AI workloads, will increasingly adopt 800-volt DC architectures to improve efficiency, reduce conversion losses and enable more scalable power distribution. This shift aligns directly with one of Hyliion's key advantages. The KARNO Power Module native output is 800-volt DC. While other technologies will require additional and costly conversion equipment to connect to these high-voltage systems, the KARNO system design allows for direct integration. This positions Hyliion as a natural fit for the evolving power architecture of modern data center and AI infrastructure. Now shifting to our capacity for the years ahead. The pace of deployments will be guided by insights gained from the initial units as we continue to fine-tune system performance and ensure consistent reliability. At the same time, our production capacity continues to expand as we transition more activities from our R&D facility in Cincinnati to our larger manufacturing facility in Austin. We now operate roughly 30 additive manufacturing machines across 3 generations of printer technology. Our current focus is on optimizing these existing systems for higher throughput while continuing to add additional machines to support growing demand. To help lead this next phase of growth, we've recently welcomed Darrell Preble as Vice President of Operations. Darrell brings extensive experience from the energy sector with a proven record of building scalable manufacturing programs and driving operational excellence, which he'll be responsible for at Hyliion. Prior to joining, he held senior leadership roles at Cummins and Husky Technologies. I'd also like to share some updates on the supply chain front. This year, we've been focusing on expanding and qualifying new suppliers to support future production scale-up. As part of that effort, I want to highlight one supply chain challenge we're actively managing. Like many U.S. manufacturers, we're experiencing challenges in sourcing the high-strength magnets out of China that are used in our linear electric motor. At present, we have sufficient inventories to support operations through the next couple of quarters and our team is actively pursuing multiple alternative sourcing strategies. That said, the broader supply environment for these magnets remains uncertain, and we're continuing to monitor it closely to mitigate any potential impact on our production schedule. To wrap up, we're very encouraged by the progress we've made so far in 2025 and the strong position we're in for the months ahead. We're excited to expand our customer deliveries and transitioning the KARNO Power Module into real-world applications. As a reminder, from our last call, we shared the KARNO Power Module and its supporting infrastructure will receive a 30% tax credit. This incentive will help accelerate adoption and support our commercial ramp up over the coming years as it remains in effect for the next decade. With that, I'll turn the call over to Jon for the financial update. Jon Panzer: Thank you, Thomas, and good morning, everyone. In the third quarter, we recorded revenue of $800,000 from research and development services related to our contracts with the Office of Naval Research. Cost of sales was also approximately $800,000, resulting in a small gross loss. In the third quarter of 2024, we recorded no revenue or cost of sales. R&D services revenue reflects both the sale of KARNO Cores and related components to the U.S. Navy, the work we perform to test and validate these units and other development work. Operating expenses for the third quarter were $15.3 million compared to $14.2 million in the third quarter of 2024. The increase was mostly related to higher research and development costs and lower gains from asset sales in the powertrain exit and termination line. The increase in R&D work reflects the more rapid pace of development and growth in the production of additive components. SG&A expenses were $5.2 million, down about $0.5 million compared to the third quarter of 2024 and due primarily to lower facilities and insurance costs, partly offset by a small increase in labor costs. We recorded $2 million of interest income during the third quarter, down from $3 million in the prior year quarter due to a lower level of investments and lower interest rates this year. Our total net loss in the third quarter was $13.3 million, up from $11.2 million in the third quarter of 2024, but about flat with what we reported in the second quarter of this year. Year-to-date, we reported revenue of nearly $2.8 million, all from R&D services and gross profit of $96,000. We reported no revenue or gross profit in the same period in 2024. Year-to-date operating expenses were $50.7 million compared to $47.2 million in the first 3 quarters of 2024. The increase is related to higher R&D expenses this year, partly offset by lower SG&A and powertrain exit and termination expenses compared to the same period in 2024. Net loss year-to-date was $44 million compared to $37.7 million last year. Turning to our cash and investment position. We spent $20.6 million during the third quarter and $55 million this year-to-date. Year-to-date capital spending was $22 million and consisted primarily of additive printing machines and related equipment along with the facility investments to support printer operations. Cash from asset sales year-to-date in 2025 was $1.2 million. We finished the third quarter with $164.7 million of cash and short- and long-term investments on our balance sheet. Throughout this year, we forecasted total 2025 cash expenditures of $65 million, including equipment financing of $10 million to offset part of this year's capital investments, leading to a year-end cash and investment balance of approximately $155 million. At this time, the timing of equipment financing is uncertain with a possibility it may shift into 2026 or end up being somewhat less than $10 million, depending on the decisions we make related to timing and available terms. R&D services revenue has ramped up a little slower than we expected partly due to a decision to defer delivery of some of the early deployment units into 2026 based on the timing needed by the U.S. Navy. Therefore, full year 2025 revenue will likely be approximately $4 million. As Thomas noted earlier, we expect that KARNO commercialization will occur in 2026, at which time we will begin recognizing revenue from KARNO system sales. We continue to expect that the capital we have on hand today will be sufficient to carry us through commercialization of the KARNO Power Module. Looking ahead, we anticipate that additional capital will eventually be required to support production growth, particularly with the purchase of additional additive manufacturing equipment. However, with approximately $165 million in cash and investments as of the end of the quarter, we are well positioned to be deliberate and opportunistic in determining the timing and structure of the capital raise. Now I'll turn the call back over to Thomas. Thomas Healy: As we wrap up, I want to leave you with 3 key takeaways. First, the KARNO Power Module is now performing at a level our initial customers require. This marks a major step forward for the product and gives us confidence as we begin broader customer deployments. Second, customer demand continues to strengthen. We have nearly 500 units under nonbinding LOIs and the newly established 30% investment tax credit further enhances the economics for our customers adopting KARNO systems. Together, these factors create a strong momentum heading into next year. And third, we're aligning with where the world's energy needs are going. From NVIDIA's planned move towards 800-volt DC architectures in data centers to our exploration of pairing the KARNO technology with next-generation nuclear systems, our technology is uniquely positioned to serve both near-term and long-term power needs. These advancements show that we're moving from development to deployment, turning the KARNO Power Module into a real-world solution for customers who need reliable distributed power. I'd now like to hand the call back over to the operator to begin Q&A. Operator: [Operator Instructions] Your first question comes from Ted Jackson with Northland. Edward Jackson: So I got, I don't know, 3 or 4 questions. The first one is the customer that has shifted its -- I guess, you would call it acceptance of the initial KARNO units from '25 into '26. I mean not that big a deal. Could you just talk maybe like what vertical is that customer? Thomas Healy: Yes. So this is the Navy. And so as we highlighted on today's call, exciting news is that ship is now in the water, in the ocean, going through sea trials and then we're scheduled to now be installed into the ship in 2026. And so that's why what we also wanted to highlight on today's call is it's not beneficial for us to build up those assets and then just have them sit waiting to actually be deployed into the ship. And so what we're going to do is we're going to take some of those, and we're actually going to make them demonstration units that we're going to bring out to data centers to some third-party validation sites and actually utilize those assets to showcase the technology there, get more customer momentum growing, but then still be able to meet the demands of the Navy in getting those units into a ship in '26. Edward Jackson: And then that ship, that's the unmanned ship that they're like -- I mean,, there's been a lot of press about the development of that ship, and that's what it is correct, the kind of this next-generation sort of crews. Thomas Healy: That's correct. And Josh and I and some of our team actually got a chance to go board the ship this past quarter. And it's unbelievably neat. It's really designed for weaponry onboard and then fuel and engines to move the ship around. So very different than conventional Navy ships where you usually have to have sleeping quarters and cafeteria and medical, all those things that personnel need. The ship has none of that. It's the hull of the ship. It's fuel storage. It's a handful of engine bays that we can deploy multiple megawatts of KARNOs into. And then the deck of the ship is designed where they can mount different types of weapons on board. And the goal of the ship is it gets deployed and then it will be out in the ocean for a long time prior to coming back to dock. And that's one of the key drivers why the Navy was so excited about our technology is because if you think about like a diesel engine that a ship is normally powered by, that requires every few hundred hours, you need to do an oil change. Well, if there's no one on board, there's no one to do that maintenance. And that's where our low maintenance design really matches what they needed out of an engine. Edward Jackson: I've seen pictures of it. It's a pretty cool looking product or system. Then the next question for me, going into kind of the testing and such is on Slide 3, I saw that you had a couple of KARNO units sitting in the parking lot going through your testing phase. I mean, is that what I'm seeing there or is that you have -- when I came out and visited, you had one out there, now you have 2 out there, I mean that itself is an indication of progress with regards to you getting systems and going through those initial runs for your end customers? Thomas Healy: That's correct. So we've got a couple of customer assets in operation at the facility. We also have a couple of our own assets in operation at the facility. So you're absolutely correct. And that was one of the reasons why we put that photo in there just to show that we are building these systems. We're getting them out there. As we highlighted on today's call, one of the next big phases here we're working on is getting that UL certification. So we're going through that testing now. And then once we have that, then that really enables us to start getting these assets out to customer sites. Edward Jackson: When do you think you'll have all the UL testing completed? Thomas Healy: Yes. We're talking in the next couple of months here, we'll have that completed. And as we highlighted on today's call, so there's a couple of different phases of UL, right? So for instance, the linear electric motor needs to be certified, the battery needs to be certified and then the whole power module itself needs certification. So one of the big milestones we hit coming into today's call was we were able to achieve the certification around the linear electric motor. So we went through that testing. We got the approval there, which as we shared, I mean, a big accomplishment where we actually passed it on the very first attempt of doing it, which as our certifier said, he had never seen something passed on day 1 of testing, which is great to see. Edward Jackson: Congrats on that. I have a few more. I'm going to ask one more and then if I need to, I'll come back in line. And that is on the regen rebuild. You mean you [ comment ] yourself the initial systems, and this is not a surprise, I don't have that component in it that it's not required for your customers and it's and easy swap out. Have you, at this point, taken the new components and started putting it in units and doing any testing with it? And is that like just for yourself? Or are you doing that and you will go into some of the initial beta units? Thomas Healy: Yes. So both in our system and then also it's now going into customer assets as well. So maybe just a step back, in past quarters, we talked about we saw performance deficiency with the regen and we were working on depowdering and new architecture, new design of that part. Over the last quarter, we implemented that part into our own asset. We saw a step change in performance out of the system. So that was great to see. And that really highlighted or brought forward what we shared on today's call, which is we've now gotten the performance to a point where we believe we're going to -- we're meeting the needs of the customers. So for instance, all of our early units that are going out to customers only require up to about 150 kilowatts of power generation. We're now exceeding that. We're now north of 150 kilowatts. So our thought is, let's move forward. Let's go ahead with the design as is, get units out into the field. And then as we near commercialization, there are some small areas that we want to continue to improve. So we're seeing some heat leakage through the piston. We're seeing some heat leakage through the cylinder wall, a sleeve that goes in there. So minor changes like change in the material of that component. So we're going through some of those changes so that as we get into commercialization or as we enter commercialization, we plan to be at the full 200 kilowatts of power output of the system. Operator: Your next question comes from Sean Milligan with Needham. Sean Milligan: Just a quick question on your pipeline. The 500 units that you have in LOI, you're going to be delivering some units next year to those customers. I'm curious about the timing you expect those customers to then like test those units at their own operations and sort of the conversion from LOI to purchase order, maybe what your expectations are on timing there? Thomas Healy: Sure. So even before we get the first asset out into their operations, some of the quantity of units will move from LOI into a firm agreement. And then from there, it will be how do we continue to work through that backlog of the additional units on the LOI, which I think to your question is how long do they need to test it, which we're hearing in the 6 to 9 months is kind of the rough time frame that customers want to run the asset, experience it. And then from there, they believe they'll have the confidence and the performance to keep going forward. It varies between customers. Some customers are saying, let's do one unit right out of the gate. Others are saying, let's do multiple units right out of the gate. But overarching the message is, there's a lot of demand in this product and the demand is continuing to grow. Even tomorrow, we have another new data center customer coming in that we're having great discussions with. And so we're continuing to build that customer interest. And as we shared today, we foresee that we will have enough demand in this product for years ahead that will actually be supply constrained as opposed to demand constraint. Sean Milligan: That's great. And then -- I mean, the other question was around the 500 units in LOI. Can you give any context around how many customers that maybe represents? And then sort of the -- like the timing of those. I think those date back to like even 2024, first half of this year, but maybe how your discussions have expanded sort of like in terms of numbers of different opportunities you're now seeing in your pipeline? Just trying to understand how the pipeline is progressing as you're kind of moving KARNO forward here? Thomas Healy: Sure. So just kind of rough numbers, I believe it's in the dozens of customers, not in the hundreds of customers that we signed LOIs with. We are in discussions with even more than that. Not all discussions go to an LOI. Some discussions go to, okay, great. We like the technology. We want to see it in operation at other people's sites before we move forward with making a commitment. So with all that, how has the market landscape evolved? I would say, initially, we were seeing a lot of interest from the military, a lot of interest from EV charging. We've actually seen some sectors that have popped up that have become even larger than those. So the data center space, seeing a ton of interest there. Data centers are just power constrained, right? That's their #1 issue. When they go to build out a new data center, they talk to the utility. Usually, the answer is there's not enough power available. And so the data centers have really shifted to moving to make your own electricity on-site power generation, which that's exactly what our technology is. Even as we highlighted in today's call, NVIDIA has come out and expressed that they see the future of data centers in the years ahead here actually shifting to an 800-volt DC architecture, which that is the architecture of the KARNO. We produced 800-volt DC natively. So we think we can fit perfectly into that. And then we've also seen just a growing demand on the commercial facility side of things. So the driver there is really can you produce your own electricity for cheaper than you could buy electricity from the grid. So I'd say data centers, commercial applications are growing. And then the work with the Navy we've been doing has been going really well to a point where they've actually pulled in other branches of the military that we're now starting to work with as well. Sean Milligan: Okay. And then the last question is around sort of like manufacturing scale up. So if you go back to the first part of this year, you had powdering issues, which you've addressed. And then also, I think you had some outsourced -- you had outsourced product manufacturing, which you brought back in-house. It sounds like the manufacturing side today, you're kind of honing in on design and feel comfortable with where you are. But I'm more curious about your ability to scale in the future. So the confidence in coming to like a systematic manufacturing process, the ability to scale up printers and then just anything you need to do in-house there? And I think you brought up magnets, but obviously, like a lot of these award potential on the data center side specifically is very large. So just the ability to source materials. I just wanted to get your big picture thoughts there for Hyliion moving forward. Thomas Healy: Sure. So I'll first start with the challenges we were facing. So we had outsourced production of the electric motor. We pulled that in-house, as you highlighted. And then we were having issues with the regen and the deep powering. We believe we've gotten our arms around that as well. So as we did this past quarter, we leaned in and said, yes, manufacturing is going to become a big part of the story ahead. That's why we hired Darrell Preble to come in and lead operations for us. He's built out manufacturing facilities and distribution facilities for Cummins and Husky in the past. So this is not an unknown journey to him, which is great. And then as we look at the phase ahead here, I think one of the big areas of focus is going to be how do we continue to get more and more out of the additive manufacturing machines. So we've got about 30 machines installed so far. We've got about -- in total, about 3 dozen roughly that we've ordered. So still a few more to be delivered here. And then from there, one of the focus areas is going to be keep getting more and more out of the machine. So we know that we're not operating at their fastest parameters at the greatest throughput. That takes some just work to get them to those faster throughput. So that will be our next phase. And then from there, we'll look to continue to expand the number of printers we have and buy more assets, and that will be how we scale volume. So the reason that, that is really key to the story is we actually expect that we're going to slow down our capital expenditures. The goal right now is not just keep buying more machines, the goal is actually going to shift to let's keep