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White House National Economic Council Director Kevin Hassett says the Fed is sending mixed signals and warns recent decisions could make the Central Bank look partisan.
White House National Economic Council Director Kevin Hassett says the Fed is sending mixed signals and warns recent decisions could make the Central Bank look partisan.
White House National Economic Council Director Kevin Hassett says the Fed is sending mixed signals and warns recent decisions could make the Central Bank look partisan.
White House National Economic Council Director Kevin Hassett says the Fed is sending mixed signals and warns recent decisions could make the Central Bank look partisan.
Operator: Good day, everyone, and thank you for standing by. Welcome to the Quebecor Inc. financial results for the third quarter 2025 conference call. I would now like to introduce Hugues Simard, Chief Financial Officer of Quebecor Inc. Please go ahead. Hugues Simard: Ladies and gentlemen, welcome to this Quebecor conference call. My name is Hugues Simard. I'm the CFO. And joining me to discuss our financial and operating results for the third quarter of 2025 is Pierre Karl Peladeau, our President and Chief Executive Officer. Anyone unable to attend the conference call will be able to access the recorded version by logging on to the webcast available on Quebecor's website until January 5. As usual, I also want to inform you that certain statements made on the call today may be considered forward-looking, and we would refer you to the risk factors outlined in today's press release and reports filed by the corporation with the regulatory authorities. Let me now turn the floor to Pierre Karl. Pierre Péladeau: [Foreign Language] and good morning, everyone. So more than 15 years ago, recognizing a huge opportunity in Quebec and across Canada, Quebecor set out on a growth strategy based on wireless. First, launching as an MVNO, then building our own network and further acquiring Freedom Mobile. We have never wavered in our resolve or direction. We invested wisely and established ourselves as a better alternative to the big 3, a solid market disruptor with the best growth momentum and the strongest balance sheet in the Canadian telecom industry. As proof that our strategy is paying off, we continue to outperform our competitors, and I'm proud to report our strongest quarterly wireless service revenue growth since the acquisition of Freedom Mobile. As well as an impressive loading performance of 114,000 net addition in the quarter with more than 323,000 new lines year-over-year despite a generally softer market. Collectively, Videotron, Freedom and Fizz now have over 4,328,000 mobile active lines, a significant milestone achieved in quite a short time in a competitive market. Each of our 3 brands continue to improve its performance quarter after quarter, resonating more and more with Canadians across the country with innovative and affordable product and services. We have created a healthy competitive environment, giving Canadians more choice, lower prices and a better experience, all the while improving our profitability, growing cash flow and continuing to reduce our leverage to maintain the lowest ratio in the Canadian telecom industry. We will spare no effort as we press on with our strategy of sustainable, profitable wireless market share growth. I will now review our operational results, starting with our telecom segment. So our telecom segment continued to deliver strong operational and financial results both in wireless and broadband, reflecting the disciplined execution of our growth initiatives, the strength of our brand portfolio, and our commitment to provide innovative and reliable services to our customers. Our service revenues are up for a second consecutive quarter at 2%, fueled by a 6.4% increase in mobile and 1.1% in Internet. Our mobile service revenue grew by $27 million in the quarter, surpassing our Q2 performance and our best since we completed the integration cycle of Freedom Mobile results. This results from our adding 323,000 new net line over the last year despite the Canadian market affected by lower immigration levels and organic growth, but also from our effective pricing strategy with a balanced and cohesive positioning of our brand. Our consolidated mobile ARPU continued to improve its performance, recording its best since the acquisition of Freedom Mobile, which bodes well for the next few quarters despite a market that remains unpredictable and highly competitive, especially in Quebec where discounting is comparatively and, in our view, irrationally heavy. At this point, we expect current market conditions to continue through the upcoming holiday season's promotional period, but we intend to maintain our disciplined approach, focusing on the quality of our products while continuing to rapidly improve our network. Specifically, on ARPU, we are very pleased with our second sequential quarterly increase, reaching $0.35 and $0.05 compared to $0.34 and $0.76 last quarter, a $0.29 gained in the 3 months. Our year-over-year performance continued to improve with a $0.66 decrease this quarter compared to a drop of $2.30 in Q2 as compared to the same period last year. Our effective mitigation of the dilutive impact of the prepaid services of Fizz and Freedom was an important contributor. As you will have noticed, we adjusted our wireless subscriber base by 51,000 to eliminate 0 revenue accounts, which translated into an approximately $0.40 ARPU pickup. To be completely transparent and contrary to our competitors, we adjusted our ARPU numbers retroactively. With our ever-improving network quality and stellar customer service, more and more Canadians enjoy the richness and peace of mind of our plans, which continues to strengthen our market position and share. Freedom's marketing plans are honest and transparent without any fake employee purchase program, new customers only or B2B offers. We have been upfront with all Canadians since day 1, offering them better services at everyday best prices. Canadians have clearly embraced our approach as evidenced by our significant churn improvement, ARPU and market share growth. An internal survey even reveals that the global satisfaction score of Freedom customers approaches that of Videotron. We are very proud to have successfully transposed the key contributors of our great success in our own market to the other regions of Canada. In terms of new adds, as I alluded to at the beginning of my address, we delivered 114,000 new net lines to our mobile customer base in the third quarter, a strong growth considering the softer market this year. This performance is also attributable to our effective retention strategy, which kept our consolidated churn among top of the industry and thus helped to defend Videotron's solid market position in Quebec and to continue to improve Freedom performance. In wireline, our service revenues continue to improve as we recorded for a second consecutive quarter our lowest decline in year-over-year. Fueled by Internet revenue growth of $3.3 million and net additions of 10,500 in the quarter, these results are very encouraging as we are only still scratching the surface of the opportunity with new services like Freedom home Internet and Fizz TV. We are also counting on the expansion of our Helix technology-based Internet and television services in new territories where they will complement our wireless services already available. Since the end of the second quarter of 2025, Videotron has announced the expanded coverage of more than 180,000 new households in Drummondville, Magog, Rimouski, Saint-Hyacinthe, Trois-Rivieres, Salaberry-de-Valleyfield and Huntingdon, as well as in many cities in Saguenay–Lac Saint-Jean region. Customers will now be able to benefit from a full complement of telecommunication services in competitive packages. We intend to enter these new markets with a disciplined pricing strategy in line with our pricing elsewhere in Quebec, counting on state-of-the-art Helix solutions and our second to none client experience to make ourselves a strong contenders in this territory. In addition to our wireline footprint, we are also expanding our wireless coverage and services areas in the Haute-Mauricie region in partnership with Ecotel and with the support of the Quebec government. This will significantly improve mobile communications in this region of Quebec, making it possible for more than 10,000 residents to subscribe to Videotron mobile services and enhancing connectivity along several highways. Freedom Mobile is also continuing to increase its service coverage now in the Ontario region of Chatham-Kent, where the resident of this large and growing region can now access our fast and reliable wireless network. These expansions reflect our continued progress in delivering on our ongoing commitment to always give our customers more with state-of-the-art advanced technology. This is but one reason why Videotron was ranked as Quebecor's preferred telecommunication provider in a recent Leger survey. Videotron stands out for its remarkable results, confirming its position as an undisputed leader in customer service among telecommunication providers in Quebec, while being recognized as the most reliable and trustworthy telecommunication company in Quebec. Turning now to our Media segment. TVA Group generated EBITDA of $18.5 million in the third quarter of 2025, an increase of $6 million compared to the same period in 2024. This favorable variance is primarily attributable to the impact of streamlining initiatives undertaken over the past 2 years as well as certain favorable nonrecurring retroactive adjustments. These measures are helping, but are in no way sufficient, to mitigate the impact of the structural crisis threatening the sustainability of Quebec television industry, particularly due to the accelerated decline in advertising revenues compounded by the negative impact on the absence of foreign blockbusters in MELS' studios. Having acted recently and respondly over the years by implementing numerous measures and a number of major restructuring plans to address the crisis, TVA Group has done its part. It is high time for our government to take the necessary action on their end. After countless advocacy efforts, hearings and meetings with successive CRTC chairpersons, Canadian heritage ministers and Quebec culture ministers over the years, we can only repeat yet again that we urgently need real action and long-term solution to protect our industry. It was particularly disappointing that the federal government in its budget deposited this Tuesday completely ignored our industry and turned a blind eye to the crisis that is hitting television broadcasting so hard. There is no tax credit for television journalism, no tax incentive for advertising in Quebec and Canadian media, and no information about when the digital services tax already paid by private broadcaster will be refunded. Furthermore, CBC/Radio-Canada annual funding had been increased by $150 million without any requirement to eliminate advertising on its platform and to curb its unfair commercial competition with Canada private television broadcasters. Regrettably, this new government has missed an opportunity to support an industry facing ever-growing challenges and job losses at an alarming rate. Regarding the Quebec government, we reiterate that it must quickly introduce concrete measures to implement the recommendations in the report of its task force of the future of Quebec audiovisual industry filed in October 2025. I will now let Hugues review our detailed financial results. Hugues Simard: [Foreign Language] On a consolidated basis in the third quarter of 2025, Quebecor recorded revenues of $1.4 billion, up 1%, EBITDA of $628 million, up $34 million or 6%, resulting from improvements across all of the corporation's business segments. Cash flows from operating activities increased $36 million to $582 million or 7% compared to the same quarter last year. In our telecom segment, total revenues grew by 1% or $13 million, a first favorable variance since Q1 of last year when we completed the integration cycle of Freedom Mobile results. This positive delivery is largely attributable to our strongest mobile service revenue growth of 6.4% fueled by a significant customer growth, but also by the favorable improvement of our mobile ARPU in the last quarter, resulting from strategic market positioning of our multiple brands and our pricing strategies. This quarter, mobile revenues were offset by our lowest wireline services revenue declines in more than a year, resulting from our effective strategies and mitigating the impact of organic declines of these services. Combined with rigorous cost management initiatives, our EBITDA reached $602.5 million, increasing by $16.6 million or 2.8%, our highest EBITDA growth since Q1 2024. As a result, our EBITDA margin improved by 0.8%, ending at 49.5% compared to 48.7% in the same period last year. Telecom CapEx spending was up by $13 million in the quarter, regulating the timing difference explained in Q2 for wireless equipment deliveries required for our 5G and 5G-plus network expansions and subscriber equipment rentals. Even with that regulation, we still anticipate higher investment levels in the last quarter to stay on track with our objectives, mainly expanding and improving our mobile network. Accounting for these investments, our quarterly adjusted cash flows from operations increased $3 million or almost 1% due to our solid EBITDA growth. Our Media segment recorded revenues of $152 million or 2% decrease, an EBITDA of $23 million, a $9 million favorable variance compared to the same quarter last year. Our Sports and Entertainment segment revenues increased by 7% to $68 million, and EBITDA was up by 28% to $15 million. We reported a net income attributable to shareholders of $236 million in the quarter or $1.03 per share compared to a net income of $189 million or $0.81 per share reported in the same quarter last year. Adjusted net income, excluding unusual items and losses on valuation of financial instruments came in at $242 million or $1.05 per share compared to an adjusted net income of $192 million or $0.82 per share in the same quarter last year. For the first 9 months, Quebecor's revenues were down by 0.3% to $4.1 billion, and EBITDA was up by $4 million to $1.8 billion, partly impacted by a $44 million increase in stock-based compensation charges. Excluding this factor, EBITDA would have increased by $48 million or 3%. EBITDA from our telecom segment grew 2%, an improvement of $38 million over last year, excluding the impact of stock-based compensation. At the end of the quarter, Quebecor's net debt-to-EBITDA ratio decreased to 3.03x, still the lowest of all our telecom competitors in Canada. We remain committed to further deleveraging in the coming quarters and intend to continue operating in this low 3 range, consistent with our current financial strategy. Our balance sheet remains very strong with available liquidity of over $1 billion at the end of the third quarter. I would also like to highlight the success of our recent refinancing where Videotron issued $800 million of senior notes yielding 3.95%. This demand -- the high demand from investors, it was very strong with a book more than 3x oversubscribed, and we were able to negotiate very favorable conditions, most notably the lowest 7-year credit spread seen in the Canadian telecommunications sector, a convincing testament to the strength of our financial foundation, our disciplined management and our growth prospects. The net proceeds will be used for the redemption of our -- or Videotron's rather 5.125% senior notes maturing on April 15, 2027. During the first 9 months of the year, we also purchased and canceled 3.7 million Class B shares for a total investment of $140 million. We thank you for your attention, and we'll now open the lines for your questions. Operator: [Operator Instructions] First, we will hear from Maher Yaghi at Scotiabank bank. Maher Yaghi: [Foreign Language] I would like to first ask you the strong performance in wireless, you mentioned that it came from lower churn and also improved gross loading. Can you maybe dissect a little bit more what drove that strong performance in the quarter? Q3 usually is a strong quarter for Freedom, but how are you thinking about Q4 so far? And which markets -- which submarkets in wireless you still haven't been able to gain market share from that you think over time could provide you more growth down the line? Hugues Simard: Thanks, Maher. So in wireless, yes, I mean, as you said yourself, the Q3 and the back-to-school period is -- has historically been a very strong quarter for us. These are the target markets that we -- that particularly resonate well with us. And again, even though organically and in terms of immigration and all the things we've talked about, the market is a little softer, we've been able to maintain our performance. And why have we been able to maintain our performance? It is because we are increasingly resonating with other cohorts whereas the freedom of the past used to be very strong with first-time buyers and immigrants and people looking for a deal or the cheapest deal. We are now able to attract and retain customers that are willing to -- they want a bit more, that want better performance. We have an increasing number of 5G-plus customers because we have been expanding the access to 5G-plus to many more of our customers. Fizz is also continuing to perform increasingly well quarter after quarter, which should not be a surprise because you will remember us telling you that Fizz was created with a very specific objective -- with very specific objectives in mind, and that was to go after and to target the younger, more urban, more digital savvy generations, which are representing the future. And I think we are showing that we're better than our competitors at reaching out to these people, to these customers. In terms of going forward in the following quarters, I think you will see if you look back that we are very -- not stable, but very consistent in our penetration, in our growth. We are continuing to retain our customers more longer, so churn is down. Our ARPU is going up. So this is really the story in this one. Look at our wireless service revenues, $27 million more in the quarter, which flows down to margin with -- considering our very disciplined cost containment. That's basically how I would call the story of -- the wireless story of the quarter, which bodes, as we said in our -- as Pierre Karl said in his note, bodes very well for the historically competitive Q4, where we intend to continue to perform very well. Pierre Péladeau: That's a pretty good answer, ain't it? Maher Yaghi: It's a very good story for sure, very good story. Maybe just one… Pierre Péladeau: May I add just one thing, is -- well, we all know that when Freedom was under the previous ownership for whatever reason, I mean, historically, the weakness was the network, the quality of the network. And I think it's important to mention that we are investing in the network. And we've been always Videotron an enterprise culture, considering that we need to deliver the best product in our available customers. So we inherit a good brand and certainly also some very good people in this organization. But now I think that we've been doing what is appropriate to improve our product by investing in the network. We will continue to do so and we will continue to do it on a disciplined basis as we've been doing, obviously, in Quebec for the last about almost 15 years now. Maher Yaghi: Yes. And maybe just to touch on the improvement in the cable segment revenue growth rate with the pricing that you passed last December starting to really kick in. But I'm trying to gauge that with Karl's -- your prepared remarks. You specifically called out the very aggressive pricing competition happening in Montreal and Quebec in general on the combo plans, very low prices. Is it easy to pass another price increase this year like you did last year amidst the competition that we're seeing right now in the marketplace? Pierre Péladeau: Well, obviously, you can easily expect that you're going to have an answer for that. But I'll tell you, we're used to that. We've been always in the same kind of environment. So there is nothing new for us. And what we're doing to make sure that we're for this situation is by being as much as disciplined as possible, watching our core cost. And we've always been in that kind of business and we will continue to do so. Historically, pricing between Quebec and all the other areas in Canada for whatever product, it was the same for cable, it's the same for wireless had been lower. So is our competitor, our main competitor, the blue guys have been trying to get market share by having lower prices than elsewhere. They certainly, in the past, being able to benefit from a higher margin elsewhere. Are they using this to compete even more aggressively in Quebec? It's not impossible. But they can do whatever they want. At the end of the day, we're going to continue to be the preferred supplier of Quebecers for many reasons, one of which is that we're offering better customer service and our products are of higher quality. Operator: The next question will be from Stephanie Price at CIBC. Sam Schmidt: It's Sam Schmidt on for Stephanie Price. I wanted to ask a question about ARPU. The declines have been improving sequentially for the last few quarters. How do you think about the timeline to return to positive ARPU growth? And it was strong in this quarter. Any onetime items to call out there? Hugues Simard: I'm sorry, I missed your first name. You're replacing Stephanie, right? Sam Schmidt: Yes. Sorry, it's Sam Schmidt on for Stephanie Price. My first question was just around the ARPU declines that have been improving sequentially for the last few quarters and how you're thinking about a timeline to return to ARPU growth. Hugues Simard: Yes. It's -- you saw our performance. We're very confident. ARPU is turning the corner, and I would expect that corner to be very, very soon. Sam Schmidt: That's helpful. And then just one more for me on mobile equipment revenues. How are you thinking about device financing heading into Black Friday? Hugues Simard: With discipline, how would I say, continued disciplined, reasonable offers. We've said this in the past that Black Friday is a time of the year where we can easily go crazy and lose our shirt, as we say, on equipment device -- on equipment or device subsidies. And we certainly do not intend to do that and to continue to be, as I said, disciplined and reasonable in our equipment offers for the rest of the year. Operator: Next question will be from Matthew Griffiths at Bank of America. Matthew Griffiths: Just on churn, firstly, if I could. It seems as though across the industry, everyone is reporting churn being lower this quarter on a year-over-year basis. I was wondering if you had any comments about how much of your churn benefit in the quarter is just kind of that halo effect of industry churn falling. Or were there things that you were doing that you kind of can see that there's -- that would have been responsible on your side for reducing the churn? And then secondly, if you can make any comments on the kind of decision and how you evaluate the network expansion question. Specifically, you mentioned this quarter expanding the wireless network into the Chatham-Kent area. So if you could share kind of just how you evaluate it, how many more opportunities you see for this going forward, it would just be helpful on our side. Hugues Simard: Matt, thanks for your question, Matt. On churn first, probably a little bit of both, to be fair. Our churn, as you know, started from very high with Freedom, the highest in the industry by far, and is now fairly equal to the lowest of the industry. And that was mostly due to the improvements to our network, its performance, its coverage, its reliability, roaming packages, marketing agility, customer experience. I mean it's a -- who knows -- and bundling opportunities. There are so many factors that collectively contributed to this lowering or this decrease in our churn. Now that it has reached, as I said, a very competitive level, then obviously, it becomes naturally a little bit more affected or more influenced by maybe more market-related metrics. And it is our goal to maintain that churn through the various improvements. I mean we're nowhere done. I mean it's not as if we're at the end of the -- of our plan here in terms of improving everything that I've talked about and going after different cohorts, as we said earlier. And as our experience keeps getting better with our customers, we're very confident on the churn level that we have not only reached the industry's best, but that we will maintain the industry's best. Of course, there are the investments that Pierre Karl talked about that will continue. We're taking this very seriously. When we relaunched -- when we bought and relaunched Freedom, we said very clearly that we went about very diligently about fixing all the pain points and making sure that the experience was quickly very much better. And we still have work to do. This is a never-ending work, and we certainly intend to, as Pierre Karl said, continue to invest in our networks and also in our marketing agility to make sure that we continue to resonate with Canadian customers. As to the network expansion, this is the -- these decisions are made on a -- it's a bit of a -- how would I say, it's a bit of a balance between going after strong and interesting regions with -- and balancing it with the investments needed in these regions. So this is something we have a plan, and we're continuing to be very diligent and very disciplined about our network expansions going forward. Focusing on the MVNO areas where we're starting to resonate well, where we're building the business, you will remember us saying that we're not going to build and hope that people come. We will launch MVNOs and where it will make sense for us, we will prioritize network investments. And I think that's the good business way to do it, and that's still what we intend to continue to do. Operator: Next question will be from Jerome Dubreuil at Desjardins. Jerome Dubreuil: The first one is on the free cash algorithm. We were seeing a bit of EBITDA growth, but also CapEx increases. So I'm wondering if you're seeing a potential for free cash growth in the coming year or if value is going to be created more through deleveraging and buybacks. I appreciate there was the share-based comp situation this year. But essentially, will absolute EBITDA growth outpace CapEx growth in the next few years? Hugues Simard: Thanks Jerome, [Foreign Language]. I think you're seeing it in the numbers. We look at our performance in terms of generating margin, generating cash, which provides us with the opportunity to continue to invest in the network, which we had said we would. And from -- I think you will remember, again, us saying from the beginning of the year or even last year that we were going to maintain very strong, stable cash flow, even though we were intending to invest more in our network. So in terms of buybacks, as you know, we flexed in the past on this, and we will continue to do so. And dividends will be -- we will continue stay true to our dividend increase, reasonable increase that we've had in the past. We're still in the soft in the -- not in the soft, in the best spots that we announced between 30% and 50% of our payout. So we feel pretty comfortable with our continued capability to generate cash, very strong cash flows that then give us the leeway to continue to invest in the network and the -- eventually in the network builds. Jerome Dubreuil: I'm just going to push a little bit on the capital allocation point here. You said in the prepared remarks that you're probably happy with leverage in the low 3s. It seems like you're getting real close to destination here on the balance sheet side. So does that mean that we should be expecting a ramp-up in the buybacks probably? Or is that a fair assumption? Hugues Simard: It's not an unfair assumption, but I wouldn't necessarily agree to it now this morning. Pierre Péladeau: And Jerome, I think that we should say it's a prerogative of the Board of Directors. And look at the sequence previously where we've been changing our balance sheet policies. I guess that we should -- that would be a good example or a good illustration of what we can expect being the situation in the future. Operator: Next question will be from Vince Valentini at TD Cowen. Vince Valentini: Let me spin that free cash flow question just more specifically to the near term. Hugh, you've done $1.06 billion of free cash flow through the first 9 months of the year. In the fourth quarter of last year, you did over $300 million in free cash flow. Is there something material in terms of timing issues we should be thinking about for the fourth quarter? Or are you going to -- like, you're going to smash through $1.2 billion or $1.3 billion of free cash flow for the year? Hugues Simard: Vince, no, we've talked about this, I think, last quarter. There are some timing issues. Our CapEx did increase a little bit in Q3, as you've seen, but there still is some timing ahead of us -- timing issues ahead of us in terms of CapEx, which you should expect to be higher in Q4. So I wouldn't go all out in our expectations of us breaking the bank in terms of cash flow. It will be a very strong cash flow and we will more than deliver what we had said we would deliver, Vince. But yes, there definitely is going to be a catch-up in CapEx towards the end of the year -- between now and the end of the year, yes. Vince Valentini: But you would definitely expect to have positive free cash flow in the fourth quarter? Hugues Simard: For sure. For sure. Yes, yes. Vince Valentini: Okay. The second thing, your Internet adds were a bit better than I expected. Is this in Quebec in your core Videotron business? Or are you starting to see some benefit from Freedom Internet in the rest of the country using TPIA? Hugues Simard: Well, a little bit of both. It is in Quebec, but it is also in Freedom home Internet is performing well. Fizz Internet is performing well. So it's -- we are in a very competitive situation and an ever-increasing competitive situation in Quebec. But we've talked about the quality of our services and network. And so we've been performing well essentially everywhere in terms of broadband. Vince Valentini: Okay. And last one, I don't know if there's any materiality to this, but as you know, I'm a happy customer. These roaming SIM cards that you guys have and people on other carriers are allowed to use them when they're traveling, how are you counting those? Are they being counted as a subscriber in the third quarter sub adds? Hugues Simard: No, no. No, they're not -- if you've turned on that SIM card, as I know for a fact that you were finally successful in doing, Vince… Vince Valentini: Yes, I did. Hugues Simard: After some help, you are not counted as a subscriber, no. Vince Valentini: So that is actually -- it is obviously service revenue. So it's going to be helping your ARPU even more than just the underlying trends in the business going forward? Hugues Simard: Yes. That's correct. And by the way, it's high time that you do become a customer of Vince. We're counting on you. Vince Valentini: I'm waiting for your Black Friday offer. Pierre Péladeau: Thanks for your business, Vince. Operator: Next question will be from Aravinda Galappatthige at Canaccord Genuity. Aravinda Galappatthige: Just a couple of quick ones from me. Hugues, you mentioned that one of the reasons for the success of Freedom sub trends is because you're kind of going into other cohorts that the old Freedom did not. I mean should we translate that comment as suggesting speaking to sort of the prepaid-postpaid mix? Any comment around how that mix has changed as you sort of progressed with gains on the subscriber front? And then secondly, just a small follow-up. The wireless ARPU redefinition, can you just clarify what that was? Hugues Simard: As to your first question, Aravinda, postpaids and prepaids for us, we're continuing to perform well on both. We have -- we're a bit agnostic, to be honest, and have continued to work well. So on all the cohorts that I talked about, I think that was more of a general comment applying to both to both postpaid and prepaid -- not specifically a move from one to the other. But we -- to be quite transparent, we're continuing to perform well on postpaid. And your second question, sorry, I've forgotten was to do with what? Aravinda Galappatthige: The ARPU redefinition. I think it was a small definition change of $0.40. Hugues Simard: Yes. Yes, it's about $0.40. We've restated it. But as those were $0 accounts, you'll see that it's almost consistently $0.40 over the last so many quarters that we restated. Operator: Next question will be from Drew McReynolds at RBC. Drew McReynolds: So a couple for me. Maybe for you, Hugh, on the CapEx trajectory in telecom. It looks like you're running a little hotter than the initial kind of $650 million or so of CapEx. Just wondering, and I think your commentary from Q4 would say you come on above that. Is there any kind of change overall to the kind of medium-term trajectory on CapEx from your perspective? And then just tied to that, we are seeing a pretty efficient kind of cable CapEx intensity come down from -- with some of your cable peers. Just wondering your cable CapEx, how you expect that to trend again through the medium term? Hugues Simard: Thanks, Drew. So on medium-term CapEx, both wireless and wireline, we will -- as I said earlier, we will, in Q4, be a little bit higher. That doesn't necessarily change our midterm -- what we said about the midterm that we are -- and we've said this before, that we're in a -- we're continuing to invest, and we're continuing to improve and ultimately expand as well our networks. And as such, it will be -- you should expect a gradual CapEx increase over the medium term. Nothing -- again, gradual, nothing -- no CapEx wall. I have some of your colleagues unfortunately use the term in the past. I don't think there's anything to be worried about, but just very reasonable and very sensible investments in both of our wireline and wireless network going forward. So no change to our midterm CapEx trajectory. Drew McReynolds: Just in the MD&A, you alluded to some favorable kind of provisioning in Q3 within telecom. I'm assuming the 2.8% year-over-year telecom EBITDA growth ex the provisioning is still a reasonably good growth rate. Can you just comment on quantifying those provisional -- favorable provisions? Hugues Simard: I won't give you the number, obviously, Drew, but it's -- no, I think your statement is fair. There's no -- yes, there was some provision adjustments as we do in a number of quarters and almost all quarters and as everybody does, but it's not material enough to impede or to change the conclusion on our increase in profitability for the quarter. Drew McReynolds: Okay. No, that's great. And last one for me, just the usual fixed wireless impact in Quebec, just how that's kind of contributing to the competitive environment, if at all? And that's it for me. Hugues Simard: To be honest, nothing significant. It is -- and by that, don't misread us. We're not saying that this is something to be dismissed. As we said in the past, fixed wireless is -- we're not saying it's not a thing. It may very well become a thing. And we are certainly in our own shop, looking at opportunities for fixed wireless. But certainly, to your -- in answer to your question, so far the impact on us has been very limited in our home turf of Quebec. But we are definitely -- and we've got the teams already lined up to start reflecting on how we will turn that into an opportunity for us in our various markets outside of Quebec. Aravinda Galappatthige: And congrats on great wireless results. Operator: Our last question will be from Tim Casey at BMO. Tim Casey: Hugh, just one modeling question and a couple of others. Working capital is running very positive so far this year. Should we expect a reversal in Q4 or maybe into Q1 next year? And what's driving that? Is that cash management or is it just timing? Hugues Simard: Tim, no, you should -- the answer your question, there should not be -- I don't see any material difference in Q4 or Q1 of next year in terms of working capital. It is -- to be honest, it is something that we've been focusing on for the past year or so, 1.5 years, where we recognized -- I think sometimes you have to be -- you have to question yourself on various occasions. And we weren't as efficient in working -- in managing our working capital as we should have been in the past. And we've tightened up a lot of things and I think it's showing. But we certainly intend to continue to perform well on working cap. And I wouldn't expect -- I mean, there's no bump either way that you should expect in the next quarters. Tim Casey: Okay. Just 2 for me. On the 50,000 subs you removed out of the base, can you give us any color on why they were $0 subs? Was this an aggressive promotion from the relaunch of Freedom? Were they -- was it an enterprise deal? What was happening there that they were so poor ARPU? And second one, as you think about expanding out of footprint on wireline, do you expect to retain similar type economics maybe on a margin basis? I would -- or should we assume that it will be dilutive to ARPU on the wireline side? Hugues Simard: Tim, to your first question, the 50,000 or 51,000 were $0 accounts. It's basically people who had opened an account but never -- or had a SIM card, mostly from before the acquisition and who never really bought a package. So they -- we had them as an account, but they weren't active and they weren't generating any revenue. So we just took them out. In terms of our out-of-footprint wireline, we -- again, our intent is to remain very disciplined and very -- I think that was your question. If I'm not answering the right question, you can ask me. We certainly -- as we've said in our notes today, both Pierre Karl and I, we intend to -- whether it's out of footprint wireline or eventually fixed wireless, whatever, it is our intent to remain very disciplined. And I think if I may make the point right now, we have been and for quite some time, been very disciplined and very predictable in our approach. We say what we're going to do, and we do what we said we were going to do, which I don't think can be said for everybody in telecom in Canada. But we certainly, in terms of wireline, intend to continue to apply that philosophy, if I can call it that. Pierre Péladeau: So we would like to thank you all attending this conference call and expect the same for our next quarter that will be our year-end. So don't miss Hamilton game, the Alouettes against the Tiger-Cats on Saturday. Hugues Simard: And you should root for the Alouettes, right? Pierre Péladeau: Sure. Thank you very much and have a nice day. Hugues Simard: Thanks, everyone. Operator: Thank you. Ladies and gentlemen, this concludes the Quebecor Inc.'s financial results for the third quarter 2025 conference call. Thank you for your participation and have a good day.