getting more and more out of the existing machines we already have. And then as Jon highlighted, then there will be another phase where, okay, let's continue to expand manufacturing and buy more assets. Operator: Your next question is from Ted Jackson with Northland. Edward Jackson: I wanted to circle back. You made a comment about -- and honestly, I was taking notes, I missed what you've said, but that you did -- you had a bit of delay in delivery or development because you decided to go for work with that 800 kilowatt? Is that what you just sort of -- can you go through that again with what you said in your prepared remarks? Thomas Healy: Yes, absolutely. So as we were putting together the UL system, we saw some areas of opportunity that we can improve both high voltage, low voltage. And so we decided to do those changes prior to going through UL certification because once you certify it, it's much more difficult to go make changes after that. You have to go back through another recertification process. So what we decided was, why don't we go ahead and roll those improvements, those changes in now and get those done, which has been done. They're in the -- to go back to your reference of the photo of the parking lot, they're incorporated into that UL system that's out there. So we made those changes. Now that did add some time to the schedule. And so that was just a strategic decision we made of let's get those rolled in and go through the UL certification process with those as opposed to have to do an alteration or change down the road. Operator: There are no further questions at this time. I will now turn the call back to Thomas Healy for any closing remarks. Thomas Healy: Great. And we actually had a couple of questions come in that Greg will read out for us as well. Greg Standley: Thomas, can you share more about why you see KARNO as a good fit with nuclear and what time line you envisioned for developing a solution in that space? Thomas Healy: So today's call is the first time we've really talked about nuclear, but the reason we wanted to is because it really highlights the versatility of the KARNO system. So as we've shared in the past, I mean, the KARNO is a heat-powered generator. And so if you look at nuclear, all nuclear does is it makes heat. And then conventionally, nuclear SMRs will use steam turbines to take that heat and convert it into electricity. And so we started engaging with an organization in the SMR space, in the nuclear space who were looking at actually replacing that steam turbine with a KARNO. And we're seeing that we should be able to produce electricity more efficiently than even a steam turbine can. And so why that's important is we're seeing that there's a lot of interest and a lot of momentum in the nuclear space. It's not happening tomorrow. This is still a ways out as to when nuclear and SMR will be deployed. But we think it's important to get our name into that discussion now because a lot of these companies are in the R&D development phase and could select us as their way to produce the electricity as opposed to using a steam turbine. Greg Standley: You mentioned on today's call that NVIDIA has highlighted a new electrical architecture for data centers. Can you elaborate on how this matches Hyliion's existing architecture? Thomas Healy: So data centers today are a lower voltage architecture. They are DC power, but they're in the 50 -- I believe it's about 58-volt DC architecture. And NVIDIA came out with a report a white paper that said they see the future actually moving to 800-volt DC power. Reason being is that as computers become more powerful, they consume more electricity. And when you just start scaling up, you end up consuming a lot of capital and just even the cost of copper to move that electricity around. So if you move to a higher voltage architecture like this 800-volt that we're at, you can reduce how much copper you need, you can reduce some of the other components and make the whole data center architecture more efficient and less costly. And so that's where we were excited to see this because it matches us perfectly. We make 800-volt DC power natively. So if that's where data centers head and they start adopting, other technologies like the grid, 480-volt AC architecture are going to require other components, other inverters or converters to move to that 800-volt DC versus we'd be able to couple without those components. So it just aligns well with our vision and structure of what the product outputs and where data centers are heading. So with that, I believe that concludes the questions that we had come in. So on a closing note, I appreciate everyone joining today's call. As we highlighted, we're pleased with some of the key metrics we've hit on the performance side of things. We're seeing growing customer demand, and we're excited about not only being a solution for the near term here, but also some of these future opportunities we discussed as well. So with that, we'll talk again next quarter. But in the meantime, I do encourage listeners to follow us on our social media channels, also follow the press releases we released as we'll be sharing more throughout the quarter on those channels. Thank you for listening. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.
Operator: Good morning, ladies and gentlemen, and welcome to Chemtrade Logistics Income Fund Third Quarter 2025 Conference Call. [Operator Instructions] I would now like to turn the conference call over to Rohit Bhardwaj, Chief Financial Officer. Please go ahead. Rohit Bhardwaj: Hello, and welcome to Chemtrade Logistics Income Fund's earnings conference call and webcast for the third quarter of 2025. Joining me today is Scott Rook, our President and Chief Executive Officer. We appreciate your continued interest and participation. Please note that this call has an accompanying slide deck, which we may reference during our prepared remarks and Q&A. This slide deck is available on our website, chemtradelogistics.com. On today's call, we will first give you a recap of our third quarter '25 financial results, our record adjusted EBITDA, including business segment performance, financial position, and updated full year 2025 guidance. I will then hand the call back to Scott, who will discuss updates on the outlook for our key products and growth initiatives. We will then open the call to analysts for Q&A. Before proceeding, note that this call will contain certain forward-looking statements that are based on current expectations and are subject to a number of risks and uncertainties. Actual results may differ materially from expectations. Further information identifying risks, uncertainties and assumptions, and additional information on certain non-IFRS and other financial measures referred to today can be found in the disclosure documents filed by Chemtrade with the securities regulatory authority available on sedarplus.com. One of the measures that we will refer to in this call is adjusted EBITDA, which is EBITDA modified to exclude noncash items, such as unrealized foreign exchange gains and losses. While our slide deck and other disclosure documents refer to adjusted EBITDA, we will simply refer to it as EBITDA in our prepared remarks. Looking at our overall results. The third quarter of 2025 was a continuation of the strong performance we have been delivering for a number of quarters. It marks the highest quarterly EBITDA in Chemtrade's history, alongside double-digit year-over-year growth in revenue and distributable cash. This is thanks in large part to the continued focus and execution of our dedicated employees, operational excellence, and our diversified product mix. Third quarter revenue increased by 12%, while EBITDA increased by 10% due to contributions from both segments. Foreign exchange was also a modest tailwind, excluding which revenue and EBITDA increased by 12% and 9%, respectively, year-over-year. Distributable cash after maintenance CapEx increased by approximately 18%, primarily due to higher EBITDA; and distributable cash after maintenance CapEx on a per unit basis increased 24% year-over-year. Turning now to the segment's performance. Excluding the impact of foreign exchange, the Sulphur and Water Chemicals segment or SWC's revenue, grew by 19%, driven primarily by higher prices and volumes for merchant acid, water products, and regen acid. SWC's EBITDA increased by 17%, after excluding the impact of foreign exchange, largely due to the same factors that contributed to revenue growth, which more than offset higher input costs. Turning to the Electrochemicals, or EC segment. Excluding the impact of foreign exchange, EC revenue was 2% higher, while EC EBITDA was 12% higher year-over-year, largely due to higher prices of caustic soda and chlorate, as well as higher volumes for chlorate, partially offset as expected by lower prices for chlorine. On an ECU basis, netbacks decreased by approximately $50, mainly due to lower netbacks for chlorine, partially offset by higher netbacks for caustic soda. Corporate costs for the third quarter were higher year-over-year, at $34.7 million versus $24.1 million in Q3 '24. The year-over- increase is primarily due to higher short-and long-term incentive compensation, as well as higher foreign exchange. Legal costs were also higher year-over-year, with a significant amount of the increase attributable to the acquisition of Polytec. This performance was broadly in line with our expectations. Looking at our capital allocation and financial position, we remain disciplined in our balanced approach. Chemtrade generated $78 million of distributable cash in Q3, up 18% year-over-year, comfortably covering the monthly distributions, with a sustainable payout ratio of 25% in the third quarter and 32% on a trailing 12-month basis. In Q3, we repurchased approximately 1 million units under the NCIB initiated in August 2025, bringing the total for 2025 to 7.1 million units. Unit repurchase remain an important portion of Chemtrade's capital allocation strategy. Alongside the investments in strategic growth and the return of capital to unitholders, Chemtrade continues to maintain a strong balance sheet and significant financial flexibility. We exited the quarter with net debt-to-EBITDA of 1.8x, well below our target and with ample liquidity of approximately USD 484 million. During and subsequent to the third quarter, we continued the optimization of our balance sheet by reducing the potential equity dilution inherent in convertible debentures by approximately 90%. We only have approximately $28 million of convertible debentures after these initiatives. These transactions were financed through a credit facility in conjunction with the proceeds of an offering of $250 million of long tenure unsecured notes, with a coupon of 5.75% that mature in 2032. Adding to the senior unsecured notes, Chemtrade issued in 2024 and earlier this year, the new series of unsecured notes enhances our fixed income investment profile while optimizing our capital structure and effectively lowering our capital costs. After the end of the quarter, we extended the maturity of our senior credit facility by 2 years to October 2030. Looking now at our guidance. Although global trade tensions were prevalent through '25 and still persist, Chemtrade's business has shown resilience and continues to deliver strong results, with market conditions for its products remaining favorable. This outlook, along with our focus on operational and commercial excellence, allows us to raise our adjusted EBITDA guidance for 2025. We now anticipate that 2025 will be a record adjusted EBITDA year surpassing 2023, when we generated adjusted EBITDA of $502.6 million. Alongside the updated EBITDA guidance, we have also updated several of our assumptions for the remainder of 2025. While you will find the full range of assumptions in our disclosure documents, we highlight that for 2025, we now expect North American MECU sales volumes of 173,000 versus 177,000 prior, net year-over-year MECU netback increase of CAD 70 versus CAD 60 prior and sodium chlorate volumes of 272,000 tonnes versus 270,000 prior. I will now hand the call over to Scott, to provide additional detail on the outlook for Chemtrade moving forward. Scott Rook: Thank you, Rohit, and thank you to all of our listeners for joining the call. As Rohit highlighted, Chemtrade delivered a record adjusted EBITDA in Q3, and we're on track to deliver the highest ever adjusted EBITDA for the full year 2025. This performance is well aligned with Chemtrade's Vision 2030, where we outlined a clear framework for sustainable growth, targeting 5% to 10% annual growth in EBITDA and distributable cash. We aim to achieve mid-cycle EBITDA of between $550 million and $600 million by 2030. While recognizing the significant achievements since introducing the Vision 2030 framework earlier this year, Chemtrade intends to provide an update to the strategic outlook once it has more clarity on the North America trade and CUSMA negotiations. As all of the products that Chemtrade exports to the U.S. from Canada are CUSMA compliant to-date, we have not seen material direct impact from incremental tariffs. We continue to closely monitor the fluid North America trade developments and will reassess in the event of any material changes. However, we are optimistic that we'll be able to work with our customers and suppliers to manage any additional costs, should they come to bear. Looking at the remainder of 2025, we are positive on the outlook for the SWC segment. We are seeing stability underpinned by consistent end market demand, particularly in water and regen acid. In Water Chemicals, demand remains strong across municipal and industrial customers due to largely nondiscretionary nature of these products. PAC and ACH experienced higher volume and pricing in the third quarter, as our investments in these products continue to bear fruit. Alum pricing was also a positive in Q3, and more than offset higher raw material costs. As we have discussed in prior calls, although raw material costs could pressure margins in the short term, we have been successful in resetting price and normalizing margins through contract renewals. On the acquisition front, integration of the Thatcher Group is progressing very well, further reinforcing our position as a leading supplier of coagulants in North America. During the third quarter, we announced the acquisition of Polytec for USD 150 million, representing an attractive acquisition multiple of approximately 6.5x expected annual EBITDA. We are looking forward to adding Polytec's turnkey water treatment solutions to Chemtrade's footprint. The closing of this transaction has been delayed due to the U.S. government shutdown, which has affected regulatory approvals. We expect to close the transaction shortly after resumption of the U.S. government activities. In light of the Polytec acquisition, we are reviewing our reporting segments, and it's likely that Water Solutions will become a separate reporting segment starting in 2026. Turning to our sulfuric acid businesses. For regen acid, the demand outlook remains steady, supported by elevated U.S. refining rates. This business has historically demonstrated resilience even in periods of economic softness. Merchant acid, while more cyclical given its wide industrial use, continues at a broadly steady pace and is further supported by risk-sharing agreements with our suppliers and customers. Chemtrade's continued focus on operational excellence and reliability allows us to respond to dynamic market conditions. Finally, our Ultrapure Acid business remains a long-term growth vector as structural demand for North America semiconductor production capacity continues to increase. Our Cairo, Ohio plant is our first large ultrapure acid project to capitalize on the expansion of advanced chip manufacturing in North America. The facility continues to advance with progressive product quality improvements and a line of sight to commercial ramp-up. We believe that ultrapure acid will be an important contributor to Chemtrade's growth and Vision 2030 targets. Within our Electrochemicals segment, we continue to progress through the rezoning process at the North Vancouver chlor-alkali facility. We submitted the rezoning application to the District of North Vancouver in late Q3, and hosted a community information meeting shortly thereafter. We anticipate the formal review process to continue during Q4. We'll keep the market informed as developments progress. Our performance in the EC segment was positive and reflective of the investments and operational excellence we've implemented at all of our facilities over the last few years. Both the higher volume and prices for sodium chlorate and higher prices for caustic soda supported Q3 results, despite the expected softness in chlorine price that is likely to continue. Industry forecast and contract pricing in Taiwan, point to a flat to moderately improving caustic soda price into 2026. For the remainder of this year, our pricing will reflect an index level of roughly USD 435 per tonne, which is up USD 50 per tonne compared to 2024. For added context, every USD 50 per tonne change in caustic soda pricing equates to approximately $14 million of incremental annual EBITDA, holding everything else equal. As Rohit highlighted earlier, we expect sodium chlorate volumes to be in line with last year, that combined with price increases implemented earlier this year have contributed to sodium chlorate remaining a strong cash flow generator for Chemtrade. Overall, while market conditions remain dynamic across the electrochemicals portfolio, the supportive outlook for caustic soda pricing, paired with fracking tide HCL demand, have offset pressures in other products. We believe this segment is well positioned for the remainder of this year. We continue to invest during Q3 and subsequent to quarter end and organic growth projects, as well as M&A with the announcement of the Polytec acquisition. As discussed in prior updates, our 2025 organic growth investments are primarily directed towards strategic projects in the water chemicals and ultra-pure acid business lines. These initiatives are well aligned with the secular demand growth and are expected to be cumulative in earnings over time. In our Water Chemicals business, we're expanding the capacity for products, and we are seeing strong demand. While many of these projects are modest in scale individually, they collectively represent meaningful earnings potential. A notable example is our new specialty water chemical line in Augusta, Georgia, where we expect construction to ramp up in early Q1, with production startup to follow. In Ultrapure Acid, our Cairo, Ohio expansion and upgrade continue to advance as we progress through certification with major customers. Commercial ramp-up is expected during 2026. We continue to see this as a high-impact project aligned with the ongoing North America onshoring of semiconductor manufacturing. Overall, our growth investments are grounded in strong market fundamentals, clear visibility to returns, and a focused approach to capital deployment. Before concluding, thank you once again, for your continued support and interest in Chemtrade. Our strong Q3 results build on several quarters of industry-leading performance that highlight the consistency and strength of our execution alongside continued demand for our products and services. Our disciplined approach to capital allocation, our strong balance sheet, and our robust cash flow generation position Chemtrade to drive long-term sustained growth in EBITDA, distributable cash and unitholder value. With that, we would now be happy to open the line for questions._ Operator: [Operator Instructions] Your first question is from Nikolai Goroupitch from CIBC Capital Markets. Nikolai Goroupitch: So margins in the SWC segment were quite healthy even with sulfur costs going up. It looks like pricing was strong, as you mentioned. Can you maybe share a bit more about how those price increases unfolded? Were they mostly cost pass-throughs or new contracts? Or was there more to it? And as sulfur prices continue to climb, how do you see SWC margins shaping up in Q4? Scott Rook: Yes, sure. I'll take that. So as you said, sulfur prices went up in -- particularly in Q3. That has an impact on the business. We saw our margins increase primarily in what we call as the Merchant Acid segment and then -- but we also saw strength in the regen business. With the merchant acid business, we benefit as sulfur goes up, our team is able to pass through prices. Prices in the Merchant Acid segment range from spot deals all the way to quarterly prices. But we were able to -- our team was able to pass through those price increases quickly. We also benefited in Q3 by having strong reliability. We did see the market saw outages from our competitors in production. And so we saw an increase in volume, which we were able to meet. And it was really the increase in volume, coupled with the pricing that led to a very strong Q3. As we understand, our competitors -- and it was more than one -- have solved their operational issues. We don't know for sure. But what I'm hearing is that they are back online, and so Q4 may not be or may be a little softer from a volume standpoint. But that was one reason for the strong Q3, was merchant. We also are continuing to see just very healthy strong demand in the regen business. So it looks like U.S. refineries are running strong. There's strong demand there. We've got good reliability, and so we would expect that to continue. Rohit Bhardwaj: Nikolai, maybe I can just add a couple of things. Because when you look at our SWC segment, sulfur is actually an input cost. So typically, you'd expect it to be a headwind when it goes up. And that is true in our water business, because there we see input costs going up, but we were -- our team was successful in offsetting that with pricing initiatives. So we were able to pass those through. And if you look at our merchant acid business, we get a significant portion as byproduct acids, which doesn't require sulfur to be produced. It's a byproduct. So when sulfur goes up, we are able to offset it in the business that we make it, but we get some benefit in the business where it's a byproduct. So all those things combined with the operational issues that our competitors faced, contributed to this performance. Nikolai Goroupitch: It seems sodium chlorate performed well this quarter as well. But with pulp mills facing fiber challenges and soft pricing, do you anticipate a slowdown in demand for sodium chlorate going forward? Scott Rook: Yes. So we see a very modest decline in sodium chlorate demand, maybe -- our estimates are down maybe 1%, 1.5% on an annual basis. But yes, I mean, that's what we're expecting. Sometimes it's a little better than that. Sometimes it's a little worse, but we are anticipating a very modest impact. Canada has announced some initiatives to support the Canadian pulp and paper industry. So we're hopeful that those will have a positive impact on the industry going forward. Operator: Your next question is from Joel Jackson from BMO Capital Markets. Joel Jackson: So I only hear positive commentary from you in general, puts and takes of positive commentary. If I take your $503 million, at least $503 million guidance for the full year, that means you're expecting contraction in the fourth quarter after getting double-digit EBITDA growth in the first 3 quarters. Which businesses are most likely to contract in the fourth quarter? Scott Rook: So Joel, at Chemtrade -- as you know, you've been following us for a long time -- we see stronger Q2s and Q3s, and we see weaker Q4s and Q1s. Joel Jackson: Sorry, Scott, to interrupt. I'm talking about year-over-year because you've got -- sorry to interrupt. Of course, you get seasonally lower in Q4. Like if I believe your guidance, I believe that your business is about to go from double-digit EBITDA growth for the first 3 quarters to decent contraction in the fourth quarter year-over-year. So which business is most likely to contract year-over-year in the fourth quarter? Scott Rook: The business will see some contraction in chlorine that we've talked about. And I think that's what -- we'll see contraction there. And then on a year-over-year, that's probably the biggest place that we would see. So in the EC segment with chlorine, chlorine products. Joel Jackson: That would be the only part of the business that contract year-over-year is chlorine. Rohit Bhardwaj: So maybe I'll just give you -- Joel, maybe I'll give you one data point that might help. So if you look at our Q3 results, we've said that on a year-to-date basis, netbacks -- MECU netbacks went up. But in Q3, they actually declined by $50. So we've seen chlorine backing off through the year, and it kind of crossed over in Q3 to pulling the entire MECU down. And so that is expected to continue in Q4. So that will be the biggest area, as Scott said, of decline. But you can see it kind of in the numbers in Q3. Q3 was very strong in merchant and regen and a few other places that offset it. Joel Jackson: Sorry. So chlorine would be the only part of the business you would expect to contract year-over-year in the fourth quarter? Rohit Bhardwaj: In terms of anything meaningful, could -- there might be a little bit here and there, but that's the meaningful one. Scott Rook: That's the only thing I think that's going to be -- that would be noticeable. Joel Jackson: Finally, when you think about 2026, obviously, you don't give '26 guidance usually about January. But can you maybe high level talk about the puts and takes we might see in '26? You're obviously going to add Polytec, a little more integration with Thatcher. I think of the North Van turnaround next year. You have the new ultrapure plant, you talked about Augusta also. Can you add-in puts and takes for '26, commodity prices, things that we should think about? Scott Rook: Yes. So as you said, again, we'll be careful about this. I'm not going to give '26 guidance, but here's what I will share. As we look at '26, probably the biggest change year-over-year will be the fact that there's a -- that there will be a turnaround in North Vancouver. So that's number one. Number two, we saw -- I mentioned that the merchant acid segment was very strong in Q3 of this year due to competitive outages, and we would not anticipate seeing those competitor outages next year. So I think that's a change. And then we will -- it's likely that we'll continue to see some weakness in chlorine, partially offset by modest increases in caustic and HCL. Then the only other one in there is that from time to time, the large U.S. refineries will take outages. So I won't make a comment on that, but it's possible that there might be a U.S. refinery to that we supply that takes an outage, and that might have a modest impact. But as you said, that will be offset by we'll have Thatcher, we'll have Polytec. We'll have other organic growth projects. We'll have ultrapure and projects happening in water that will offset those. Rohit Bhardwaj: I think one thing to add, Joel, is it's hard to predict the Canadian dollar foreign exchange. If you look at the current commentary around interest rates in Canada, there's more than speculation that Bank of Canada goes on hold and there's actually even some surveys that show that Bank of Canada might raise rates next year, and the U.S. is expected to start their easing cycle. So again, we are not economists, but that is one I'll point out is it is possible that there'll be some headwinds from FX, but we'll have some -- we do have a hedging program, but we are -- still have some exposure. Operator: Your next question is from Ben Isaacson from Scotiabank. Ben Isaacson: Maybe just a little bit different question to the one that Joel is asking or maybe asking it in a different way. So if I take your $500 million roughly speaking, guidance for 2025. And then if I add the 5% to 10% growth that you talk about in the future, in 2030, I'm getting $640 million to $800 million, and you guys are at $550 million to $600 million. So a few ways to look at that. Number one is that you're over-earning this year, which I think is part of the answer. But number two, it implies that your growth rate is much lower or you're going to kind of raise that aspiration in 2030. So the first question is, can you talk about that disconnect? Scott Rook: Yes, Ben, so the Vision 2030 that we shared in March of this year, I stated that the goal was to grow earnings by roughly 5% to 10% on an average rate from 2020 -- from the guidance -- the initial guidance of 2025, which our initial guidance was roughly $440 million. And so we said as that as a starting point, our Vision 2030 was to grow that number on average 5% to 10% through 2030, which would be roughly between $550 million to $600 million. So given the $500 million where we are now, we're certainly ahead of that target, and we've closed on Polytec -- sorry, we have not closed. We hope to be closing very quickly. with Polytec and Thatcher, and we have all of that. We are anticipating that as we're talking about that 5-year projection that what's fueling that is half of that growth is coming from our organic growth projects. The other half is coming from acquisitions that we plan to make. There could be some pullback in some of the materials that we talked about, there could be chlorine, could be pullback in other areas. And as we put all of that together, we're looking at that on average, 5% to 10%. It is true, just as you said, that through this year, we're ahead of the line if you draw the line from 2025 to 2030. It's too early to go out and revise the 2030 number right now. So we want to be successful with our organic growth, be successful with the acquisitions, and we'll continue to look at that number going forward. But the starting point for that -- again, to emphasize -- was $440 guidance at the beginning of this year. Ben Isaacson: Just my last question is with sulfur prices moving, can you assess how much is kind of local operational downtime versus what's been happening in Russia, grown strikes taking offline a lot of capacity and now there's an export ban. Like how do we parse out the difference between local temporary things and then kind of the bigger structural issue in Russia? Or how are you thinking about that going forward? Scott Rook: Yes. So look, I think that's an excellent question. That's a tough question. I don't know that I'm -- well, I would say there's certainly part of that -- part is coming from both. I can share my opinion and Rohit may have an opinion as well. I think there's more of it that has to do probably with some of the trade barriers and things going on in the fertilizer market, part of which is tied in with Russia. But we have -- the sulfur market does move around a lot. And so I think you can look at this recent increase and say that's not unusual if you look at what happens in sulfur over a 15-year period. And so that would take out the Russia part of the equation. Yes. So my feeling is that this -- it was a pretty big spike in sulfur. It wasn't really forecasted, and maybe that has to do with some of the trade discussions and tariffs associated with fertilizer. But that's probably all I can share. Rohit, anything you want to add? Rohit Bhardwaj: Yes. I think if you look at sulfur over even a 20-year period, it tends to be kind of a midpoint that you kind of gravitate towards. So you get these spikes, they tend not to last very long and then they reverse themselves pretty quickly. When you look at the Tampa index, it really is -- it comes about due to negotiations between the large producers and large fertilizer consumers; and so it is a little opaque and it can move around quite a bit. So I think the bottom line is that we do get a bit of a lift when sulfur goes up, but we are generally fairly immune to sulfur moves. And so we don't really face that much downside when it goes down. And again, this quarter, the bigger influence was really the supply tightness that came in that drove pricing higher and not necessarily -- you get a bit of less from sulfur, but it's not that significant. Ben Isaacson: So then, Rohit, just last question, just to extrapolate on what you just said. I would have thought that the timing of the sulfur spike right now would be perfect for your contracting in the water treatment business because you're contracting at presumably a higher cost. And then if this temporary spike comes off, then you get some margin expansion. Is that the wrong way to think about it? Is that not right? Rohit Bhardwaj: So what you're suggesting, and I think that is that if we lock in pricing with a customer or a municipal customer for 12 months now, keeping in mind where sulfur is and then the sulfur eases off, we get the benefit. That is a true statement. But we also -- we don't just look at today's sulfur price. We do try and take a look in the future because, frankly, there's a competitive marketplace, and we need to also be cognizant of what other data points are out there in the marketplace that all market participants look at. And also keeping in mind, we don't have -- it's not like we have December contracts in the water business. These come up every week. They're rolling. So you will get some benefit, but there are puts and takes because it's not like some businesses have a December kind of contracting season. Water is not like municipalities put it out to tender. Ben Isaacson: So it doesn't all reset January 1? Rohit Bhardwaj: No. Operator: Your next question is from Gary Ho from Desjardins Capital Markets. Rohit Bhardwaj: Gary, we can't seem to hear you. Operator: I think Ben just disconnected his line from the queue. [Operator Instructions] It seems we have no more questions. Please proceed with the closing remarks. Rohit Bhardwaj: I think if anyone -- whoever got disconnected, feel free to give us a call and we'll try and help you out if you got disconnected by mistake. Sorry, Scott, go ahead. Scott Rook: Yes. All right. Yes. No, this is the fewest questions that we have had, just as Rohit said. If there's any others, feel free to reach out to any time. I'd like to thank everyone for joining the call today. And I'd like to, as always, add my thanks to the Chemtrade employees for delivering very strong results in Q3. Thanks, everyone. Have a great day. Operator: Thank you. Ladies and gentlemen, the conference has now ended. Thank you all for joining. You may all disconnect your lines.
Operator: Good morning, ladies and gentlemen, and welcome to the Altius Minerals Q3 Conference Call and Webcast. [Operator Instructions] Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Wednesday, November 12, 2025. And I would now like to turn the conference over to Ms. Flora Wood. Thank you. Please go ahead. Flora Wood: Thank you, Ina. Good morning, everyone, and welcome to our Q3 conference call. Our press release and interim filings were released yesterday after the close and are available on our website. This event is being webcast live, and you'll be able to access a replay of the call along with this presentation slides that are on our website at altiusminerals.com. Brian Dalton, CEO; and Stephanie Hussey, CFO are our speakers for the call. You've heard Stephanie before when she substituted for Ben. For this quarter, I'm proud to introduce her as CFO. Now on forward-looking statements. The forward-looking statement on Slide 2 applies to everything we say in our formal remarks and during the Q&A. And with that, Stephanie is up first. . Stephanie Hussey: Thank you, Flora, and good morning, everybody. Yesterday, we reported Q3 net earnings of $265 million or $5.72 per share which reflects the $340 million gain on the sale of the Arthur Gold Royalty as well as reflecting higher royalty revenues. G&A costs are up slightly related to onetime retirement payments and moving forward, we can expect a reduction in base salary costs of approximately 40%. The corporation also recognized a $64 million gain in other comprehensive earnings following the origin Triple Flag plan of arrangement. Altius received cash of $29.5 million, Triple Flag shares, which were sold for proceeds of $37 million and shares in the new Orogen SpinCo. Increases in royalty revenue and adjusted EBITDA for Q3 reflects higher attributable Potash volumes and realized prices, higher copper stream deliveries and $3.4 million in interest and investment income. These mounts are partially offset by lower incomes from iron ore. Growth in operating cash flow for the quarter was driven by higher royalty revenue and interest receipts offset by taxes paid and working capital changes. Q3 2025 adjusted net earnings of $0.17 per share is higher than the third quarter of 2024, with the main adjusting items being the gain on the sale of the Arthur Gold Royalty, foreign exchange and related tax impacts. Following our two significant transactions in the quarter, the corporation considerably strengthens its balance sheet and liquidity profile. In Q3, we received USD 250 million of the $275 million purchase price of the Arthur Royalty. And in Q4, we can expect the remaining $25 million, net of any withholding taxes. And this will be following the expiry of any challenge and appeal periods associated with our arbitration process. Current total liquidity available is approximately $540 million and this includes cash on hand, $125 million available under our revolver as well as $62.5 million potentially available as an accordion feature subject to certain criteria under the terms of our credit agreement. During the quarter, we made debt repayments of $11 million. This consisted of $9 million voluntary repayments under revolver and a $2 million principal repayment on our term debt. We paid total cash dividends of $4.2 million and issued approximately 13,000 common shares under the dividend reinvestment plan. In August, the corporation renewed its normal course issuer bid for another year and we purchased and canceled fixed 52,000 common shares for a total cost of $1.5 million. Yesterday, our Board of Directors approved a quarterly dividend of $0.10 per share to be paid to shareholders of record on November the 28 with a payment date of December 15. Our renewable royalty business also remains well funded with increased market activity and new opportunities arising from development, construction and operating level investments. We expect to see continued portfolio growth over the coming quarters. Before I hand it over to Brian, I wanted to thank both Ben Lewis and Chad Wells for their guidance and support throughout my career. Ben has been a mentor of mine since 2006 before I joined Altius in 2014. I look forward to working with them both in their advisory roles moving forward. And with that, I'll hand it over to Brian. Brian Dalton: Thank you, Stef. Thank you, Flora, and to everyone for being with us today. I would like to start where Stef left off in thanking Ben and Chad for many years of dedicated service and comraderie as we work together to grow Altius from a small junior explorer to a well-diversified royalty company and highly profitable exploration business. Your efforts is left Altius in far better shape than when you joined. While we wish them well in their requirements, we are delighted to be able to still avail their wisdom going forward and to continue to call them friends. I know I'm speaking for the entire team, and congratulating Stephanie in her advancement and progression to the role of CFO, where we know she will continue to excel. As noted by Stephanie, Altius finds itself today in excellent financial health with a very strong balance sheet from which to base future potential growth. The effort of figuring out how we might best deploy our capital resources is well underway, and our corporate development team is busily analyzing and comparing a host of interesting options. You will hear more on this effort in coming quarters, I'm sure. All this work certainly includes analysis of various external opportunities, we continue to keep sight of our already established internal growth profile that stems from existing assets and investments we made primarily through a less rosy or optimistic part of the mining industry cycle than we currently seem to be experiencing. This past quarter saw an improvement in prices for many of the commodities we are exposed to, particularly for Potash, copper, U.S.-based electricity, gold and lithium, and this has naturally begun to translate into higher royalty revenue. Prices only half the story at best, however, when considering royalty investments at Altius. We are far more intrigued and focused on the volume side of the equation and note that it is during the up parts of the cycle when sentiment and capital availability drive decisions by operators to expand existing operations and to build new ones. We are seeing positive signals in this regard across our portfolio. This is a function of the very dedicated focus we placed over the past decade or more on selecting for assets that we felt will be the most likely investment candidate for these types of investments. Essentially, this means attaching ourselves to assets in which existing production rates seem low as a function of resource size and/or in which cost structures and other development parameters are more favorable than most competing alternatives. Nowhere is this feature more prominent within our portfolio that with respect to our ultra long life, low cost, low due political risk, Potash mine exposures. Global demand growth for Potash and ultimately, food continues to track along a well-established trend and the signals from our operators about continuing to hold, if not grow market share are currently amplifying. So while we still believe even after strong movement over the past two years, that current Potash prices do not readily incentivize a new wave of major growth investments, we do know that these must ultimately come and that our asset exposures represent the most advantaged opportunities to bring on the supplies that the world will need and need sooner than most observers currently anticipate. Our continuing work to estimate incentivization pricing for both brownfields and brownfields potash development in Saskatchewan was recently informed by updated costs and time to completion estimates that BHP announced for its Jansen project. This has led to our view that the gap between current prices and the levels required to keep the global potash market applied as further wide than recent years. Another area of potential future volume growth that we are monitoring closely is with respect to Lundin's current efforts to expand production levels at Chapada complex. It has reported that it is exploring a relatively low capital cost project to incorporate higher-grade ore from its recent [ Telkwa ] discovery that would result in meaningful increase in final copper output. We are expecting more details of this plan in the first quarter of next year and note that our copper stream rates extends to the [indiscernible]. We saw good news during the quarter from Silvercorp that it continues to track well in terms of cost and time line for its under construction Curipamba mine, where we hold a 2% NSR. At spot prices, our annual revenue expectations and IRR estimates on the original investments have increased meaningfully. This is in large part driven by Curipamba strong precious metal content. Turning to our U.S.