Operator: Good morning, ladies and gentlemen, and welcome to Murphy Oil Corporation Third Quarter 2025 Earnings Conference Call and Webcast. [Operator Instructions] I would now like to turn the conference over to Atif Riaz, Vice President, Investor Relations and Treasurer. Please go ahead. Atif Riaz: Thank you, Lucy. Good morning, and welcome to our third quarter 2025 earnings conference call. Joining me today are Eric Hambly, President and CEO; Tom Mireles, Executive Vice President and CFO; and Chris Lorino, Senior Vice President, Operations. Yesterday after market close, we issued our third quarter earnings release, a slide presentation and a stockholder update. These documents can be found on Murphy's website and we will reference them today throughout our call. As a reminder, today's call contains forward-looking statements as defined under U.S. securities laws. No assurances can be given that these events will occur or that the projections will be attained. A variety of factors exist that may cause actual results to differ. For further discussion of risk factors, please refer to our most recent annual report filed with the SEC. Murphy takes no duty to publicly update or revise any forward-looking statements, except as required by law. Throughout today's call, production numbers, reserves and financial amounts are adjusted to exclude noncontrolling interest in the Gulf of America. I will now turn the call over to Eric for opening remarks. Eric Hambly: Thank you, Atif, and thank you, everyone, for joining us this morning. Consistent with our approach last quarter, we released our quarterly stockholder update last night alongside our earnings release. This morning, I will share a few high-level insights and perspectives on our business before we move into Q&A. I'd like to start by thanking our employees for delivering strong operational performance in the third quarter, exceeding the high end of our production guidance for the second quarter in a row. We achieved total production of 200,000 barrels of oil equivalents per day and oil production of 94,000 barrels per day, underscoring the strength and potential of our assets. It's always good to have a quarter where we deliver strong operational performance, both on the production and cost fronts, and we did exactly that in the third quarter. Operating costs in the quarter averaged $9.39 per BOE, 20% less than in the prior quarter. In the third quarter, capital expenditures totaled $164 million, which was below our guidance. While a large part of that lower CapEx was due to timing, it also reflects our ongoing efforts to drive capital efficiencies across our business. On the international development and exploration front, we made significant progress in the third quarter. Our Lac Da Vang (Golden Camel) field development is progressing on track. And in fact, we started drilling our first development well earlier this week. This is a major milestone marking our first development in Vietnam. I commend the team for continuing to execute this project safely and ahead of schedule in collaboration with our multiple local and international partners. Our Hai Su Vang 2X Appraisal Well was spud in line with our plan and Civette, the first of our 3-well exploration program in Cote d'Ivoire is also on track to be spud before year-end. This quarter, our exploration teams are working very hard at exploring and appraising prospects across 3 continents, testing gross resource potential of over 1 billion barrels of oil equivalent. These projects showcase Murphy's international expertise, reputation and partnerships, key differentiators that position us as a partner of choice for global exploration and development. We look forward to sharing the results from our exploration and appraisal program with you in the coming months. As we assess our operational plans for 2026, we are closely monitoring the commodity markets. We remain confident that our strong balance sheet and flexible multi-basin portfolio will allow us to manage near-term volatility while staying on track to achieve our long-term goals. Looking ahead, exploration continues to play a significant part in the Murphy story and we're encouraged to see a renewed focus in the industry on the need for exploration and conventional resources to meet global energy demand. With a robust portfolio of assets and decades of expertise, we are well positioned to capitalize on the opportunities ahead. That's a very brief summary of our quarter and key catalysts for our business and we will now open the lines up for questions. Operator: [Operator Instructions] With that, our first question comes from the line of Arun Jayaram with JPMorgan. Arun Jayaram: Eric, I was wondering if you could start a little bit around your exploration program in West Africa. Maybe some details on the Civette well, which you mentioned should spud by year-end. And it looks like you've re-sequenced the program to include a different prospect for your third exploration approach. I was wondering if you could just give us some more color around that program. Eric Hambly: Sure, Arun. We're really excited about our Cote d'Ivoire exploration program, which will start drilling before the end of the year, likely spud Civette in December and that should put us in a position to have some results to discuss at our January fourth quarter earnings call. The following 2 wells in the program likely not have results to report until later in the first quarter or possibly into the second quarter of 2026. The Civette prospect is very similar in terms of the geology to the Calao discovery from the Murene-1X well Eni announced in the second quarter of 2024. It's the same type of geology, just a slightly shallower interval testing highly prospective to us, Santonian-Turonian interval which we're really excited about. We think as we released in our slide decks in the past, the potential is significant. And the reason that we are really excited about it is it has the potential to be quite large with a mean of over 400 million barrels, upside of 1 billion barrel range and we're able to test the wells. Our program of wells are going to be kind of in the $50 million to $60 million gross range. So really excited about it. It's definitely in the right neighborhood. There's been a lot of recent success from Eni in the area and it's similar looking geology and we're pretty excited about it. [Indiscernible]. So as we've kind of continued to work through our reprocess seismic data set and kind of mature our assessment of the prospectivity, we decided to pivot from drilling Kobus to Bubale. And the reason we did that is we think that it offers a lower cost to test and lower risk or a higher chance of a discovery and also a very large resource range. So we're pretty excited about that. The Kobus discovery is definitely still something that's out there and it might be the subject of follow-on exploration. Obviously, with some success, it would encourage us even more. It is a different play type than Kobus, one that we think has a higher chance of being successful and that's why we made the switch. So there's nothing wrong with Kobus, just that we think that Bubale is a slightly better and we're prioritizing sort of our top 3 exploration tests in the blocks. Those are the ones that we think are the most compelling near term. Arun Jayaram: Makes total sense. And just maybe a follow-up. Obviously, you're drilling one of the more important appraisal wells at a very long time in terms of Murphy. Can you give us some of your key objectives? And I know you've shared with us the location of the appraisal well in Vietnam, but maybe give us some thoughts on what you're looking to test at the HSV field. Eric Hambly: Sure. Yes, it's a good question. The main purpose of the HSV-2X well is to determine what the lateral continuity of the reservoir is. So away from the discovery location, what is the makeup and content of the sand in the major discovered reservoirs to potentially test for a thick in the pay section and really critically determine if we can, where the oil water contact is. So we believe the location that we're testing has the potential to prove a thickened section in the primary reservoir of the discovery and also prove the known oil column deeper. And that's the main objective of the appraisal well, which the whole point is to determine what is the -- tighten the range of resources and figure out how large is the field and help us start to plan field development. We need to know where the oil is so we know where to put the development wells. And this is the first of what may be more than one appraisal well to determine how large the field is and how to optimally develop it. But this one has a significant impact in that the major discovered reservoir that we flow tested that we announced earlier this year, we're hoping to prove a deeper oil column with that and potentially expanded thicker section. Arun Jayaram: Great, Eric. We'll enjoy well watching because you have a lot of interesting things that you're testing over the next 3 to 6 months. Appreciate it. Operator: And the next question comes from the line of Neil Mehta with Goldman Sachs. Neil Mehta: We're obviously working through a choppier macro right now and there's a lot of reasons for long-term optimism, but of course, there's some reasons for near-term caution. So just talk about your down cycle playbook and how you ultimately use a period of potential commodity weakness to make the business better a couple of years out. Eric Hambly: Great question. Obviously, we're paying very close attention to what's going on with commodity markets, watching both oil and gas. We're still working to put together a plan for our 2026 budget, which we'll discuss like normal in our fourth quarter call in January. We're factoring in things like what do we think will happen with oil price in the first part of the year versus potentially the later part of '26 heading into '27. We're trying to develop a plan, not just for the year, but a multiyear plan that supports our strategy that balances near-term production and free cash flow with investing for longer-term resource additions, primarily for our offshore business. We do have significant flexibility in our capital program. We could run quite a bit smaller onshore program for sure. In our offshore business, there are a few things that I think we're likely to do in almost all oil price scenarios. There are things that we have a lot of flexibility to have an altered program. I think the things that are likely to be a little more sticky for us and that we probably choose to do, our Vietnam appraisal program that we're doing now and our Cote d'Ivoire 3-well program, I think you could see us doing those in most cases. You would have to probably have a very, very low oil price where we decide to alter those plans. The other one is our Lac Da Vang (Golden Camel) field development. It's something that we likely see through to conclusion of the first phase in most oil price scenarios. As we talked about last quarter, I'll kind of reiterate, we're very comfortable with our sort of base plan in line with our communicated multiyear range of CapEx. If oil price is $60 or so the longer that we think we'll see a sustained oil price that might be lower like, say, $55 or lower for a long time, we might start to get more aggressive in altering and lowering our capital plan. And again, we have quite a bit of flexibility. Obviously, the sooner we start making changes, the more we could affect next year CapEx. But we feel like we're well positioned. We also feel like we have a very strong balance sheet. So we're able to kind of -- if we wanted to, we could lean into a little bit of invest through the cycle. But like I said earlier, we're going to be pretty cautious around protecting a strong balance sheet, investing with kind of a balance of short term, medium term, long term. And I think we've acted in the past with quite a bit of discipline and you can expect to see that from us going forward. Neil Mehta: Yes, very clear, Eric. And then that brings up the follow-up, which is as we think about the '26 CapEx, the midpoint of your guide this year is $1.21 billion, of which offshore is 36% of the balance is outside of it. And so just how do you think about the buckets of CapEx as you go into '26, recognizing we'll get more color early next year, but what are some of the moving pieces as we anchor 6 versus 5? Eric Hambly: Very good question. Again, we're still working the details. I'll give you kind of directionally that is kind of provisional. I think with our active program exploring in Cote d'Ivoire, you might see a little more spending from us in exploration than this year or past years just by a little bit. In terms of onshore spending, we'll probably have a slightly lower capital program in Tupper and Eagle Ford than we had in 2025. In offshore, we have a really compelling set of investments to pursue with strong returns and very low breakevens. One of which we've highlighted is the Chinook 8 well, which is a development well in our currently producing Chinook field that we expect to bring online in the second half of the year. And we think it will have a gross oil production rate somewhere in the 15,000 barrel a day range. So those are very compelling investments that we're likely to do. The rest of the details around exactly what the rest of our offshore program and do we fine-tune our Eagle Ford program with potentially lower commodity price, that's something that we're going to be looking at and paying attention to and kind of thinking about as we head into next year. I would say, overall, it would be reasonable to expect us to have a capital program next year of a similar scale as we've communicated in the past, which is a $1.1 billion to $1.3 billion range. Operator: And the next question comes from the line of Carlos Escalante with Wolfe Research. Carlos Andres E. Escalante: First of all, congratulations, quite the turnaround on sequential quarters. So congrats on that. If I may, I'd like to ask my first question on your operational improvements thus far this year. So maybe you can perhaps frame and quantify how the improvements in both your Eagle Ford and Montney, how that success has translated in terms of corporate breakeven. And I know and I realize it's a small piece of your portfolio, but just wonder how that is manifesting in your underlying breakeven. Eric Hambly: Great question. Just high level, I'm very impressed with and very happy with our team's ability with a fairly limited onshore program to be able to continue to make improvements in our capital efficiency, both Eagle Ford and Montney, particularly, where in the second quarter and third quarter wells, we saw some of our strongest performance ever. Initial rates, 90-day cum oils, 90-day cum gas for Tupper, all been amongst some of the best wells we brought online. That's been through a combination of various things. In many places, we're drilling longer laterals, which we're able to improve our drilling targeting, our completion styles, we adjust kind of the completion design for each specific area to try to optimize what's going on there. Our flowback strategies have been really enhanced. And it's just driving a really strong outperformance. I think we've highlighted that in some cases, we're seeing production rates in terms of the first few month production that are 50% to 100% above what historical performance is. So really strong. In our Tupper asset, we -- in 2025, we've used a completion design that had significantly higher proppant loading and we think that's working for us and will likely feature that going forward. What I'm also really proud about is that we were able to pump better fracs with CapEx neutral or, in fact, some CapEx savings across our program. So we're doing things that are not just spending more money to get more performance. We're actually getting better performance with equal or lower investment, which is really good for generating cash flow and to your point, what our breakevens are. In the stockholder update, we highlight just how low some of the breakevens are for the Catarina program we delivered. Obviously, when you can have breakevens that are $35 or less and sometimes even in the $20s, that's awfully strong. So really happy with how all that's going and it's led to significant performance -- outperformance and I think it's durable in the sense that the remaining inventory we have to drill, we're going to keep doing the same sort of stuff and we should continue to see that kind of outperformance as we progress the rest of our onshore program. In offshore, I'm really happy with the turnaround. We had a tough year, 1.5 years with wells offline in the Gulf requiring workovers. We progressed through that. I think we're in a good spot. We did have a production beat for the quarter even when you adjust for no storm downtime in the Gulf, we still exceeded even beyond what the storm downtime provision was with really impressive work by our team to have very low downtime in our operated major facilities, really top world-class performance in terms of our operating performance there. Carlos Andres E. Escalante: That's very, very helpful color, Eric. And then for my follow-up, if I may follow up on Arun's question on West Africa. It looks like most of the historical exploration effort in the region has been done along the Upper Cretaceous with some success, but it was really Eni's Baleine and Calao discoveries, at least in our view, that have enlightened this new wave of excitement in the emerging deeper Albian Santonian intervals. Would you guys concur with that in terms of is your seismic effort consistent with exploring that deeper potential as well as the Santonian-Turonian interval that you mentioned, Eric? Eric Hambly: Yes, it's a very good question, Carlos. So what has happened in this Greater Tano Basin area is after the success of Jubilee going back a decade, pretty much everybody drilled the same look-alike prospects as Jubilee until Eni did something different. And I would say it's a fair characterization that we see potential in the largely untested slightly deeper intervals. And that's what we're pursuing in most of our prospects here that we're testing. Operator: And the next question comes from the line of Paul Cheng with Scotiabank. Paul Cheng: Two questions. One, I want to go back into the 2X appraisal well that you're going to drill in Vietnam. If it is successful, Eric, can you tell us that is that going to be sufficient for you to set the development plan or that you think you actually would be better off because it's a large discovery? So you're better off that to drill an additional appraisal well that to really get a confirm and whether that you will go with a -- given the size that do you think that a early production system will work better and then that you will have a full development? Or that you will just go ahead with a full development? And trying to see that, I mean, what's the next step in 2026 after this -- after the completion of this well is going to look like? This is the first question. The second question is on the impairment charge. You're saying that just because of a unfavorable disproportion expense allocation so that you write down the value in there, is that have any implication for your other well or other fields in the area? Eric Hambly: Okay. Paul, on your first question, we're drilling the Hai Su Vang-2X well. And I mentioned earlier on the call kind of the purpose of what we're trying to accomplish. So the potential for future appraisal beyond this is somewhat dependent on what we find in the 2X well. If we find a deeper oil column than proven in the discovery well, we're likely to have other appraisal wells to kind of determine where -- how much oil there is. If we drill just below the currently low proven oil in the Hai Su Vang-1X discovery well and find water level, then we may be less likely to pursue another appraisal well. So it somewhat depends on what we find. What we will do, what we typically do is sort of learn as we go and on a kind of point-forward basis, determine what do we need to know about the field to move forward to have confidence that we have it described appropriately with an ability to commit the capital to go develop it. So I think it's likely that we will have an additional appraisal well beyond the 2X, but it will be somewhat dependent on the results that we have and what we still have unknown about the field as we go forward. If we find only oil in the 2X well, it could imply that there is a deeper oil water contact than we test in the 2X and we'll likely go find it or try to find it with additional appraisal wells. One of the thing, our appraisal program is pretty efficient here. These wells are not too expensive to drill to find out. So we're able to do that quite efficiently. Just briefly on the impairment [indiscernible]... Paul Cheng: Impairment. Can you tell us what is you guys leaning to us into the development concept at this point? Eric Hambly: Sure. Yes, Paul. So -- and I didn't fully answer part of your question, I guess. We will try to do what we can to appraise the field kind of in the coming months and understand what we think the size of the reservoir is and how to optimally develop it. We will try to move forward to planning a field development plan and working with our partners and the government on that. And I would say we don't know yet because we don't know what we haven't yet determined, but we'd probably be looking at targeting final investment decision in 2027 and looking in a kind of a standard mode to producing Hai Su Vang in, say, around 2030, possibly earlier with an early production system. We're looking at all opportunities we can to efficiently develop the field. A conventional development of the field would be similar to our (Golden Camel) Lac Da Vang would be an FSO and a series of platforms, a main processing platform and wellhead platforms. There's also a possibility of redeploying an existing FPSO and doing some wellhead platform or subsea tieback type of opportunities. Those are all things that we're thinking about, looking out and we'll be trying to move as aggressively as we can to see first production with potentially early production system, but that's not something that's been particularly common in Vietnam. So that would be something we'd be sort of newly bringing to bear there. Before I move on to the impairment, did I address your question, Paul? Paul Cheng: Yes. Very good. Eric Hambly: Okay. On the impairment, we periodically review the projects in our portfolio and kind of reevaluate our plans of investment. In the Dalmatian field, we had planned to do 2 wells. And as we continue to study those and think about them, we saw that the operating expenses that those wells would be burdened with from the host facility that we do not operate started to look like they were really high costs. And that high cost made it look like they may not be the best investments to make. So with the current cost estimates, those investments in new wells would definitely clear our cost of capital, but they start to become less attractive investments compared to other things we would choose to invest in. So we decided in our 5-year plan in front of us to not invest in those 2 wells that were in our prior plan. When we remove that assumed revenue and reserves from our plan, it led to an impairment. The producing wells are doing fine. The impact of producing wells is really nothing. We just -- when you take the revenue and the reserves away from that plan, the future cash flow didn't compare favorably to the undepreciated book value, which led to an impairment. So there's no significant read-through to the currently producing assets or any other fields in the area. It's just we're choosing in our 5-year plan to invest in better investments. Paul Cheng: Right. I think that's my question because you're saying that is related to a unoperated facility that the allocation of cost is higher. Do you have other assets that will have a potential impact or potential risk to that that will change your development outlook? Eric Hambly: That's a good question, Paul. So we are fortunate to be in a position where we operate the host facilities for most of our production and the host facilities other than the one that Dalmatian uses that we do not operate have very low operating expenses. So the main nonoperated ones would be St. Malo and Lucius, which are very strong performing assets with very low operating expenses. The rest of our Gulf of America portfolio, effectively, we operate almost all of it and we're happy with our expenses there. It's really just this one Petronas facility that's late in life and experiencing escalating costs and the operator hasn't been too willing to do much to make the cost structure go lower, which is really the only sore point from escalating third-party operated cost issue. Operator: And the next question comes from the line of Charles Meade with Johnson Rice. Charles Meade: I wanted to ask a question about your U.S. onshore guide for 4Q. And this might be down in the weeds a bit, but -- and specific to the Eagle Ford. And so that asset has really outperformed in 2Q and again in 3Q. And I understand you're not bringing any new wells on in 4Q. But even just for the PDP decline for that, your guide calls for that dropped by roughly 30% quarter-over-quarter. And I think you mentioned earlier in your prepared remarks that those recent wells that you brought online, I think I wrote down, you said those have been 50% to even 100% above type curve. And so I'm curious, is this -- that decline you're projecting for 4Q, is that the case where just internally, people don't want to underwrite the idea that these wells are going to continue to outperform the type curve? Or alternatively, is this something where you've already seen here in October, maybe early November, that those wells that had been 50%, 100% over the type curve have reverted to the type curve? Where do we fall on that spectrum there? Eric Hambly: That's a good question. What I'll do is I'll give you my thoughts and then if it's insufficiently answered, I'll have Chris jump in and help me out here. What we have seen in Eagle Ford is really strong early production performance from our second quarter and third quarter wells. In the third quarter, more than half of our Eagle Ford production was from wells that we brought online in 2025 in the second and third quarter. So you're seeing more than half of our production come from essentially brand-new wells, which, as we know, shale wells, once they come off peak, they do have early kind of in the first quarter or so, a steep decline and they sort of shallow out over time. So what we are including in our guidance is an assumption that we will see significant decline in line with our kind of typical shale well performance that we see in Eagle Ford. Having said that, the early decline performance from our Eagle Ford wells is either in line or shallower than our historical decline performance from prior years. Even though our initial rates are higher, the decline rates early on so far have been in line or in some cases, shallower. So there's no big issue [indiscernible]. We are just modeling what we think will be a reasonable decline from what are really high initial rates. I'm really happy with the team performance. If you look at our Eagle Ford asset, roughly our fourth quarter guide is something like 5,000 barrels a day above our fourth quarter of '24. So that performance is continuing to be strong heading into the fourth quarter. It's just that the wells are -- the last of our new wells came online in July and we expect them to decline. Chris Lorino: Hey Charles, just to add to that, when you're thinking about Q3 production, this is -- Eric mentioned, it's the highest new well production that we've had since 2019. So it is a little -- it is a big -- because we've outperformed so well, that's why you have more steep decline with the new wells versus the base. But looking forward, we've got such a bright outlook on the Eagle Ford wells and just continue to improve our long runway of Tier 1 inventory that just keeps getting better and better with lower breakevens. Charles Meade: Right, right. That's helpful. So success can bring its own different issues. Eric, I want to go back to Vietnam, but ask about your Lac Da Vang development. And appropriately, there's a lot of attention on the HSV. But can you remind us what the -- I know that there was already discovery that you guys came into, but can you give us -- remind us of the kind of the history of this field? And what I'm really curious about is if there -- when you're drilling your development wells there, is everything already very well characterized and there's no chance of a surprise? Or are there things that you're attuned to possible surprises or upside with this development drilling that's going to deliver more near-term volumes? Eric Hambly: That's a great question. The Lac Da Vang (Golden Camel) field is one that has been significantly appraised up to the point prior to our investment decision. The initial phase development is targeting what is sort of the most appraised part of the reservoir. The second phase is sort of targeting, which will be wells online in probably '28, '29 -- sorry, drilling in '28 and online in '29. That part of the development has about half fairly well appraised and half kind of reaching out into the less appraised parts of the field. So near term, we're really comfortable that we're going to be developing something that we understand pretty well. Having said that, I think that there's always a little bit of uncertainty in terms of new field, how you expect wells to perform. So far, we continue as we learn more about the field to think it looks better and better versus worse and worse. And we'll certainly learn a lot from the initial development wells that we drill and we'll be trying to optimize our development as we move forward. But yes, it's -- I would characterize it as quite reasonably appraised, especially for what we're going to bring online for first oil. Operator: And the next question comes from the line of Leo Mariani with ROTH Capital. Leo Mariani: Wanted to ask a little bit about operating expenses. So very, very low here in 3Q, kind of certainly below the guidance range you guys had given. And now you guys are sort of kind of maybe guiding back up a little bit on OpEx in 4Q. So can you just provide some color there? Was it just like a total absence of workover spend in 3Q or something? Why did the number come out just a lot lower than it sort of has been? And is that sort of repeatable? Eric Hambly: Yes. Great question. We did have some offshore workover spend in the third quarter. We talked about our onlines of kind of wrapping up our program. So we did have workover spend offshore, but it was of a little bit lesser amount than in prior quarters. The lack of large-scale offshore workovers helped improve our costs. We had significantly higher production across our onshore business and we lowered costs. In our Eagle Ford business, particularly, we're really focused on reducing the dollars being spent. That's mostly driven by field labor, maintenance costs, rental equipment, water handling, some work from our supply chain team to kind of renegotiate contracts and a real serious focus on optimizing the work that we do in the field through our remote operations center working with the guys out there in the field. Really happy with that. Those reductions in costs, which we kind of highlight in our stockholder update, those Eagle Ford reductions are durable and that really helped. What also really helped for the quarter was our record Tupper Montney production, has extremely low operating expenses. So when you blend in the sub-$4 operating expenses from Tupper, it really helps you have a total company fairly low operating expense. In the fourth quarter, we're guiding a $10 to $12 per barrel OpEx across the whole company. And the reason it's going up is that not because costs in terms of dollars are going up, but we are modeling a little bit less production. So the cost per barrel will likely creep up into that kind of range, which really is sort of a typical range for us on the long haul. Leo Mariani: Okay. Very thorough answer. Appreciate that. And then just kind of on the sort of operational side. Obviously, gas prices have been quite low in Alberta in terms of AECO. Are you guys factoring in any kind of shut-ins that may have occurred in the guide for 4Q? Certainly, your Tupper volumes are down a decent amount. I know we haven't had really drilled a well in a while and you're getting some declines. But just what's the story with any kind of Montney shut-ins? How are you thinking about that? Is there some price level where it's kind of saved some of the gas? Or is it more just kind of keep the plant full? Eric Hambly: Yes. What we're modeling in our fourth quarter production for our Tupper Montney is just typical decline from our base and new wells. And also, we're estimating a higher royalty paid in the fourth quarter compared to prior couple of quarters, driven by what we expect to be higher gas prices, pretty significantly higher. I won't get the numbers exactly right, but rough math I think AECO in the second quarter was like $0.64 an Mcf, and we're expecting a fourth quarter to be a little over $2, like $2.05, something like that. That may not be the exact numbers, but they're awfully close. Leo Mariani: Okay. That's helpful. And then just real quick on the buyback. In this type of oil market, call it, $60 hasn't been obviously great for anybody. Are you guys basically kind of saying that probably don't expect much of the way the buyback if this kind of price sort of holds as you really kind of prioritize capital spend and the dividend? Eric Hambly: I think it's fair to say with the free cash flow we have available with current commodity prices, we're less likely to be particularly active in share repurchase. Having said that, if we think there's a big dislocation in terms of our valuation and what our stock trades at, then we're not opposed to leaning into it as we've done in the past. Tom, if you want to add any color to that or that. Thomas Mireles: I think you covered it. It's something that we think of on an annual basis. We did in the first quarter start off with $100 million of share repurchases. But as Eric said, we're kind of keeping an eye on the price and oil price and likely not going to go too heavy on that in the remainder of the year. Operator: And the next question comes from the line of Geoff Jay with Daniel Energy Partners. Geoff Jay: I guess I was just going to follow up on Neil and Charles' questions from earlier. But when you talk about how there could be a smaller onshore program next year, is that potentially in response to a lower kind of macro or lower oil price environment? Or is it kind of a confirmation that you think that the outperformance that you've seen onshore is repeatable? Eric Hambly: Good question. In our base plan, it's mostly the latter that, for example, our Tupper Montney, we kept that plant full for 5 months. The activity level we think it takes to refill and keep full from Tupper is less than this year because we are already coming in at a higher production level. In Eagle Ford, we've been guiding for many years that we anticipate using the asset to produce it in a 30,000 to 35,000 barrel a day range. And this year, we should be significantly higher than that, like around 37,000 for the year. And we think that the repeatability of our strong well performance of our new investments will be there. And so we think it will take a little bit less capital to deliver the same or higher kind of performance from our onshore assets. That's what's really driving it. My other comment earlier in the response to the call was if we see significantly low commodity prices, we do have flexibility and even pulling the capital spend in those assets down below what our kind of base plan might look like, which would have production impacts, obviously. Operator: And we currently have no further questions at this time. I would like to turn it back to Eric Hambly for closing remarks. Eric Hambly: I'd like to close by again thanking our employees for their hard work and dedication and our shareholders for their ongoing trust. Thank you, and this concludes our call. Operator: Thank you, presenters. And ladies and gentlemen, this now concludes today's presentation. Thank you all for joining. You may now disconnect.