-based electricity royalties, we saw excellent progress during the quarter with continuing revenue ramp up as new projects continue to commission and our interconnection funding initiative began to deliver results. Our portfolio now consists of 13 operating state royalties and 5 projects under construction by a very strong suite of counterparties. Last most importantly, we note that the freeze up in investment activity that has characterized the renewable electricity sector for most of this year, driven by heightened political and policy uncertainty has begun to thaw. This has led to the resumption of project sales activity for our developer partners and the associated derisking of our underlying royalties. It has also led to increased industry project financing activity that has allowed us to increase our near-term expectations for deployment into new royalty investments. We anticipate being in a position to provide further detail on this front in our year-end update. At Arthur, we heard another very encouraging update from AGA that spoke to ongoing resource growth and project scope potential based on continuing positive drilling results. This included references to growth and continuity for a particularly high-grade portion of the Merlin deposit that in previous studies was shown to give the potential for several years of plus 1 million-ounce per year production rates in the early part of the mine plan. To the extent that this high-grade core continues to expand, the obvious implication is that there is increased potential for this type of production rate to continue for longer. At current prices, that production rate implies royalty revenue levels of potentially more than $30 million a year for our 0.5% NSR. We look forward to learning more when AGA publishes the PFS this coming February. Turning next to CAMI. We congratulate Champion and partners, Nippon Steel and Sojitz on closing the first phase of their investment partnership during the quarter. We were also encouraged to learn of continuing progress with respect to engineering studies, environmental permitting, social licensing and efforts to attract infrastructure support associated with Canada's new push to strengthen its critical mineral sector. As mentioned previously, this project has particular strategic importance to Nippon as it continues to execute a major investment program that is designed to modernize its steelmaking fleet to electric arc furnace-based technology, which is reliant on high purity inputs of the type CAMIs being designed to produce. Our 3% CAMI royalty has the potential to become our single largest by revenue. Another encouraging feature of these stronger resource markets that sport noting is that it results in an increased availability of capital for explorers. There's more money available for the juniors. This, in turn, naturally leads to increased drilling activity across our portfolio of early-stage royalty projects and therefore, enhance discovery potential and the possibility for more CAMI and silicon type events in our future. I'll conclude by saying that while our efforts to source external opportunities have certainly notched up following the closing of the partial sale of our -- after royalty, -- we do not believe that our growth is at all dependent or solely dependent on this work. The work we did in selecting for higher probability expansion and new build opportunities over the past number of years, already solidifies our potential organic growth profile. We look forward to updating you further following Q4 and what we expect will be a particularly busy and exciting period of reporting from several of our royalty operator counterparties. And with that, I'll turn it over to your questions. Thank you. Operator: Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] And your first question comes from the line of Brian MacArthur from Raymond James. Brian MacArthur: I have 2 questions. My first one is just a technical one. On the $25 million payment from Franco, they talked about making it in Q4 and your wording sort of sounds like you think you'll get it into Q4, but there may be additional challenges. Are you seeing challenges? Or is that just being cautious language about when you get to $25 million in . Brian Dalton: Well, the payment is due upon the expiry date of any challenge, assuming that no challenge has been made. And to date, we don't know of any challenge, and we're getting very close to that deadline for Anglo to make any challenge. But that's really -- it's a technical answer as well. It's a very formal trigger for that payment. And essentially, it means we've got to go past the appeal period, appeal is probably not exactly the right word, but challenge period and without challenging at that point, the payment is automatically due. Brian MacArthur: But that time period is in Q4, technically. Brian Dalton: That is like within days. Brian MacArthur: Okay. Great. My other question just relates to GBR. There's a lot of discussion now about if I'm reading this correctly, that you're putting debt into a lot of these deals at the moment. When you do that, and you get your 7% return. Is there a length that you're entitled to a royalty? Or how are you thinking about that? Because again, my view would be royalties get a different multiple than doing debt yield at the end of the day. Brian Dalton: Yes. No, I think you're exactly right in that assessment. So there is a dedicated debt financing facility in place that is being utilized to both these interconnection deposits. To date, there isn't a formal linkage to royalties. But at some point, these deposits that are currently fully refundable will turn to refundable deposits and then at that point, our payments are due. So we do see a lot of opportunity there to continue these relationships with those groups as that shifts over and we can potentially convert some of the facilities to royalties in the future. But obviously, that's a 2-part equation on both sides would have to see something reasonable there. So I think it's probably better to look at it as yes, a nice sort of incremental source of revenue means of supporting our partners and others in the industry and certainly, hopefully, anyway, a means of relationship building tool that hopefully leads to additional deal flow. But for the meantime, it's, it's quite profitable and -- but I wouldn't treat it as sort of -- this is not long-term recurring revenue. These are relatively short duration instruments. Operator: And your next question comes from the line of Orest Wowkodaw from Scotiabank. Orest Wowkodaw: Brian, could you please give us some color on what Altius plans to do with this cash windfall that's received from the recent transactions? I mean you're sitting with near enough $400 million plus of cash. How do you plan to deploy that moving forward? And do you see opportunities out there to deploy it? And if you do, I'd be curious sort of what commodities you're looking at right now. . Brian Dalton: Probably I'll give you some color on the last part, but I think in terms of the kinds of commodity exposures we already had. We like those -- we're careful about managing balance across that, but we're not afraid to have something get bigger if that's where the opportunity unity rests. But we're not looking at any kind of big forays into anything exotic. We like the kinds of commodity exposures that we have. As far as the deployment question goes, yes, there are potential opportunities out there and Mark and the team are pretty busy working through those. But you know us, we're going to be very patient and disciplined and take our time with sorting through things. And there's lots of opportunities with the fullness of time here. It could involve external opportunities that could also involve what we would call internal M&A, and that's using the buyback to increase our exposure to the existing growth profile that we already have in place. So we're taking our time. We're going through what our alternatives are. And this will be done methodically in Altius like fashion. I mean, you know us the last time we had a pilot cash, and we talked about deploying it into new opportunities. We ended up waiting for, I think it was over 5 years until the window opened. So we're not afraid of that either. It's not the base assumption here, but yes, it's world-class problem, and we're working through it. It's a fun effort. And I think everyone certainly is excited to have the shackles off a little bit in that anything we're looking at now as potential external opportunities, at least doesn't necessarily involve equity or the dilution of the -- what's already embedded as a growth profile within the company. So I'm not going to get any more specific on that, as you might imagine. Orest Wowkodaw: Well, I'll try anyways with a follow-up question. I totally understand that it takes time and these opportunities come up when they come up. But in terms of the potential to increase your buyback, is that something we could see sooner rather than later? . Brian Dalton: I'll put it this way. When we're looking at external opportunities, everything has to measure up against what we see as the upside in terms of owning more of our own assets. So that's part of the mix right now. That's sort of the analysis that's going on. How does that opportunity compare to this one over here, this one over here and the one that's always available for us. And some of that's going to be market circumstantial. I know it's been a strong market here, but markets have been known to be volatile in the past, and we're kind of excited about that volatility quite frankly, at Altius and ready to move. But yes. I think we're getting there. We're getting there in terms of priority lists. And just when we do make a priority list, it doesn't mean it's immediately actionable, but at least informs us to be ready employees to potentially do things, whether that's on the buyback or something external. So you did get a little more out of me, but that's it, I promise. Operator: [Operator Instructions] And your next question comes from the line of Craig Hutchison from TD Cowen. Craig Hutchison: Maybe just a follow-up question from Brian's question earlier just on the GBR. And it seems like there's a lot of opportunity in this kind of deploying capital to support these refundable interconnection deposits. But I guess how big could this opportunity be? And you mentioned it's more short term in nature. Can you give us a sense of how long you expect it to take to get repaid just looking at a 7% margin spread that seems to imply at least in my view, there is some risk here, giving us a pretty healthy margin. But just any kind of context in terms of the potential opportunity here those duration of the timing and the repayments of the refundable interconnection deposits. And just maybe if you can speak to why that margin is so high. Brian Dalton: I wouldn't actually characterize it as a function of the investments being risky. In fact, it might be a little bit the other way. It's largely a function of how low our cost of capital is for that we're utilizing, because these are fully refundable deposits. We're not actually making the payments to the counterparties. These are being pledged on their behalf, but we retain full control. So -- these are not -- it's not cash that's gone to a counterparty. So for example, if the counterparty got in trouble, these deposits are not -- essentially, they're not part of their, their asset mix, and we retain full control. So we've got quite a high rating attached to that facility. And so yes, it's pretty low cost capital. And then on the other side, it does speak to pretty -- how would I put it? Like money is fairly expensive in the renewable sector. So a lot of these groups as well will be developers by nature, right? It's not going to be the next areas of the world that are looking for this money from us who can fund it from existing balance sheets. These are groups that, quite frankly, would rather not have their own capital tied up with these deposits, they'd rather advance their projects on the ground. So the return what we're getting paid to provide these facilities is a function of more difficult market conditions, particularly for equity type capital and just a prioritization of uses of capital by some of these groups, this isn't going to be out there for extended periods of time. So the cost is it just makes sense for them. It's what the market is bearing right now. If you go further with it and think more to what we're -- I guess, more focused on, which is acquiring long-term royalty type interests, recurring revenue streams, optionality, all that sort of thing. The same can be true like returns, our expected returns have edged up in the last while. And that's -- it's largely a function, just look at the equity markets in the renewable space right now. It's not particularly strong, although those seem to be improving. And I'll be honest, on the other hand, and this is what's remarkable is that there is some reticence amongst lending groups and banks because they actually fear repercussions from the U.S. administration about being seem to be supportive of the industry. So quite a wild backdrop really, but if you've got conviction long-term belief what it results in is competing forms of capital are scarcer now than they would have been and returns have adjusted accordingly. And the other thing that's remarkable about this is that the actual fundamental backdrop is really strong. So you've got these challenging market conditions and reluctance on the part of competing forms of capital against what is probably the strongest electricity markets that anyone who's an investor has ever seen in the U.S. market. And the gap that's sort of how that gap is, in some ways, being filled is through -- it's the end users of the power. It's the buyers of the power who are stepping up and signing quite long term above market priced contracts to buy the electricity. And so that's sort of what stepped in to fill the hole that was created when sort of tax credits and all those sorts of benefits that used to be part of the economic mix for these projects has gone away. What's happened is a quite capitalist response in that the people who actually need the power are filling the hole and just providing whatever price is needed to get the power made. And so on that hand, it's extremely bullish conditions out there, but remarkably weak financing conditions. So quite an interesting to position there, but I love it. Operator: There are no further questions at this time. Ms. Wood, please proceed. Flora Wood: Thank you, Ina. We do actually have a question from a shareholder who e-mailed. Thank you for doing that, by the way. And it's about the Labrador Trough high-grade low maturity iron ore -- and the first part of it is really about the outlook, especially in light of Simandou coming on. And the second part is do we have any update on Julienne Lake. Brian Dalton: Second part is easy, no real update there. And in fact, there was a recent change in government in -- within Newfoundland, and this is obviously the process that I think is being referred to as proposals that we've made to the proper provincial governments around advancing or developing the Julienne Lake deposit that it controls. So we don't have the results of that process in front of us yet and it may take a little time for the new government to get their heads around what's going on there, but we'll certainly be updating whenever we do. The Simandou question, there's a little bit of confusion, I think, out there in the market with respect to that. It's not actually designed to produce ultra-high purity DR-grade iron ore. There's talk of that potentially being some of the mix down the road. But really what it is, it's more of the higher grade end of the blast furnace, spectrum. And it's sort of -- it's a function of how rapidly overall grades are declining in Australia, I would say, I think there's even pushes now to reduce the benchmark from 62 down to 61, all sorts of challenges from the established producers there that are emerging and trying to meet basic spec for blast furnace grade. So as I understand that anyway, Simandou is meant to be -- that continuum for blast furnace grade would be sort of, say, 58% to 65%, and that's meant to improve Rio's contribution on the higher end of that spectrum and to bring their overall to sort of arrest the overall grade decline they've been dealing with. Flora Wood: That's good. I think there's no further questions. So we'd like to thank everybody again for joining us, and we look forward to speaking with you for Q4. Brian Dalton: Thank you, everyone. Congratulations first one under your belt. Flora Wood: Thank you. Thanks, everybody, for joining. Operator: And this concludes today's call. Thank you for participating. You may all disconnect.
Mark Sclater: Good morning, everybody. Thank you very much for those of you that have come in person, and welcome to those on the phones. I thought I'd start by thanking our employees. The speed of change across Avon has been challenging at times but people love being part of a team that is up to something exciting. We've grown the company and EPS has doubled since 2023. We now have an exciting pipeline of new products, a solid balance sheet and more strategic options. We could only do all this with such a great team. We made excellent progress in 2025. Revenue and profitability grew rapidly. We've transformed every factory using our strengthened system. We reduced costs by closing our Californian factory. In 2025, we invested $14 million in R&D, most of it expensed, fueling a pipeline of innovative products and generating excitement amongst our customers. The order book and pipeline are both stronger than ever. We have a scalable platform facing into growing markets and we're firmly on track to exceed our revenue targets and reach our margin target range in 2026. I'll now hand over to Rich and he'll talk you through the numbers. Richard Cashin: Thank you, Jos. Good morning, everyone. So as you can see then, the headlines demonstrate another year of strong progress. As usual, all of the comparators will be on a constant currency basis. The order book at the end of 2025 has hit another record at $263 million, 16% higher than the prior year. This leaves us very well covered for FY '26 across both helmets and respirators. Revenue growth of 14% dropped through to strong adjusted operating profit, up 31% at $40.3 million. And my preferred area of focus, return on invested capital came in at 18.6% after significant progress was made reducing the average level of working capital tied up in the business. Cash conversion of 90% represents another good year even after a late burst in Q4 resulted in a high receivables balance as we crossed into FY '26. And the combination of all of these factors saw the balance sheet strengthen further with net debt leverage of below 0.9x despite considerable investment into the business during the year. Revenue growth, ROIC, cash conversion and leverage are now all better than our medium-term targets and operating margin is well on its way. Moving on to the P&L. Order intake in the year was very healthy at $352 million, giving a book-to-bill of 1.12. Orders were slightly lower year-on-year, reflecting very high call-offs against the U.S. Department of War helmet programs in '24 and a slightly lower share of IHPS awards in '25. The phasing of these call-offs will always be fairly lumpy in nature but the record closing order book of $263 million benefited from strong growth in Avon Protection, more than offsetting a modest decline in Team Wendy, largely reflecting the increased Department of War deliveries and the phasing of orders already mentioned. Revenue growth of 13.8% reflects a strong performance across the board with 16% growth in Avon Protection and 12% growth in Team Wendy. Operating profit of $40.3 million, over 30% above prior year levels, results in margin of 12.8%, an improvement of 130 basis points year-on-year and a helpful step on the road to achieving our medium-term objective of 14% to 16%. I will walk through an operating profit bridge shortly to pick out the key moving parts. Net finance costs reduced 16% to $5.4 million, driven by lower average net debt and the tax charge of $8 million represents an effective tax rate of 23%, which is roughly where we would expect it to stay absent further changes to the tax regime. This all adds up to adjusted basic EPS of $0.912 per share, an