Operator: Hello, ladies and gentlemen. Thank you for standing by, and welcome to Zai Lab's Third Quarter 2025 Financial Results Conference Call. [Operator Instructions]. As a reminder, today's call is being recorded. It is now my pleasure to turn the floor over to Christine Chiou, Senior Vice President of Investor Relations. Please go ahead. Christine Chiou: Thank you, operator. Hello, and welcome, everyone. Today's earnings call will be led by Dr. Samantha Du, Zai Lab's Founder, CEO and Chairperson. She will be joined by Josh Smiley, President and Chief Operating Officer; Dr. Rafael Amado, President and Head of Global Research and Development; and Dr. Yajing Chen, Chief Financial Officer. As a reminder, during today's call, we will be making certain forward-looking statements based on our current expectations. These statements are subject to numerous risks and uncertainties that may cause actual results to differ materially from what we expect due to a variety of factors, including those discussed in our SEC filings. We also refer to adjusted loss from operations, which is a non-GAAP financial measure. Please refer to our earnings release furnished with the SEC on November 6, 2025, for additional information on this non-GAAP financial measure. At this time, it is my pleasure to turn the call over to Dr. Samantha Du. Ying Du: Thank you, Christine. Good morning, and good evening, everyone. Thank you for joining us today. Before we discuss the quarter, I want to take a moment to reflect on who we are, where we are headed. Zai Lab was built on a clear vision to bring the best global innovation to patients in China and to discover and develop new innovations that can compete on the world stage. That vision remains unchanged. Today, our global pipeline is stepping to the forefront, becoming the next key chapter in Zai's growth story. Zoci or ZL-1310 has now entered the pivotal stage less than 2 years from Phase 1/1b, an extraordinary pace at any standard in our industry. And we're on the path for our first global approval by 2027 or early 2028. Beyond Zoci, we're expanding our global portfolio with other highly differentiated programs, including our IL-13xIL-31R bispecific atopic dermatitis, IL-12 PD-1 bispecific and LRRC15 ADC for solid tumors. More importantly, we have built a global R&D organization that combines speed, scientific rigor and quality expected of a global biopharma. On our commercial business in China, we are commercially profitable today and on a steady, profitable growth path. However, the pace has been slower than we expected. The environment is complex and dynamic. But at the same time, there are encouraging signs of progress. Regulatory reviews are faster and NRDL negotiations are more transparent. We have one of the strongest commercial teams in the industry, backed by a portfolio of differentiated, high potential assets, and we remain confident in the long-term potential of this business. This next chapter will take focus and persistence, but we have the right science, the right team and the right vision. Together, we are building a company that will make a lasting difference for patients and create long-term value for our shareholders. With that, I'll now hand the call over to Rafael, who will walk you through the progress of our R&D pipeline. Rafael? Rafael Amado: Thank you, Samantha. I will begin with a few highlights from our global pipeline, starting with ZL-1310 or Zoci. Two weeks ago, at the triple meeting conference, we presented updated Phase I data in previously treated extensive stage small cell lung cancer. This global study enrolled 115 patients across the U.S., Europe and China. At baseline, 90% of patients had received a PD-1 or PD-L1 therapy, nearly 1/3 had brain metastases and several had progressed on a prior DLL3 targeted therapy, including tarlatamab, making this a very difficult to treat heavily pretreated patient population. At the 1.6 milligrams per kilogram dose, we observed an overall response rate of 68% and a disease control rate of 94%, among the strongest efficacy signals reported in the second line setting. Importantly, we also saw robust activity in patients with brain metastases, including an 80% overall response rate in lesions, which had received no prior treatment of any kind, suggesting that Zoci may offer a new way to control both systemic as well as intracranial disease without interrupting therapy, a potential game changer in terms of speed to treatment for these patients whose tumors tend to be growing very fast. Across all doses and lines, the median duration of response was 6.1 months, and the median progression-free survival was 5.4 months, which is highly encouraging for a monotherapy in this refractory population across doses and lines of therapy. Data from the 1.2 and 1.6 milligrams per kilogram cohort continue to mature as enrollment continues and patients remain on treatment. Zoci also continues to demonstrate a best-in-class safety profile. At the 1.6 milligrams per kilogram dose, grade 3 or higher treatment-related adverse events were observed in only 13% of patients, far below the 35% to 50% rate seen with other ADCs in this setting. There were no drug-related discontinuations or deaths and only 2 Grade 1 interstitial lung disease cases across both expansion doses of 1.2 and 1.6 milligrams per kilogram. This combination of deep efficacy and favorable tolerability positions Zoci as an ideal candidate for the first-line combination where safety is paramount. We've now begun enrollment in our registrational Phase III trial in extensive stage small cell lung cancer with the potential for an accelerated approval submission. We're also advancing our first-line strategy with plans to initiate a Phase III study next year following results of our ongoing combination study evaluating Zoci plus PD-L1 with and without chemotherapy. In addition, we see significant opportunity for Zoci as a backbone therapy in novel mechanism combinations. We plan to initiate studies with agents with ethanol and complementary mechanisms of action, and we will share details once the studies are posted on clinicaltrials.gov. Beyond small cell lung cancer, Zoci is being evaluated in Neuroendocrine Carcinomas or NAC, which have poor prognosis and no targeted therapy despite high DLL3 expression. Early data with ZL-1310 are encouraging, and we plan to present results in the first half of next year and to move into a registrational study thereafter. Beyond Zoci, our next wave of innovative global assets continue to advance rapidly. ZL-1503, our internally discovered IL-13/IL-31 bispecific antibody for atopic dermatitis recently entered Phase I. Its dual mechanism targets both itch and inflammation and its extended half-life offers potential for less frequent dosing. A subcutaneous formulation is being developed. Preclinical results support its use in other inflammatory diseases. First-in-human data are expected in 2026. ZL-6201 is an internally discovered LRRC15 targeted antibody with a next-generation payload linker. It remains on track for a U.S. IND submission by year-end and a global Phase I study initiation early next year for patients with cancer that have tumor cell or tumor stroma expressing this target. ZL-1222 is another internally discovered asset. It is a next-generation PD-1 IL-12 immunocytokine designed to deliver cytokine signaling directly into the tumor microenvironment while preserving PD-1 checkpoint blockade. IND-enabling work is underway, and we expect to move quickly towards an IND once data are available. Now turning to our key late-stage regional programs in immunology and neuroscience. The Efgartigimod continues to expand across multiple autoimmune indications. The ADAPT SERON study in seronegative gMG was positive, the first global Phase III trial to show clinically meaningful improvements across all 3 gMG subtypes, MuSK+, LRP4+, and triple seronegative. Three additional Phase III readouts in Ocular myasthenia gravis, Myositis and Thyroid eye disease are expected next year with China contributing to global enrollment. For Povetacicept, our partner, Vertex recently received FDA breakthrough therapy designation for IgAN. Enrollment of the global RAINIER Phase 3 is complete with an interim analysis planned for the first half of 2026, where patients from China are included and potentially supporting an accelerated approval submission next year. The global pivotal Phase II/III study in primary membranous nephropathy was initiated in October, and we're on track to enroll patients in China this quarter. Together, these achievements reflect the depth and quality of our pipeline, one that is advancing with speed and efficiency and with a clear focus on novel mechanisms and clinical differentiation. In summary, over the next 12 months, we expect to reach several important milestones across our global portfolio. For Zoci, we expect a catalyst-rich year with updated intracranial data, first-line small cell lung cancer combination data and results in neuroendocrine carcinoma in the first half. In parallel, we plan to initiate registrational studies in first-line small cell lung cancer and other neuroendocrine carcinomas as well as starting studies with novel combinations across line of therapy. Beyond Zoci, we expect first-in-human data for ZL-1503 or IL-1331 and to advance ZL-6201 or LRRC15 into global Phase I development. We're also progressing ZL-1222 or anti-PD-1/ IL-12 agonist and look forward to sharing additional data in the coming year. And with that, I'll hand it over to Josh. Joshua Smiley: Thank you, Rafael, and hello, everyone. Before we turn to our third quarter results, I'd like to start by welcoming Dr. Yajing Chen, he as our new Chief Business Officer. Chen brings both deep scientific expertise and investment experience and will play a central role in expanding our portfolio and unlocking value through partnerships and out-licensing. I'd also like to sincerely thank Jonathan Wang for his many contributions over the past decade in helping build the strong foundation that now supports our next phase of growth. Now turning to our commercial performance. Total revenues were $116 million, representing 14% growth year-over-year. VYVGART and VYVGART Hytrulo contributed $27.7 million, which includes a $2.4 million reduction following a voluntary price adjustment on Hytrulo to align with NRDL guidelines ahead of national pricing negotiations. While this adjustment affected reported sales, the underlying fundamentals of the launch remain very strong. VYVGART continues to be one of the most successful immunology launches ever in China, ranking as the #1 innovative drug by sales among all new launches in the past 2 years. More importantly, the trends beneath the headline numbers point to durable long-term growth. There are 2 key growth drivers underpinning the trajectory of VYVGART in gMG, patient demand and treatment duration, the latter of which is particularly important given the chronic nature of the disease. First, on demand. We continue to see steady new patient additions each month with nearly 21,000 patients treated to date. VYVGART penetration in gMG remains only around 12%, meaning we are still in the early stages of market development with significant room for expansion. Second, on treatment duration. The updated MG guidelines published in July have been a meaningful catalyst to emphasize both the importance of rapid symptom control, where VYVGART has demonstrated strong efficacy and a minimum of 3 treatment cycles to reduce the risk of relapse and maintain durable disease control. Since publication, we have seen clear signs of positive impact in real-world practice. Physicians are becoming receptive to maintaining patients on therapy even after achieving symptom control, signaling a shift from episodic to maintenance use. As a result of our efforts, the average vials per patient have increased over 30% year-to-date versus last year, with a notable acceleration in Q3. And VYVGART volumes have grown sequentially in the mid-teens. We see this level of growth as realistic and sustainable as we head into 2026. Now admittedly, the pace of market build for this first-in-class therapy for chronic disease has been more measured than we initially anticipated. With VYVGART, we are shaping this new market thoughtfully, focusing not only on driving adoption, but also on redefining how gMG is managed over the long term. Through physician education and real-world experience, we aim to change long-standing treatment patterns. While the ramp is slower than expected, the long-term potential of VYVGART in gMG is substantial. Beyond gMG, we're making progress in CIDP, expanding access across both supplemental and commercial health insurance plans. We will continue to add new layers of growth with new indications and formulations with the most immediate being seronegative gMG and the prefilled syringe. Looking ahead, our next major launch opportunity is KarXT, currently under regulatory review. KarXT has the potential to redefine schizophrenia treatment in China, introducing the first new mechanism of action in more than 70 years. Notably, it has already been included in the China Schizophrenia Prevention and Treatment Guidelines 2025 Edition, the first national guideline globally to do so, underscoring its strong differentiation and anticipated clinical impact. Across the company, we remain disciplined in our operations, scaling efficiently while investing strategically in commercial execution and pipeline innovation. And with that, I will now pass the call over to Yajing to take us through our financial results. Yajing? Yajing Chen: Thank you, Josh. Now I will review highlights from our third quarter 2025 financial results compared to the prior year period. Total revenue grew 14% year-over-year to $116.1 million in the third quarter, primarily driven by higher sales of NUZYRA supported by increasing market coverage and penetration. Demand for XACDURO remains robust, and we aim to normalize supply by year-end. ZEJULA grew sequentially but declined year-over-year amid evolving competitive dynamics within the PARP class. Given this trend as well as VYVGART dynamics discussed earlier, we are updating our full year total revenue guidance to at least $460 million. Our continued focus on financial discipline and efficiency was evident in our cost structure with both R&D and SG&A as a percentage of revenue declining significantly year-over-year. R&D expenses for the third quarter decreased 27% year-over-year, mainly due to a decrease in licensing fees in connection with upfront and milestone payments. SG&A expenses for the third quarter increased 4% year-over-year, mainly due to higher general selling expenses to support the growth of NUZYRA and VYVGART, partially offset by lower selling expenses for ZEJULA. As a result, loss from operations improved 28% in the third quarter to $48.8 million and adjusted loss from operations, which excludes certain noncash items, depreciation, amortization and share-based compensation, was $28 million in the third quarter, a 42% improvement from the prior year. While we expect meaningful quarter-over-quarter improvement in adjusted operating loss, we now expect profitability to shift beyond the fourth quarter, reflecting the lower revenue base this year. Importantly, our fundamentals remain strong. Our China business is already commercially profitable and growing, and we are executing strong financial discipline and investing strategically in R&D. We are on a path to profitability, and we'll provide updated 2026 financial guidance when we report our full year 2025 earnings. Zai Lab is at a major value inflection point with a rapidly advancing global pipeline, a commercially profitable China business and a path to profitability. We also maintain a strong financial foundation, ending the quarter with $817 million in cash, which provides us with the flexibility to invest in both innovation and disciplined execution. And with that, I would now like to turn the call back over to the operator to open up the line for questions. Operator? Operator: [Operator Instructions] We will now take our first question from the line of Jonathan Chang from Leerink Partners. Jonathan Chang: First question, on the revised revenue guidance, how should we be thinking about the key drivers for growth and the path to profitability? And then second question on ZL-1503. Can you help set expectations for the initial data readout expected in 2026? And how are you guys seeing the opportunity in atopic dermatitis? Joshua Smiley: Thanks, Jonathan. It's Josh Smiley. Thanks for the questions. I'll take the first one on revenue drivers, and then Rafael will talk about 1503. I think as we think about revenue headed into the fourth quarter here, drivers will continue to be VYVGART, we expect continued good sequential growth driven by new patient additions and continued growth and durability in terms of the number of doses patients get. We are seeing, as I mentioned in the opening remarks, we're seeing good progress as a result of the national guidelines that were issued in July, which focus on getting patients into at least 3 courses of therapy. So, we'll see, we expect to see continued growth there. ZEJULA, we are seeing a return to growth. As we've mentioned throughout the year, the quarterly numbers, I think, will be a little bit choppy because of the generic entries for Lynparza, but we do expect VBP to kick in, in the fourth quarter here, and that gives us a chance to gain share in this class, and we're confident we will. So, we'd expect to see some growth there. rest of the portfolio continues to do well. We are excited about the progress we're seeing with XACDURO, but still face supply constraints. So, we'll be somewhat limited as we come into the fourth quarter here or there. But overall, good momentum in the portfolio and good growth drivers. We'll give more specific guidance for 2026 as we get into next year. But obviously, we're looking forward to the launch of KarXT, the potential approval of TIVDAK and continued growth in these, in the core part of the portfolio. As it relates to profitability, again, our profitability will be driven by growth in the business in China. The China business, of course, is profitable today. And as we continue to drive top line growth, that profitability will be enough to cover the R&D and corporate costs that we have. So, we're still on that path. It's just, we just need the growth to continue in the portfolio. With that, I'll turn it to Rafael to talk about 1503. Rafael Amado: Thanks, Josh. Thanks, Jonathan. So, 1503, we're really excited about this molecule. As you know, it's both dual IL-13/31 inhibitors. It traps IL-13, and we know that, that is a proven pathway. And 31 is a very potent pathway in initiating pruritus. So, we think the combination plus the long half-life is going to translate into a really brisk effect, which is very fast and sustained. We have initiated the IND already. We plan to do a multi-country study. And obviously, it's a first-in-human study. We will do single ascending dose in normal volunteers and then multiple doses in patients with atopic dermatitis. In the lab, we've been looking at other models of TH2 diseases, and we are very encouraged with what we're seeing on asthma, rhinitis and other disorders that affect [TH2]. So, in addition to this, we're going to be looking at efficacy endpoints given the half-life that is long, we think that we will be able to see effects on EASI scores as well as IgA/ID [Audio Gap] and so this is going to be measured very frequently. We hope to have the data available by the middle of next year, but it will obviously accumulate throughout next year, and we will present when we have sufficient data. It's a placebo-controlled trial. So, we'll be able to have comparisons. And obviously, we know what the landmarks are here with other products. So again, a very large opportunity. This is a very common disease, even a fraction percentage of capturing in AD would be a large opportunity. And also, the possibility of expanding into other TH2 diseases, I think make this a very promising product. Operator: We will now take our next question from the line of Anupam Rama from JPMorgan. Anupam Rama: This is Joyce on for Anupam. The press release today really led with progress on your own internal global development programs. Is this a shift in how you're thinking about the resource allocation in terms of your prior focus on external BD versus now the internal pipeline? Joshua Smiley: Thanks. It's Josh. I'll start. First, we are very excited about the pipeline that we have today with the global emphasis. And of course, that will be a priority to invest in and Rafael outlined our near-term focus in terms of 1310 and getting the registration trial up and running and expanding into first line and into neuroendocrine tumors. So that's going to be a focus. We've got a really exciting global portfolio behind that. We think we have the capacity here to fully invest in those programs. We have a strong balance sheet with plenty of cash to continue to pursue on a targeted basis, the right kind of external opportunities to bring in, both on a global and regional basis. And we have the capacity within the income statement on the R&D side to, I think, fully invest behind these exciting opportunities and still manage, I think, an R&D budget that's within the range of what we've seen the last few years. So, priorities are advance the pipeline, continue to build the pipeline and continue to drive the commercial business in China, which is profitable today and will be increasingly profitable over time. Operator: We will now take our next question from the line of Yigal Nochomovitz from Citi. Yigal Nochomovitz: This is Caroline on for Yigal. We were wondering where you're seeing the greatest opportunity and greatest likelihood for success for your internal global pipeline among LRRC and PD-1, IL-2 and others. I have a second question, if okay. Joshua Smiley: Rafael, jump in on this one, please. Rafael Amado: Sure. Obviously, the most immediate one is 1310. I mean, it clearly is quite active. It is well tolerated, very few related grade 3 and above treatment effects. treatment side effects, strong brisk effect on brain metastases in untreated brain metastases. And again, very high percent of patients responding. We are starting up the Phase III study for second line. We've had recent discussions with FDA, and we're sharpening the design to the point that it's already started. We will continue to do some work on the dose, but I think that is going to finish pretty quickly. With regards to the rest of the products, obviously, 1503, I mean, these are proven pathways. So, the bar for activity is pretty low. And also, the characteristics of the product with FC modification for long half-life makes it very ideal for patients with these chronic diseases. And then with regards to some of the other ones, LRRC15 is particularly interesting because it will be the first time where a tumor is being targeted where the target is not necessarily in the tumor. So, there will be these 2 groups of patients like sarcoma patients where the tumor does express LRRC15, but others in which the tumor only expresses the target in fibroblasts. And if that is the case, if we can actually abrogate tumors where the tumor is negative, but the tumor microenvironment is positive, then it opens a whole host of tumor types. So pretty excited about this. And I think we are with others leading in ADC, which is one of our focus in oncology. And then I'll finish with PD-1 IL-12. It's been very hard to target IL-12 because it's toxic. So, we've been able to engineer an IL-12 stimulated moiety, which actually is attenuated. So, it doesn't really cause side effects of T cell activation. And at the same time, with full blockade of PD-1. So, in animal models, we can see that we can actually restore PD-1 resistant tumors, which would be pretty exciting to see. And we are seeing, as you know, more enhancements on PD-1 as a checkpoint with other molecules. And we think that an IL-12 would be one of them. So, I'll just finish by saying that we can move these things pretty quickly. We'll have 2 INDs this year. One of them will enroll this year. The other one will start enrolling in January. And PD-1 IL-12 is a candidate that will have an IND next year and hopefully, the first patient as well in the second half. So yes, we're excited about all of them. But obviously, our strongest focus right now is making sure that we cover the lives on 1310. Yigal Nochomovitz: Got it. And on my second question, we're wondering what you're doing to set yourself up for a strong KarXT launch? And what more have you learned about the schizophrenia market in China to best position KarXT in the marketplace? Joshua Smiley: It's Josh. Yes, we're quite excited about the opportunity with KarXT. Regulatory reviews are going well. So, we are hopeful for an approval sometime in the near term here. First, I think if you look in China, there's a huge opportunity. Of course, there haven't been any new mechanisms approved in severe melan illness or schizophrenia in more than 70 years. So, the opportunity for a mechanism like KarXT that provides both efficacy on positive symptoms, negative symptoms and cognition is, I think, well anticipated and thought leaders are anxious for this drug to come. So, we'll launch with a targeted sales force. I think the difference in China versus what we see in some of the Western markets, certainly in the U.S. is it's a more concentrated approach. Patients tend to be in bigger institutions. So, with a relatively targeted sales force and education program, we should be able to touch a significant portion of the market at launch. And again, just to remind people that the opportunity here is quite significant with millions of patients today suffering from schizophrenia. Obviously, it's a lifelong disease. So, we're anxious to get the approval first to get up and running in 2026 and then move toward NRDL listing in 2027. Operator: Our next question comes from the line of Li Watsek from Cantor Fitzgerald. Li Wang Watsek: I have one commercial, one pipeline question. I guess just given some of the complex commercial dynamics in China and your revised guidance, can you provide your updated views on the $2 billion revenue target by 2028? And then second is for ZL1310, sounds like you're expanding to neuroendocrine tumors next year. I wonder if you can just talk a little bit about the pathway to approval and what would be the bar? Joshua Smiley: Thanks, Li. It's Josh. I think first on the $2 billion 2028 goal, we will look at all the moves that we had in the portfolio, and we'll provide a more fulsome update next year, maybe starting at JPMorgan. But to comment, we feel really good about the portfolio we have today. As Samantha mentioned upfront, I think the most exciting piece is the opportunity for sales outside of China in 2028. We mentioned that 1310, we see a path for an approval as early as late 2027. So, to have some significant sales in 2028 coming from the U.S. in small cell lung cancer, I think, quite exciting and certainly represents a new inflection point and phase of growth for us. The portfolio in China continues to grow. And we've talked about the dynamics with VYVGART, which we expect over the course of the next number of years to continue to grow at a good and steady rate, supplemented by additional indications. since we have talked about that revenue goal, we've added Pove and Veli, both of which can launch in the 2028-time frame. So, we're quite excited about the long-term growth potential of the portfolio and most excited this year about the progress on 1310 and what it means for sales, not just in China, but outside of China within this time frame. Yes, Rafael, if you can jump in, please. Rafael Amado: Yes. Thanks, Caroline. So, I'll talk a bit about NEC. So, the study that we have has 2 cohorts of carcinoma. So, these are highly proliferative tumors that have a poor prognosis. One is gastroenteropancreatic tumors or GEP, and the others are other NECs that can arise from other sites, other organs. We are seeing responses in both groups. It's still early days, obviously, and we're accumulating more and more evidence of activity. These are patients that have had more than one line of therapy, which tends to be platinum-based therapy. And there really isn't any standard for these patients. The tumors tend to grow fast and actually mortality is quite high. So, in terms of how we want to proceed with this, the idea would be to sort of circumscribe the tumors that have similar natural history like GEP, large cell non-small cell lung cancer and also tumors of a non-primary and do a study, a single-arm trial and try to characterize the response rate. I think anything above 30% to 40% would be of great interest because there really isn't any therapy. Many of these patients go to clinical trials with reasonable durability. So, we would plan to have discussions with regulatory authorities to see whether given the unmet need single-arm trial with these kinds of results could result in an accelerated approval. The alternative is to do a physician choice comparator, which also we will be prepared to launch. And given the activity that we are seeing, if it continues, it wouldn't be a very large study, particularly given the large unmet need and the fact that this is an orphan indication. So pretty excited about what the agency will see and opine once we have sufficient follow-up and sufficient patients to characterize the activity. Operator: Our next question comes from the line of Lai Chen from Goldman Sachs. Ziyi Chen: Two questions. The first one is regarding the guidance. We try to understand a bit more about compared to the expectations set in any guidance previously, in which areas has the company encountered deeper than anticipated challenges in China environment, particularly for VYVGART and ZEJULA. Could you elaborate a bit more? And also, I think beginning of the year, in terms of the guidance, not only about the top line, but also you mentioned about fourth quarter cash breakeven target. Is that still intact? That's my first one. Second is regarding the R&D because Zai Lab is really pivoting towards a global R&D company. So, in terms of the pipeline buildup, particularly for the early-stage pipeline buildup, now we got oncology ADCs, we have 2 different ADCs. We have PD-1, IL-12, and we also have immunology. So we're trying to understand a bit more about the strategy, the portfolio strategy when you're deciding what to go after and what not to do. So, could you provide a bit more color on that? Joshua Smiley: Sure. Thanks. First, on the performance this year, I would say, relative to our initial expectations, VYVGART, while growing well, and we're pleased with the underlying dynamics, as we've mentioned throughout the call, it's just taking longer to get to the rate that we, of treatment that we see in the U.S. market, for example. So, we're focused now on getting patients up to at least 3 cycles of treatment, and we're seeing progress there. It's just slow. So, I would say that's our sort of on the VYVGART piece, that's the piece that has been the slowest relative to our expectations. Again, I think this is what we're realizing is it's a long-term build the market opportunity. We have the long term with this product, and we're seeing good response to things like the national guidelines and our continued promotional and educational efforts. So just a slower ramp to get to the kind of treatment duration that we see in the Western markets. On ZEJULA, we expect to gain share as a function of Lynparza going generic, and we saw some delays there in terms of, relative to our initial expectations relative to VBP. Again, we expect that to kick in beginning in the fourth quarter and set us up well for next year. Certainly, again, there are dynamics related to affordability and hospital purchasing and otherwise that may make that a bit choppy. But I think the underlying opportunity for ZEJULA is to gain share from what had been Lynparza as it goes to generic. The third piece for us is then just we've talked about this through the year. It's a great product and our partner, Pfizer, is seeing really great response and demand in the hospital setting for this drug. And we've had more supply constraints than we anticipated at the beginning of the year. We're working through those, and we're hopeful that as we come into 2026, those will be resolved, and we'll be able to fully meet the demand that we're seeing in the marketplace. Those things together, of course, will help and drive profitability. I think if you look at our path to profitability and focus on the noncash, I mean, on the cash sort of earnings, which is our non-GAAP number, you see continued good progress in that regard. And that progress should continue. We'll give you an update for 2026. But really, it's just going to be a function of continued growth on the top line. And I think at the numbers that we're suggesting here for the fourth quarter, we probably won't quite get there, but we'll still show good improvement, and we'll be on that path as we head into 2026. Rafael, if you can talk about how we think about the portfolio and the next opportunities. Rafael Amado: Sure. So, the portfolio will continue to grow as a blend of both internal as well as external opportunities. I'm really proud of the fact that many of the products that are now in development came from our protein science laboratories, which have been very productive. But in terms of strategy in oncology, we will continue with antibody drug conjugates, and we will continue to innovate there. There are other antibodies that we haven't mentioned that are in the pipeline at the moment, and we spend a lot of time trying to characterize the antibody vis-a-vis the target. and then use the right payload linker. So that's going to continue to grow. We also have an interest in immunocytokines, which I mentioned before. We have other immunocytokines that will come after the PD-1 IL-12. And then T cell engagers, we've made an effort in T cell engagers, and we will be reporting with time some of these candidates entering the clinic. Outside of oncology, you are right. I mean, we have been focusing on autoimmunity, neuroscience and immunology. In autoimmunity, we are focusing on cytokines, both antibodies or bispecifics perhaps cell depletion as well and then signal transduction of some of these cytokine pathways, which involve small molecules as well. And so overall, we will remain opportunistic, obviously, for either regional or global opportunities that have novel mechanisms of action, have differentiation and really make a big difference for patients. But the guardrails, if you will, are the ones that I just described to you. So, thanks for the question. Ying Du: Yes. I think, Joe, just like Rafael was saying, we, even though our pipeline in China, regional pipeline has oncology, autoimmune and neuro and anti-infectious. But for our global pipeline, we are focusing on oncology and autoimmune and anti-inflammatory specifically that Rafael was saying. So internally for global development pipelines, we are only focused on those 2 areas. Operator: Our last question today comes from the line of Clara Dong from Jefferies. Yuxi Dong: This is Jenna on for Clara. We have 2 questions, if we may. First, on VYVGART. I think previously, we were under the impression that sales will be back half loaded. So, I was just curious what kind of visibility or leading indicators you may have for Q4 and 2026? And more specifically, can you comment on, for example, pace, number of cycles on average patients are getting today? What does the pace look like over the next few years to reach the 3 average doses? And then our second question is on Bema in the context of the Amgen announcement. I was just curious if it's still possible to have a path forward for just China based on the trials you're running or the data you have in hand? Joshua Smiley: I'll start with VYVGART and then Rafael can talk about Bema. I think on VYVGART, what we're seeing is good underlying growth in terms of duration or number of vials or cycles patients get. I think as we started the year, on average, we were probably close to 1 cycle per year or per patient per year, and that represented the fact that at launch, we were getting lots of the acute patients and VYVGART, of course, works really well in an acute setting, but to get the full benefit for patients with gMG that allows them to work and live their lives fully, you need to get the maintenance benefits, which kick in at least 3 cycles. Through this year, we're seeing progress towards an average of 2 cycles per year. And as you mentioned in your question, the goal is to get to at least 3 and over time, aspirations toward 5, where we see the full benefits in clinical trial and real-world setting, so I think as we look into next year, we'd expect the underlying growth to continue probably at this, what we're seeing in terms of volume, so sort of number of vials in total is sequential quarterly growth in the sort of low teens. And I think that's reasonable to expect as we head into next year and continue to sort of climb towards that on average, 3 cycles of use; again, supplemented by, or accelerated by the national guidelines that were issued in July and our efforts to educate physicians in that regard. So, we're looking forward to the continued underlying growth here, and I think expect that to continue on a good basis as we head into 2026. Rafael, do you want to talk about Bema? Rafael Amado: Sure. So, we're still digesting the data. You saw the data at ESMO that was presented with the primary analysis of 096 and then the final analysis with this attenuated treatment effect. And then Amgen announced that 098 was a negative study in terms of not meeting statistical significance. So, we're looking at with Amgen and our partner at translational markers and subgroups, and we will be doing this in the upcoming weeks and make a decision. But our opinion is that it will be very challenging to get an approval in China with this data set. So as such, we're thinking about how to deploy these resources to the rich pipeline that we've been discussing today and try to capitalize on the fact that we will have this opportunity of time, people, resources and effort to advance the current pipeline. Operator: Thank you, we have come to the end of the question-and-answer session. Thank you all very much for your questions. I'll now turn the conference back to Dr. Samantha Du for her closing comments. Ying Du: Thank you, operator. I want to thank everyone for taking the time to join us on the call today. We appreciate your support and look forward to updating you again after the fourth quarter of 2025. Operator, you may now disconnect this call. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect your lines.
Operator: Ladies and gentlemen, thank you for standing by. [Operator Instructions] I would now like to turn the conference over to Tahmin Clarke. Please go ahead, sir. Tahmin Clarke: Thank you, operator. Good afternoon, and welcome to Arlo Technologies Third Quarter 2025 Financial Results Conference Call. Joining us from the company are Mr. Matthew McRae, CEO; and Mr. Kurt Binder, COO and CFO. If you have not received a copy of today's release, please visit Arlo's Investor Relations website at investor.arlo.com. Before we begin the formal remarks, we advise you that today's conference call contains forward-looking statements. Forward-looking statements include statements regarding our potential future business, operating results and financial condition, including descriptions of our revenue, gross margins, operating margins, earnings per share, expenses, cash outlook, free cash flow and free cash flow margin. ARR, Rule of 40 and other KPIs, guidance for the fourth quarter of 2025, the long-range plan targets, the rate and timing of paid subscriber growth, the commercial launch and momentum of new products and services, the timing and impact of tariffs, strategic objectives and initiatives, market expansion and future growth, partnerships with various market leaders and strategic collaborators, continued new product and service differentiation and the impact of general macroeconomic conditions on our business, operating results and financial conditions. Actual results or trends could differ materially from those contemplated by these forward-looking statements. For more information, please refer to the risk factors discussed in Arlo's periodic filings with the SEC, including our annual report on Form 10-K and our most recent quarterly report on Form 10-Q filed earlier today. Any forward-looking statements that we make on this call are based on assumptions as of today, and Arlo undertakes no obligation to update these statements as a result of new information or future events. In addition, several non-GAAP financial measures will be discussed on the call. A reconciliation of the GAAP to non-GAAP measures can be found in today's press release on our Investor Relations website. At this time, I would now like to turn the call over to Matt. Matthew McRae: Thank you, Tahmin, and thank you, everyone, for joining us today on Arlo's Third Quarter 2025 Earnings Call. Q3 was another record-breaking quarter for Arlo across numerous performance and financial metrics. I'll start by highlighting our outstanding SaaS business, which continues to grow and propel Arlo to new heights. We added 281,000 paid accounts during the quarter, well above our target range of 190,000 to 230,000 and which drove our total paid accounts to 5.4 million. This performance was driven by net additions in our retail and direct channel, coupled with stronger performance from our partner, Verisure. I'd like to take a moment to congratulate Verisure on their recent acquisition of ADT Mexico and their successful initial public offering last month. Their success is so well deserved, and we look forward to continuing to be a part of their growth and outstanding execution across their expanding footprint. Arlo Secure 6, our latest AI-based security platform, is also driving our performance with users finding substantial value in the features and capabilities. In our retail and direct channel, average revenue per user was over $15 per month, and the lifetime value of each user grew to over $870, a new record for Arlo. These metrics helped propel Arlo's annual recurring revenue to $323 million, up 34% year-over-year and another record for the company, while service gross margin expanded 770 basis points to more than 85%. In addition to this impressive service performance, Arlo also executed the largest product launch in company history during the quarter, comprised of new platforms and products across our Essential, Pro and Ultra product tiers. These platforms not only bring a 20% to 35% reduction in BOM costs and new form factors such as pan, tilt, zoom, they also contributed to a nearly 30% year-over-year unit sales growth in Q3. These new products are receiving high ratings from both professional and user reviews, which call out the ease of setup, high performance and new capabilities across the lineup. The execution of this product launch and transition was nearly flawless. Arlo launched over 100 SKUs simultaneously across channels on time despite several shipping and weather disruptions, all while managing the [ ex-ramp ] of inventory for a smooth transition. This is extraordinarily difficult to achieve, and a huge congratulations and thank you to the Arlo cross-functional teams on this exceptional outcome. There are very few companies in the world that have successfully developed world-class capabilities in both the Software Service segment and the hardware device segment. This quarter is a great illustration that Arlo is one of those rare companies that can not only excel in both areas, but also bring these segments together to create compelling user experiences and drive real shareholder value. And that could not be more obvious based on our full Q3 results and profitability. Adjusted EBITDA was up 50% year-over-year and reached $17 million. GAAP earnings per share was $0.07 in the quarter, a new record for Arlo. And year-to-date, we reported a massive $0.35 improvement compared to the first 9 months over last year. And looking at our services business in a Rule of 40 context, Arlo achieved a result of 46, which underscores the elite performance against all peers in the SaaS space. Looking ahead to Q4, Arlo is exceptionally well positioned in a competitive market with our new product launch, and we expect to see 20% to 30% unit growth year-over-year, which sets us up well for service revenue growth heading into 2026. And we continue to see great progress across our strategic accounts, including Verisure driving growth via their IPO, Allstate deploying kits to home insurance customers and ADT testing units in the field ahead of next year's market launch. Expect more announcements in this area over the coming quarters. Given this performance, it is clear that Arlo is making excellent progress against our long-range plan targets of 10 million paid accounts, $700 million in ARR and an operating income of over 25%. Now I'll turn it over to Kurt for a more detailed review of our Q3 results and our outlook ahead. Kurt Binder: Thank you, Matt, and thank you, everyone, for joining us today. During the quarter, we again delivered outstanding financial results driven by our commitment to our services-first strategy. Every decision that we make as an organization is centered around delivering an innovative and value-added smart home security experience that drives annual recurring revenue, and these efforts are yielding strong results. As Matt mentioned, the LTV generated by our paid accounts is at an all-time high and ensuring that we continue to fill the acquisition funnel and drive our subscriptions and services revenue is paramount to delivering best-in-class SaaS metrics and achieving our long-term financial goals. Now on to the results for the quarter. Subscriptions and services revenue was $79.9 million, up 29% year-over-year, driven by a significant increase in ARPU and a great pace of paid account adds over that same period. This strong performance is largely due to the introduction of our new AI-driven Arlo Secure 6 rate plan offerings. Additionally, our intense focus on enhancing customer journeys and delivering a differentiated value proposition drove new paid accounts to select our premium rate plans and existing customers to upgrade to higher rate plans. Paid accounts continued their strong growth trajectory as we generated 281,000 paid subscribers in Q3. We exited the quarter with a base of 5.4 million paid accounts, an increase of 27% year-over-year. Improving ARPU trends and the growth in our retail paid account base reflects our ability to guide customers to our higher-value AI-enhanced service levels and in turn, drove our annual recurring revenue to $323 million, up 34% over the same period last year. Total revenue for the third quarter came in at $139.5 million, up slightly from the prior year period, with our subscriptions and services revenue comprising 57% of total revenue, up from 45% in the same period last year. This level of predictable and recurring service revenue is the key driver of our substantial improvement in profitability and our ability to deliver best-in-class SaaS metrics, including ARR growth. Product revenue for the period was $59.6 million, down $16.2 million or 21% when compared to the prior year and as a result of the industry-wide decline in ASPs as well as the frequency and depth of promotional campaigns, especially in Q3 as we promoted our end-of-life or EOL products to make way for the sell-in of our broader next-generation product portfolio. We continue to drive new household formation by optimally pricing our products to increase POS volume and utilize the devices as a subscriber acquisition vehicle. The refresh of our product portfolio offers a considerable reduction in BOM costs, enhancing our competitiveness across various price tiers while also helping to offset some of the tariff impact. And with the upcoming holiday season, we are leveraging this portfolio to help accelerate the growth trajectory of our subscriptions and services revenue. Given the outstanding subscriptions and services gross margin and expanding profitability with each new paid account, our decision to sacrifice product gross margin for durable, highly profitable subscriptions and services revenue is an easy one. We view a modest decline in product gross margin as part of our cost of customer acquisition. And even after considering the incremental investment, we are still delivering a best-in-class LTV to CAC ratio in the range of 3x. Our goal to drive solid POS volume and gain access to additional households in Q3 occurred as planned, and we expect a similar outcome in the fourth quarter. We believe the strategy insulates us from certain external market factors and drive shareholder value, and we will continue to lean into this approach during this Q4 holiday selling season. In Q3, international customers generated $58 million or 42% of our total revenue, down from $66 million or 48% in the prior year period related to the increased level of subscription and services revenue from our U.S. retail business and the successful launch of our new products. Verisure continues to be an important partner for us in Europe, and we thank them for their continued collaboration and expect them to remain a solid growth driver in the future. From this point on, my discussion will focus on non-GAAP numbers. The reconciliation from GAAP to non-GAAP figures is detailed in our earnings release, which was distributed earlier today. Our non-GAAP subscriptions and services gross margin was 85%, again, a new record and up 770 bps year-over-year. The significant growth in services gross margins is attributable to enhanced ARPU, coupled with a reduction in the cost to serve our customers, including lower storage and compute costs. Product gross margins were negative, representing a modest decline when compared to the same period last year. The decline in product gross margin is related to the full quarter impact of tariffs approximating $5 million, coupled with industry-wide ASP declines and planned promotional spend on EOL products to optimize inventory levels ahead of our recent product launch. Even withstanding these items, we reported consolidated non-GAAP gross margin of 41%, up 540 bps year-over-year. Our continued improvement in profitability in a period where the full impact of tariffs was experienced underscores the significant ancillary benefits that the shift to our services enterprise provides us. Total non-GAAP operating expenses for the third quarter were $41.1 million, up 6% from $38.7 million in the same period last year. The year-over-year increase is primarily driven by app store fees and an increase in personnel to support R&D investment as we launch our new innovative product offerings and Arlo Secure 6 this year. Our leveraged go-to-market approach has enabled us to maintain our operating expenses at roughly $40 million per quarter or less since 2022, while growing ARR at a 37% CAGR during that period, which is truly remarkable. For the third quarter, adjusted EBITDA was $17.1 million or an adjusted EBITDA margin of 12.2%. The growth in adjusted EBITDA represents a 50% increase year-over-year and a powerful testament to the operating leverage created by scaling our subscriptions and services business. Further, we generated non-GAAP net income of $18.1 million for the third quarter and $53.3 million for the 9-month period ended September 30, which was up an impressive 68% when compared to the same period last year. Regarding our balance sheet and liquidity position, we ended the quarter with $165.5 million in cash, cash equivalents and short-term investments. This balance is up about $19 million since September of 2024, even withstanding certain strategic investments and our ongoing share repurchase program. We generated record free cash flow of $49 million during the first 9 months of the year, representing a free cash flow margin of almost 13%. Our Q3 accounts receivable balance was $76.7 million at quarter end, with DSOs at 50 days, up from 45 days in the same period last year. Our Q3 inventory balance was $44.4 million, down from the $52 million level in September of last year and a testament to the amazing job that our supply chain team has done with optimizing inventory levels ahead of our portfolio refresh. Inventory turns were 6.4x, up from 5.8x last year as we sold in inventory for one of our largest product launches in history. Now turning to our outlook. Even with the full impact of tariffs during the period, our business generated outstanding financial results driven by the resilience of our subscriptions and services business. The recent launch of our innovative product portfolio gives us dry powder to remain competitive given the solid reduction in BOM cost. We will leverage our new products and competitive ASPs to drive strong POS volume and accelerate paid subscription growth. As a result, we expect our Q4 consolidated revenue outlook to be in the range of $131 million to $141 million. Additionally, we expect non-GAAP net income per diluted share for Q4 to be in the range of $0.13 to $0.19. And now I'll open it up for questions. Operator: [Operator Instructions] The first question comes from Adam Tindle with Raymond James. Adam Tindle: I just wanted to start maybe on margins, obviously, acknowledging that gross and operating margin overall is quite healthy here. But when we look at the components, you had your largest launch with a 20% to 30% BOM cost reduction that you talked about, but product gross margin is still pressured. I understand there's a number of moving parts driving that. Maybe the question would be, if you could just remind us the accounting method for inventory and wondering if that BOM cost reduction is maybe not fully reflected in the Q3 results that we're seeing. And secondly, there's an inventory clear out that you mentioned. I wonder if you could, Kurt, just help us quantify that. Is that something that was -- what did it do to impact in the quarter? And does it carry into future quarters from here? Kurt Binder: Yes. Adam, let me just start by saying, as we've discussed in the past, we are very much focused on our consolidated gross margins, and we were extremely pleased by the fact that if you look at the third quarter consolidated gross margins relative to last year, we were up about 540 bps. If you look at that margin on a year-to-date basis, we're up about 640 bps. So as we've mentioned before, we hold ourselves accountable to continue to grow consolidated gross margin, and we'll continue to do that here in the upcoming future. As it relates to the product gross margin you're referencing, Adam, we were at -- on a non-GAAP basis at about 17% -- negative 17.3%. What's embedded within that number is a number of things. So first and foremost, obviously, we had the first full quarter of tariffs. If you actually look at it closely and you strip out tariffs, that margin actually would decline to about a negative 8%. So small -- or I would say, a pretty significant shift from the 17% and in that range of, say, high single digits. Additionally, we did have a fair amount of EOL investment that was necessary to make sure that all of the inventory in the channel was at the right levels, which would enable us to load in the right amount of inventory on the next-generation platform of products that we just rolled out. So there was a fair amount of upfront spending to encourage promotional activity to move that inventory through. That inventory has now been moved through, and we feel really good about where we stand right now as we go into the fourth quarter. So I have to say that we're extremely pleased with the fact that if you look across all of our operating metrics, especially our profitability targets, whether it's adjusted EBITDA, non-GAAP operating income, gross margins, they are all moving up and to the right, and we're extremely pleased with the overall performance of the team in this area. That's helpful. Adam Tindle: Yes. And it provides obviously a platform for future growth in margin when some of these temporary items rebound as well. So it makes sense. Maybe a follow-up, Matt. There's a number of growth drivers in the future as well for the business. I know you addressed some of the partnership in particular in your prepared remarks. So I want to ask a question on 2 of those. First is on Verisure. You mentioned the ADT Mexico piece of this. I wonder if that's maybe a broader opportunity for Arlo to expand more in Latin America in general. Would that need to be sort of a separate RFP process for you to win? Or do you have sort of visibility into that as an opportunity? How big could that be? And then secondly, on ADT itself, you mentioned they're testing units ahead of the market launch. Just wonder -- I understand you're probably going to be a little bit limited on what you can say here, but any framework that you can get as you get closer to this in setting investor expectations on the magnitude of that partnership? Matthew McRae: Yes. Great question. And when you talk about growth drivers, Adam, you're 100% right when we're focused on a couple of areas. One is, as Kurt was just mentioning, the growth in our normal channels like retail channels, and that's going really well. We mentioned on the call that units were up year-over-year by nearly 30% from a POS perspective, and we expect somewhere between 20% and 30% growth there. One of the other areas is exactly what you're talking about, what we call strategic accounts or our more B2B plays. There's a couple, and you mentioned some of them. So the ADT Mexico acquisition by Verisure, I believe, actually closed yesterday. in European time. And we've been actually working with them, as you probably could guess, behind the scenes for months, if not actually quarters, preparing and actually certifying all of our products for Mexico. So there's no incremental business to win. As you know, we are, at this time, the exclusive provider of some of the back-end service for them. We do a lot of camera development for them, both on Arlo product for those certain regions, but also some custom products that we've developed for them. So our expectation is that ADT Mexico acquisition by Verisure is kind of the first area they're focused on with potentially a more bigger expansion across Latin America. So it is a new region, I think, for the partnership to expand into over time and drive a lot of growth for both companies. So we're excited -- really excited about that. Then you look at EDT, I can't say a lot about EDT beyond what I said on the call, except that from an Arlo execution perspective in conjunction with that partner that we hit all the timelines we needed to hit, and there's actually product in the field. And from a user experience perspective, it's stellar. So we're really excited about talking more about that in the future, and we'll leave that to the date that, that actually goes live. And then I mentioned on the call that this is an area that we're excited about, and you should expect some more information over time. There are several other partnerships that we're in discussion with. And I expect between now and probably the end of Q1 or maybe going slightly into Q2, we'll have a couple of more sizable name brand accounts in the partnership space that we'll be talking about that could have a material impact on us going forward. So if you -- if I pull back and talk about how we get to our long-range targets that we talked about on the call, the 10 million subscribers, the $700 million in ARR and increasing that operating income over 25%. Kurt and I on previous calls, have said we think about 60% of that incremental growth over where we are today is going to come from strategic accounts. And I would tell you, based on recent activities and some of the things we can talk about and some of the things that are coming soon, I absolutely believe that's the case that we'll see 60% of that incremental growth come from strategic. And that's saying a lot because we think the traditional channels, retail and direct are growing really nicely, and we think there's a lot of growth there. So hopefully, that gives you a little bit more color on those specific accounts and where we think this part of our business is headed over the next couple of quarters. Operator: [Operator Instructions] The following comes from Jacob Stephan with Lake Street Capital Markets. Jacob Stephan: Nice quarter. Just wanted to ask, you guys made some comments last call, gross shipments in Q3 will be higher than you had originally expected. And you also kind of mentioned 20% to 30% unit growth as we look at the second half of the year here in Q4 specifically. But maybe you could help us kind of think through -- we saw higher negative margin in the products segment, but products actually -- product revenue was actually higher than we kind of had anticipated. And I understand that tariffs are part of the impact there. But maybe help us kind of contrast that with where you expect -- because it seems like you guys are a little bit above plan in Q3. And maybe I'm wondering if there's any kind of pull forward into Q3 versus what's going to be in Q4? Kurt Binder: Yes. There's no pull-in. I mean it was a very strong quarter. And to kind of break that down a little bit, the growth ship number is obviously strong because of the ex-ramp and the load-in of all of our new products. We always have a little conservativeness built in when we do the forecast for the quarter because there's a lot of things you can just run into from a supply chain logistics perspective. And I kind of mentioned on the call, we had a -- there was a container ship that caught fire in Korea. There was containers dropping in the ocean in Long Beach, none of ours, by the way. There were 2 typhoons. I mean, so there's always some things going on. And again, the team here executed exceptionally well around all of that, and we landed all the product where we needed to on time. And so I would say is that little bit of buffer we leave in for supply chain issues maybe during the quarter, we didn't need. And so you saw a pretty strong quarter on gross ship. The 20% to 30% or the inside the quarter, the 29% growth on year-over-year units, that's actually our forecast and results on POS. So how many units actually sold through the channel. And we like to talk about the growth that we're seeing there, 29% in Q3 and the 20% to 30% we're anticipating in Q4 because, as you know, shipments out really then become household formation, which then becomes service revenue, which is what's obviously driving the outstanding performance of the company and the expansion of profitability over time. So that's -- the gross ship number, Q3 is always strong because of seasonality. I think it was exceptionally strong because of the execution of the team and the load-in of so many new products. But the 29% in Q3 and the 20% to 30%, that's actually commentary on POS, which actually leads to future service revenue. Jacob Stephan: Yes. Understood. I know you guys run a tight ship on the logistics team. But maybe kind of help me think through some of the more important partners then as we enter kind of the back half of the year here. Obviously, you guys have bigger shelf share at Best Buy. You're kind of growing into a longer-term partner -- a bigger partnership with Walmart. Help me think through some of these strategic kind of retail partners? Kurt Binder: Yes, absolutely. I mean I think just commenting on Q4 in general, we know it was going to be a very competitive quarter. We're seeing great demand in the channel. So that's a good sign as we roll forward on Q4, but we knew it was going to be a competitive quarter, and you can see us preparing the entire company to actually be really successful inside of a competitive environment. So the product launch with 20% to 35% COGS declines as an example of that. A lot of the promotional activity we've got lined up with our biggest partners. Some of those are obviously Amazon, which is a big part of the market. We're actually gaining some share there week by week, and so we're happy about that. You mentioned Walmart. I mean, Walmart is part of our thesis around this product segment going more mass market. And we're seeing a wider population actually enter the space as the awareness over the product category and people feeling less safe in general is starting to drive. And we've been proven right over the last couple of holiday seasons. So we're expecting a strong holiday season with Walmart as well. And that's the channel as we've launched in our new product line, we've gone from 4 SKUs or 5 SKUs to closer to 9 SKUs at Walmart, so almost a doubling of shelf share there. And that's partially what's driving some of the unit velocity year-over-year from a quarter basis and why we feel like we're going to be exceptionally positioned with this product line going throughout 2026. So from a partnership perspective or where we think some of the growth is coming, it's across the board. I think we'll see strength in our strategic accounts. And then a lot of our big retail partners were set up, I think, very well for what will be a competitive quarter, but something we completely anticipated with our product launch and our promotional activity. And for us, as you know, it's really about driving that household formation to see that service revenue grow through the end of the year and actually tip over into a strong service quarter in Q1. Jacob Stephan: Got it. And maybe just kind of continuing on the service revenue growth question and comments. When we look at paid sub adds of 281,000, maybe you could kind of help us piece out the timing of those subs in the quarter, obviously, keeping in mind your $310 million service revenue guidance for the full year. Matthew McRae: Yes. I think it was pretty much through the quarter. There are some that kind of came a little bit later as we promoted the older product through the channel that Kurt was talking about, some of the EOL product towards the end of the quarter as the new product came in. So it might be a little bit more backloaded than you would expect over maybe a traditional just very linear trajectory through the quarter. But that 281,000 was really driven by 2 things. One, Verisure performed very well, and I think that was part and parcel of their IPO and going to market there and just really leaning into sales and executing extraordinarily well in Europe. But we're seeing strength in our retail and direct channel. as well, which is great. And so you see a more balanced revenue line when Kurt was talking about the split between Europe and the United States. So you're seeing some strength across our traditional channels. Another indicator of that is what I was saying before around seeing nearly 30% unit growth in the quarter. Now if you remember, when we guided the year on service revenue, we guided close to $300 million in service revenue. And on our last call, already seeing what was happening in Q3, we took that up to closer to $310 million. And so that's the confidence we're seeing. We are already seeing some of that sell-through happen in Q3 on the previous call and why we were willing to kind of bring up that guidance to demonstrate how strong not only the lift and the growth in the market of unit sales going through to the end user, but that it is resulting in higher than originally expected service revenue, which obviously leads to greater profitability. Operator: Thank you. This concludes today's conference call. You may now disconnect.
Adriana Wagner: Good morning, and welcome to the ENGIE Brasil Energia's Third Quarter '25 Earnings Results Video Conference. I'm Adriana Wagner, Investor Relations Analyst at ENGIE Brasil, and I would like to make a few announcements. [Operator Instructions] It is worth remembering that this video conference is being recorded at our site, www.engie.com.br/investors, we have made available the results presentation and earnings release filed at the CVM, which analyzes financial statements, operational results, ESG indicators and progress in the implementation of new projects in detail. Before proceeding, I would like to clarify that all statements that may be made during this video conference regarding the company's business outlook should be treated as forecast depending on the country's macroeconomic conditions of the performance regulation of the electric sector besides other variables. They are, therefore, subject to change. We remind the journalists who wish to ask questions that they can do it through e-mail sending it to the company's press conference to present the results. We have with us today, Mr. Pierre Gratien Leblanc, the CFO and IRO; Guilherme Ferrari, Renewable Energy and Storage Officer; Marcos Keller, Director of Energy Trading; and Leonardo Depine, Manager for Investor Relationships. I would like to give the floor to Pierre to begin the presentation. Pierre Gratien Leblanc: So good morning, everyone. I will do it in English. So I hope it will be fine for everyone. So thanks for joining us in this -- during this hour. Always a very, very important moment for us to meet you and to explain you the financial results and the main highlights for the last quarter '25. So if we start with the highlights, it can be the main achievement we realized during this quarter are the following. First of all, regarding our project Assuruá and Assu Sol, we now almost complete the physical phases, and we are starting the operational commercial operations. So we are on time, and it's a very, very great achievement for us. Then we complete also the acquisition and the integration in our portfolio of the 2 hydro power plant, Santo Antonio do Jari and Cachoeira. So now there are -- the 2 assets are fully embedded in our portfolio management and since mid of August, and they are starting to contribute in our EBITDA. We won for the 15th time the trophy of transparency in accounting, Anefac, which recognize the transparency and the quality of our financial statements. And it's a very, very great job from teams and our accounting team. We also be certified as the Best Place to Work according to the GPTW, Great Place to Work Brazil. So good company and good achievement from our HR team. Then I have to mention that there is a subsequent event post from Q3. This is an increase of our social capital. So we decided because we need to comply with the law and our profit reserve was above our social capital in late '24. So we need to increase our capital through the profit reserve incorporation. So we will do it during November months, and we will do it through bonus shares. Then Q3 results in terms of finance is a very, very -- next slide, please. is a very, very good, robust and solid results. As you can see on the slide, our EBITDA grew by almost 12.54% compared to last quarter '24, which is good results. And if we look at year-end -- year-to-date EBITDA, of course, on a recurring basis, we increased our EBITDA in '25 by 6.4%. It's a little bit less true regarding the net recurring results because you can see that we decreased by -- in year-to-date by 8.4% our net income due to the -- mainly 3 factors. First of all, we see an increase of our depreciation of assets because we do have compared to last year, 3 big assets now in operation like Caldeirao Cachoeira. We also have an increase of our financial expenses linked to the high interest rate in Brazil in '25 much higher than in '24. And we do have an increase in our tax expenses also. But overall, very good results, robust. We deliver what we say. So ENGIE is a healthy company on that. Then regarding the ESG KPIs, well oriented to be fair, all of them, except maybe -- and unfortunately, we have to -- 4 accidents during the last quarter '25, 4 accidents with work stop days, some days. So we are still paying a lot of attention, a lot of focus on that. And we also support a lot the increase of the women in our leadership team. So we are on track. We are on the good way to achieve our results. We increased the percentage of women in our leadership team. And we continue to invest in innovation and in our responsibility, social responsibility even if we decrease a little bit our contribution on that. Now time to leave the floor to Guilherme in order for him to present the operation in renewables. Guilherme Ferrari: Very well, I'm going to explain what underlies these figures. Here, we have the availability of our wind, solar and electric assets. Our performance continues to improve, especially in wind and photovoltaic. We have a team that works closely with our suppliers so that we can have greater availability in our equipment. This is the effort of our team, of course, with the help of investment, always seeking good performance of our assets. Now the performance has been significant in these 2 technologies. In energy, we are subject to seasonality, but we're also following a very good availability standard. In transmission, also a very high availability. And of course, these are assets that are more predictable in terms of operations, except for unforeseen things, but we're doing well in transmission as well. Now regarding curtailment, the hot topic in the sector of renewable energy, it has been significantly impacting our generation. The impact is on wind, solar assets and very much aligned with what is happening in the system. We attempt, of course, to minimize this, optimize everything with maintenance, management of these curtailments. We hope that a solution for curtailment will come in the fourth quarter with operational adjustments that should come from ANEEL and the National Integration System. Now another important point that has already been mentioned by Pierre is the acquisition of Cachoeira Caldeirao and Santo Antonio do Jari. And I think you can go on to the next slide. No, perhaps not. If you could go back. Therefore, the organic growth in this quarter, where we added 680 megas additionally from [ Cerrado ] and additionally, the 2 hydroelectric plants mentioned by Cachoeira Caldeirao and Santo Antonio do Jari with 612 megawatts. Next slide, please. As has already been mentioned, we see a growth in generation. This comes from our organic growth and from the M&A operation we have just carried out. Once again, it's organic growth and an enhancement in performance. This year, the wind situation was above what we had expected, helping us to minimize the issue of curtailment. Operational enhancement, better natural resources, both solar and wind, all of these are helping us have an increase in power generation. Next slide. Keller, you have the floor. Marcos Amboni: Good morning to everybody. And I think this slide summarizes our trading activity for the quarter. It was an excellent quarter. And in the graph to the right, you can observe that we had very good sales during the quarter. Now this is a comment we made in the call of last quarter that some operations that were under negotiation are still not reflected in our balance. And this is the case of this quarter, where they are reflected, the variation is due to the accounting of new productions with high production levels, and we're showing the availability, new contracts for all the years until 2029. So we have good volumes, as you can see. And besides these good production volumes, you can see the number of our consumers. We have a good evolution in that figure of consumers when compared with the same quarter last year. 17.6% increase of consumers. We have 2,056 at the close of the quarter and a growth of 24% in consumer units served in the third quarter of '25 until the end. Once again, very positive figures in energy sold, volumes sold as well as in our consumer portfolio with a lower ticket perhaps, but with higher margin. We can see the position of our resources available until 2030 going forward. This means that we continue with that strategy of contracting through time, fine-tuning tactical adjustments, gradual growth, guaranteeing revenues and the predictability of our results. I think this is what I wanted to say regarding that slide, and I am at your disposal during Q&A. Well, to go back to the projects that are under implementation, the Assuruá Wind Complex, as Pierre mentioned, the physical progress has been concluded. It is 100% operational. We're waiting for ANEEL dispatch to enter commercial operations of 100% of this complex. And we're waiting for the decision of ONS that has created new procedures to obtain, well, the license and to test these assets. It's worth highlighting that the Assuruá Wind Complex, as you already know, has quite a bit of supply and the performance has been much above what is expected. It surprises us in terms of its performance. It's the largest wind complex in Brazil and also the part with the best performance throughout Brazil. This project was delivered within the forcing budget within the right time line with health and security fully complied with. And we're in the final stage of execution, the environmental part, the recovery of degraded areas and investment in social areas surrounding the assets location. Next slide, please. Assu Sol, we have concluded it. We are progressing in installation activities. And because of this new procedure of the ONS, we're waiting to signal all of the procedures to be able to enter commercial activity. This is an asset with very good performance, top line performance. Now in terms of CapEx, it's all according to what has been scheduled. It was -- it is in accordance to our scheduling. And the same holds true for health and security. We have a recovery plan for the degraded areas. These are activities that tend to take longer, but within what is foreseen and as part of the social work that we carry out. Next slide, please. Our first transmission project in this presentation is Asa Branca. The first stretch is between [ Shaffield 2 and Corso 3]. It's about to be concluded. This should happen in the fourth quarter. Now at the end of this year, we will have 33% of the project RAP, a relevant amount compared to what we expected in the auction. Now the second stretch is awaiting the license for the continuation. This should take a few weeks, and this should begin the coming year. The final stretch of the project will only come into operation at the end of 2027. Well, in Grauna, this comes from a recent auction at the end of 2024. It's still in the environmental phase, but going according to plan. Now that red line that you see, the brownfield on the map. At the beginning of July, we began to operate that line. We have 5% of the total RAP, not that much, but an important framework for us. It's the first brownfield that we take on with our own operation, not with third parties. And of course, this is important for ENGIE. Regarding Grauna, now if anybody would like to add something, please do. No great updates compared to the last quarter. We -- Well, we are fully mapping everything out in the graph that you see. And regarding the transfer, which is a frequent question that we receive, we're still awaiting the stance of the controller, and there's nothing new this quarter regarding that topic. And the last one, Guilherme, who will speak about expansion where there is nothing that novel. Guilherme Ferrari: Nothing new here. We continue to maintain our project pipeline. And we are awaiting and the market is reacting, of course. There are real demands. We hope this will not be impacted by curtailment. We continue to keep these in our portfolio, especially the wind assets so that we can follow on with their development. Expansions are always marginal, but highly welcome. And as part of this context, we have the possibility of the auction for capacity in the coming year. We have 2 of our assets, Santiago and others that will participate, but well, we will be able to take part in this auction. And another important point refers to the batteries. We're beginning to look at these with greater attention, the development of batteries to also take part in the auction that will take place in the coming year. Marcos Amboni: Well, thank you, Guilherme. We'll go to see our financial performance, return on equity and return on invested capital at satisfactory levels, showing how resilient we are. We invested more than BRL 38 million in the last years, which means that our asset base has increased. And of course, it is updated. The prices in the past were old. It seemed to be greater with this new updated base, the prices have dropped a bit. And some of these projects are not delivering 100% of their EBITDA. This will become more clear in 2026, Assuruá and others delivering their full performance. And so the levels will be more recurrent. Now for the 9 months of '25, we have a slightly higher share of transmission vis-a-vis 2024 as part of our strategy of diversification. 