increase of 35% despite the step-up in tax from last year's 17%, which benefited from some one-off adjusting items. Avon Protection has had a tremendous year. Order intake up 18%, order book up 63%, revenue up 16% and operating profit margin up 160 basis points at almost 20%. This shows the ability of the business to lean into a strong demand environment and deliver profitable growth. The growth in orders and backlog has been largely driven by strength in international markets, offsetting a softer year in Commercial Americas following a particularly strong 2024. Ukraine-related demand now accounts for just $13 million in the backlog for delivery in FY '26. This may not repeat, but even after stripping this out, you can see that the order book has grown very well. Revenue growth was driven by Australian FM54 deliveries, strong demand for CBRN boots and gloves to NATO customers and some Ukraine support, coupled with another good year for rebreather deliveries. The excellent drop-through margin was helped by operational gearing, improving productivity and sales mix. Given the strength of the order book, Avon Protection is exceptionally well positioned to deliver further profitable growth in FY '26. Order intake in Team Wendy came in a little softer year-on-year, largely owing to lower receipts from the Department of War following very strong intake in '24. The backlog remains robust at around 1x sales with the strengthened product portfolio driving an excellent pipeline of opportunities as we enter FY '26. Revenue growth of 12% was driven by further growth in ACH II deliveries as we move towards full rate production, further aided by strong demand for bump helmets from a number of end customers, including the U.S. Air Force and Navy. Operating profit margin nudged forward from 4.6% -- to 4.6%, excuse me, from 3.9% in the prior year, which is a good improvement, but still some way off our medium-term ambitions. We are confident in further progress in 2026 as we demonstrate the sustainability of the production rate increases in Q4 and as the benefits of cost reduction following the Irvine site closure start to wash through. As a reminder, ACH II shipments, although driving top line growth, will remain dilutive at the gross margin level. We expect financial performance to accelerate through the year as we improve quality and productivity, which will skew Team Wendy operating margins towards the second half. Now as we move on to the usual operating profit walk for the year, starting with the $30.8 million jumping off point for last year after adjusting for FX. The first positive bar of $15.4 million shows the effect of the 14% revenue growth seen in the year, split roughly 2/3, 1/3 in favor of Avon Protection. Then you can see a further $7.6 million benefit through the combination of operational gearing, product mix and CI activities that have improved efficiency and reduced scrap costs. Note that as previously guided, there was a dilution effect of $2 million from growth in sales of the lower-margin ACH II helmet. There is a $7.1 million headwind from the step-up in investment in future growth, which includes increased sales and marketing, commissions, training and the increased net R&D charge to the P&L. There's a further $2.6 million headwind for increased comp, including share scheme costs. And I've also pulled out the $1 million drag on earnings from tariff costs and increased national insurance in the U.K. And then finally, the other bar of $2.8 million inevitably covers a multitude of things, but the big ones are increased travel, additional investment in IT and costs incurred in tidying up some of our back-office processes. Moving on to the cash flow statement. You can see that net debt ticked up by $6.6 million in the year. The big driver was the $12 million outflow in working capital as production rates in Team Wendy ramped up, culminating in very strong product deliveries in Q4. This resulted in a high receivables balance at the end of September, all of which has now unwound. The pension contribution of $6 million was as expected. And as usual, guidance on future contributions and other financial matters is provided in the appendix to the slides. Purchase of shares to fund discretionary comp schemes increased by $4 million to $9 million during FY '25, reflecting the increase in share price and the strengthening outlook. This prevents future dilution. It's worth pointing out that cash tax will remain lower than P&L tax for the next couple of years as we burn off historical tax losses. The big items to highlight on the balance sheet include inventory remaining broadly flat despite the 14% growth in revenue, resulting in improved inventory turns and the high receivables balance at the end of the year impacting the other current assets line. As already mentioned, this has now normalized following strong cash receipts in the first quarter. Despite the modest increase in net debt, the leverage ratio continued to improve, driven by the increased profitability of the business. Overall, average working capital returns, which is a measure I like as it eliminates the impact of period-end ROIC improved by 15%. The other item worth drawing to your attention is the further increase in the pension deficit or decrease, I think, in the pension deficit to $13.8 million, down from $17.2 million last year. This is due to our $6 million contributions, offset by modest asset underperformance. I've included the capital allocation slide in the deck again this time, reflecting a further reduction in the year-end net debt-to-EBITDA ratio, which is now comfortably below our target level of 1 to 2x. As Jos will cover shortly, we are expanding the revolutionize point of our STAR strategy to incorporate acquisitions as one explicit avenue to future growth, which, if executed thoughtfully, will present opportunities to deliver compounding shareholder returns. While we're still at the very early stages of developing this muscle, we felt it worthwhile to call out. And beyond that, the chart is essentially unchanged, highlighting the prioritization of organic growth and the progressive nature of the dividend. Moving on to transformation. It's worth highlighting that transformation costs came in a little higher than expected in FY '25, reflecting a crescendo in effort in second half activity as we aggressively ramped up production rates in Cleveland. As flagged when we launched the transformation project back in 2023, expenditure will fall significantly in FY '26 with the expected outlay of approximately $6 million linked to two specific projects. The first and already communicated is the completion of transition away from SAP in our Salem facility, which we expect to save us over $1 million per year. This is progressing well and will be complete by the end of the first half. The second and new project is a continuation of the functional excellence work stream with the focus on the way we deploy IT services across the group. We expect to invest up to $4 million of OpEx plus a little bit of CapEx in the design and execution of a new target operating model for IT, which we believe will deliver significant returns in a very short time scale. The investment will be completed in FY '26 and the overall project will have a payback of less than 24 months. This project reflects the end of transformation-related costs taken below adjusted operating profit. So finally, moving on to our expectations for the full year. We expect further good growth in helmet deliveries as we finish the ACH II ramp-up with additional growth coming from commercial and international markets. We also expect good growth in Avon Protection, underpinned by the robust order book in this business. These factors combined equate to high single-digit revenue growth at the group level. We expect the financial benefits of the transformation program to drop through this year with a modest weighting to the second half. Even after the additional dilution from the growth in low-margin ACH sales, we are confident that we can deliver our operating margin within our 14% to 16% target range. As highlighted on the previous slide, we expect transformation investment in FY '26 to drop to around $6 million and return on invested capital will continue to progress nicely. And finally, we expect cash conversion to remain above 80% with continued improvements in operating efficiency being partially offset by further investment in future growth. And with that, I'll now hand back to Jos to update you on the operational and strategic progress and focus for the coming year. Mark Sclater: Thank you very much, Rich. We continue to focus on delivering our STAR strategy, refining it each year with new initiatives. Our strengthened system has become a powerful engine for continuous improvement, and we still see lots of opportunity ahead. Much of our transformation program is complete with two newer projects running into 2026. The transformation program will finish in 2026 but the strengthened system will continue. Kaizen is forever, as we say internally. In advance, we're increasing investment into R&D, sales, marketing and people. 2026 will see our most ambitious new product development program yet. In revolutionize, we've been very successful in securing customer-funded development programs. This year, we're expanding revolutionize to include acquisitions. Our long-term vision is to compound shareholder value by complementing our organic growth with targeted acquisitions. We have the team, the capability and the business improvement system to extract value from acquired assets. That said, our immediate focus remains on organic growth. While acquisitions are part of our long-term strategy, we're not in a rush. We will wait until we find the right opportunities at the right price. As a reminder, this is our scalable business improvement system. The STAR strategy and objective setting process keeps our people focused on action. Our STAR Academy builds the capability of our people and the strengthened system enables us to continuously improve our processes, creating cash to invest into the front end of the business. During the year, we trained every employee on our strengthened system, developed 20 proprietary courses in our STAR Academy and took 30 of our senior employees to Japan for intense continuous improvement training. Another 20 people are going next week. We believe that improving our operating metrics ultimately drives growth and profit versus 2023, when we originally set out our ambitions, productivity has improved 28%, scrap has reduced 62% and inventory turns have improved 46%. But this is just the start. There is more to come. At the midyear, we highlighted the operational risk in Team Wendy associated with production ramp-up and the move from batch to flow manufacturing. This turned out to be prescient. The speed of the ramp-up was difficult. Yet as these graphs show, we are making progress. Over the summer, we tripled production on our Department of War lines as we implemented flow manufacturing. This demonstrates the potential of our new lines. We now need to increase production rates again on the ACH lines by another 50%, and we need to ensure we can deliver consistently every week. We are not out of the woods yet. We learned a lot over the summer and have used this to improve our strength and system. We learned that teams can go much faster than they think. We ran 14 improvement projects over 8 weeks. Leadership from the front is critical. We need to show people rather than just tell them. A line that flows can only run as fast as its slowest operation. The fastest way to speed up a line is to deeply understand each process and tackle the biggest bottleneck one at a time. Lines cannot be improved by sitting in an office. Change needs employee buy-in. We spent a lot of time explaining what we expected of our operators and training them on the strength of the system. From a strategic perspective, our aim is to make the most advanced and best looking helmets with the lowest lead times and cost of production. Avon Protection also made excellent progress as this slide illustrates. In the electronics value stream, which includes rebreathers, productivity increased 79% and scrap halved. In boots and gloves, production increased 47%, improving return on capital and helping us deliver on high customer demand. Both divisions have transformed every production line from batch to flow manufacturing. We've moved almost every single piece of equipment across the entire group, often more than once. You can see the scale of the change in this time lapse video of our U.K. site over the past year. One of the reasons that we're happy to share our strengthened system is that it's not about knowing what to do. It's about actually doing it. Real progress comes from making tangible change every week. That's what delivers sustainable benefits. Moving on to transformation. As you can see, most of our initiatives are nearly complete. We expect to see benefits this year and beyond. Just to pick out a few points. In footprint optimization, we closed a factory in California and built a new one in Cleveland. In operational excellence, we've transformed all four of our factories. In functional excellence, we've reduced costs and improved quality in the finance function and we have a plan to make IT more efficient. In commercial optimization, Stacy Stern, our new VP of Sales, has developed a strategy to improve our sales capability and we have more bid activity than ever before. We will also hold more marketing events where we arrange for our customers to shoot our helmets so they can see how good they are for themselves. 2026 marks an important milestone. The transformation phase we started in 2023 will end in 2026 as planned. During this phase, we've fixed a lot and have done much to improve the business. There's more to do this year but we are starting to get our heads up and look to the future as we move from the fixed phase to growth. Our markets are supportive. Defense spending is up, CBRN threats are growing and user numbers are increasing. We are investing more in innovation and are building a strong pipeline of new products, and we're not just reacting to demand, we're shaping it. We have a repeatable and scalable business improvement system that creates the platform for future growth, supported by a strong balance sheet and the potential for acquisitions. In Avon Protection, the order book is -- the order book of $117 million is up 63%. As you can see, both revenue and the order book are well diversified across customers and product lines. This year, we reached a milestone of $100 million of total orders under our NATO framework contracts to 16 countries for restorators, boots and gloves. Each country we win creates recurring revenue for the future. Beyond the order book, our pipeline of opportunities is bigger than ever. We have large potential filter orders from the U.S. Department of War and from the Middle East. Our MITR lightweight Half Mask and powered goggles were launched this year. We have opportunities for MITR sales with the special forces of 4 out of 5 of the 5 I's. This is important because regular forces tend to follow the lead of the special forces. In rebreathers, we won orders with Canada and 2 European Navies and have bid for 2 additional new navies. In addition, we're actively engaged with the U.S. Navy, U.S. SOCOM and the U.S. Marines on rebreather opportunities and expect to receive invitations to tender this year. In Ensemble, we have opportunities for our lightweight chemically resistant suit in the Middle East with NATO and the United States. Overall, our pipeline of opportunities is up considerably and we are going for some big pieces of business. We will not win everything. But with a weighted pipeline up more than 80%, we should continue to grow. We mentioned at our interims that we are working with the U.S. Marines to develop MITR further on a program called ENBD. Since then, we've been awarded another development program by the Department of War as part of their push to combat irregular warfare. The aim of this program is to develop a scalable tactical assault respirator, which they call STAR. I suppose I should be flattered that they've chosen to copy our acronym. STAR builds on the MITR platform and adds functionality and equipment. The exciting thing about STAR is that it has a very wide range of interested user groups, including the U.S. Special Forces, the Air Force, LAPD and the FBI. These programs will enhance the capability of MITR and develop it into a complete system that will create an entirely new market for us. In addition, we've achieved CE and NIOSH approval of the MITR Half Mask and particulate filter, which opens the U.S. Federal market to us. Interest in our EXOSKIN suit increased during the second half. We're optimistic that our lightweight, low-burden suit is what the users want. Two different versions of our EXOSKIN suits have been chosen by the U.S. Department of War for trials, which could lead to the sale of 700 suits. There is potential for a larger program beyond that but competition will no doubt be fierce. We've also won a key order with the Turkish MoD for a full ensemble system, including suits, boots, gloves, masks and CS-PAPR systems. This shows that our strategy to sell full ensemble packages meets the needs of our customers. So far, we're working with technology partners in this area, but there is potential for selective technology acquisitions to help us accelerate. We continue to launch new products to drive growth. This year, we'll launch the next-generation CS-PAPR. This has been trialed at several end-user events, and they love the way it helps enable them to escape from sudden high-threat situations by seamlessly switching to supplied air. We've also developed a new voice protection unit for our 50 series of masks, which we plan to start delivering in the first half. The new unit offers users improved functionality and less complexity. Looking further out, we're working on a new shallow water rebreather and expect to bid for funding to help us accelerate this program. We're also looking to exploit our new multilayer filter bed technology, which provides a far broader spectrum of protection than existing carbon filters. Team Wendy's order book of $146 million largely consists of next-generation IHPs, ACH and EXFIL for the Australian Defense Force. We saw good growth in the U.S. police and first responder market, which was up 15%. And we had another year of very strong demand for combat helm pads and liner systems. Our support for Navy for EXFIL bump helmets has also been a key driver of growth with over 25,000 helmets shipped to the U.S. Navy in 2025. These helmets offer enhanced impact and work with hearing protection, addressing long-standing gaps in legacy systems. The pipeline in Team Wendy is also promising. The EPIC helmet range has taken our leading military technology into commercial helmets. This has helped us win market share. Internationally, we're working with two militaries on new opportunities that look hopeful. We launched RIFLETECH in the first half and have seen encouraging early demand. It delivers elite ballistic protection and all-day comfort in a lightweight mission-ready design. The new pad system is so comfortable that during testing, one user forgot to take the helmet off at the end of their shift. Furthermore, I'm told that the first rule of being in the military is to look cool, and RIFLETECH certainly delivers on that. We've now shipped Rifle Tech to an international military, made our first e-commerce sales and sold units to U.S. police forces. This demonstrates that there is demand for a very high-end helmet in the market. In 2026, we'll launch our most ambitious development program yet with two new ballistic helmets built around our latest technology and our no through-hole attachment system. These will upgrade our range with higher protection at lower weight. We also plan to launch a new generation of bump helmets, offering leading protection and multi-certification to cover a broader range of user requirements. Together, these launches will increase our range into new markets and further differentiate Team Wendy from its competitors. We'll share more at the midyear. Meanwhile, demand for Integrated Head Protection continues to grow. In 2025, we secured a new Department of War funded program to develop a helmet that can withstand an even higher ballistic threat with integrated eye and hearing protection and night vision compatibility. This is important because it positions us well for the next generation of Department of war helmets. As you can see from this slide, we have achieved most of our goals that were originally set for 2027. The only exception is margin where our aim is to achieve our target this year. With regard to risk, we still need to increase production rates on ACH Gen II. We know how to do this, but there is a lot to do. Recruiting good people at the speed we need remains challenging. There is a risk of increased competition on the NextGen IHPS program with a new supplier potentially entering the market. This would take the number of suppliers from 2 to 3 with demand continuing to look strong. The government shutdown currently prevents the delivery of helmets to the DOW but does not slow production. We