1/4 comes from transmission, gas transportation, 75% from generation. Here, we see our revenue changes at 31.8%. Most of this due to IFRS, BRL 22 million in transmission, but we do have an important organic effect in growth of revenue and volumes, inflation and new assets coming into operation vis-a-vis the same period last year. And if we look at EBITDA, this will become more clear. Now to go to the results of TAG that continues to deliver a very consistent performance, BRL 2.3 billion, and BRL 1 billion -- almost BRL 1 billion of profit this quarter of net income, very similar to the first quarter, somewhat below the second quarter where we had a nonrecurrent effect and doing very well. Here, we have a more complex graph for this presentation referring to EBITDA at one end, the accounting EBITDA that is published. Then we have the intermediate bar that is adjusted EBITDA. This quarter, there were very few adjustments, as you can see and in the middle, adjusted EBITDA and the effect of IFRS, all have a similar growth between 10% and 13%. Transmission, very stable, equity income of tax somewhat lower. So we're left with generation with an increase of BRL 287 million that we have called performance is price, volume and expansion and reduction due to costs associated to expansion, connection cables, material service and sundry costs. This is a positive result coming from generation. Now in the middle, we have a growth of 10.5%. Net income change, a very similar panorama in the center, an increase of 10% from BRL 666 million to BRL 738 million, most comes from adjusted EBITDA, income taxes, negative variations due to depreciation, new assets and partly due to financial results. Our indebtedness has increased a bit. And we have, of course, the interest rates that are higher than the third quarter last year, leading to a 10% increase. We'll speak about our indebtedness, balance debt. It's increasing, which is expected BRL 3 million for the acquisition of Jari and Cachoeira. We have BRL 600 million in debt, BRL 3 million impact on our debt. Only this acquisition changed the EBITDA. It was 2.7x last year. It has now reached 3.2x. This is still a satisfactory level that guarantees a AAA, which we would like to maintain in gross debt, 3.8x, a well-balanced debt, as you can see. Of course, as of now, we need to be more cautious in our coming steps, but a healthy indebtedness. Now in this slide, we show you the debt profile and maturity, a very smooth schedule after 2030. Therefore, this profile is BRL 2 billion a year in terms of debt payment, fully under control. We continue to be AAA, 1/3 in CDI and the rest in IPCA. The cost of the debt evidently has increased a bit, 6.4% on average compared to 5.6% in the same period last year. Of course, there is pressure from the financial conditions throughout the country. Regarding our CapEx, no significant changes, a detachment year-on-year, almost BRL 10 billion year-on-year. This year, BRL 6 billion, which means the BRL 3 billion from Jari and Cachoeira and the rest for the conclusion of Jari, the transmission companies, that is where our CapEx is going to. And in '26, '27, everything at lower levels. We will be left with maintenance and the 2 transmission companies. Grauna that extends to 2028 and Asa Branca until 2027. And finally, well, this slide, I believe, is the same as that of last quarter to show you our payment of dividend 2021, 100%. And since '23, we maintain this at 55% without significant changes. And that is it. Adri will now lead the Q&A session for us. Adriana Wagner: [Operator Instructions] Our first question is from Daniel Travitzky from Safra. He has 2 questions. I will pose the first question and put it together with another question from [ Huang ], an individual investor about the share of bonuses. Could you explain the rationale to do that now? And we have the question from Ruan on the bonus and other models for the payout of dividends and shareholder capital. Pierre Gratien Leblanc: I can take it, this one. You complement if you want. So why we are doing that? It's just because ahead of '24, our profit reserve was above the capital. And to be compliant with the law, we need to increase our capital -- social capital. This is the first point. The second point is we do have -- we had space until -- to increase our social capital until the authorized capital we do have. And this authorized capital was -- is today at BRL 7 billion. So we take the opportunity to go up to the limit or close to the limit. And we proposed to the Board yesterday, and it was approved to increase the social capital up to BRL 6.9 billion, and it will be done through a bonus action. Why? Just because we wanted to -- also to have a better liquidity of our shares in the stocks. And through these mechanisms, we will increase the liquidity of our shares without any financial impact at short term for our minority interest shareholders. Guilherme, if you want to complement or not, up to you. Guilherme Ferrari: No, that was perfect, Pierre, simply to complement the remuneration model besides the shareholder equity payment. In the future, we can alter the company's stock. I don't think this will be done in the short term. This is a model that will be analyzed to see if there's any advantage in doing that. Adriana Wagner: The second part of the question refers to your vision on the solution proposed for the curtailment in provisional measure 384. This is also part of Juan's question, who asks about curtailment and how to deal with it in the medium term? Pierre Gratien Leblanc: I would like to begin the answer, then I will give the floor to Guilherme or Keller. This provisional measure 304 was approved, but not sanctioned. We have to wait for it to be sanctioned. And we need to understand the regulation better. Perhaps Guilherme would like to comment on what is included in this provisional measure. Guilherme Ferrari: Well, this is simply to add information. We're faced with several uncertainties in terms of the real impact, which will be the reimbursement. We still have doubts if there will be reimbursement regarding power or if there will not be reimbursement. And there is an issue that we already mentioned, regulatory issues that could make investments in generation have a different technical condition to the ones we have presently, creating another obstacle to the incredible growth of generation companies. Now all of this strongly impacts our curtailment projections going forward. Marcos Amboni: Well, I don't have very much to add. Everything has been said. We would have to see the final version of provisional measure 304. There are 2 articles that we need to analyze before we can estimate what will be subject to reimbursement and those articles that refer to us and the impact, the effect that this causes on physical distribution and distributed distribution. These are points that need to be further assessed at the end of this legislation. Now there is a positive point in the midterm, and it is interesting for the long term better conditions to insert batteries into the system. This will help us overcome several difficulties that we face at present and physical curtailment can be mitigated if we make good use of these batteries. Now in the coming months and years, we will see how this plays out. To complete that topic and others, we're going to approach this in great detail in ENGIE Day that will be held in Sao Paulo at the end of November. If you can't be with us, we will record the session. Adriana Wagner: Our next question is from Joaquin. The question is will the company think of similar acquisitions compared to the assets recently acquired? Will this go in detriment of new assets in the renewable sector? Guilherme Ferrari: I will begin and then Depine and Keller, please feel at ease to add your comments. Now evidently, the market with this oversupply ended up thinking greenfield made no sense. And with curtailment massively impacting the results, greenfield has been put aside. Now this is a factor that will make us postpone our decision to invest in greenfields. And when we look at M&A for wind and solar operations, the curtailment factor is a fundamental assumption. Of course, the seller will try to insist on curtailment. The buyer will insist on a more realistic curtailment, and this leads to a great difference in values. Potential M&As for renewable wind and solar energy will have to wait until we have a clear vision of the impact of provisional measure 304 and the regulation that will come about to work with distributed generation. Now M&As in hydro plants, well, this is not only our desire, but that of other players, but it is scarce in the market. There are a few opportunities. Whenever an opportunity arises, we will look at it, of course, following the line that we followed for Cachoeira and Jari. We will see the quality of the assets, labor -- I think, labor qualification is fundamental, and that was a positive point in these 2 assets. We were able to maintain all of the employees that were already working there, bringing in the knowledge since the phase of conception until the beginning of operation. And we're adding ENGIE's knowledge to enhance the quality of these assets. We have to carry out an in-house analysis. And as I said, these assets are scarce in the market. There are not very many opportunities. Adriana Wagner: Thank you, Guilherme. The next question comes from Bruno Oliveira, sell-side analyst. Two questions. Any planning on TAG, a possible partial sale in the horizon? And as part of your investment projects, any outlook for a dividend payout of 100%? Or is it too early for this discussion? Pierre Gratien Leblanc: The answer is quite easy is no. Nothing planned in the very, very short term or short term or medium term for TAG. Depine, maybe you can take the second one. Leonardo Depine: Well, regarding the dividends, for the time being, no, our indebtedness continues to grow somewhat above 3 at present and will further increase because of the 2 projects under construction until mid-2026. I think Bruno asked about this. It doesn't make sense for the time being to go back to 100% of payout with indebtedness above 3%. I think we had already referred to this in the second quarter as well. Adriana Wagner: Very good. Thank you. To continue with the next question from Victor Brug, a sell-side analyst for JPMorgan. Any update in the revision of tariffs in the Northeast, TAG? Leonardo Depine: Well, from TAG and the regulator itself, we have heard that this tariff revision should happen in the first half of the coming year. The last information is that this review will be carried out in 2 stages. They're going to work on work and the asset base. So this process will be displaced through June, perhaps will be concluded in June. This is the last statement we heard from the regulator. We shouldn't expect anything very concrete in the short term. Adriana Wagner: Our next question comes from Bruno Vidal, sell-side analyst from XP Investments. Does the company have an outlook on participation in BP and which would be the modality, capital stock increase or increase of indebtedness? Pierre Gratien Leblanc: So we are still studying this opportunity to prepay our UBP topic. We are waiting for the ANEEL calculation. And then we will have until beginning of December to discuss with ANEEL. And then ANEEL will give us if we are interested to prepay the deadline to do the cash out. How we will do it? So it will be probably now in '26, not in '25, is still under discussion inside EBE. We do have a lot of different options. Increase of capital may be one, but it's not the only one. So we will take and choose the best option for EBE to finance the prepayment if we decide to do it. I hope that as Depine said earlier, I hope that end of December during our Investor Day in Sao Paulo, we could give you more and more detail on that. Leonardo Depine: Thank you very much. Our calculation in the time line, the payment should be until the end of March or the beginning of April. So we have the first quarter of 2026 to discuss these options. Adriana Wagner: Our next question is from Lorena, sell-side analyst from Itaú BBA. Our trading strategy, which is the outlook of maintaining part of the portfolio uncontracted considering the price of energy in the coming years. Leonardo Depine: I can answer that. If you could tell me the first part. Adriana Wagner: Our trading strategy, which is the outlook of maintaining part of the portfolio uncontracted, considering our viewpoint on energy in coming years. Leonardo Depine: We continue with that vision, with that strategy of having gradual uncontracting and we make tactical adjustments in terms of sales. This is the best for a company that is capital intensive and works with generation. We give ourselves the opportunity to make the most of higher prices in that long arm. Now we're thinking of year plus 1, year plus 2. We have future prices that are higher than years further ahead. So there is space for that long arm, while the market prices react in the upward position. It's important to make the most of contracting and not move away from this now. There's also a limit in liquidity in the market. So we can't contract everything on the spot with this very volatile price model, we know there are scenarios where the price will be much too low and spot prices will be low and we have to counterbalance our vision that there is room for future prices to improve vis-a-vis the risk in the short term, not allowing huge volume for the short term because we'll end up in the spot market. This is a bet, of course. Our profile is to have an appropriate management between results, our revenues and the risks that we take on. To summarize, we're going to continue following our broader strategy of gradually contracting future energy. Adriana Wagner: Thank you very much. At this point, we would like to end the question-and-answer session. I will return the floor to our officers and Mr. Depine for their closing remarks. Leonardo Depine: I would like to thank all of you for your attendance, and we hope to see you at our next events. We will meet at our event at the end of November, and we hope to have a better vision of the impacts of PM304. Thank you all very much. Have a good day, and we hope to see you in our next event. Pierre Gratien Leblanc: Thank you all. See you in late November in Sao Paulo. Adriana Wagner: We thank all of you for your attendance, the energy video conference and have a very good afternoon.
Operator: Good day, and thank you for standing by. Welcome to the Pacira BioSciences Third Quarter Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Susan Mesco. Please go ahead. Susan Mesco: Thank you. Good afternoon, everyone. Welcome to today's conference call to discuss our third quarter 2025 financial results. Joining me are Frank Lee, Chief Executive Officer; Brendan Teehan, Chief Commercial Officer; and Shawn Cross, Chief Financial Officer. Jonathan Slonin, our Chief Medical Officer, is also here for our question-and-answer session. Before we begin, let me remind you that this call will include forward-looking statements subject to the safe harbor provisions of federal securities laws. Such statements represent our judgment as of today and may involve risks and uncertainties. This may cause our actual results, performance or achievements to differ materially. For information concerning risk factors that could affect the company, please refer to our filings with the SEC. These are available from the SEC or the Pacira website. Lastly, as a reminder, we will be discussing non-GAAP financial measures on today's call. A description of these metrics, along with our reconciliation to GAAP, can be found in the news release issued earlier this afternoon. With that, I will now turn the call over to Frank Lee. Frank Lee: Thank you, Susan, and good afternoon to everyone joining today's call. We're pleased to report another successful quarter of strong execution across our corporate, clinical and commercial initiatives. We're seeing top line growth accelerate with year-over-year revenues increasing by 6%, driven by a strong quarter for EXPAREL and iovera. We continue to make important progress advancing our 5x30 path to growth and value creation. To remind you, this plan supports 2 broad strategic initiatives: first, growing our best-in-class commercial-based business; and second, advancing an innovative pipeline of potentially transformative assets such as PCRX-201. Notable third quarter highlights include increasing EXPAREL demand with year-over-year volumes up approximately 9%. This is the highest quarterly growth we've seen in over 3 years and underscores the value of our commercial investments, improving manufacturing efficiencies and favorable gross margin supporting our second increase in full year guidance, significant cash flows and a strong balance sheet, enabling investments in new growth initiatives, meaningfully expanding our clinical pipeline with the in-licensing of AMT-143. This complementary long-acting non-opioid directly aligns with our 5x30 strategy and has the potential to provide longer pain relief versus currently available local analgesics. Disciplined and strategic capital deployment, including share repurchases of another $50 million. And finally, solidifying our exclusivity runway with the listing of our 21st EXPAREL patent. This now appears in the FDA's Orange Book and additional patents are forthcoming. I'll begin with a high-level overview of our commercial portfolio, where we're seeing improving trends for each of our products. For our flagship product, EXPAREL, momentum is on the rise as a result of strong execution, expanding market access, awareness and utilization. On the market access front, we continue to make important strides improving patient access to opioid-sparing pain therapies. To that end, our GPO partnerships and performance-based contracting are delivering and growing our EXPAREL user base. We continue to secure key wins with additional national and regional commercial payers now providing separate EXPAREL reimbursement. We remain ahead of plan and expect to surpass our full year goal of 100 million covered lives across commercial and government payers. Turning to Zilretta, new initiatives to better support this promotionally responsive product are underway. We're confident the foundation is in place for a return to growth. Our colleagues at Johnson & Johnson MedTech are now trained and active in the field. This partnership is a great example of 5x30 in action. We have tripled our commercial footprint, which we believe will provide a meaningful incremental growth. Lastly, iovera had a strong third quarter as a result of its dedicated sales force and other commercial investments. On the manufacturing front, the team continues to make important progress with third quarter gross margins supporting another increase in guidance. Switching gears to the pipeline. Here, we're focused on becoming the therapeutic area leader in musculoskeletal pain and adjacencies. These are large markets with high unmet need. Our clinical initiatives center around advancing an innovative pipeline along with life cycle management for our commercial base. For new product development, we're prioritizing complementary mid to late-stage derisked opportunities spanning the patient journey. PCRX-201 is a great example that's advancing in a Phase II study for osteoarthritis of the knee. Interest in this study has been high, and we recently concluded enrollment for Part A ahead of plan, placing us on track for 12-month data next year. The data continue to underscore PCR-201's potential to revolutionize OA treatment landscape and be at the forefront of local gene therapy for the masses. Last month, we presented 3-year follow-up data from the Phase I study at the American College of Rheumatology Convergence. These data demonstrated sustained efficacy with improvements in pain, stiffness and function for over 3 years. Importantly, efficacy was observed across all structural severity subgroups, including the most severe. Investigators also highlighted that pre-existing neutralizing antibodies did not affect PCR-201’s efficacy or safety at all 3 doses. Natural immune responses are a major obstacle for gene therapies, and these preliminary data indicate the potential for redosing. We also expanded our pipeline with the recent in-licensing of AMT-143, a novel long-acting formulation of bupivacaine. This asset sits squarely in our wheelhouse, given our deep expertise in long-acting locally administered pain therapeutics. This franchise-enhancing asset is highly complementary to EXPAREL and will allow us to serve a broader range of patients and health care professionals. Its innovative hydrogel technology is a proprietary combination of 2 polymers. It's easy to administer, requiring only installation into the surgical site with minimal reliance on specialized technique. The hydrogel rapidly forms a slow-release depot as it warms to body temperature. In a Phase I study, AMT-143 demonstrated sustained analgesic release through 14 days. This supports its potential for several days of pain control, which would be the longest duration among currently available local analgesics. These data, along with bupivacaine's validated mechanism of action provide an attractive development risk and differentiated product profile. We expect to initiate a Phase II program next year, which places on track for commercialization to begin within our 5x30 time frame. Given its strong commercial synergies, we expect it to be meaningfully accretive to cash flows and earnings. With respect to our HCAd-based preclinical portfolio, we prioritized 3 programs, all with disease-modifying potential in painful conditions of high unmet need. PCRX-1003 for degenerative disease, addressing a major cause of chronic back pain with few currently available effective therapies. PCRX-1002 for dry eye disease, a widespread condition where current treatments offer only temporary relief and PCRX-1001 for canine osteoarthritis, which has strong out-licensing potential for a large market lacking durable solutions. Switching gears to life cycle management. Here, we're highlighting the value of our products with real-world data. Last month, we presented 3 health economics and outcome studies at the AMCP Nexus. The use of EXPAREL was associated with reduced opioid use, lower costs and improved recovery outcomes. Our comprehensive real-world IGOR registry now has more than 3,000 OA patients enrolled. As you know, OA is a unique condition that patients live with for decades and receive a myriad of pain treatments as their disease progresses. IGOR is positioned to provide in-depth insights into the patient journey. We're capturing clinical and economic data as well as patient-reported outcomes for all 3 of our products. Its potential for meaningful evidence is better than any known OA registry of its kind. And to round out the pipeline discussion, our 2 registrational studies for Zilretta in the shoulder OA and iovera in spasticity are progressing. We expect to have interim data readouts from both studies next year. The last item I'll touch upon are the recent Paragraph IV notifications. And as you know, generic attempts are common for successful products like EXPAREL. A great deal has changed since the first genetic filer, where we had one patent at the time. Our current EXPAREL patent estate is stronger than it's ever been, and the team continues to innovate to further solidify our runway. Bottom line, any [ ANDA ] filer has a very high series of hurdles they will need to overcome to be commercially successful. We intend to vigorously protect our intellectual property and have an expert team focused on advancing our legal strategy. As for the rest of us, we're sharply focused on driving growth and remain confident EXPAREL will be a key growth driver of our success for the foreseeable future. With that, I'd like to turn the call over to Bren to share more details on our commercial performance in the third quarter. Bren? Brendan Teehan: Thank you, Frank, and good afternoon to all joining us today. I'm excited to share highlights of the terrific progress we've made over the past few months on the commercial front. Building on our first half trends, we further increased our revenue growth rate in the third quarter, driven by improving EXPAREL volume growth of roughly 9%. This is nearly 3x the first quarter volume growth rate of 3% and significantly higher than our second quarter volume growth rate of 6%. As Frank mentioned, this underscores the value of our commercial investments and positions us for significant and sustainable revenues going forward. We're seeing continued momentum from leading indicators as we head into year-end. These data reinforce our confidence that EXPAREL will be a key driver of our 5x30 objective of 5-year double-digit CAGR for revenue. I'll start with market access, where we continue to reshape the value story for our customers. In addition to clinical value, our accounts consider market access for their specific patient population when making treatment decisions. Here, we're using real-world evidence to highlight EXPAREL's clinical and economic value to national, regional and local commercial plans. We're excited to report that we continue to track ahead of plan and are maintaining an accelerated pace, expanding our commercial coverage map with NOPAIN like policies covering EXPAREL outside of the surgical bundle. We currently estimate that approximately 60 million commercial lives now have access to EXPAREL via the separate reimbursement mechanism. This places us ahead of plan with a total covered population of nearly 90 million lives across both commercial and government payers. As we build this critical mass of coverage, we're communicating these advances to our customers and are very encouraged to see them expanding EXPAREL utilization as evidenced by our growth. Our access efforts continue to be strategic, focusing on key markets with high procedural volumes. We have prioritized our top 5 states, which collectively account for approximately 40% of EXPAREL volumes, where we are steadily expanding coverage. Access here is increasing utilization with third quarter volumes up more than 10% collectively in these markets. Coupled with this progress, we continue to see strong and growing utilization of the EXPAREL J-code for both commercial and Medicare claims. We're also expanding access through compelling strategic pricing programs. Through these preferential pricing programs, health care systems for the opportunity to be at the forefront of opioid-sparing pain management. Our pricing strategy is having a positive impact with our contracted business delivering year-over-year volume growth in the low teens. We expect volumes to improve over time with only a modest impact on net sales dollars. On the GPO front, our third partnership went live in June and is off to an excellent start. Since launch, we have seen significant growth in volumes from accounts within this network, exceeding our forecast. With our 3 GPO networks and individual agreements with health care systems, more than 90% of our EXPAREL business has contracted pricing. Importantly, these are performance-based and designed to maintain and grow both volumes and revenues. In addition to providing our customers with favorable pricing, we are assisting patients in new ways with our recently launched patient assistant programs to further support best practice patient care. Our support specialists are helping qualified patients overcome financial and administrative barriers, minimizing patient out-of-pocket costs. All of these programs have created market access that is more favorable than it has ever been with more key milestones on the horizon for all 3 of our products. Given our strong progress on the market access front, we believe the time is right to mobilize patients to ask for EXPAREL to be part of their treatment plan for postsurgical pain. We rolled out several targeted digital pilot programs in the first half of the year to advance patient and physician awareness and engagement. We're seeing encouraging early signs from these campaigns. Since launch, overall EXPAREL website traffic is up more than 70% across both consumer and health care provider platforms. This is an excellent indicator that our refreshed marketing approach is resonating. Importantly, patient and caregiver awareness, coupled with improved access is translating into real-world volume growth for EXPAREL. Looking at the sites of care, we continue to see strong adoption in ambulatory surgery centers with this setting delivering third quarter volumes up more than 25% over last year. As you know, decision-making in these settings is more streamlined, enabling faster adoption to take advantage of the new reimbursement policies. In the hospital setting, year-over-year volume growth has improved from mid-single digit to a high single-digit percentage. As expected, faster adoption is taking place within community hospitals, where we saw third quarter volume growth in the low teens. Switching gears to our other commercial products. For Zilretta, we're currently expanding our reach through our new partnership with J&J MedTech. In addition, we've rolled out key programs to expand utilization, including our new patient support hub and co-pay assistance programs as well as performance-based agreements with our top customers. We believe these will help meaningfully overcome barriers to Zilretta utilization. For iovera, our sales force realignment is kicking in, and we are seeing a small but growing uplift from the [ MEDEO ] branch launch and improving reimbursement from NOPAIN. We are also ramping up reimbursement training and launching additional customer-facing materials around our new patient services hub. In summary, we believe we are well positioned for a strong finish to 2025 with improving growth ahead. I will turn the call over to Shawn for his review of the financials. Shawn Cross: Thank you, Bren. I'll start with an update on sales and margin trends. Third quarter EXPAREL sales increased to $139.9 million versus $132.0 million in 2024. Volume growth of 9% was partially offset by a shift in vial mix and discounting from our third GPO going live with each having a roughly equal impact. As Bren mentioned, third quarter volumes within this network were ahead of plan, which resulted in a slightly higher-than-expected single-digit year-over-year impact to our net selling price. As we move forward into 2026, we expect volume growth and revenue growth to converge over time as we anniversary these 3-year agreements. Third quarter Zilretta sales were $29.0 million versus $28.4 million in 2024. Looking ahead with our new partnership with J&J and other commercial investments, we believe the stage is set for improving growth. For iovera, third quarter sales grew to $6.5 million versus $5.7 million in 2024. Turning to gross margins. On a consolidated basis, our third quarter non-GAAP gross margin improved to 82% versus 78% last year. Gross margins continue to benefit from the improved cost and efficiencies of our large-scale EXPAREL manufacturing suites. For non-GAAP R&D expense, the third quarter increased to $22.5 million from $17.3 million reported last year. This increase relates to strong enrollment in Part A of our Phase II study, PCRX-201 as well as expenses associated with the Zilretta and iovera registrational studies. Non-GAAP SG&A expense came in at $81.7 million for the third quarter, which is up from $65 million last year. This increase is largely due to investments in our commercial, medical and market access organization, targeted marketing initiatives and field force expansion. All of this resulted in another quarter of significant adjusted EBITDA of $49.4 million for the third quarter. As for the balance sheet, we continue to operate from a position of strength. We ended the quarter with cash and investments of approximately $246 million. With a business that is producing significant operating cash flow, we are well equipped to advance our 5x30 strategy and create shareholder value. We continue to take a disciplined approach to capital allocation where we're focusing on 3 areas: first, accelerating growth of our best-in-class base business; second, advancing an innovative pipeline and becoming the leader in musculoskeletal pain and adjacencies; and third, opportunistically returning capital to shareholders. During the third quarter, we executed an additional $50 million in share repurchases and retired approximately 2 million shares of common stock. To remind you, we have approximately $200 million remaining under our current share buyback authorization, which runs through the end of 2026. We will continue to be opportunistic with stock repurchases given what we believe is a significant disconnect in our market valuation. As we execute 5x30, we expect to prioritize accretive opportunities that benefit operating margins to enhance shareholder value. That brings us to our full year P&L guidance for 2025. Today, we are increasing our guidance for non-GAAP gross margins to 80% to 82% from our previous range of 78% to 80%. 2025 margins benefited from increased manufacturing efficiencies, favorable production volumes and the elimination of our EXPAREL royalty obligation. For all other guidance, we are narrowing our full year ranges as follows: revenues of $725 million to $735 million. While EXPAREL and iovera had a strong uptick in the third quarter as expected, Zilretta's acceleration has been slower than anticipated. Non-GAAP R&D expense of $95 million to $105 million, non-GAAP SG&A expense of $310 million to $320 million, stock-based compensation of $56 million to $59 million. And lastly, for those modeling adjusted EBITDA, we expect our full year 2025 depreciation and amortization expense to be approximately $30 million. Looking ahead, we expect sustainable and significant earnings driven by improving sales, enhanced gross margins and stabilizing operating expenses. In addition, opportunistic stock repurchases and reduction in share count will further enhance EPS. So with that, I'll turn the call back to Frank. Frank Lee: Thank you, Shawn. In closing, I want to thank our entire team for their strong execution, advancing our 5x30 strategy and dedication to the patients we serve. I'm proud of the significant strides we've made this year across our corporate, clinical and commercial objectives. Looking ahead, we believe we're well positioned for sustainable success and significant value creation. Thank you again for joining us today and for your continued support of our important mission. With that, we're ready to open up the call for questions. Operator? Operator: [Operator Instructions] Our first question comes from the line of Les Sulewski from Truist. Leszek Sulewski: So in the prepared remarks, you commented that the GPO had a higher volume than expected, which pulled down the ASP. How much of that total volume growth was tied to that GPO? And then second, was there anything noteworthy about the difference in the number of selling days in the quarter? And could you share any metrics around average volumes per day? And then I have a follow-up. Frank Lee: Les, this is Frank. Thanks for the question. Yes, we had strong uptake from the GPO that we signed in June. That's a favorable thing. And so as we anniversary that, that will flow through the system in Shawn mentioned the gap between volume is very strong, as you heard, 9% and sales will start to close as we get into next year. So Shawn, I don't know if you want to say anything more. Shawn Cross: I completely agree. We anticipate them narrowing over time, and we're feeling good about the volume trajectory. Frank Lee: Les, you had another question, remind me the second question? Leszek Sulewski: Yes. The second day was around the selling days in the quarter, any potential impact from that and metrics around average volumes per day. Frank Lee: [ No ] So let's just come back to -- it's an important point overall about as we now think about, as you heard, the volume growth of EXPAREL going from 3% to 6% to 9% and as we get into next year and flow through these GPO agreements. And of course, there will be -- we'll take price at some point. This will all add up into dollar sales that are running more at double digits as we had talked about. So we're encouraged that the second half is starting to turn out the way we start to articulate that at the beginning of the year in terms of growth accelerating in the second half. Leszek Sulewski: Okay. Okay. That's helpful. And just one last one for me, and I'll jump in the queue. What's the rationale [ between ] the AMT-143 program? And then how do you think about the trial design, specifically which pain indications would you pursue? And how do you envision the label ultimately to look like? Will it be indication specific or broad based on your design? And then thoughts around the IP protection around this technology given the compound is generic. Frank Lee: That's a good question. So I'm going to come back to our thinking around how we think about building our pipeline in a disciplined manner. We are certainly well, I would say, from a capability standpoint, well versed in developing products like this. We think there's a place in the market for a product that has longer durability and ease of use, that is installation as opposed to any other method that requires technique and so that's the rationale behind it. We think there's a place in the market. We think it's complementary to EXPAREL. And of course, we have the infrastructure in place, so it will be highly synergistic. When it comes to our development programs, it's early to say, Les, we need to work through this. But my sense of it is that we'll be very consistent with the way that we've built other programs in the past, and we'll provide more light on in terms of specific trial design as we get into next year. So that's broadly what it is. In terms of IP, I believe you can speak to that, AMT-143. Brendan Teehan: Sure. The IP goes out to [ 2042 ]. They have a solid state, and we're going to look to expand upon that. Frank Lee: Yes. Jonathan, anything more on your end? Jonathan Slonin: I agree with you, Frank. opportunity here to provide another non-opioid pain solution. And so we're excited about the potential of this asset. Operator: The next question comes from the line of Gary Nachman with Raymond James. Gary Nachman: So where are you in terms of improving awareness of NOPAIN with the bigger hospitals? Where are you seeing the bigger challenges in getting faster adoption there? And when will that accelerate? Will it be next year potentially? And then what was the overall market growth for elective procedures in the third quarter? And maybe what you're seeing, how that's trending in the fourth quarter so far? Frank Lee: Yes. Thanks for the question, Gary. Let me say a few words, and I'll turn it over to Bren for any of his comments. Just to set the stage, I think we've been very consistent in saying that we've seen a good growth uptake when it comes to the smaller hospitals and ASCs. And these bigger institutions will take more time because it's obviously more decision-makers and of course, they have to implement this into their overall system. So it will take some more time. There's clearly an effort behind it. But let me turn it over to Bren for any additional thoughts here. Bren? Brendan Teehan: Yes, for sure. Thanks for the question. I think we are seeing increased awareness for NOPAIN. And I would reference a couple of our prepared comments. Obviously, where there are fewer decision-makers in ASCs and community hospitals, that's where we have our fastest growth. But we've also seen improvement in the larger and broader hospital segment. And despite the fact that there are more decision-makers, we are seeing formulary and P&T decisions in favor of EXPAREL that would be reflective of an audience that's not only taking into account NOPAIN, but are starting to see the significant commercial wins that we have along the way. And it is one of our key commercial initiatives to make sure that we're engaging more of those economic stakeholders, particularly pharmacists and the C-suite, so they have a broader understanding of not only the reimbursement that's being generated, but the potential for EXPAREL, not just clinically but from a profitability standpoint to be of value to the IDN. Frank Lee: And Gary, you had asked about procedures overall, the market-- and from what we've seen, maybe, Brendan, you can comment on that a little bit. Brendan Teehan: For sure. The first half of the year, elective procedures were sluggish, even a little bit down. Having looked at the data in the third quarter, I would say there are modest improvements, but not monumental. And certainly, I think EXPAREL's performance in terms of continuing to drive increased volumes are despite what I would consider to be sluggish or somewhat headwinds in that space. Fourth quarter to be determined, but I would say that fourth quarter, we tend to see more elective procedures simply as a function of seasonality. Gary Nachman: Okay. Great. And then just a couple more quick ones. Just any early indicators for how the J&J partnership is helping Zilretta so far? When do you expect to see somewhat of an inflection there in sales? I know it's still early days and probably didn't see much of an impact in the third quarter, but could it be as early as 4Q or it's going to take more time? And then just on the gross margin, should that continue to improve next year from the 80% to 82% level that you're at right now? Frank Lee: Gary, with regard to Zilretta, I'll just say a few words here and turn it over to Bren. Just a big picture, as Shawn mentioned, we're very pleased with the way that now EXPAREL has grown and also now iovera with this new dedicated field force it's taken a little bit more time to get Zilretta where it needs to be. And when you take a look at our numbers, that's really what was flat instead of growing. So with that said, let me turn it over to Bren for any other thoughts here about how we're going to maximize J&J MedTech partnership. Brendan Teehan: Yes. Thanks, and thanks for the question. I would say 2 things have been important changes in the third quarter. Obviously, we have a dedicated Zilretta sales force. In doing so, they have an expanded footprint and are engaging a number of customers that for that singular group will be first-time customers. And I think that's just a little bit of disruption you would have expected in the third quarter. Also, the J&J MedTech team was fully trained in the third quarter, but that's a good way to describe it, trained and not yet fully out there to see the entire footprint that we have an opportunity to address. So I expect us to begin to see further momentum in the fourth quarter and then significant progress in 2026 as we see a larger audience multiple times with our message. And I would say that Zilretta fits very nicely into the J&J story of the osteoarthritis of the knee treatment journey, and there are a lot of market dynamics that would help us to incorporate Zilretta logically into that treatment journey. Frank Lee: Thanks, Bren. And for the question, Gary, about gross margin, certainly, we're very pleased with the progress we've made. And I think your question was how we see that going forward. And so let me turn it over to Shawn here. Shawn Cross: Yes. Thanks, Gary. So maybe just a step back from a big picture, the guidance we put out for goals we put out from a long-range plan perspective are in our 5x30, which is the 5 percentage point improvement over the 2024 margin. And just as a reminder, the non-GAAP was 76%. So that's the big picture. So just with regard to the performance we've seen this year, first of all, terrific execution by the team and better-than-expected yields from both the 200-liter facilities. So these higher volumes, simple math have resulted in lower per unit costs that have benefited the margins this year. So inventory target is 6 months. We're a little bit ahead of that. We're selling through the lower cost inventory. And so going forward, as the production volumes normalize, we expect to be back on track for our 5x30 plan for a 5% point steady improvement in gross margins over 2024, 76%. Gary Nachman: Okay. That sounds great. So you should at least be in that level looking out into next year, it sounds like. Frank Lee: Bottom line, inventory levels are higher this year, Gary. And so per unit, the margin is better. Next year, as we work it down, it will be slightly less favorable, but then we'll come back to that favorability probably in the second half of the year as we work through the inventory. Operator: The next question comes from Dennis Ding with Jefferies. Dennis Ding: I have 2, if I may. Number one is on BD. Should we expect more deals like [ Amicathera ], i.e., things that seem fairly early? Or do you plan to do more of these types of Phase I deals or can you be more opportunistic and bring something that's in Phase III or even commercial? And then number two, just on PCRX-201, I know you referenced docs who are excited about 201. But what about feedback from docs who aren't as excited? What's the major barrier there? Is it just data? Or do you think there's broader skepticism around gene therapy, especially in the ortho community who may be unfamiliar with the modality? Frank Lee: Thanks for the question, Dennis. First on BD and then on 201, I'll say a few words and turn it over to Jonathan. BD, as we've talked about, we're going to take a very, very disciplined approach to BD. And so that means that these are things that fit into the broadly defined musculoskeletal pain and adjacencies. And certainly, AMT-143 fits into that. As we look at assets, certainly, we favor those assets that are further along in the clinic that have validated mechanisms of action. And so we're not going to take target risk. And so those are some of the guideposts, so to speak, as we think about bringing things into the pipeline. And so we remain open to those kind of opportunities, and we're going to look at those very, very carefully in a disciplined way and bring in those things where we can really add value to those programs. With respect to 201, what I'd say there is, overall, I believe we've seen very good enthusiasm for PCRX-201. And so let me turn it over to Jonathan to have his thoughts. He's been the recent meetings, et cetera. Jonathan Slonin: Yes. All the feedback has been extremely positive and exciting. To your point, I think we continue as we do education and address some of the misnomers around what our platform is compared to current gene therapy. And we explain the benefits around the safety, the cost, the flexibility because of the payload size, it becomes very favorable, not just over current treatment options, which we see lasting maybe 3 to 6 months. And our research shows that patients just aren't happy, and that's all they have. So once we explain to them the benefits of 201 in that we're not giving you a drug produced in a factory, but we're just helping your body cells become that factory and the safety that we've seen so far in our clinical trials, the first question is usually like when can I get this? So we are very optimistic moving forward with 201 and excited that Part A of Phase II enrolled ahead of schedule for us. Frank Lee: Yes. Thanks, Jonathan. Look, I'd summarize it as this is gene therapy for the masses. And so when we come from that line of thinking, that opens up people's minds this opportunity because the way we do that is by, as you know, a local approach as opposed to systemic and that has obviously favorability when it comes to safety and cost of goods and all the things that Jonathan talked about. So we remain optimistic. We're running the Part B and manufacturing process will -- from a commercially viable standpoint is well underway. And so we've got good momentum on this one. Operator: The next question comes from the line of Serge Belanger with Needham & Co. John Gionco: This is John on for Serge today. Just a couple from us. First, I wanted to touch on the shift in bio mix and discounting associated with the latest GPO that came on board in June. Curious if you could provide any color on the level of discounting that you've seen thus far and when you'd expect pricing to stabilize? And then second, on the in-licensing from for AMT-143. Just curious how you view 143's profile in comparison to EXPAREL? And with the potential of [ bohooan ] being on the market down the line, how would you view the future commercial dynamics between the two. Frank Lee: Yes. So thanks for the question, John. Let me answer the AMT-143 a little bit more, and then I'll turn it over to Shawn to talk about [ volume mix ] and GPOs and [ anniversarying ] that last one. What I'd say is that when we take a look at the marketplace, of course, currently available therapies and analgesics are in the range of what we provide for EXPAREL, 3 or 4 days, et cetera. Now we think there is a place in the market for longer durability of effect. And also in those situations where there might not be an ability to bring in other specialists that the surgeon himself can instill this particular product. And so we think it's complementary to what we have. And so that's how we think about it. Certainly, we've got a little ways to go to get this program to market, and we'll be starting our Phase II program as we talk about next year. But there's clearly a market need for something like this. So let me turn it over to Shawn here to talk about [ volume mix ] GPO. Shawn Cross: Great. John, thanks for the call. So just to reiterate from the prepared remarks, we saw the 9% encouraging volume growth for EXPAREL with a 6% growth on the revenue side. And that 3% delta, as mentioned, was roughly 50-50 split between the volume mix towards the 10 ml and then the impact of the GPO discounting. So we can't talk about specific discounts with regard to the GPOs. But as we move forward, we would expect the fourth quarter to be somewhat similar. But then encouragingly, and we'll talk more about this when we put out 2026 guidance. But as we move forward into '26 and beyond, we do expect volume and revenue growth to converge over time. And there's a couple of key things just to remember. Let's just assume we continue to drive volume at the current levels or even a bit higher, if all goes as planned, January price increase. And then once we do lap the third GPO agreement, which is performing quite well in mid next year, that's when we expect the convergence to sort of hit its stride. Operator: I'm showing no further questions at this time. I would now like to turn it back to Susan Mesco for closing remarks. Susan Mesco: Thank you, Jill, and thanks to all on the call for your questions and time today. We're energized by the opportunities ahead and remain focused on executing our 5x30 growth strategy with discipline and purpose. As we close out the year, we are confident in our ability to build on our momentum and position Pacira for long-term success. Thank you again for your continued support and be well. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Good day, and thank you for standing by. My name is Margie, and I will be your conference operator today, and welcome to the Carriage Services Third Quarter 2025 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Steve Metzger, President. Please go ahead, sir. Steve Metzger: Good morning, everyone, and thank you for joining us to discuss our third quarter results. In addition to myself, on the call this morning from management are Carlos Quezada, Chief Executive Officer and Vice Chairman of the Board of Directors; and John Enwright, Chief Financial Officer. On the Carriage Services website, you can find our earnings press release, which was issued yesterday after the market closed. Our press release is intended to supplement our remarks this morning and include supplemental financial information, including the reconciliation of differences between GAAP and non-GAAP financial measures. Today's call will begin with formal remarks from Carlos and John and will be followed by a question-and-answer period. Before we begin, I'd like to remind everyone that during this call, we'll make some forward-looking statements, including comments about our business, projections and plans. Forward-looking statements inherently involve risks and uncertainties and only reflect our views as of today. These risks and uncertainties include, but are not limited to, factors identified in our earnings press release as well as in our SEC filings, all of which can be found on our website. Thank you all for joining us this morning. And now I'd like to turn the call over to Carlos. Carlos Quezada: Thank you, Steve. Good morning, everyone, and thank you for joining our third quarter earnings call. I am excited to share our performance and the progress we are making towards our 2030 vision. This quarter reflects continued momentum and demonstrates the effectiveness of our strategic objectives, grounded in disciplined capital allocation, relentless improvement and purposeful growth, which continue to deliver meaningful and sustainable results. During this call, I will highlight the key financial and operational drivers. Then John will take a deeper dive into our financial performance, balance sheet, recent divestiture activity and guidance for the remainder of the year. Before we begin, I want to thank our incredible Carriage team. Your passion, ownership mindset and unwavering commitment to creating premier experiences for the families and communities we serve are at the heart of this company. You continue to build a best-in-class culture rooted in trust, partnership and service excellence. Through every premier experience, you elevate the reputation of our funeral homes and cemeteries across the country, one family at a time. Thank you. I also want to welcome the newest members of the Carriage family, Faith Chapel Funeral Homes and Crematory, Osceola Memory Gardens Cemetery Funeral Homes and Crematory, Porta Coeli Funeral Home and Crematory, Fisk Funeral Home and Crematory, Funeraria Borinquen and Cremation Care Providers of Central Florida. We are honored you chose to partner with Carriage. We will work every day to protect and elevate your legacy. Welcome to the team. Now turning to our financial results. Total operating revenue for the quarter grew to $101.3 million, an increase of 5.2% over the same period last year, primarily driven by an impressive 21.4% year-over-year increase in preneed cemetery sales. Another strong driver was general agency commission revenue tied to insurance-funded prearranged funeral sales, which grew to $2.6 million, up 61% from last year's third quarter. As we look at each segment, funeral operating revenue was down $753,000 or 1.3%, primarily driven by a 2.1% reduction in funeral volume. The summer months, July and August produced lower volumes than expected. However, we're glad to see volume return to normal in September. And based on what we have seen in October, we expect a normalized volume trend to continue in the fourth quarter. As it relates to our cemetery segment, it continues to be a key long-term value engine with operating revenue reaching $35.6 million, an increase of $4 million or 12.6% year-over-year. This performance underscore a strong runway for purposeful growth as we continue our investment in property development, technology-enabled sales capabilities and deepening community relationships, which we believe will create enduring value for families and our shareholders. Regarding our insurance-funded pre-arranged funeral sales strategy, we're very pleased to report that our progress is exceeding expectations, with September setting an all-time high and surpassing the $7 million mark in preneed funeral sales. This accounted for 50.5% of the year-over-year growth in financial revenue from general agency commissions. We continue to work hand-in-hand with our sales partners, the National Guardian Life Insurance Company and Precoa to identify ways to leverage their technological capabilities and increase preneed sales. With our continuous focus on execution, we believe we can sustainably grow preneed funeral sales through 2026. Total field EBITDA for the quarter was $46.3 million, an increase of $1.4 million or 3.1%. This growth was driven in large part by renewed momentum in preneed cemetery sales following permit delays earlier in the year, resulting in a strong 21.4% increase over the same period last year. We are very excited about the short-term future of our preneed cemetery sales strategy with the launch of Sales Edge 2.0, our upgraded CRM platform, which now integrates a marketing module to generate and convert leads more effectively. And in November, we will introduce Titan, our AI-powered sales agent designed to generate leads and schedule appointments for our preneed counselors. Sales Edge 2.0 and Titan represents a significant step forward in leveraging technology, innovation and data analytics to accelerate sales growth. We remain confident in our sales strategy and continue to grow preneed cemetery sales within our previously stated range of 10% to 20%. During the third quarter, adjusted consolidated EBITDA grew to $33 million, up $2.2 million or 7.3% versus last year. And adjusted consolidated EBITDA margin was 32.1% compared to 30.5% during the third quarter of last year, an expansion of 160 basis points, reflecting our strong operating leverage and positive momentum heading into the last quarter of this year. Adjusted diluted earnings per share were $0.75, up from $0.64 in the same quarter last year, an increase of 17.2%, reflecting our continued operational momentum and disciplined financial management and reinforcing our commitment to long-term shareholder value creation. In closing, we are very pleased with our third quarter results. They reflect disciplined execution and our unwavering focus on delivering premier experiences for the families we serve. These results also underscore the strength of our team, the power of our partnerships and the meaningful progress we're making as we elevate the experience and lead with a true passion for service. Our focus remains grounded in successfully executing on our 3 strategic objectives: disciplined capital allocation to invest in long-term strategic value creation while maintaining a strong balance sheet, relentless improvement to elevate performance, efficiencies and talent at every level and purposeful growth, fueled by culture, innovation, partnerships and strategic acquisitions. We believe our greatest strength is our culture, rooted in trust, empowerment, innovation and a sincere passion for delivering premier experiences to every family every time. Our field leaders exemplify compassion, excellence and ownership, redefining how families are served and advancing our mission every single day. We are continuing to build something enduring, a modern, innovative, values-driven Carriage positioned for sustainable long-term value creation for our families, our employees and our shareholders. As we enter the final quarter of the year, we do so with momentum, confidence and a clear vision for the future. Thank you, and I now turn the call over to John. John Enwright: Good morning, and thank you, Carlos. The third quarter results are a testament to our team's commitment to excellence and strategic focus. Building on a strong first half, we delivered adjusted EPS growth of 17% reflecting our commitment to disciplined execution across all business segments. Year-to-date, our 21% EPS growth demonstrates how our strategic objectives are driving consistent results. I am proud of our organization's dedication and look forward to sustaining the momentum. My comments today will primarily focus on our performance in the third quarter of 2025 compared to the third quarter of 2024. We achieved consolidated adjusted EBITDA of $33 million, 32.1% of revenue, up from $30.7 million or 30.5% of revenue in last year's third quarter. This improvement came from better results in our cemetery segment and prearranged funeral program, which resulted in an increase in EBITDA of approximately $2.7 million, offset by a small decline in funeral home volume compared to last year. Our adjusted EPS performance in the third quarter of 2025 increased to $0.75 from $0.64, which is an increase of $0.11 compared to the prior year's third quarter. When looking at GAAP results, our EPS in the third quarter was $0.41 compared to $0.63 in the third quarter of 2024. As we anticipated, our GAAP performance was negatively impacted by a loss on divestitures and impairment of long-lived assets from businesses held for sale at the end of the third quarter of 2025. To provide further insight into our divestiture strategy, we successfully completed the sale of several noncore assets in the third quarter. Over the past 5 years, we have systematically divested businesses that no longer fit our long-term growth strategy. By reallocating the proceeds from these transactions, we have made significant progress toward achieving our target leverage range by paying down debt and investing in acquisitions that offer greater potential in strategic markets. Throughout this period of portfolio transformation, we have consistently grown both revenue and profitability while steadily reducing our leverage. Looking ahead, although occasional divestiture opportunities may arise, we do not anticipate any substantial activity in this area going forward. Moving on to cash from operating activities. We saw an increase of $3.8 million over the prior year or an 18.3% increase, primarily a result of year-over-year improved operating results. Based on these results, our adjusted free cash flow in the quarter increased by 7.7% over the prior year. The $3.8 million increase in cash from operating activities was almost offset by a year-over-year increase in our capital expenditures in the quarter. During the quarter, significant activity occurred related to acquisitions, divestitures and capital expenditures. The net cash outflow from these activities for the quarter amounted to $44.7 million. Year-to-date, these activities have led to a total cash usage of $31.9 million. In alignment with our disciplined capital allocation strategic objective, our leverage ratio improved to 4.1x this quarter, down from 4.2x last quarter. We reduced our debt by approximately $5.1 million compared to last year's third quarter. Due to our focus on managing debt, interest expense fell by $1.1 million, and our average interest rate was roughly 180 basis points lower than last year. Capital expenditures for the quarter totaled $6.7 million compared to $4.6 million in the same period last year. Of the $6.7 million, $1.7 million was allocated to maintenance capital and $5 million to growth capital. Overhead expenditure totaled $13.7 million or 13.4% of revenues compared to $14.2 million or 14.1% of revenues in the same quarter of the previous year. Our teams remain committed to actively managing controllable expenses, such as overhead spending. Throughout the year and during the quarter, corporate spending has consistently been aligned with the targeted range of 13% to 14%. Now moving on to our updated outlook. With 1 quarter remaining in the fiscal year, we have narrowed our guidance ranges and are reaffirming the midpoint previously communicated. Achieving these results would mark record highs for revenue, adjusted consolidated EBITDA, adjusted diluted EPS in our company's history, which includes results during the peak of the pandemic. We believe these results will position us strongly for 2026. Our current outlook anticipates revenues in the range of $413 million to $417 million, adjusted consolidated EBITDA between $130 million and $132 million, adjusted diluted EPS of $3.25 to $3.30, overhead expenses ranging from 13% to 13.5% of revenues, adjusted free cash flow between $44 million and $48 million, leverage ratio ending 2025 between 4x to 4.1x. This concludes the prepared remarks. I will now turn it over to the operator to open it up for questions. Operator: [Operator Instructions] Your first question comes from the line of George Kelly of ROTH Capital. George Kelly: A couple for you. I'll start with the contract weakness that you flagged for, I think it was July and August. Can you quantify what you saw monthly just intra-quarter? And then you mentioned that you expect 4Q to kind of return to normal. What did October look like? Carlos Quezada: George, thank you so much for the question. So I don't have a specific volume for each one of the 2 months. What we saw from a percentage perspective, somewhere around middle-digit percentage of negative volume on both months of July and August, but then came back very strong in the month of September. Therefore, I have been able to make up a lot of the ground we lost in those 2 months. There's no specific reason. What I can tell you about what we found out from our partners and vendors across the industry is that it was pretty broad across the board, not just consolidators, but also privately owned funeral homes and -- experienced the same thing. As it relates to October, we see very positive trends in the month of October. I don't want to disclose the number just yet, but I do feel pretty positive about the fourth quarter. And specifically related to volume, we did better than last year. George Kelly: Okay. That's helpful. And then another question on the same theme. Just thinking high level for 2026, is it fair to just kind of baseline like with a low single-digit volume growth year be reasonable? Carlos Quezada: I believe so, George. What we have typically modeled or been talking about modeling for next year is a 1% to 2% growth on the funeral home side related to volume. George Kelly: Okay. That's great. And then just one last question for me. Your preneed cemetery business was again really strong in the quarter after a little bit lower growth in the first half of the year. Was that related to 1 or 2 kind of specific CapEx projects? Or I know you were working through permitting. Like anything you can flag there? And what's the expectation going forward in that business? Carlos Quezada: You bet. So if you remember during the first quarter and the second quarter, I mentioned that we did experience some delays in some of our largest cemeteries, the ones that are actually giving a lot of the contribution from a preneed cemetery sales perspective into our performance. And that was the delay. Although, I mean, we still had some pretty nice middle single-digit growth in the first quarter and second quarter. But our range is typically 10% to 20%. For this month, we have some pretty significant numbers at almost 21.4%. And so our running expectation of range remains at 10% to 20%. We do see a strong fourth quarter from that point of view. I don't foresee many more delays as we have some good learnings from the permit process in some of those states that are a little more restrictive. And we're taking all the precautions and all the time ahead as we continue to develop premier inventory in those cemeteries. John Enwright: George, to Carlos' point, and we've commented to this in the past, at the beginning of the year, we had a large cemetery that had a sinkhole that we were working through, and we saw some of that benefited really. We were able to recognize some of those sales in the third quarter associated with sales that happened, but the development didn't get completed until the third quarter. So that was partially a result of some of the cemetery performance in the third quarter. Operator: Your next question comes from the line of Liam Burke of B. Riley Securities. Liam Burke: Carlos, you mentioned that overall macro, the industry saw slower activity in the funeral home side. Margins were lower year-over-year. Is that just a function of volume? Or are there any other expenses in there that need to be worked through? Carlos Quezada: No. When you look at our margins, remain pretty strong. It's just that on the cemetery side, we are promoting a lot of premium cemetery sales in this year. Liam Burke: I'm sorry, Carlos. This is just on the funeral home side. Carlos Quezada: On the funeral home side, I'm sorry. Yes, on the funeral home side, it really is just a leverage question, right? At the end of the day, ultimately, sales were down. And when calls are down, it's a high fixed cost segment. So when we see calls down, we see margin, call it, closer to the high 30s. In the first quarter, when you saw volume up, you saw us in the low 40s. So it really is a -- the leverage really is just a driver being a fixed cost. Liam Burke: Perfect. That's what I thought. And on cemetery, now that Carlos brought it up, margins were great there. Obviously, they bounce around from quarter-to-quarter, but -- and I don't need a specific number. Are you sensing a floor EBITDA margin level at the cemetery business? Carlos Quezada: I really don't. You see the fluctuations come from our ability to recognize what we're selling on the preneed sales side. If for some reason, we are selling, let's say, it's a large private mausoleum that is going to take time to develop or is a recently developed project that is not fully completed, it won't be able to be recognized. So that month, you're going to get a greater cost from the commissions coming from those preneed cemetery sales, but you won't be able to recognize the revenue related to those sales. So that dynamic plays a little bit, as you know, on the cemetery side. As the months go through and you develop and deliver that inventory, then you are able to recognize the revenue, and that's where you see those fluctuations. But overall, as you see for the year-to-date numbers, they're pretty strong. Liam Burke: Yes, they are. Operator: Your next question comes from the line of Parker Snure of Raymond James. Parker Snure: I just wanted to hit on the insurance-funded preneed progress, making a lot of good progress there. I know you said that you think it can grow sustainably into 2026. But I was just hoping you could maybe just dive a little deeper there just in terms of like what inning in the kind of baseball analogy, do you think we are kind of getting that fully rolled out? Is this fully rolled out to all of your salespeople? Is there still some room to go? What is the kind of total amount of commission dollars that you're generating from that business