expect to see a temporary impact on working capital in the first half but no long-term impact. Looking at opportunities, we are bidding for several major U.S. and international programs, which are not currently in our forecast as timing is uncertain. There may be upside here but it's too early to tell for now. The strength of the system does have the potential to deliver higher margins than guided but we remain of the view that it's rare for everything to go right. To wrap up, nearly 2 years ago, we set out to transform the group through our business improvement system. The original transformation projects are largely complete. We've launched world-leading products and technologies and partnered on a record number of development programs, further strengthening our competitive moat. Our markets remain highly attractive with rising defense spending and a record order book backed by a robust pipeline of new opportunities. We have a scalable business improvement system, which is a powerful tool for improving businesses and generating shareholder value. In summary, we see opportunities ahead and believe that we have the people and the processes to realize those opportunities. Thank you very much for listening, and thanks to the guys in the room. We'll now open up for questions. Andrew Douglas: It's Andrew Douglas from Jefferies. I've got a few questions. I'll maybe go into two spots and come back later. On the IHPS, can you explain to us why there's new competition to the market? You've got two people who are doing a good job. Is the DOW wanting a third one? And if a third entrant does come to the market, is it not going to take them a while to get fully up to speed with FAT approval, ramp-up approval, et cetera, et cetera? Mark Sclater: Yes, it's a very good question. We asked the same thing. The answer is that Gentex was slow getting FAT. In fact, I think it failed that first time around. And as a result, the Department of War reached out to another company and asked them whether they have been interested for applying for FAT. Somewhat irritating that Gentex then did pass FAT but the other party was some way down the road of working how to build the helmet itself. So they are now in FAT. We don't yet know whether they're going to pass or not. It is a difficult technical challenge that helmet. And even if they do get FAT, one thing to get FAT is another thing to work out how to make it as we've discovered ourselves, it's quite tricky. But I think there is a possibility that we'll get a third player in the market, annoyingly nothing to do with us because we pass FAT first time around. Andrew Douglas: Second -- just I've got some for Jos, some for Rich. On the M&A side, where are we in terms of the pipeline? I mean it sounds to me like we're now thinking about it. Do we have a pipeline of -- I don't know how many companies you need in the pipeline, but do we have one and then you're trying to work your way through to figure out what's the best? Or do you know what you want to buy? It's a question of when it comes up and at the right price? Mark Sclater: I think it's early days. We are focused this year very much on organic growth and getting the margin into our range. We want to deliver on our promises before focusing on other things. I think this is the year where we'll start to get our heads up and look a bit more externally and go and visit more companies. But with M&A, you have to kiss a lot of frogs to find a princess. And it's going to take us a while to build up a pipeline of opportunities. I think the only potential exception to that is I think we've got a good set of partnerships for suits but there are some options there where acquisition might help us accelerate better than partnerships, but they'd probably be very small. Andrew Douglas: And then just a few quick ones for Rich. On the receivables, how much was it? And is that just a question of you delivering lots in the fourth quarter and get paid in the first quarter? Or is there something else going on? Richard Cashin: No, it was exactly that. So the overhang, $25 million to $26 million was $17 million, all owed by one customer and now all paid by set customer. Andrew Douglas: And then on one of the slides, you talked about a GBP 10 million benefit in '26 from transform basically finishing. Is that all in '26? Or is that an annualized number that we should think about by '26? Richard Cashin: It is an annualized number, but most of it will come from... Richard Paige: It's Richard Paige from Deutsche Numis. Three from me as well, please. Given what you've said on Q4, it sounds like there was not -- for want of a better word, not a scramble but quite a surge towards the end of the period. Could you just talk through a bit more what happened, please? I think you're on the ground lately. Mark Sclater: I don't know if you're set up for that. Yes. I mean the summer was pretty intense. I was actually in Cleveland for 2 months solidly on the factory floor for the entire 2 months. I actually spent the first 3 weeks in the paint booth trying to get that to working, which we did eventually do. We have an automated paint line, but it was not painting in an automated way to start with. After that, we just started debottlenecking the lines and knocking down problems one at a time. I think it was very intense. It was very tiring for people. There were a lot of 12-hour days. I'd say it was also very rewarding though because every week, we could see the production rates coming up and more helmets getting approved by the DoD. So -- but yes, it was a hard push for sure. Not for the faint-hearted and actually, you've given me the opportunity to thank all the team in Cleveland. I mean it was really hard work. It's not -- I mean, they probably don't -- I think they did love having the CEO there for 2 months, but probably in the first week, they say, "Oh my God." But we ended up creating a really strong team, and they work really, really hard. So I'm very grateful to them. Richard Paige: You've alluded to second half weighting for the year ahead. Could you just give us a little bit more flavor around that, please? Yes. Richard Cashin: I think we're trying to get the numbers. So we can come back to that. But the drivers for the weighting are twofold. So firstly, demonstrating ability to hit rate was the important thing for Q4 '25, which we did. In the first half of '26, two things need to happen. So firstly, we need to demonstrate to ourselves that, that rate we have hit is sustainable. And then secondly, as Jos mentioned in his slides, we've got to increase it again by another 50% on one of the helmet types. So there is still a lot to do. And of course we operate [indiscernible] margin level, it is helpful from an operational gearing perspective. So that clearly weights margin a little bit on in the first month, then great. But I don't think we will. I think it will take us the half. So maybe instead of 48%, 52%, think 46%, 54%. Richard Paige: My last one is a little bit selfish. I think of my Christmas stocking list, you've moved all of your facilities to flow manufacturing. In your own words, you moved almost every bit of equipment in the firm. What are you writing a book about, Jos? Mark Sclater: I'm not writing. We are going to -- I think we're going to do a second edition of the strength of the system just to put in some of the learning. So I think we should continuously improve it as we learn ourselves. It's one reason -- I've actually got a longer deck of what we learned over the summer in Cleveland that we've started training our people internally on you've just got one slide from it in this deck. But I actually do have a new mission. I don't think we're very good at helping our people transition from being technical specialists to leading teams. So I want to write a training program around that to help them kind of make that important career move from technical specialists to leader of bigger teams. We have had a number of people where I think we probably could have helped them more than we have done. So that's my next mission. Richard Paige: [indiscernible] Very grateful for having something to do to keep him busy in the afternoon. Toby Thorrington: Toby Thorrington from Equity Development. Question is all for Rich, I think. So good improvement in gross margin in the period. Scrap looked like a decent size. Scrap reduction looked like a decent sized contributor to that. If I read the chart correctly, scrap rates not much more than 1% now. Is there much more to come from that? And what's the gross margin outlook generally? Richard Cashin: That's 2 questions, that's cheating. I finished yet. On scrap, yes, there's plenty more to go. I mean, interestingly, I remember standing up here 2 years ago pointing out that we were scrapping $1 million a month in one of our factories. That $1 million has now gone down to $0.25 million, which is obviously great, but that's still $0.25 million a month that we're scrapping in that factory, and we've got 4 factories. So there's still plenty to go at on scrap. Gross margin improvements, we do expect that they will continue to come through. We've got the annualized effect of closing Irvine that we expect will come through in 2026 and a lot of that will come through in gross margin. The cost of doing business on an operating level in California is somewhat different to Ohio. So that will come through in gross margin. Going the other way, of course, as we increase ACH deliveries by another 50%, that will be dilutive to gross margin. But I expect to see good solid progression in '26. Toby Thorrington: Okay. And relatedly, but further down the P&L, I think SG&A increased more than revenue in the period but it's sort of consistently so first half, second half. Just what's behind that and the outlook again for that, please? Richard Cashin: Yes, that was the $7.3 million bar that I picked out in the operating profit walk. And I picked out because it's healthy SG&A, that's kind of investment in future growth. So you've got R&D in there. And don't forget, we capital -- we expense almost all of our R&D costs now. So every dollar we spend is an effective headwind in the year. But it's also sales and marketing. Jos called out the new appointee to head the sales team. The activity of taking helmets out to customers and shooting them or allowing customers to shoot them, that doesn't come for nothing. But it's an incredibly high-quality investment in our product. It allows customers to pick it up, play with it, see it, see what it's capable of and then buy it. So pretty good quality investment in SG&A. Actually, run rate SG&A, which is all the stuff that we've always done, came down year-on-year despite a 14% revenue growth. Mark Sclater: Yes. We have -- it's a good piece of analysis that we have a view that many companies are not thoughtful enough about reallocating resource. And what we've done is we've taken a lot out of what you might call the back office and operations. And then we've invested into the front end of the business, sales, marketing, bids. We've stepped our bids because we've got a lot more bids, so we had to recruit some people to support that and R&D. And that was always our intention 3 years ago to invest more into that area. Toby Thorrington: Sure. Okay. And final one, just on cash, I'm not sure whether transformation costs and cash out were aligned in FY '25. But is that -- will that be the case in FY '26, $6 million all in cash out? Richard Cashin: Yes. So '25, no, it wasn't aligned because $3 million of the transformation was accelerated depreciation, which is obviously noncash. We've now done with accelerated depreciation. So basically, all of '26, this $6 million will be cash. Andrew Humphrey: Andrew Humphrey at Peel Hunt. Just a couple. Just building on that question about investing for future growth. Clearly, the year ahead guidance includes a fairly meaningful step-up in self-funded R&D and CapEx. Sort of -- and that kind of seems to match up with the pretty kind of full list of bids and opportunities that you've outlined in the statement. Maybe can you tie those two things together? Does that kind of step-up in the money you're investing in the business kind of tie up to conversion of 50%, 75%, 90% of those opportunities? How should we be thinking about how that kind of gets toggled next year? I've got one more. Richard Cashin: Do you want to start on that? Mark Sclater: I think you go for that. Richard Cashin: I mean talking about the jump from '25 to '26 is actually quite hard because it's contingent on a lot of things happening that we don't yet know will happen. So it might be easier if we look at '24 to '25. The sort of things that we were investing heavily in, in 2024 included finalizing development of the Half Mask, sort of getting beyond 50% through the development of the goggle that go with the MITR system and essentially starting and finishing development of RIFLETECH. And all of those things have started to contribute to revenue in '25. So if you think about that linkage, that's quite important. The other thing I would think about is Avon Protection is an international business and has been for 20 years. So very significant sales outside of the U.K. and U.S. Team Wendy is not in that same situation yet. 90-something percent of everything that Team Wendy sells is inside the Continental U.S. with the balance really being the Australian Defense Force. If Team Wendy is to grow in the way that we think it is capable of growing, it needs to push its boundary into the Rest of the World, which requires investment. And so we've talked about investing in sales. We've talked about investing in marketing. A large part of that push has been building a sales team that's capable of addressing international opportunities. And that is a team that is qualified to talk to international customers in a language that they understand. U.S. Department of War customers have a very specific language. U.S. police forces have a very specific language. That doesn't always translate into international customers. Mark Sclater: I don't know whether this is answering your question, but there's obviously a bit of a -- there's a period where you have to develop a new product, which takes time, probably quicker on helmets than MITR, MITR took us about 18 months. Then there's a period where we have to seed the market, build the marketing materials, they have to assess it. That probably all takes you a year. We're starting to see RIFLETECH sales. We're starting to see a lot of interest in MITR but actually it's this year that the sales should step up on those. The new helmets we launched, I think they'll probably benefit us maybe the back end of this year, but probably the real sales are going to come next year, 2027 on those. Suits, we actually developed the suits maybe 2 to 3 years ago. We probably carried on refining them. They're probably the best. We would say they're the best chemical resistant suits in the world. They're way lighter than anyone else's. They're more breathable but it's taken us a long time to get the market to buy into the fact that they are an improvement over what's out there at the moment. And now suddenly, we're seeing customers super interested in them, but the sales at the moment are very small suits. So it's kind of all upside for us. And then the new -- the bid team we've got, again, we're bidding for a lot more of it, it's going to take us a while to see it. And the new international sales team in helmets, we're bidding for more there as well, but it's going to take a little while to come through. So this could be a year where we start seeing all the bidding activity from '25 coming through in 2026. You also asked about CapEx. I don't think we need a lot of CapEx this year. And the guys, we have a phrase internally of used wisdom before money. The area where we're absolutely stacked at the moment in addition to helmets is boots and gloves. We've got a very long order backlog. We bought 4 secondhand presses from another company that's sort of shrinking in the U.K. We're refurbing those. They cost us like $15,000 each. They're $250,000 new. So we've got basically no depreciation on them, so that should let us be very competitive. Andrew Humphrey: Okay. And maybe one more on U.S. government shutdown that you called out as a risk factor and particularly around the working capital impact. Like clearly, we're through a phase of that now and one would hope that kind of in the next few months, things will normalize. But have you sort of put that down as a risk with sort of half an eye on what may happen again in January? Or is that just that it kind of -- it all takes time to work through the system? Mark Sclater: Before the latest movement in the shutdown ending. But I would say actually, our program office was very helpful. We have a plan with them that we could actually carry on shipping ACH and carry on being paid for it even in government shutdown. So it was only IHPS where we were making but not shipping. Could we get another shutdown in January, perhaps, but we would expect that still to apply. So it would only be IHPS affected. The other thing that was quite interesting about the shutdown is our program offices did not shut down because they're essential. And perhaps more interestingly for us, the suits program with the U.S. DoD, they were furloughed, but then they came back and they issued the contracts and then they went back on furlough. So I guess what I'm saying is it's so important to the U.S. government that they actually took people off furlough to issue the contracts. Andrew Humphrey: Going back to the rebreather in the U.S., we had a deal a couple of years back in those big numbers. We've now got 3 customers would appear. Now it might be one customer in 3 ways. I don't know what 3 different customers -- so is the opportunity there as we kind of previously thought? And does that include the shallow water thing is that a non-U.S.? Mark Sclater: They're still refining their requirements. Some of them seem to want everything, something that does deepwater and shallow water. I think we're going to end up developing a shallow water variant. But the numbers are the same for the Navy and then Marines and Special Forces are on top of the original numbers but they are smaller. But you certainly look at 700 or 800 units, but we may not win. I think we're working with them closely and I've had a number of meetings with them so as the team. I'm sure our competitors are doing the same. Andrew Humphrey: Still down to 1 or 2 competitors? Mark Sclater: Still seems to be the same number of competitors. touch wood, we still haven't lost a bid but that could happen at some point. Unfortunately, it's a capitalist world, and we have competitors. Thank you for coming.