line? And where do you think that can go? And just any other comments on kind of where we are in that trajectory and getting that to kind of more of a sustainable kind of base? Carlos Quezada: Great question. As you have seen probably over the last 1.5 years since we rolled out our partnership with NGL and Precoa, we have been able to fully and completely roll out this everywhere across our network. However, some businesses were able to grow significantly right off the bat and some were lacking. Over the last probably 4 months, we have been working on updating those that were not performing to the level of expectation we have and the opportunity that is in front of us and then tweak some of the models that we have. To give an example, there are different models that we have allocated based on the specificity of the business, the location and the opportunity that is in front of that particular business. That will -- just to give you some examples, one is called proactive model, right? So that marketing opportunity, the ability to create leads, it is owned by the Precoa team, and they are accountable for that. If we take ownership of that and the local manager don't do a good job is not on it, then we won't be able to generate as much lead. So what we did is move some of those selective services businesses now into the proactive model to be a little bit more aggressive. So we do expect additional growth from our strategy. In addition to that, our partner, Precoa, it is rolling out new technological tools to drive. We have a new CRM as well. They have new AI tools that are going to accelerate lead generation and the ability to close on more deals. So I do think from your question, probably we're somewhere around maybe the fifth, sixth inning. We have big targets for pre-arranged funeral. I mentioned in my remarks that we achieved for the first time in one single month, the $7 million mark. I do expect that to continue to grow throughout 2026 to maybe getting to a very low double digit. Parker Snure: Okay. Great. And maybe just remind us where we are in the kind of course of the Trinity implementation. Is there -- I know we're getting towards the end of that, but is there any ongoing kind of implementation costs that are still flowing through the P&L that we can maybe expect those to kind of wean off over the next couple of quarters? And then just what kind of -- remind us what kind of efficiencies you think you can kind of garner from that technology throughout your enterprise? John Enwright: Parker, this is John. So from implementation costs, we'll still have some implementation costs as we roll into next year. So we're at the beginning stages of the pilot that rolls out this year, and then we'll have more of a significant rollout as we hit the first quarter into next year. And that really is specific to call our funeral homes. And then we'll roll into our either combos or cemeteries, which will be in the later part of next year, which will have some costs. So as you think about it, the cost will be equitable to probably 2026, which was down from -- excuse me, equitable in 2026 to '25, which was down from implementation costs from 2024. We'll see the real benefit or some leverage associated with the rollout really into '27 because that's when the whole network will be rolled out. Carlos Quezada: Yes. In addition to that, Parker, I truly believe that you won't see much synergies from this new system in '26, mainly coming from some parallel systems, making sure that the transition is effective and ensuring the accuracy of every single piece of our software. Operator: [Operator Instructions] Your next question comes from the line of Alex Paris of Barrington Research. Alexander Paris: Nice job on the quarter. I appreciate your prepared comments. Just a further question on funeral services revenue and volume and price per contract. I appreciate the comments that July and August were below expectations, returned to normal in September. And in October, you returned to sort of normalized growth, which you're defining as 1% to 2%, if I'm not mistaken. When can we expect this business to get to more normalized growth on a consistent basis, deaths and taxes, right? The death rate influences that, obviously, for larger consolidators such as yourself. We had a pull-forward effect from COVID that I believe we worked our way through largely and demographics should be helping. I don't know if it's helping yet, but just any more color you can give really on the longer-term outlook for funeral services contract growth. Carlos Quezada: Yes, absolutely. From a pull-forward effect, we don't really see much more of that impact to be significant over the next few quarters. We truly believe that's pretty much in the past. As you mentioned, we do believe there's a nice tailwind that's going to help us continue to grow basically because of the demographics. I mentioned in the past that right now, the oldest baby boomer is right about 80 years old, specifically. The average age of death in the United States today is 79.5. So we could expect the beginning of favorable death rates in the near future. We're not putting too much of those numbers into our forecast. We want to be more thoughtful. I am more concerned about the flu season, for example, coming up into this fourth quarter. If you remember, the fourth quarter of last year, typically, you'll have the beginning of the flu season, which drives a greater death rate. And for some reason, it is shifted from December into January, therefore, having a little weaker fourth quarter than expected last year and a stronger first quarter of this year. If that trend remains, it may shift how we perceive quarters in terms of the seasonality. But I do believe, other than that, we should be able to slowly, but surely go back to our normalized volumes and the death rate should stabilize with some significant headwinds over the next many years. Alexander Paris: Yes. I realize it varies by quarter even in a normalized environment. But over the course of the year, it usually tracks with the death rate and demographics favor a rising death rate in the U.S., as you pointed out, morbid, but unavoidable, right? So all right. And then I just wanted to circle back on acquisitions and divestitures. Acquisitions, this is the first acquisition -- acquisitions that you've made in 2.5 years by my count, the time during which you kind of reduced the debt, improved the balance sheet. But first of all, let's start with the acquisitions before we go to divestitures. You announced that on September 9, it was 2 businesses, collectively known as Osceola together, more than $15 million in revenue, one combo, five funeral homes, one crematory and central care facility, one cremation-focused business. And then beyond that, let's talk about pipeline and the multiples you're seeing in the M&A. John Enwright: Alex, as far as the pipeline goes, we're pretty excited about what we're seeing right now. We're in active conversations with a number of premier businesses and owners. We won't see anything this year, but Q1 of next year, we anticipate to be busy. We're also a little more aggressive on our proactive outreach to businesses that we've identified would be good partners for Carriage based on our criteria. So excited about the pipeline, excited about the opportunity that lies there. And then just circling back, you highlighted Osceola, but also we want to welcome Pensacola and the Faith Chapel team. That's another business that joined us that we're really excited about. But integration is off to a good start. So really the team here just excited about being able to get back to growth. Alexander Paris: And then the last question in that list of questions was what is the level of competitive activity in M&A? And what are you seeing in terms of trends in multiples being paid, either what you're paying or what they're paying in the industry for the kind of assets that you're targeting, high-quality assets and demographically favorable geographies? John Enwright: The way I would answer that is there's really 2 categories there. One category are those businesses that we're sourcing internally. It's not really a competitive process. It's based on reputation and us really paying a fair price for a good business. And that's obviously our preferred path. And then the second are businesses that are being led by brokers. Those tend to be fairly competitive. We see the same players show up for those high-quality businesses. We're going to win some, and we're not going to win them all. In terms of multiples, for an average business, I think we all kind of circle around 7 to 8 times. And then for a premium business, you're looking at high single digits on the multiple. The thing I would add to that, though, the EBITDA multiple is one thing we look at, but the reality for us is I use Osceola as an example. If there's a business that has significant levers for us in terms of upside growth. So for example, they have a great cemetery where maybe there's not a diverse selection of inventory. That's something that we're particularly good at here at Carriage, then we see that as an opportunity where we might be willing to pay a bit more of a premium because the upside is there or maybe the market has some synergies for us with existing businesses where we can share resources and we can work together on that front. So we'll look at the multiple, but we'll also be flexible based on the opportunities that a particular business offers us. Alexander Paris: And then lastly, on that topic, you said Q4 will -- we shouldn't expect to see any acquisitions announced, but potentially in Q1. Can you remind us what the methodology is for guidance? When do you factor the acquisition in the guidance? I think it's when it becomes under contract, et cetera. John Enwright: Yes, that's exactly right. So obviously, we're working through the 2026 plan as well as what we'll be presenting for guidance. So if we don't have anything known by the time we present Q4 results, we'll exclude that from our expectations. Alexander Paris: Got you. That's what I thought. And then just moving on to the divestiture of noncore assets. According to the press release, I believe, seven funeral homes, one cemetery. What were the revenues and EBITDA of those operations? And I presume that they are factored into current fiscal 2025 guidance. John Enwright: Yes. So Alex, for the businesses that we divested in Q3, they represented about $2.4 million in EBITDA, about $9 million in revenue and proceeds there were just over $19 million. Carlos Quezada: And in regards to guidance, yes, we took the lost business into consideration when we put the guidance together. Operator: Thank you. This does conclude today's question-and-answer session. I would now like to turn the call back to Carlos for closing remarks. Please go ahead. Carlos Quezada: Thank you for joining us today. Carriage remains focused on driving sustainable, profitable growth through disciplined capital allocation and operational excellence. The strategy is delivering results, making our balance sheet stronger and positioning us to create long-term shareholder value. We're confident in our momentum and in our ability to execute on our strategic objectives. We appreciate your continued support of Carriage, and we thank you, and we'll see you next year as we deliver results for the fourth quarter. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Thank you for standing by. At this time, I would like to welcome everyone to today's Third Quarter 2025 Watts Water Technologies' Earnings Call. [Operator Instructions] I'd now like to turn the call over to Diane McClintock, Senior Vice President of Investor Relations. Diane? Diane McClintock: Thank you, and good morning, everyone. Welcome to our third quarter earnings conference call. Joining me today are Bob Pagano, President and CEO; and Ryan Lada, our CFO. During today's call, Bob will provide an overview of the third quarter, a business update and an update on our outlook for 2025. Ryan will discuss the details of our third quarter performance and provide our outlook for the fourth quarter and for the full year. Following our remarks, we will address questions related to the information covered during the call. Today's webcast is accompanied by a presentation, which can be found in the Investor Relations section of our website. We will reference this presentation throughout our prepared remarks. Any reference to non-GAAP financial information is reconciled in the appendix to the presentation. I'd like to remind everyone that during this call, we may be making certain comments that constitute forward-looking statements. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially. For information concerning these risks, see Watts' publicly available filings with the SEC. The company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. With that, I will turn the call over to Bob. Robert Pagano: Thank you, Diane, and good morning, everyone. Please turn to Slide 3, and I'll provide an overview of the quarter. We are pleased with our strong third quarter results, which exceeded expectations. Watts' multiyear track record of success would not be possible without the dedication, collaboration and support of our team members and business partners, and I'd like to express my sincere gratitude. Organic sales increased 9% in the quarter, with favorable price in the Americas, volume and pull-forward demand more than offsetting the decline in Europe. We also benefited from incremental sales from our I-CON and EasyWater acquisitions and favorable foreign exchange movements. Adjusted operating margin of 18.5% was better than anticipated due to favorable price, volume leverage, productivity and mix. Year-to-date free cash flow continues to be solid, and we expect to generate seasonally strong free cash flow through year-end. The balance sheet remains healthy, and we have ample flexibility to support our disciplined capital allocation strategy. On that note, we're excited to have acquired Haws Corporation, a leading global brand providing emergency, safety and hydration solutions for use in industrial, institutional and nonresidential end markets for more than 120 years. The addition of Haws' innovative specified product portfolio enhances our value proposition and broadens our capabilities. Haws has annual sales of approximately $60 million and is expected to be modestly dilutive to margins for the first year while we integrate and realize the benefits of synergies leveraging the One Watts performance system. I'm also pleased with the integrations of Bradley, Josam, I-CON and EasyWater, which are progressing well and synergy realization is tracking ahead of our original estimates. We continue to proactively manage tariff-related challenges through strategic pricing and supply chain optimization. The tariff environment remains uncertain, but based on tariffs in effect as of today, our global direct tariff impact in 2025 is estimated to be $40 million, consistent with our guidance at the last earnings call. We have successfully handled the cost impact so far in 2025 and plan to continue doing so. Now an update on our outlook for the remainder of the year. Due to our strong third quarter performance and our expectations for the fourth quarter, we are increasing our full year sales and margin outlook. Tariff-related price increases, foreign exchange movements, strong data center sales and the acquisition of Haws, are all favorable relative to the sales outlook we provided in August. However, there's ongoing uncertainty around the impact of supply chain disruptions and tariffs including the effect on new construction and global GDP, as well as around the impact of the U.S. government shutdown. As a reminder, GDP is a proxy for our repair and replacement business, which represents approximately 60% of total revenue. With that, let me turn the call over to Ryan, who will address our third quarter results and our fourth quarter and full year outlook in more detail. Ryan? Ryan Lada: Thank you, Bob, and good morning, everyone. Please turn to Slide 4, which highlights our third quarter results. Sales reached $612 million, setting a third quarter record for Watts. This reflects growth of 13% on a reported basis and 9% on an organic basis. Strong organic growth in the Americas more than offset a decline in Europe and a flat quarter in APMEA. In the Americas, reported sales were up 16% and organic sales were up 13%, exceeding expectations. Growth was driven by favorable price, volume and approximately $11 million of pull-forward demand. Sales from the I-CON and EasyWater acquisitions added another $11 million or 3 points to America's reported growth. Europe reported sales were up 4%, while organic sales were down 2% as market weakness more than offset price. Reported sales in Europe benefited from favorable foreign exchange. APMEA sales decreased 1% on a reported basis and were flat on an organic basis. Growth in Australia and the Middle East was offset by declines in China and New Zealand. Compared to prior year, adjusted EBITDA of $128 million increased 21% and adjusted EBITDA margin of 20.9% increased 140 basis points. Adjusted operating income of $113 million increased 22% and adjusted operating margin of 18.5% was up 140 basis points. Adjusted EBITDA and operating income were supported by favorable price, leverage in the Americas and productivity. These benefits more than offset inflation, volume deleverage in Europe, tariffs and investments. Our Americas segment margin increased 180 basis points to 23.7%. Europe segment margin increased 160 basis points to 12.2%, and APMEA segment margin increased 90 basis points to 19.4%. Adjusted earnings per share of $2.50 were up 23% compared to the prior year with contributions from operations, acquisitions, foreign exchange and reduced interest expense. The adjusted effective tax rate in the quarter was 25.8%, an increase of 60 basis points relative to the third quarter of 2024. This increase was primarily due to the recent changes in U.S. tax regulations related to the One Big Beautiful Bill act. For GAAP purposes, we incurred $1.9 million of pretax restructuring charges related to the exit of a facility in France and other actions within Europe. Our free cash flow year-to-date through the third quarter was $216 million compared to $204 million last year. The cash flow increase was driven by higher net income and lower tax payments resulting from the change in U.S. tax regulations, which more than offset inventory investment and increased CapEx. We expect seasonally strong free cash flow in the fourth quarter and are on track to achieve our full year goal of free cash flow conversion greater than or equal to 100% of net income. The balance sheet remains strong. Our quarter end net debt to capitalization ratio was negative 15% and our net leverage is negative 0.5x. Our solid cash flow and healthy balance sheet continue to give us capital allocation optionality. Now on Slide 5, let's review our assumptions about our fourth quarter and full year outlook. As Bob mentioned, we are raising our full year sales and margin outlook. This is driven by a strong third quarter, incremental price, favorable foreign exchange and strong sales in data centers. We are also benefiting from incremental sales of approximately $10 million related to the acquisition of Haws Corporation, which will be included in our Americas segment. We now anticipate organic sales growth of 4% to 5%, a 3-point increase to the midpoint from our previous outlook. Our reported sales growth is expected to be up 7% to 8%, a 4-point increase from our previous outlook. This reflects incremental revenue from the Haws acquisition and favorable foreign exchange impacts detailed by region in the appendix. Regionally, we anticipate stronger sales growth in the Americas and Europe while APMEA is projected to be slightly below our previous outlook. We are raising our full year adjusted EBITDA margin outlook to a range of 140 to 150 basis points, an increase of 55 basis points from the midpoint of our previous outlook. We are also raising our full year adjusted operating margin expansion to a range of up 140 to 150 basis points, an increase of 65 basis points from the midpoint of our previous outlook. Our updated outlook includes 10 basis points of dilution from the Haws acquisition. It also assumes $40 million in estimated direct tariff costs, consistent with our previous guidance. This is based on tariffs in effect as of today. Our free cash flow expectation remains in line with our previous outlook. We expect to deliver free cash flow conversion of greater than or equal to 100% of net income in 2025. Next, a few items to consider for the fourth quarter. On an organic basis, we expect sales growth of 4% to 8%. Regionally, we expect high single-digit growth in the Americas, low single-digit growth in APMEA and slight declines in Europe. The sequential slowdown in the Americas reflects the pull forward demand discussed earlier. We expect approximately $20 million in incremental sales in the Americas from the I-CON, EasyWater and Haws acquisitions. Additionally, we estimate a foreign exchange tailwind of approximately $10 million in the quarter. Regional assumptions are detailed in the appendix. Fourth quarter adjusted EBITDA margin is expected to be in the range of 19.6% to 20.1%, an increase of 30 to 80 basis points. Adjusted operating margin is projected to be between 17% and 17.5% or up 20 to 70 basis points. Price and volume leverage in the Americas should more than offset volume deleverage in Europe and dilution from the Haws acquisition. The sequential margin decline reflects normal seasonality and the impact of the Haws acquisition. Other key inputs for the fourth quarter and full year can become in the appendix. And with that, I'll turn the call back over to Bob before we move to Q&A. Bob? Robert Pagano: Thanks, Ryan. On Slide 6, I'd like to summarize our comments before we address your questions. Our third quarter performance was better than anticipated with record third quarter sales, operating income and earnings per share, driven by strong performance in our Americas region and better-than-expected results in Europe. We continue to execute well amid an uncertain trade environment, and we expect that price and our global supply chain strategy will enable us to continue navigating effectively. As a result of our strong third quarter performance and fourth quarter expectations, we are increasing our full year sales and margin outlook. We successfully closed on the acquisition of Haws Corporation earlier this week and look forward to welcoming them to the Watts family of brands. Our balance sheet remains strong and provides ample flexibility to support our capital allocation priorities. I'm confident in the resilience of our business and our team's ability to execute despite the uncertain environment as we continue to create durable, long-term value for our shareholders. With that, operator, please open the line for questions. Operator: [Operator Instructions] It looks like our first question today comes from the line of Nathan Jones with Stifel. Nathan Jones: Maybe just starting on the $11 million of demand pull forward into the third quarter. I assume that's probably ahead of price increases related to the increase in copper tariffs. And so that would then lead me to the question of, can you talk about what the price contribution was in 3Q? And then I assume the price contribution in Americas in 4Q will be somewhat higher due to those tariffs? Robert Pagano: Correct, it was $11 million, as you said -- as we talked about, and about 6% was our price. Nathan Jones: That's in 3Q. Do you have an expectation for 4Q? I assume there's been more price to cover that tariffs. Robert Pagano: Slightly higher than that. Nathan Jones: Okay. Fair enough. I guess the second question I wanted to ask was on this Haws acquisition. Obviously, the questions are going to be around the drinking water business. It's been pretty robust growth, been seen by one of your competitors in that business, but they do have very high market share in that. And based on Haws revenue, pretty low market share for them. How do you go about competing with the LK business in -- specifically in that drinking water business and look to grow the market share for that business? Robert Pagano: Well, Nathan, as we talked about it, Haws is a $60 million sales company, about 20% of its business is in the hydration market. Look it's a company that's been around a long time, 120 years, great brand, known for their quality and customer service. So they're niche in their hydration area, mainly on the West Coast. So we'll be evaluating that, but we primarily bought that business for their safety product, which complements our Bradley business. Nathan Jones: Maybe then just as a final question, you could talk about how it complements the Bradley business. I did notice that and whether or not you can kind of marry those two together to generate revenue synergies out of those businesses. Robert Pagano: Yes. Yes, so they make bigger sizes of safety showers and equipment and other products that we don't have. So it's complementary with some of the gaps that we have and gives us the full portfolio to leverage in our portfolio. So we believe it's a nice growing market and something we can leverage going forward. Operator: And our next question comes from the line of Mike Halloran with R.W. Baird. Michael Halloran: Could you just dig into how you're looking at the end markets here today and how you're thinking about the trajectory next year? I think primary focus for the question would be on the non-res, res pieces and how you see those playing out over to next year in North America as well as maybe generic comment on Europe as well? Robert Pagano: Yes. So let's look at Q3, we basically saw similar markets that we saw in Q2. So we'll be watching, I think, in general, multifamily, residential, which -- single family, again, slow growth. We're seeing probably similar to that going into next year. It's too early to talk about next year at this point in time. But I think we're all looking at ABI, Dodge Momentum, all the leading indicators. So 2026 is probably going to be a slow growth market similar to 2025 at this point in time. On the question on Europe, it was nice to see Europe finally getting close to bottom like we were projecting, minus 2% organically for us against easier compares, but something -- it's nice to see we're finally getting to the bottom of this. I don't think you'll see new construction growth really grow significantly in Europe, until this war -- the war in Ukraine subsides and each one of the government's understanding how much they have to fund that. So again, continued slow growth assumptions in Europe. Michael Halloran: And then secondary question, just maybe the puts and takes that drove the sequential margin improvement in Europe, but if you look at the guide for Europe margins up substantially. I guess the primary question, though is, is that the right run rate to think about sort of going into next year? The EBITDA margin implied for the European segment for the fourth quarter. In other words, are you back at the previous run rate now that you've gotten a chunk of that restructuring done and hopefully, a little bit more normal mix? Robert Pagano: Yes, that's the goal, Mike. I mean certainly, the team has been doing a great job of getting through the restructuring and closing of the site. We're now complete, adjusting their cost structure to the current market environment. And the team is doubling down and relooking on an 80-20 basis, the markets because they've shifted so much over the last couple of years. So team's really looking at that. We'll provide a little more guidance as we move into 2026. Operator: And our next question comes from the line of Jeff Hammond with KeyBanc. Jeffrey Hammond: You talked about kind of pricing through Q4. I'm just wondering, as we look forward into '26, what you think carryover prices at least into the first half? And then as you contemplate your normal course pricing for '26, is that a more normal kind of view? Or does it continue to be elevated with inflation, tariffs, et cetera? Robert Pagano: Well, Jeff, I mean, most of the price increases happened in the -- starting in April, et cetera. So there will be some carryover because we've had multiple price increases during the year. With the adjustments of tariffs, with all tariffs, there's a fluid thing, as we all know. So we'll be adjusting and looking at tariffs as we go forward into next year right now. So again, we're watching it very closely. We should have some favorable price certainly in the first quarter as we continue to roll off of some of those and you know, we had both prebuy in Q2 and Q3 now of this year. So again, we'll be providing more information in 2026, but there'll be some carryover into next year. Jeffrey Hammond: Okay. And then we talk more and more about data center, obviously, booming. Just wondering if you can, I guess, size that business for 2025 year, what you think -- for this year. What you think it can be in a few years? And I think most of your exposure historically was Asia, a lot of the demand is happening in the U.S., and I'm just wondering about your success bringing that over to the North American market. Robert Pagano: Yes, Jeff. I would say our North America team is going to surpass Asia Pacific this year. We've been growing very quickly in North America. We'll size it at the end of this year, but I can say that it's growing high double digits, and it's one of our fastest-growing markets in North America and in Asia Pacific. So we'll continue to double down on that. It's offsetting some of the softness in the residential side of our markets and it's nice, complementary to what we're doing, and you're seeing it come through our results in Q3. Jeffrey Hammond: Okay. And then just last one, multifamily, just update there. It seems like maybe some bottoming and things getting better. And I guess it depends on where you are in the build process, but just an update there. Robert Pagano: Yes. On the multifamilies, again, it's been a soft market. Like you said, there's various regions of the country that are still booming. But certainly, when you look at the single housing crisis where there's not enough homes and unaffordability, we are seeing projects in the multifamily, but it's not -- and there's shovel-ready projects ready to go. People are finishing what they've started. I think they're waiting for some certainty on the tariff front and making sure that comes down as well as waiting for some lower interest rates. So we think it's close to bottoming out, and we'll watch carefully through there, but it's not been a robust market. But we're hopeful that it will begin getting better as interest rates start coming down next year. Operator: [Operator Instructions] And our next question comes from the line of Ryan Connors with Northcoast Research. Ryan Connors: Most of my questions have been answered. You've been pretty comprehensive here. But I did pick up there, Bob, through the phone on your tone around tariffs and the increased uncertainty there. I think you're kind of alluding to the SCOTUS case, which I don't follow these things too closely, but apparently, it didn't go all that well and there's a chance that maybe the whole thing could be just disallowed. So obviously, that would be a very disruptive outcome given the -- all the price you've taken related to tariffs. So without getting too detailed, I mean just conceptually, if we were to hypothetically assume tariffs just go away and SCOTUS says no go. What does that conceptually look like? Do you keep the price that you've gotten? Do you give that back? Just curious how -- conceptually how you would look at that kind of a scenario? Robert Pagano: Yes, Ryan, that's a great question. Fundamentally, I have a hard time believing that the government is going to give anything back to any of us and even if they lose the case, it will be interesting to see the appeals and the potential adjustments. So we're watching it carefully. It would be very complicated, as you can imagine, because our pricing has not just been because of tariffs. Copper prices have been up double digits, general inflation has been high, labor, et cetera. So it's a very complicated item, and we're watching this very closely and we'll adjust based on what the market does at this point in time. But it's very complicated, as you said. And I think a lot of people are trying to figure this out, and we'll just have to wait and see how it plays out. Ryan Connors: Yes. I mean just as a follow-up to that, would it be crazy to think that, okay, the price you put in the market has been accepted in the market. It's been -- it's kind of there and you can sort of keep that and even if you don't get any retroactive credits that maybe that scenario could actually be a margin positive going forward? I mean, is that -- am I way off base there? Robert Pagano: Yes. That's -- it's such a difficult question, Ryan. And it's just -- there's so many different variables from that point of view. I think we're all going to have to wait and see and have many different scenarios to understand what's market pricing and what's happening on this. So again, stay tuned. I think we're all watching carefully. Operator: And our next question comes from the line of Joe Giordano -- sorry, Giordano with TD Cowen. Unknown Analyst: This is Chris on for Joe. You had mentioned the uncertainty surrounding the government shutdown. Just wondering if you could elaborate on what parts of the business that you are seeing or expect to potentially see impact from that shutdown? Robert Pagano: It's primarily on the residential side, right? Any time there's uncertainty, people withhold and slow down things. So I think it's just one of those things. Just an added variable, we're watching very carefully. Nothing big to report on at this point in time, but something that's certainly out there, and it's just normal process, people pull back when they're uncertain. And we'll see how that goes through. Hopefully, they'll get that resolved very soon. Unknown Analyst: Great. And with Haws, is there any difference in how they go to market versus your predominant channels and any opportunity to sell through your existing channels? Robert Pagano: It's very similar to our current process through wholesalers and distributions. And so yes, no, it's very similar. We can leverage our channels. The nice thing about Haws is they have more international exposure than we have, so that's an opportunity for us to leverage. Operator: [Operator Instructions] And our next question is from the line of Andrew Krill with Deutsche Bank. Andrew Krill: Want to ask another one on Haws. Just can you provide like any sense of the historical growth rates there? What do you expect looking forward? And then on margins for the business, and I guess, if we do the math on the dilution, is it correct, it's around like 10% EBIT margins initially as you integrate the business? And then like over time, any reason this can't be a lot to average or better margin business? Robert Pagano: Yes. So in general, I would say they're similar to the institutional growth, which is above, let's call it, growth of our traditional portfolio that includes residential. I would say their EBITDA is in the mid- to high single digits right now. And we certainly believe over the next several years, we'll be able to get them to the Watts' overall margin. So teams are on it really early at this point. Team, we're making out, great brand, great quality and great people. So we're excited to leverage that going forward. Andrew Krill: Great. And then switching back to Europe. I know the margin improvement is encouraging, a pretty nice inflection. More medium term, I think the prior high watermark was about 16% EBIT margin. So just -- like can you get there, do you think that volumes remain sluggish around where they are just with the new initiatives you have in place? Or I think we're getting back to that? Like, one, is it possible like and do you need volume leverage to get there? Robert Pagano: Well, certainly, volume leverage would help. And certainly, we're taking cost structure. I think the team is relooking, as I said earlier, at the 80-20 because the markets have changed significantly since we did a very detailed 80-20 on that. We're reshuffling that, and we'll provide more guidance, but that should help our margins going forward, but it takes a while to unravel some of the contracts we have with customers. But team's on it. We're looking at it. I would say, our aspirations are to get back up to those levels. But as you know, I'm always cautious on Europe at this point in time given the market dynamics and given the uncertainty with the conflict in Ukraine that's having an impact on local incentives, et cetera. So watching it very closely. The team's on it, but it's nice to see. I think we're starting to hit that bottoming out at this point in time. Operator: And there are no further questions at this time, so I will now turn the call back over to Bob Pagano for closing remarks. Bob? Robert Pagano: Thank you for taking the time to join us today. We appreciate your continued interest in Watts and look forward to speaking with you again during our fourth quarter earnings call in early February. Have a good day, and stay safe. Operator: Thank you. And this concludes today's conference call. You may now disconnect. Have a great day, everyone.