Operator: Good morning, ladies and gentlemen, and welcome to ICL Third Quarter 2025 Earnings Call. [Operator Instructions] This call is being recorded on Wednesday, November 12, 2025. I would now like to turn the conference over to Peggy Reilly Tharp. Please go ahead. Peggy Tharp: Thank you. Hello, everyone. I'm Peggy Reilly Tharp, Vice President of Global Investor Relations for ICL Group. I'd like to welcome you, and thank you for joining us today for our earnings conference call. This event is being webcast live on our website at icl-group.com. -- and there will be a replay available a few hours after the live call and a transcript will be available shortly thereafter. Earlier today, we filed our reports and our presentation with the securities authorities and the stock exchanges in both Israel and the United States. Those reports as well as the press release and our presentation are also available on our website. Please be sure to review the disclaimer on Slide 2 of the presentation. Our comments today will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations and are not guarantees of future performance. The company undertakes no obligation to update any information discussed on this call at any time. We will begin with a presentation by our CEO, Mr. Elad Aharonson, followed by Mr. Aviram Lahav, our CFO. After the presentation, we will open the line for a Q&A session. I'd now like to turn the call over to Elad. Elad Aharonson: Thank you, Peggy, and welcome, everyone, to our third quarter 2025 earnings call. Since our last report, we have begun to witness significant positive actions in Israel, the cease fire, the return of the hostages and the renewed focus on stability and peace. I'm sure you join us in looking forward to a new normal in the Middle East. Here at ICL, we are also looking forward to executing against our new strategic principles. In our earnings release, we included some details, and I will be sharing more information following our quarterly review. As a result, our call today will be longer than usual. I want to thank you in advance for your patience, and I look forward to your questions. Now if you please turn to Slide 3 for a brief overview of the quarter. Sales were $1.853 billion, up 6% year-over-year. For our specialties-driven businesses, sales of $1.461 billion were up 3%. Consolidated adjusted EBITDA was $398 million. This amount improved 4% year-over-year and was up 13% on a sequential basis. In the third quarter, adjusted diluted earnings per share were $0.10. Operating cash flow of $308 million improved nearly $40 million sequentially. In general, the quarter was in line with expectations. Overall prices continued to improve in the third quarter. Trends were generally consistent across the end markets we serve. However, sentiment and performance varies by region. Let's start with a review of our divisions and begin with our Industrial Products business on Slide 4. For the third quarter, sales of $295 million were down slightly year-over-year. However, EBITDA improved on an annual basis and came in at $67 million. Overall, results were in line with the first half of the year as expected. For flame retardants, performance was mixed. Sales of phosphorus-based products improved. However, bromine-based sales were impacted by continued softness in the construction end market. Other end markets remained stable, including clear brine fluid sales to the oil and gas industry. Specialty Minerals reported strong results for the third quarter with good demand from the food end markets. Turning to third quarter results for our potash division on Slide 5. Sales were $453 million with EBITDA of $169 million. Our average potash price for the third quarter was $353 per ton. This improved 6% on a sequential basis and was up nearly 20% year-over-year. Potash sales volume of 1,046,000 metric tons in the third quarter were roughly stable on an annual basis. Importantly, we saw a sequential increase in potash production. During the third quarter, we continued to maximize the profitability of our potash resources. Whenever possible, we prioritize potash supply to the best global market. For this quarter, my commentary around potash goes beyond our financial results. If you will turn to Slide 6, I wish to address a matter that has resulted in some questions from investors. As you know, last week, we signed an MOU with the state of Israel regarding the Dead Sea concession. First and foremost, we view this MOU as a positive and proactive step. It is expected to provide long-term regulatory clarity and business certainty. It also allows ICL to responsibly prepare for the conclusion of the current concession in 2030 and also positions us for the awarding of the new concession at that time. Importantly, we believe this agreement will improve the terms of the future concession and that we remain the leading candidate to be awarded the new concession and to extract the greatest economic value out of it. The situation required a careful review and choice between 2 alternatives, and I will now explain our rationale. The state made it clear that it plans to launch a competitive tender as required by law. It also insisted of the legal transfer of the assets upon expiration as stipulated by law. The law grant us the right of first offer and the right to compensation for the assets. We determined it was prudent to reach an informed upfront agreement rather than potentially face prolonged disputes or unilateral actions by the state of Israel, including by legislation affecting our rights. Now that the tender is open to all and the value has been placed on our assets, we believe the process will result in overall fairer and more attractive new concession terms. In addition, we believe we have achieved 2 critical certainties. First, we secured compensation of approximately $2.54 billion plus sold harvesting costs amounting to hundreds of millions of dollars if we were not to win the concession. We also established certainty on the timing of this payment. Without the MOU, the end of the concession might have resulted in transfer of the assets without full and immediate compensation. Also, it is important to mention that the agreements regarding the asset value are not expected to have a material impact on our financial results. Second, we avoided the possibility of extended legal proceedings, preparing for and partaking in any complex legal action would have potentially disrupted the day-to-day operations essential for managing a global company. We favored the test of upfront consensus over potentially lengthy disputes and legal proceedings. And once the terms of the future concession are published, we will review them and determine if they are economically viable. We continue to believe that ICL is the most suitable candidate to be awarded the future concession. We currently intend to participate in the process once it begins, assuming, of course, that the terms are economically viable. At ICL, we have been operating the Dead Sea site for more than 100 years. Our knowledge is far deeper than any other potential bidder. -- will possess accumulated proficiencies and practical operational experience. These and other advantages position ICL as a proven entity with the capabilities to manage this unique and complex opportunity. Now turning back to our quarterly update with a review of the Phosphate Solutions division on Slide 7. Strong quarter sales of $605 million were up 5% on an annual basis. Sales improved on higher specialty volumes and higher commodity prices. EBITDA of $134 million was in line with the prior quarter, but down slightly versus the prior year as expected. Overall, profitability was impacted by higher raw material costs, especially for sulfur. Specialty Food Phosphates delivered its strongest quarter in 2 years with continued strategy execution. In China, our YPH joint venture benefited from both higher prices and volumes and an increase in demand for battery materials. Overall, Phosphate Specialties performance was as expected with most regions remaining stable. However, softness continue in Europe, a trend that is expected to linger into the fourth quarter. This brings us to our Growing Solutions business division on Slide 8. Third quarter sales of $561 million improved 4% year-over-year. Our continued strategic focus on global specialty solutions, which have been customized for regional customers helped to drive annual and quarterly improvement. This was the case in both North America and Europe. In both regions, we saw continued solid execution of our growth plans. Sales in Asia improved in the third quarter, but rising raw material costs impacted profit. This trend is likely to extend into the fourth quarter. In Brazil, the overall market was under pressure and faced a variety of difficulties. Soy prices remained low and in some areas, there were significantly lower yields. Interest rates for farmers increased across the board as did brand. For ICL, both sales and profit decreased in Brazil. This was the result of lower volumes due in part to reduced farmer affordability, but also as raw material costs increased. Farmers are in wait-and-see mode and have deferred their decision-making. This has resulted in pressure on premium products and renewed competition in general. Overall, growing Solutions product trends in the third quarter were positive. However, farmer affordability on a global basis remained under pressure. And while continue to gain share in the market, we still have room to grow. And with that, I would like to turn the call over to Aviram for a brief financial overview before I share an update on our guidance and our new strategic principles. Aviram Lahav: Thank you, Elad, and to all of you for joining us today. Let us get started on Slide 10 with a very quick look at quarterly changes in key market metrics. On a macro basis, global inflation rates came down on average as did interest rates, so 2 positive indicators. However, global industrial production and U.S. housing starts both decreased versus the prior quarter. For fertilizers, the picture was more mixed. Both the grain price index and farmer sentiment decreased on a quarterly basis. However, farmer sentiment was up significantly year-over-year. Over the same time frame, potash and phosphate prices improved. There was also an increase in ocean freight rates, a reversal from the relatively stable trend of prior quarters. One of the other indicators we track is the price of Chinese bromine, which is relevant to industrial products and prices continue to improve in the third quarter. Durable goods are also an indicator for this business, and they picked up as well. We also follow remodeling activity as this is a good metric for both Industrial Products and Phosphate Solutions, while roughly flat on a sequential basis, it improved year-over-year. As Phosphate Specialty Solutions are an important part of the food and beverage end market, we also track these trends, which increased both through August and significantly year-over-year. If you will now turn to Slide 11 for a look at our year-over-year sales bridges. For the third quarter, sales were up $100 million or 6% with potash, Phosphate Solutions and growing Solutions all demonstrating growth. Turning to the right side of the slide, you can see $127 million benefit from higher prices this quarter, which was partially offset by lower volumes. On Slide 12, you can see our third quarter EBITDA, which improved 4% versus the prior year. Similar to sales, we saw higher prices and lower volumes. Once again, we saw a significant increase in raw material costs. Before I turn the call back over to Elad, I would like to quickly share a few highlights on Slide 13. Our balance sheet remains strong with available resources of $1.6 billion. Our net debt to adjusted EBITDA rate is at 1.4x, and we delivered operating cash flow of $308 million. Once again, we're distributing 50% of adjusted net income to our shareholders. This translates to a total dividend of $62 million and results in a trailing 12-month dividend yield of 2.8%. And with that, I would like to turn the call back over to Elad for a review of our guidance and our strategic outlook. Elad Aharonson: Thank you, Aviram. Before moving to an overview of our new strategic principles, I would ask you to turn to Slide 15 and a review of our 2025 guidance, which we are maintaining. For our specialties-driven businesses, we continue to expect EBITDA to be between $0.95 billion to $1.15 billion in 2025. For potash sales volumes, we continue to expect this amount to be between 4.3 million and 4.5 million metric tons. So until this point, we have talked about the third quarter and the Dead Sea concession. Now after 8 months as ICL's CEO, I would like to share with you how I see the company's future and where I would like to lead it in the next few years. Over that time, we see 3 megatrends taking shape, and these are shown in Slide 17. First, in a world with growing population and increasingly strained resources, the pressure for food availability is escalating. Second, many nations have realized the necessity of preserving resources in order to ensure the access to food and minerals. Third, in a world of deglobalization, geopolitics and trade wars, the importance of being a company with global reach and local customization is becoming even more critical. We see ICL as a strategic player capable of addressing these trends. On Slide 18, you can see that approximately 70% of our business addresses the issue of food availability. ICL also benefits from access to key mineral resources, mainly potash, phosphate and bromine. While potash is frequently thought of as our largest mineral, in terms of sales, it is actually a second to phosphate. And we are well represented geographically across Europe, North and South America and Asia, both in terms of sales and production. This enables us to provide global reach with local empowerment, which is especially important as more countries are turning inwards in the search for critical solutions. but we know we can do more to maximize our resources and positioning. And that is why ICL is preparing to embark on its next chapter. Over the past several months, we completed a comprehensive review of the company, and you can see an outline of this process in Slide 19. We worked with our team and other experts to examine every aspect of ICL. We began by looking back at our results over the past 5 years. While we have had some good successes, we also experienced some misplaced opportunities, which became distractions to our core businesses. Next, we looked at the future and reviewed the challenges and opportunities ahead. With so many changes on the horizon, we needed to analyze the long-term healthiness of our current businesses and work to identify future growth engines. For this exercise, we looked both within our core and at new potential segments. For each specialty business, we reviewed market momentum, including top trends, market size and the value of the business. We also analyzed our competitive position and our unique value proposition. At this point, we discovered that many of our businesses are at the core of ICL. They are stable and successful contributors, and we will work to maintain these businesses and improve their competitive position. However, our research also showed that some of our businesses might not be as good of a fit to our future. This led us to reach the key takeaways on Slide 20. First, we will expand in the markets that are within our core and where we have significant growth potential. While we carefully examine growth opportunities outside our core, we concluded that we are already participating in very attractive markets. Second, we will extract value from the markets where we are already leaders. For these businesses, we will focus on maintaining our position while driving cost and profitability. Third, we plan to examine businesses that are either not synergetic or have low potential. We will also consider redirecting our resources to focus on better aligned opportunities. This brings us to Slide 21 and our 3 strategic principles. The first is profitable growth, targeting specialty crop nutrition and Specialty Food Solutions. The second is relating to maximizing and improving the businesses that we have identified as core to ICL, and this includes our phosphate, potash and bromine resources. The third is dedicated to portfolio optimization and cost efficiency. All 3 of these principles will benefit from our willingness to embrace new technologies like AI and our deep history of innovation. When combined, this renewed strategic approach will allow ICL to shape its own future. I would now like to share more about this future and our overall strategy going forward. The review we completed helped us to identify 2 distinct businesses, which you can see on Slide 23. We believe Specialty Crop Nutrition and Specialty Food Solutions have the potential to be significant growth engines for ICL. These are 2 areas where we already have deep experience and broad exposure and the future looks bright. To help share our vision, I would like to dive a bit deeper into each principle. Let's begin with our 2 growth engines, Specialty Crop Nutrition and Specialty Food Solutions. As you know, ICL's Growing Solutions segment is already a global leader in specialty Crop Nutrition with room to grow and become even more dominant in this space. On Slide 24, you can see that in 2020, our Specialty Crop Nutrition sales were $1 billion with EBITDA of approximately $60 million. Since that time, we have expanded geographically, enhanced our operations and logistics, completed multiple acquisitions and improved our R&D efforts. As a result, in 2024, we delivered Specialty Crop Nutrition sales of $2 billion. EBITDA increased more than 3x to approximately $200 million, and we are on track to continue this trend. But our research has shown that there is still room to grow. This is due to expected changes in the market and the overall macro environment, including global food security, which I already mentioned. As you can see on Slide 25, the population has doubled since the '70s, but the land meant to feed it has remained unchanged. Thanks to increased use of specialty fertilizers, which help improve yields, there is still enough food. The importance of specialty fertilizers is expected to increase as agriculture production efficiency and sustainability remain critical to food security. Specialty crop nutrition products are the answer. As you can see in Slide 26, this market is expected to grow at 6% rate from $32 billion in 2024 to more than $45 billion in 2030. Here at ICL, we are already well positioned to capture this growth. This is thanks to our broad portfolio of global specialty solutions and our significant regional presence. And going forward, we plan to target the areas on Slide 27 with a distinct focus on global reach with local empowerment. We will target strategic acquisitions, including bolt-on opportunities to expand our product capabilities. We also intend to develop a leading position in the growing areas of biostimulants, nutrient fuel efficiency and organic and recycled products. Our efforts in these areas will be augmented by changes in our portfolio mix, which are designed to drive sales in more profitable product categories. And this work has already begun in Europe. We will also drive sustainable and profitable expansion into high-growth geographies such as India, China and Brazil. These expansions will be through targeted capital investments and will be both by acquisition and on an organic basis. Turning now to Slide 28 and our second growth engine, Specialty Food Solutions, which is part of our Phosphate Solutions segment. We are already leading the $1.5 billion phosphate food specialties market. However, this represents a small piece of the total food ingredients pie worth approximately $150 billion and growing at an expected rate of more than 6% over the next 5 years. On Slide 29, you can see how well we are positioned in the functional food ingredients market. However, we plan to move beyond the relatively narrow field of phosphate-based ingredients and to extend our reach into new target markets. As you know, ICL is already participants in many food end markets. In 2024, our Specialty Food Solutions sales totaled more than $0.5 billion. We are confident that we have the assets and the capabilities to expand deeper into the robust food ingredients market. However, we want to be sure we do so in focused, strategic and successful manner. As a result, we analyzed a wide array of possibilities and looked at each based on both attractiveness in general and fit with ICL. These efforts led to our focus on 4 distinct functional food ingredients. These markets will provide us with exposure to approximately $35 billion in value and expected average 5-year growth rate of approximately 6%. On Slide 30, you can see that we are well positioned to capture the expected growth in these markets. We will be able to leverage our existing global footprint. This includes production, innovation and sales locations across key and growing regions. Our specialty food solutions already cater to 7 out of the top 10 biggest global food companies, as shown on Slide 31. This is in addition to more than 2,000 other customers, and all of them demand quality and consistency from their partners. When it comes to Specialty Food solutions, ICL possess a unique combination of technical functionalities, robust infrastructure and category expertise shown on Slide 32. We expect to leverage these strengths as we expand deeper into functional food ingredients. To grow in these markets, we intend to focus on the areas where we believe we can reach a market leadership position. On Slide 33, you can see that this includes preservatives and leavening agents, among others. As part of these efforts, we will aggressively target acquisitions and other opportunities that leverage our existing assets. This includes our people, global footprint, customer base and Sterling reputation. Over the next 5 years, we are looking for organic growth rate of more than 6%. This growth will complement our strategic acquisitions. We expect to achieve this goal through solutions that provide existing customers and new food and beverage companies with bundled solutions. This overall approach to profitable growth by targeting specialty crop nutrition and specialty food solutions will allow us to significantly advance our business while reducing risk. It enables us to drive expansion while still staying close to our core businesses. which brings us to our next principle on Slide 34, maximizing our core businesses. This includes our potash segment, our Industrial Products segment and our commodity phosphate operations. Let us first start with potash on Slide 35. Earlier, we talked about the concession, but I want to reiterate that we are preparing to win the next Dead Sea concession. This is part of our ongoing strategy as we continue to believe ICL is the most suitable candidate. In parallel, we will continue to work on operational excellence and to maintain our competitive cost position. At the Dead Sea, we intend to return production rates to pre-war levels. In Spain, we expect to increase production to all-time highs as the turnaround at this location continues. The second of our core businesses found on Slide 36 is our Industrial Products segment, a stable and profitable part of ICL. We already serve as a global market leader in bromine. We intend to maintain that position and to continue developing new bromine and flame retardant applications. This is in addition to meeting customer demand from the various specialty end markets we serve. Our third core business is the nonfood-related portion of our Phosphate Solutions segment, which is shown on Slide 37. This includes our stable and profitable industrial phosphate solutions, which are part of a growing market with strong demand. Not only is our Phosphate Solutions segment fully integrated, which provides cost advantages, we are also the only Western manufacturer operating in China. Our production there is interchangeable and serves both our growing solutions business and our phosphate commodities and specialties customers. I would like now to turn to Slide 39 and our final principle, optimization and efficiency. As part of this work, we intend to optimize our efforts and focus our resources on the opportunities best aligned with our core businesses. This will result in the examination of some businesses that have fewer synergies and lower potential. As part of our portfolio optimization efforts, we have shifted our approach to LFP battery materials shown on Slide 40. While we will remain a provider of raw materials to battery customers, we will not be moving further downstream into cathode active materials. This means we will be discontinuing our planned global LFP expansion, and this includes construction of the previously announced project in St. Louis, U.S. and in Spain. After a careful review of shifting external dynamics, it became apparent that this was the best course of action for ICL. With increasing level of investments on one hand, lower-than-expected prices on the other hand, proceeding with our LFP battery materials projects would have embedded our ability to develop other businesses. So at this time, we believe directing our most significant investments into our 2 growth engines will provide greater shareholder value. In addition to optimization, we also plan to drive efficiency and increase productivity across our entire business. As you can see in Slide 41, we expect to improve efficiency by transforming ICL into an AI-driven organization. AI will be embedded into the core of our decisions, processes and products. We will not just be adopting isolated AI tools, we will rethinking how ICL innovates, operates and delivers value. We also expect to use AI to help drive the significant operational efficiencies shown on Slide 42. Our key focus areas and targeted initiatives encompass operations and maintenance, including labor costs, logistics, supply chain and procurement and product line optimization. Before we begin the Q&A, I would like to turn to Slide 43 and review our 3 principles one final time. The first is profitable growth, targeting specialty Crop Nutrition and Specialty Food Solutions. The second is relating to maximizing and improving the businesses we have identified as core to ICL. The third is dedicated to portfolio optimization and cost efficiency. As you can see on Slide 44, at ICL, we are moving beyond our legacy and are now actively shaping our future. We have a clear and resilient strategy focused on growth, productivity and efficiency. We have aligned with global trends and are guided by a focused strategy, and we are ready to turn today's opportunities into sustainable and profitable growth for the future. Before we move to Q&A, I would like to thank all of our employees around the world for another good quarter. As employees of ICL, we are more than just a company. We are a global community connected by purpose and grounded in the values of humunity, respect, resilience and responsibility. And with that, I would like to turn the call back over to the operator for Q&A. Operator: [Operator Instructions] Our first question comes from the line of Ben Theurer with Barclays. Benjamin Theurer: So obviously, a lot to unpack here. And I'd like to pick up on some of these strategic highlights that you've presented over the last couple of minutes and really want to understand a little bit what you're seeing in terms of future potential in those 2 major areas, thinking of especially Crop Nutrition and Food Solutions. So starting off on Crop Nutrition, and you've nicely highlighted this, how you've achieved bigger -- basically a doubling in sales, but more than a tripling on EBITDA. So the margin still looks though below what some of the traditional businesses or the legacy businesses would be. So I just want to understand how you think about that business over time from a margin contribution as you evolve and grow that on Specialty Crop Nutrition. And then on Food Solutions, you've highlighted that you've talked about you want to expand beyond what might be phosphate-based. So can you help us maybe understand a little bit if that's more an M&A-driven idea, if that's a partnership? What are the things that you can do in order to expand beyond what is phosphate-based solutions? Those were my 2 main questions. Elad Aharonson: Thank you, Ben. Great questions. And let me answer the first one first. So as for Specialty Crop Nutrition, so the potential is huge, and I do agree with you that even though we tripled the EBITDA in the last few years, still there is room for improvement. And in that respect, what we intend to do is, first, there are some R&D efforts that we invested in, in the last 2, 3 years that will bring fruits in the coming 2, 3 years. It takes time. And that brings some very unique solutions in which -- of which we can take premium prices that are really unique. But on top of it, there is another -- another effort, and that's about the portfolio mix. When we are talking about specialty fertilizers or specialty crop nutrition, it's not everything the same. And within this scale of different portfolio products, there are products with much better profitability like biostimulants, control release fertilizer and more unique stuff. On the other hand, there are less profitable products. I'll give you one example. That's a product based on polysulphate from Boulby mine in the U.K. And what we are doing now, and we start this journey in Europe already and we saw the results in Q3, but it's just the beginning of the journey is to change this to switch the mix of the portfolio to more profitable products. And I believe it will bring us to EBITDA mid-double digit. And that's our target in that respect on top of the growth itself, which will come from organic growth, but also M&A. So that's about the specialty crop nutrition. As for the food ingredients, this is a different story. We have a business of $500 million, give or take nowadays within the functional food ingredients. However, we are very focused on a subsegment of this, which is the phosphate-based solution. And we saw that very similar, very close by, we have some bigger potential market of $35 billion, which is the functional food ingredients, which are not only phosphate and that's what we are targeting. It will be based on 2 parallel efforts. One, organic growth in our labs, in our R&D labs and with our own workforce, we can do much better once we unlock this other market. But on top of it, for sure, we are going for acquisitions. Some of them will be more strategic, some of them will be bolt-on, but it will not be only organic growth. It will be also in nonorganic or M&A-based growth. And we are open also for partnerships. Aviram Lahav: If I may, Ben I would like to add one thing that from time to time in meetings, I pointed out, and it's quite strange that strange or not strange that in the specialty fertilizers world, the country, for instance, the crop protection world, there is no global powerhouse. -- is what we see is an opportunity to build a global powerhouse in specialty fertilizer. Now the analysis can be that such a global strong body did not grow because maybe regulatory was not harsh at this stage. But if you think about it over time and the capability of such a global powerhouse to take things from one region to another, from one country to another to develop centrally portfolio and then disseminate it in various countries, I believe that you can see the potential that ICL from this point onwards will become significantly bigger. It can go from strength to strength. I think that if you look in the future, and it's not quarter-over-quarter, but a little bit deeper into the future. there should be and there will be a very central point for such a body. That's something that strategically I would point out, and I think it's worthwhile. That's interesting. On the food, I have [indiscernible]. Benjamin Theurer: Okay. Very clear. And then just one real quick 1 as we look into, I mean, obviously, you're kind of like on track delivering everything and you've reiterated the guidance. But you've highlighted a few things, particularly in South America, pharma sentiment affordability. So I just want to understand how much might have been just more of a timing issue? What not has happened? May have shifted into the fourth Q? And what is really underlying on a sentiment base, just the availability of credit. How challenging is the situation right now in South America? Aviram Lahav: I think when you say South America, you probably mean that more specific in Brazil, even though South America as a whole, in Argentina, there's a different story going on right now. Other countries are in different shape, but specifically in Brazil, I believe at this stage is quite a unique situation where, obviously, a very, very good and successful agricultural country, has a few factors that are leading hard on it. The credit side is significant, credit available to farmers and the chain, as they call it, is tight, the ability to export to China will probably be hampered to a degree by what is happening between the U.S. and China, specifically talking about. So the interest rate, the real interest rate is being kept very high interalia because the Bank of Brazil, who is really independent, believe it or not, is at war with Lula and especially as they enter an election year. And all these things together lead us, and I think what's important to say that I think are a very responsible company, and we are working on this constantly. And yes, we could have sold significantly more if we had more propensity to let further credit evolve. We are taking the market that we believe is the right one. We are examining all the time. And yes, to a degree, there's some. However, I do believe that over time this will probably be resolved. Not sure Q4 is a cue that is happened. But definitely, going forward, I think it will be because Brazil has been and will be the #1 country in the world for agriculture. There's no question about that. So I think that's probably the essence. Operator: And the next question comes from the line of Laurence Alexander with Jefferies. Kevin Estok: This is Kevin Estok on for Laurence. So thank you for really diving into your top priorities in specialty crop nutrition, Food Solutions. I guess my first question is sort of in the same vein as one of the -- one aspect of the previous analyst. And I guess you mentioned biostimulants, but I was wondering if you could share what else was in your pipeline currently? And maybe how much of your assumptions are around sort of acquiring incremental capabilities? And maybe how ICL was positioning itself against its competitors in these spaces. Elad Aharonson: Okay. So as you probably know, in the last few years, we already acquired 5 companies in this segment, the growing solutions, specialty fertilizers. And we intend to acquire more. One effort is to expand to some new territories and the other one is to put our hand on some new technology, which is obvious. As for the portfolio itself, I already mentioned, we are moving towards biostimulants, both botanic-based biostimulants and microbial based. So this is one element. The other one is nutrient use efficiency. So we are, I think, leader in controlled release fertilizers. Now we are bringing the new generation biodegradable controlled release fertilizers and also in the liquid and water soluble fertilizers that includes biostimulants, this is another area. There are some other developments that from commercial perspective, I would not like to disclose at this point, but we are working on. We have a very strong R&D teams across the globe, and we'll bring some news in the near future. Again, the portfolio mix will be changed and the profitability, the gross profit of this new portfolio will be much better than the existing one. It will not be made in one time. It will take time, but we are on our way. Kevin Estok: Got it. And just for my second question is basically on some of the weaker end markets, industrial and construction. I guess I was just wondering if you were seeing any green shoots there yet. And maybe what your thoughts were around, I guess, what it takes to turn the bulk end market? Aviram Lahav: Yes. It's Aviram. I think that there's quite a segregation between the different markets. I think in the electronics side, we are seeing better trends. First of all, you see in the end of the day, we switched obviously to the value or volume, and we see that the prices quite significantly better. In China, China is the main driver. So the electronics, I think it's turned the corner. It's not as high as it was in the days of the corona, but it's better, and this is -- we are actually enjoying this side. On the housing, I believe that there's a long way to go. First of all, housing is much more geographic. In the U.S., I think you know the market very well. It's is okay, but not that great. In China, on the other hand, there are most significant issues. Again, they come from too much that was done at the time and a lot of credit stories that are there. So this is a market which will probably come around slower, but all in, if you look at how the division is performing, it is performing well. You can see the results and the shift to value and really leading the market is nice for us. Operator: And the next question comes from Joel Jackson with BMO Capital Markets. Joel Jackson: I'll ask a few questions. Maybe first, short some -- maybe just first, a short-term question. Can you talk about your major businesses here in Q4 and talk about how each 1 is faring versus Q3 or whatever you want to say. Aviram Lahav: Look, I think I'll take it for a minute, but Elad obviously, will expand and give you his thoughts which are important. But look, we are confirming our guidance that has a lot after caretaking. We are there. We see in Q4 will probably be okay. But as now, there's the logic and continuation of what we're seeing right now, but I think that on a trajectory. I don't see something major changing. Okay. Elad Aharonson: Joel, I'll say things that maybe obviously, potash prices, keep the same prices, give or take. Phosphate prices also remain same level, relatively high, good same level. However, sulfur cost is going up. So margin will be affected by that. Bromine prices a bit higher. I think right now, it's about 3,600 something like that in China. So prices will remain relatively strong. However, cost mainly of sulfur, it's an issue. And the rest, I don't see any drama. Joel Jackson: That's for sure. And I guess the potash business is pretty stable. Pricing was down, volume pretty stable, margin stable? Is that fair for Q4? Elad Aharonson: Yes. Yes. We made progress on potash production quantities in the last few months. We are very happy with the improvement. It's like post war improvement, I would say. But by the way, not only in Israel, in Spain, regardless of or no wars in Spain as far as I know, but still, we see an improvement in new product in Spain. So quantities on production are going up, which is an upside. Joel Jackson: Okay. And then on the new strategy, which I have a lot of elements of strategies that has been presented by last decades of CEOs and CFOs in corporates, what tangibly in 2026, should we expect to see from ICL to start hitting your milestones for your strategic -- new strategic priorities? What tangible milestones should we see in 2026? Elad Aharonson: So let me go back to the first part of your sentence or question. So it's not exactly the same strategy. When it comes to specialty fertilizers, I agree with you, and we are going to accelerate, but we are on track. And as we showed, we already doubled the top line and triple the EBITDA and by improving the mix and some additional acquisitions, I think we'll get better. On the other hand, when it comes to specialty food solutions, the functional ingredients, this is a different strategy. In the past, it wasn't a growth engine for the company. We take now a different direction. We are going to expand it. We are going to accelerate the growth. We believe in this segment. And again, the change is that we are not only looking it as an outlet for phosphate and staying at the phosphate-based solutions, we are going to address the bigger market of the food ingredients of the -- sorry, functional food ingredients, which is much bigger market, more than 20x bigger than the phosphate-based solution, which is part of it. And that will be done, as I mentioned, also by acquisitions I hope we'll have some news about it in the coming few quarters. So that could be a change. On the other hand, we changed or the other part of the strategy that was about LFP cathode material. Yes, we are going to remain as a raw material provider to the battery industry, but we are not going to go one step downstream and get into this huge investments in the dynamic of the current market. So in that respect, we changed the direction. Joel Jackson: Thank you for correcting me on some of that. I appreciate it. Finally, obviously, we all saw what happened last week with the MOU. You've laid out the transparency of it now and can you talk about what do you think the market has gotten wrong on ICL last week as this news came out? Elad Aharonson: Yes. That's a great point. I'll say, honestly, I think it's -- we have 2 dimensions here. One is the MOU itself. Is it good or bad? I can elaborate. I already talked about it during the presentation. I think it's good and positive step to ICL, more certainty, more clarity. We know what we get. And most important, I think it doesn't hurt our chances to be the next concession owner. But on the other side, we'll get better terms for the next concession better than the option that we were source or the only player on the field. And I can elaborate, but I know very well the dynamic with the state of Israel. If we were the only one to play in this game, the terms would have been much, much more severe. So that's -- in that respect, it's a good sign. I think part of the surprise was because people realized for the first time that the concession is going to end in 2030. Now everyone knows it or knew it, but it becomes a little bit more real. Still, I think with all the caveats, I think ICL has great chances to be the next concession owner. But not less important, I think this step will make sure that the economical terms will be much more reasonable than what it could have been. Aviram Lahav: Let me, if I may, just to add about the value of the assets. In the end of the day, we at replacement costs believed and believe that the value of the assets is obviously as high as we noted. And of course, we always said that there are different methods of calculation, et cetera, et cetera. . But the perception in the market was that this value is so high that it will basically deter every new bidder. Now that in itself is, in a way, is a semi-cooked idea because in the end, as Elad said, okay, I suppose that there is no other bidder, and we are the sole game in town what would be the conditions of the new concession. And that is something that I fully agree it was sort of sidetracked and not taken into account. Now I'm saying again, the value of the assets, we believe that replacement obviously is much higher, but we do get an insurance policy that if we walk away, by the way, if we want the concession has a very, very high likelihood than we would have, we will want it to know if it makes sense. What we have now is certainly that if 1 reason or another, we do not have it, then we have a minimum agreed upon threshold, which we will get and we will see the money at the end of the current concession. This could have been very different otherwise. So when you put it all, we actually were very, very positive, very positive about this arrangement. The market, on the other hand, as you say, for differently, maybe didn't factor it in, maybe was deterred by the difference in the price between the $3 billion and the $6 billion, and it can be quite a lot of the things put together. I think it was, to a large extent, laterite tell that indeed, obviously, it's 4 years a quarter from now, but still there is an event at the end of March 2030. Probably that's a constant. Operator: And I'm showing no further questions at this time. I would like to turn it back to for Elad Aharonson closing remarks. Elad Aharonson: Okay. So again, the way we see it, a good quarter for ICL and also, we wanted to spend some time with you today give our feedback on the MOU about the concession and mainly on at least the highlights of the strategy. So thank you for taking the time. and we are in other channels for more questions. Thank you very much. And maybe the last sentence, I'd like to thank very much the ICL employees all across the world, for dedicated work and very nice achievements. So thank you all the ICL employees. And thank you all, and see you next time. Operator: Thank you. And this concludes today's conference call. Thank you all for joining. You may now disconnect.