Operator: Good day, and welcome to the NCR Atleos Q3 2025 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Melanie Skijus, Head of Investor Relations. Please go ahead. Melanie Skijus: Good morning, and thank you for joining the Atleos Third Quarter 2025 Earnings Call. Joining me on the call today are Tim Oliver, Chief Executive Officer; Andy Wamser, Chief Financial Officer; and Stuart MacKinnon, Chief Operating Officer. During the call, we will reference our third quarter 2025 earnings presentation available through the webcast and on our new Investor Relations website at investor.ncratleos.com. Today's presentation will include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. Risks and uncertainties include, but are not limited to, the factors identified in today's earnings materials and our periodic filings with the SEC, including our annual report. During the call today, we will also refer to certain non-GAAP financial measures, which the company uses to measure its performance. These non-GAAP measures are reconciled to their GAAP counterparts in the presentation materials. The webcast this morning is being recorded and will be available for replay by accessing our Investor Relations website. With that, I will turn the call over to Tim. Timothy Oliver: Thanks, Melanie, and thank you to everyone for joining us on our call this morning. I will start this morning by quickly reviewing the quarterly operational performance and strategic progress from a more forward-looking and qualitative perspective. I'll leave the quantitative review to Andy. I will then provide some context on the current business environment and its consideration in our outlook. I'll end by reiterating the compelling Atleos story and describing a capital allocation strategy that anticipates steady growth and free cash flow. And then Stuart, Andy and I will take your questions. Having now passed the second anniversary of our spin from legacy NCR, our separation process is complete. The magnitude of the effort and of the accomplishment cannot be overstated. We bifurcated or duplicated 140 years' worth of IT systems and hardware. We physically separated hundreds of global locations. We established dozens of new legal entities. We migrated over 700 critical customer connections and completed over 200 transition service agreements. I'm very pleased that the resources formerly dedicated to this effort can now be focused on growing Atleos. From the outset, we described 2 fundamental goals that we knew would be essential to the eventual valuation of our company. First, establishing a quarterly pattern of transparent and predictable financial performance; and second, deploying free cash flow to reduce leverage and then begin returning free cash to shareholders. In the third quarter, our seventh full quarter as a separate publicly traded company, Atleos extended a series of steady financial performance that has repeatedly been consistent with our expectations and our external guidance. The resiliency of both Atleos business model and its employees that drive it, augmented by prudent contingency planning have allowed us to overcome exogenous shocks like 50% import tariffs, persistently high interest rates, disrupted supply routes and dramatic shifts in immigrant work payrolls. As we enter the fourth quarter, we have also crossed the originally targeted threshold leverage level of 3x and are on path to be at about 2.8x at year-end. While we were unable to repurchase shares in Q3 due to trading window restrictions, we expect to begin repurchasing Atleos shares in the upcoming trading window and to establish a 10b5-1 plan that dictates the repurchase program thereafter. For those following along in the presentation from the Investor Relations website, I will start on Slide 5 that provides a quick visual of our vertically integrated self-service offering. As digital transaction and asset types proliferate, the translation to and from physical assets becomes increasingly complex and is accelerating the outsourcing of self-service banking and the cash ecosystem. Banks and retailers are demanding more efficient and lower friction physical transactions and more capable devices and at convenient and safe locations beyond the branch. Our service infrastructure and installed base of machines is purpose-built to solve these needs. We become essential to any transaction that requires physical authentication and the ability to dispense or accept or even safe keep valuable physical assets. NCR Atleos is uniquely positioned to benefit from either of the 2 solutions, a shared financial utility ATM estate or outsourced bank-specific fleets. Both growth vectors leverage a common Atleos infrastructure that is world-class, has unmatched global scale and delivers significant cost leverage. Turning to Chart 6, which describes our Q3 performance against our qualitative and financial goals. The third quarter was an exceptional quarter from a strategic and competitive perspective. We grew efficiently by delivering robust hardware revenue that augments our leading installed base with record production from our manufacturing facility in Chennai. We drove incremental revenue from the global service fleet by accelerating our outsourced services business. Our Service First initiative elevated service levels and is being recognized by our partners and rewarded by our customers. And we embraced simplicity, reducing inefficiencies across the company, optimizing our production and supply chain operations, redesigning the organization to speed decision-making and investing in systems and people to make us easier to do business with. Core top line growth was 6%, led atypically, but not unexpectedly by traditional hardware revenue and the conversion of services backlog. This growth was partially offset by lower payroll card transactions in the U.S. network business. Profitability ramped nicely and was at the high end of our expectations due to an advantageous hardware revenue mix, accretive outsourced ATM-as-a-Service revenue growth, fixed cost leverage and direct cost productivity in our service organization. These were all partially offset by higher cash rental costs and higher tariffs. Shifting to Chart 7, which describes the self-service banking segment. This is primarily a service business comprised of a global installed base of over 500,000 ATMs sold to financial institutions that run our subscription software and rely on Atleos servicing agreements for the duration of their deployment. Traditionally, ATM services have been centered on maintenance and repair, but increasingly, banks are opting to outsource more or even all of the services necessary to run and manage their ATMs. We now have over 120,000 machines that we support beyond traditional break/fix, including those that are fully outsourced Atleos. Segment financial performance was strong. Revenue grew an impressive 11% in the third quarter, benefiting from increased demand for our recycler product, coupled with acceleration in outsourced services. Services and software combined grew 5%. And ATM-as-a-Service was the primary source of services growth and continued to gain momentum with meaningful additions to total contract value to customer count and to backlog. This segment generated significant profit growth with margins up across each hardware, software and services. Scalable services growth and advantageous hardware mix were augmented by indirect productivity efforts, all contributed to margin expansion. Demand across the product portfolio and especially our recycler product has exceeded expectations. In early 2024, we launched an effort to strengthen our manufacturing capabilities to prioritize our engineering effort and to increase throughput for next-generation recyclers. This effort has now reduced our delivery lead times from months to weeks. Demand for our ATM outsourced services is also strong and accelerating, posting 37% growth in Q3. We have streamlined the sales process and improved conversion rates, resulting in our best quarter ever for ATM-as-a-Service bookings, approximately $195 million of total contract value, including our first as-a-service customers in Latin America and in the Middle East. Backlog remains strong in this business, and we expect the fourth quarter implementations to be the highest of the year. Our Service First initiative is working. Already industry-leading service levels continue to trend upward in the third quarter. We completed our annual customer satisfaction survey in the third quarter, and the results showed an impressive 30% improvement in our Net Promoter Score from already solid scores in the prior year. We will use the detailed data from this survey to focus on areas that need improvement, and we'll follow up with every customer comment and request. Our efforts to simplify how we operate are generating positive business outcomes. Following the successful test run of our AI-driven dispatch and service optimization model in Canada, we launched for all of North America in the second quarter. These AI tools have delivered meaningful improvement in both first-time repair and time to repair metrics through automated dispatching. We will roll these tools out in the U.K. and Europe in Q1, and we'll test a third AI tool in North America in 2026 that is focused on preventative maintenance. Turning to Chart 8, summarizing the Network segment. The Network segment is our utility banking business that consists of approximately 80,000 owned and operated ATMs in 13 countries that are placed in blue-chip retail locations where consumers can meet their regular banking needs. The network business continues to grow the number of network cardholders, the number of client financial institutions, the types of transactions resident on the machine and the geographies. Similar to Q2, positive trends in surcharge-free transactions, cash deposits and TAP were more than offset by significantly lower payroll card transactions in U.S. cities with large migrant workforces and lower dynamic currency conversion transactions due to fewer international visitors. The net result was an overall modest decline in segment revenue. These 2 effects seem to have stabilized at new levels in August and September. And that said, our rolling 12-month ARPU was up slightly, and our machine count grew to about 81,000 machines, offsetting the recurring reduction we've seen from pharmacy closures. Growth in this segment typically results from expanding the number of cardholders, extending the footprint of the network or growing the transaction capability of the machines in the network. In Q3, Allpoint executed an important branding agreement with a top 10 U.S. bank and added deposit capability with the world's largest credit union. Our emerging transaction types were equally successful. ReadyCode further expanded its presence in digital payments through an agreement with Coinme, and volumes from gig workers are recovering quickly from a contractual pause. Cash deposits were up 90%, with particular lift from cap-based deposits. Our newer fleets in Greece and Italy are outperforming expectations in these cash preferred economies. And we continue to build a pipeline of partnerships and integrations to increase transaction opportunities and volumes with a focus on fintech issuers and wallet providers. And finally, on Chart 9, I summarize our investment thesis. First, our comprehensive portfolio is unique and allows Atleos to be indifferent to the self-service solution our customers prefer, whether there's a full outsourcing of traditional infrastructure or membership and access to a shared financial utility network. Second, our scale is unmatched, enables world-class service and efficient incremental costs. Third, the outsourcing of the cash ecosystem and physical transactions by banks and retailers is accelerating, and we are the obvious choice to take on that work. Fourth, we understand the importance of a new small-cap company like Atleos to establish a track record of consistency and transparency. Seven quarters in, our financial performance in every quarter has been very similar to our guided ranges. And finally, we expect to generate predictable free cash flow at steadily improving free cash flow yields sufficient to simultaneously improve our balance sheet and repurchase shares. Before Andy walks you through the detailed results, I'd like to express my appreciation to the 20,000 strong Atleos employee base. If you subscribe to any of our social media channels, you know that our recently celebrated Atleos Brand Week highlighted a positive, dedicated and engaged global team. Our continued success is entirely due to our collaborative spirit and our collective effort. Together, let's close out a successful 2025 and carry momentum into 2026. And with that, Andy, over to you. R. Wamser: Thank you, Tim. Building on Tim's comments, the company continued to drive strong performance in the third quarter, making good progress on our plans for the year, advancing our long-term growth strategy and delivering solid financial results. The strong momentum we have built in ATM-as-a-Service, coupled with our robust hardware order book and sales pipeline, has us on track to meet our operating and financial objectives for the year. Starting on Slide 11. I will focus my comments on core results for the third quarter as the Voyix-related business continues to wind down and impact comparability with the prior year period. As a reminder, Voyix-related comps have increasingly become less meaningful as we progress throughout the year. In 2026, the Voyix-related revenue will be negligible. The key message in the quarter is that we are delivering strong financial results and successfully overcoming various macro-related impacts on our business. Results for the quarter either met or exceeded the upper end of our guidance ranges and included 6% core top line growth and a 7% increase in EBITDA, including 8% growth in the core business, strong margins and an impressive 22% earnings per share growth. We achieved 4% growth in our services and software businesses, including an acceleration in ATM-as-a-Service growth of 37% year-over-year. Hardware was up 24% year-over-year, in line with our expectations. We achieved strong results with high recurring revenue alongside a second sequential quarter of meaningfully higher hardware sales versus recent years. Strong growth in our higher-margin recurring businesses, coupled with productivity improvements, drove adjusted EBITDA in the third quarter to $219 million, an increase of 8% year-over-year in our core business. The primary source of EBITDA growth was the self-service banking segment and was partially offset by a decline in the Network segment and a slight increase in corporate costs. Adjusted EBITDA margin of 19.5% expanded approximately 40 basis points from the prior year with strong margin expansion for self-service banking, more than offsetting margin compression from the Network segment. Net interest expense decreased $12 million compared to the prior year, benefiting from a lower debt balance, lower variable rates and lower credit spreads achieved in our credit facility refinancing late last year. The other income and expense line increased by $5 million year-over-year. The non-GAAP effective tax rate was approximately 19% for the third quarter compared to 18% in the prior year. Non-GAAP fully diluted earnings per share increased an impressive 22% year-over-year to $1.09. On Slide 12, we present our third quarter 2025 free cash flow reconciliation and strong financial position at quarter end. We generated $124 million of free cash flow in the third quarter, which was in line with expectations and supportive of our full year outlook. We expect to deliver a nice step-up in free cash flow in the fourth quarter as adjusted EBITDA increases sequentially and we recover investments in working capital. Net leverage exited the third quarter at 2.99x and was an improvement of more than 0.5 turn compared to the prior year. We made $20 million of debt principal payments in the quarter and finished under $2.9 billion of debt. Our unrestricted cash balance was just over $400 million at quarter end and resulted in a net debt balance of under $2.5 billion. Based on our financial outlook and capital allocation priorities, we expect net leverage to be approximately 2.8x as we close out the year. Turning to Slide 13. The self-service banking segment delivered exceptional financial results in the third quarter. Starting in the upper left, revenue grew 11% year-over-year and reached a new quarterly high of $744 million. The primary driver of top line growth was 25% growth in hardware deliveries, which reflects continued higher demand related to the industry refresh cycle and uptake of our recycler product. Hardware demand remains robust and should drive another step-up in revenue in the fourth quarter. Our services and software businesses continued to generate healthy growth of 5% on a combined basis with banks increasingly outsourcing more services to us. Moving to the chart on the top right, SSB grew adjusted EBITDA an impressive 21% in the third quarter to $196 million, also a new quarterly high. The key takeaway here is our ability to drive significant incremental profit through efficient, profitable growth and continuous productivity improvements. Segment adjusted EBITDA margin expanded 220 basis points year-over-year to above 26%, with margins up across each line of business. This strong performance includes absorbing approximately $7 million of gross tariff impacts in the quarter. Moving to the bottom of the slide, KPIs reflect healthy fundamentals of the business. On the bottom left of the slide, the mix of recurring revenue was 57%, with recurring revenue still comprising a majority of the business, even with one of the strongest hardware quarters in recent years. Annual recurring revenue, or ARR, was up year-over-year, reflecting the continued build in recurring services and software revenue from our existing installed base. Next is Slide 14 and our ATM-as-a-Service outsourcing business. As a reminder, our Bank Outsourcing Solutions business resides within our self-service banking segment. Advancing our customers through the continuum of ATM outsourced services to full outsourcing is a key strategic priority for the company. We break out primary operational metrics separately to help investors better understand and track our progress. Starting at the top left of the slide, revenue grew 37% year-over-year to $67 million for the third quarter, led by 24% growth in unique customers and a favorable mix shift to North America, which is our highest margin geography. We also expanded to 2 new geographies in Q3, closing our first deals in Latin America and the Middle East. The chart on the top right highlights the strong profitability of our ATM outsourced services business with gross profit up an impressive 65% year-over-year and gross margin up 700 basis points to 40%, benefiting from faster growth and margin expansion in NAMER. Moving to the bottom of the slide, KPIs also demonstrate the positive trajectory of the business. On the left, ARR continues to build and was up 37% year-over-year to $268 million, and we are on track to exceed $300 million of annual recurring revenue as we close out the year. We finished the quarter with a strong backlog, up approximately 100% and the sales pipeline to deliver our growth target for the year. On the right, you can see the healthy revenue uplift we generate from our ATM-as-a-Service business with third quarter average revenue per unit or ARPU of $8,300, which is well above segment and total company averages. The modest sequential downtick in ARPU for the third quarter was influenced by a higher mix of asset-light customers onboarded in recent quarters. Such fluctuations are expected because the base is still relatively small, so variables like region, scope and timing of onboarding can impact ARPU for the quarter. Over the longer term, we expect this performance metric to trend upward from growth in higher ARPU regions like North America and Europe. Moving to the Network segment on Slide 15. Segment revenue of $328 million was down 1% year-over-year. As we exit this year, we see positive fundamentals in the business, which is demonstrated by an increase in device count, an increase in new retail customers, deposit volumes and new geographies. As we look at Q3 results, cash withdrawal transactions were approximately 4% lower than the prior year, with mid-single-digit decreases in the U.K. and North America. As mentioned in our second quarter call, North America continues to be impacted by several factors beyond our control. An acquisition of one of ReadyCode's key digital payment partners, coupled with shifts in immigration policy have affected certain consumer segments. We continue to see lower utilization of prepaid payroll cards given certain government policies. Excluding those items, we estimate North America withdrawals would have grown low to mid-single digits. In Q3, we expanded our presence in Canada with the addition of Access Cash. The asset added over 6,000 ATMs to our network fleet in one of our key markets. We have also seen an improvement in dynamic currency conversion transactions as travel to the United States began to recover and stabilize in the third quarter. Additionally, our ReadyCode platform continues to attract strong interest from leading wallet providers, fintech innovators and money service businesses. In Q3, we successfully stabilized transaction volumes by onboarding several new partners, leveraging our seamless digital-to-cash and cash-to-digital capabilities. We also deepened our strategic Allpoint relationships, expanding access through key retail partnerships. As a result, we are seeing a solid rebound in transaction volumes, driven by our commitment to delivering surcharge-free access for gig economy users, unlocking value and driving sustained growth. We generated strong top line trends from sources other than withdrawals, helping to diversify the business and support future growth. Our utility deposit network continues to gain strong traction with deposit volumes up 90% year-over-year and reaching an all-time high, clear evidence of market enthusiasm and a fundamental shift toward modern banking solutions. Moving to the upper right. Adjusted EBITDA for the third quarter was $93 million. The year-over-year decrease in EBITDA was expected and was primarily due to a $9 million increase in vault cash costs resulting from the wind down of previous hedges and macro-related transactional headwinds. Adjusted EBITDA margin was 28% in the third quarter, and we are on track to maintain this margin performance in the fourth quarter. The metrics at the bottom of the slide highlight key elements of our strategy. The chart on the left shows our last 12-month ARPU remained strong and continued to move higher by 2% year-over-year in the third quarter. On the right, you can see our ATM portfolio finished the quarter at approximately 81,000 units, which is up both year-over-year and sequentially. We anticipate ATM network units will remain relatively flat as we close out the year, while we focus on driving new transaction types and other opportunities to monetize our fleet. Turning to Slide 16 for our approach to capital allocation. Over the past 7 quarters, the company has demonstrated the ability to generate profitable growth and significant free cash flow. We continue to have a clear and compelling path to strong financial results with margin levers in the business providing outsized earnings growth potential and improved free cash flow conversion. Our capital allocation priorities are focused and disciplined, continue to reduce debt, investing in our business, pursuing strategic bolt-on acquisitions and returning capital to shareholders. Our guiding principles remain consistent, a balanced approach designed to deliver the highest long-term value for our shareholders. As we exited the third quarter, we successfully achieved our net leverage target of below 3x, reinforcing the strength of our balance sheet and our financial flexibility. We take a disciplined approach to investment opportunities, ensuring that both strategic innovation investments and bolt-on M&A meet rigorous return thresholds. Reflecting confidence in the forward outlook of our business, you will recall that our Board authorized a $200 million share repurchase program that has a 2-year duration. In the fourth quarter, we will begin to repurchase our shares in the open market and also through a 10b5-1 plan. With the capacity of our business to generate significant and improving free cash flow, we have unique flexibility to return capital to shareholders, while at the same time, strengthening our capital structure and investing for future growth. In short, we are confident in our ability to deliver predictable growth, disciplined capital deployment, improved free cash flow conversion and strong shareholder returns. Moving to Slide 17 for financial outlook. Given solid third quarter results and positive momentum heading into the fourth quarter, we have reaffirmed the full year 2025 guidance ranges presented earlier this year. We have confidence we will deliver full year 2025 free cash flow conversion in excess of our 30% target. Looking beyond 2025, we anticipate further improvement in our free cash flow conversion, approaching 35% of adjusted EBITDA over the next 12 months. This progress will be driven by continued margin expansion, particularly in recurring long-term services, monetization of our network ATMs, lower debt costs through recent and anticipated rate cuts and ongoing working capital efficiencies. Concluding my comments, Atleos had a successful third quarter and sets us up well to achieve our plan for the year. We delivered solid financial results, had great operational execution and made progress on our key strategic goals to grow efficiently, prioritize service and embrace simplicity. We are reaffirming our guidance ranges for 2025 as we effectively manage higher and uncertain tariffs and macro-related headwinds on our business. Our risk mitigation actions have been successful and are ongoing. To put a finer point on the year with 9 months behind us, we are tracking toward the high end of our guided range for revenue given stronger hardware demand trends versus our original assumptions. In line with our previously provided comments for adjusted EBITDA, we expect to deliver results at the lower end of the guided range. The adjusted EBITDA outlook reflects the impact of previously discussed tariff increases and broader macroeconomic pressures. Finally, both adjusted EPS and free cash flow performance in 2025 continue to track at the midpoint of our original guidance with internal initiatives executed to reduce interest and tax expenses and as we benefit from working capital efficiency improvements. We are moving into 2026 with confidence in our approach and our ability to drive continued profitable growth. With an unmatched platform of ATM solutions, we are focused on expanding our leadership and delivering significant value for shareholders. With that, I will turn it back to the operator. Operator: [Operator Instructions] We will take our first question from George Tong with Goldman Sachs. Keen Fai Tong: You talked about how the network business was affected by lower prepaid card transaction volumes. Can you elaborate on how prepaid volumes played out during the quarter and exiting the quarter, if there were any improvements in trends seen? Timothy Oliver: Yes. Thanks for asking that question. They got better. So they stabilized at not great levels, but they've stabilized. They stopped getting worse. So I think those who are being paid differently or have chosen not to be paid at all and gone somewhere else to work, that effect has now stabilized, which means that, that downdraft should abate, and we expect to see this business return to growth in the fourth quarter. Keen Fai Tong: Got it. That's helpful. And then can you provide an update on how you expect tariffs to impact the business in the fourth quarter and beyond? Timothy Oliver: Yes, that's a good question. We wish we get to answer that question. So here's what we've done. We scrambled to reduce costs and change where we ship some machines from to minimize the impact of tariffs this year. I think ultimately, the total impact of tariffs will be between, say, let's call it $25 million for this year. Any changes to the tariff at this point, we're already halfway through the quarter would be, I guess, helpful and set a better stage for '26. There's expectations that the tariff rate that's currently at 50%, 5-0 percent will come down to something closer to 15% to 16% when negotiations with India result in a positive outcome. We'll plan for next year at the 25% rate. Our budgeting process will presume a 25% rate, which would cause tariffs to be modestly higher year-over-year, so go from $25 million to say, $30 million. If it stays at $50 million, it's $20 million worse than that. And if it goes down to $15 million or $18 million, it's $10 million or $12 million better than this year. So there's a range of potential outcomes. I think the right place for us to be right now is presume a 25% number, which is right down the middle of what we've seen. But there's very -- we're very hopeful that we'll see something closer to 15% to 18% in the not-too-distant future. When we see that number, it will be helpful to margin rate. I don't know, Andy, if you want to add anything to that? R. Wamser: No. I mean you hit the key points. So Tim is right, the gross tariff impact will be possibly $30 million for this year. I would say, though, that if you follow the news, which we do track, probably on an hourly basis, that the expectation that something should be announced here imminently. And as Tim mentioned, it's in that 15%-ish range. So we will see, and we'll also see what the Supreme Court says. Timothy Oliver: But we presumed no change to the tariff rate in our guidance for the fourth quarter. We presume it stays at 50%. Operator: We will take our next question from Matt Summerville with D.A. Davidson. Matt Summerville: I want to ask one first on the network business. What percent of the transactional mix today is traditional withdrawals versus what it was 2 or 3 years ago? And can you talk about the relative profitability of withdrawal transaction sets versus non withdrawal as you try and expand beyond kind of that historical dependence on withdrawal? Timothy Oliver: Thanks, Matt. So remember that the transact -- withdrawal transactions in the United States have actually been a grower for us for a period of time. And the surcharge-free transaction volume has always been more than sufficient to offset the modest declines in surcharge transactions. The only thing that's changed in that dynamic because the surcharge fee continues to grow very nicely is this prepaid card. The prepaid payroll card is down about 15% to 16% year-over-year, which translates into a downdraft on the business. The other parts of the world, we see withdrawal transaction volumes that are very strong, particularly in cash-intensive economies. The U.K. is an exception to that. The U.K. has been on a downward trend for the last 4 or 5 years, really even predating the pandemic. And so we continue to -- that hasn't changed. That's been the same for some period of time. I think if you look at the Network business, approximately 75% of that business is U.S.-based. And so the phenomenon we're talking about would impact approximately 75% of the total revenue, if that's helpful. But Stuart, you want to add? Stuart MacKinnon: Yes. I want to address your second question sort of in terms of percentage of our revenue that is withdrawal-based versus the other factors we have in the network business, such as ReadyCode transactions, deposit transactions, branding and other revenue drivers. Withdrawal transactions still make up the majority of the revenue in the high 80s, I would say. And -- but we're starting to every quarter, essentially offset that with -- you've heard about the 90% increase in deposit transactions. Those are our highest margin transactions and the ones that we are seeing the most demand for as banks look for alternate locations to serve their customers depending on their branch footprint consolidation activities. Matt Summerville: Got it. And then as a follow-up to go over to self-service banking for a second. You threw a lot of numbers out there on the as-a-service stuff, and I want to make sure I kind of understand. So you're going to exit '25 with an ARR at $300 million or more. You had $195 million, I believe, of contract bookings. How does that -- what I guess would be the total as-a-service backlog? And early read, obviously, but where do you think based on all that TCV and bookings, where do you think the exit rate for '26 could look like for that business? Timothy Oliver: I think we're going to have another year of approximately 40% growth rate in that business. It's going to grow about 40% in the fourth quarter. You'll recall that we had hoped to have the machines come on a little more linearly this year than they did in 2024. They didn't. They were back-end loaded. But we'll have a really nice ARR as we exit the year, which will, let's call it, lock in a lot of the growth that we were expecting in 2026. So think about a 40% growth rate in Q4 and a 40% growth rate in 2026. And you'll remember that we hope this business -- at one point in time, we rolled this business out, we thought the growth rate might be higher than that. But what's been clear is the adoption rate has been not slower because of demand. Demand has been strong, but slower because of the time that it takes to both complete the sale and ultimately implement the solution. So we've rolled the devices onto the system, onto the as-a-service program a little bit slower than we would have liked to. So we feel very good about backlog. The $195 million, we probably should be doing something like that in most quarters. We're going to keep that 40% growth rate going, right? That number was $175 million last quarter. It's $195 million this quarter. It needs to grow with the business. That total contract value, if you divide that by 6, that's typical an average duration for a contract in there, that would give you a sense of how much that $195 million would impact the ARR going forward. R. Wamser: And Matt, maybe just one thing to emphasize is that growth of 37% is also coming with phenomenal margins. So the gross profit was up 65% in the quarter, and we saw a gross margin expansion of 700 basis points. So I think the point there is not only the backlog continuing to be strong, but it's also a very high-quality backlog in terms of what we're able to generate from a top line and then from a flow-through perspective. Matt Summerville: Got it. And if I can just sneak one more in. What does the ARPU look like as a service backlog today? And how are you thinking about maybe pivoting over to the hardware side of the business? How are you thinking about the duration of the hardware cycle? R. Wamser: Sure. Yes. So I'll take the first question. So as we look at the ARPU in the backlog today, it's effectively flat from where we are for where we were for Q3. Some of that has to do with just timing of some incremental deals that we had in the APAC region, which is a little bit lower. But I wouldn't read too much into that. The sales team is doing a phenomenal job in terms of trying -- of getting new contracts in NAMER and EMEA. And so the backlog can change in terms of that average ARPU, but we are really confident in terms of -- as Tim talked about the TCV that we signed up and the team is doing a great job building on to that. Timothy Oliver: Yes. And I'll take the second one because it's a really good story. We're going to put into service about 20% more devices this year than we did last year. We're going to sell 60% more recyclers this year than we did last year. We're -- the growth rates in our hardware business are even surprising us. That has a lot to do with terrific service levels from Len's organization that are wowing our customers has a lot to do with the really concentrated effort we made on the recycler that Stuart led, and the team pulled off nearly flawlessly. So I feel great about where we are. I look at some of our nearest competitors, they've got relatively flat performance in hardware. I don't even know how to do that math. The market is very, very good. Bookings are very strong. Demand is high, and we expect that trend to continue into next year. Now at some point, we'll hit that -- this high level, but I anticipate hardware revenue being up again next year even on some very difficult comparisons. So we couldn't be more thrilled. We don't like to talk about hardware around here too much. We obviously we're a service company. But when you can lock up these 5- to 7-year contracts on devices that are very lucrative for us beyond the hardware sale, we feel great. So the mix is right. The profitability is strong. Sometimes we get a mix that's high in hardware. We see profitability go down because it's lower margin than the services side. The productivity we generated there and the price point on the devices we ship have all caused it to be more profitable than we would have thought. So taken all together, our hardware business is killing it right now, and I think it's going to continue. Operator: [Operator Instructions] We will take our next question from Dominick Gabriele with Compass Point. Dominick Gabriele: I guess when you're -- well, first, let's just stick with the recycler because it just sounds like that is becoming a larger and larger contributor. You talked about the 60% more recyclers just now. Is there any chance that you'd be able to give us an idea of how much revenue that makes up and what the revenue story is going forward on the recycler business? I still have a follow-up, too. Timothy Oliver: I don't think I'll distinguish between the more traditional device, either the multifunction or just the dispense device. But we'll continue to give you the growth rates in the recycler, if you'd like. I think remember that our growth rate is probably somewhat self-inflicted, right? We didn't ship as many machines from a recycler perspective, we would have liked to last year. And our competitive position wasn't as good as it needed to be. And I think what you're seeing this year to a certain extent is 2 things. One, our recycler is very, very good and performing exceptionally well. We're proud to put it into service, and we've got some of the larger banks choosing to go with our solution and getting our machines into their labs. So I think that matters a lot. It's also true that larger banks are starting to buy a preponderance of their fleets as recyclers. There's just an underlying dynamic. They are fully bought into the recycler. The upside associated or the upside associated with profitability and downside -- lower costs associated with putting a recycler in place. So I think it's twofold. One is we're doing a hell of a lot better job with our recycler product than we did a year ago. And secondly, our big bank customers are choosing recyclers nearly every time when they import a new machine. Dominick Gabriele: Great. I appreciate that. I guess if maybe you could just walk through some of the puts and takes and you talked about the tariff piece, which was really helpful. But maybe even beyond that, can you talk about kind of the headwinds and the tailwinds, the puts and takes to adjusted EBITDA growth that were in 2025? Just trying to think about the trajectory of the business as we exit '25 into '26, given... Timothy Oliver: Yes. It's a very fair question, and I knew this is going to come up, right? It's time for you all to start to build models into 2026. And Andy would kill me if I started to talk about '26 guidance and rightly so. So right into our budgeting process now. I think whatever happens in tariffs, we'll figure out a way to absorb it like we did this year. We'll just -- we'll figure that out, right? We did it this year, we'll do it again. I have a hard time believing that tariffs will be much of a headwind next year, which suggests to me maybe they're a modest tailwind. We will get lower interest expense next year. It's helpful to us. We've got -- every time they reduce interest rates by 0.25 point, we pick up or we pick up annually. R. Wamser: It's about -- well, if you think about just the U.S., we're talking about just the U.S. Fed. We about $2.6 billion in cash. So if you think about today, we've had 50 basis points, so that's -- cut that in half, that's $13 million on a full year basis. We get another point, again, just add another, call it, 6.5 or so. Timothy Oliver: Yes. It's hard to rely on those. We've built more into our budget for each of the last couple of years than we've actually seen. I'm hopeful we'll see one right here at the end. They've always been a little later than we would have liked to, so you don't get the full year effect. But in general, thinking about '26, taking all that aside because it all seems to -- at least I think we've converted what were headwinds and tailwinds in each of those circumstances. I think it's going to be a year a lot like this one. You're going to see 40% growth in ATM-as-a-Service. You're going to see terrific hardware numbers, more difficult comps in the second half of the year, but it will be really terrific. You're going to see a recovery in the network business that cost to start growing again in the fourth quarter and getting back to respectable growth rates as the year plays out. And I think in aggregate, you're going to see a growth rate from us is 4% to 5%. We're going to grow profitability twice that fast. We're going to generate more cash flow with convergence going from 30% to 35% or better next year. So I think it's -- if you kind of use that as your construct to put the model together and think through kind of project forward what we're feeling this year, I don't think a lot is going to change. Dominick Gabriele: And maybe actually, if you don't mind, maybe just one last one. The hardware sales in the quarter are obviously good for the quarter, but it feels like they set up the opportunity for a long-term contract effectively, right, through the life of the machine and there's knock-on effects from that device being put in place over the next multiple years. And so maybe could you just talk about, given that the demand for your products seems to be increasing, how that could flow through the income statement and financial metrics in the kind of years to come, next 12 to 18 months? Timothy Oliver: Growing that installed base is the most important thing we're going to do this year. It is our right to sell software on a subscription basis and to service those devices for 5 to 7 years in duration, has everything to do with our ability to put them in place and a good customer who trusts us to do that for them. So despite the fact we don't tend to talk about hardware very often because we're not a device company, we are a service company. But our service business relies on the success of the hardware business and relies -- our software business relies on the success of those devices. It's been very strong. Or to say it differently, when you miss on a device, you've missed on that revenue stream for 5 to 7 years, and it's a very painful thing to do. So yes, this is really, really important, and it's going to see -- when you see growth next year in the service revenue away from ATM-as-a-Service. You've got ATM-as-a-Service that's just you're picking up more services around the same devices, you're also going to see growth in software and services associated with that fleet getting incrementally larger such that the software and service pull-through is stronger. So this is a very important year. And if this cycle of replacement continues to be strong, we believe that it will, it's a very good time to have people like your hardware because it's -- you're booking 5 to 7 years' worth of revenue. It's probably 4x the cost of the device itself. Operator: We will take our next question from Antoine Legault with Wedbush Securities. Antoine Legault: Just on the vault cash, you mentioned you have about $3.6 billion in vault cash. That obviously drives interest expense, and I appreciate that the Fed has been cutting rates and you benefit from that. But just thinking about that notional amount, do you have any ability to -- or discretion to flex that number up or down? Is that $3.6 billion sort of the right number? Could this be optimized further depending on network activity in quarters where activity is a bit lower? Just how -- is there anything to be done here? Help me understand how that can work. Stuart MacKinnon: Yes. Just a quick -- it's $2.6 billion that we have sort of out in our machines around the world. Timothy Oliver: Total USD 26... Stuart MacKinnon: USD 26. And that number has come down substantially over the last couple of years as we've implemented optimization. It's our biggest expense. So it's the area where we have the highest amount of focus in terms of optimizing efficiency. And it's one of the big drivers for ATM-as-a-Service as we take over a customer's fleet, we're able to optimize their utilization of cash and return capital back to them as well. So it's a number we're incredibly focused on, and we try to drive that number down every chance we get. So a combination of improved efficiency and lower interest rates next year will help the network as it returns to growth. Timothy Oliver: Stuart, what are the inputs of that algorithm to help us decide how much cash and how often roll trucks? Stuart MacKinnon: It's a combination of where the machine is. So some machines are harder to get to, so the drop cost is higher. Combination of the vault that's getting to and obviously, a combination of the utilization of the machine. So we make decisions around whether we refill the machine weekly, monthly, biweekly, depending on the drop cost and then a combination of whether we have a recycler or a cash dispenser in there. If we have a recycler in that unit as we have been increasing our deposit-taking network, that machine becomes increasingly more optimized and requires less visits, and thus lower cash rates. Operator: There are no further questions at this time. I will turn the conference back to Mr. Oliver for any additional or closing remarks. Timothy Oliver: Great. Well, thank you. This quarter looked a heck of a lot like the one that preceded it, and I suspect that the next one will be the same. We're making good, steady progress everywhere. We're winning more often than not. Our employees are performing exceptionally well. Our customer service levels are high and continue to get higher. It's very hard not to feel good about where this business is headed. We hope that will translate into a closing out a good year here in our fourth quarter, and then most importantly, probably give us good momentum going into 2026. We appreciate your time today. And I guess, happy holidays. We won't talk to you again until February. So an early happy holidays from the Atleos team for those on the call. Thanks a bunch. We'll talk to you again in 90 days. Operator: This concludes today's call. Thank you for your participation. You may now disconnect.
Operator: Hello, ladies and gentlemen. Thank you for standing by, and welcome to Zai Lab's Third Quarter 2025 Financial Results Conference Call. [Operator Instructions]. As a reminder, today's call is being recorded. It is now my pleasure to turn the floor over to Christine Chiou, Senior Vice President of Investor Relations. Please go ahead. Christine Chiou: Thank you, operator. Hello, and welcome, everyone. Today's earnings call will be led by Dr. Samantha Du, Zai Lab's Founder, CEO and Chairperson. She will be joined by Josh Smiley, President and Chief Operating Officer; Dr. Rafael Amado, President and Head of Global Research and Development; and Dr. Yajing Chen, Chief Financial Officer. As a reminder, during today's call, we will be making certain forward-looking statements based on our current expectations. These statements are subject to numerous risks and uncertainties that may cause actual results to differ materially from what we expect due to a variety of factors, including those discussed in our SEC filings. We also refer to adjusted loss from operations, which is a non-GAAP financial measure. Please refer to our earnings release furnished with the SEC on November 6, 2025, for additional information on this non-GAAP financial measure. At this time, it is my pleasure to turn the call over to Dr. Samantha Du. Ying Du: Thank you, Christine. Good morning, and good evening, everyone. Thank you for joining us today. Before we discuss the quarter, I want to take a moment to reflect on who we are, where we are headed. Zai Lab was built on a clear vision to bring the best global innovation to patients in China and to discover and develop new innovations that can compete on the world stage. That vision remains unchanged. Today, our global pipeline is stepping to the forefront, becoming the next key chapter in Zai's growth story. Zoci or ZL-1310 has now entered the pivotal stage less than 2 years from Phase 1/1b, an extraordinary pace at any standard in our industry. And we're on the path for our first global approval by 2027 or early 2028. Beyond Zoci, we're expanding our global portfolio with other highly differentiated programs, including our IL-13xIL-31R bispecific atopic dermatitis, IL-12 PD-1 bispecific and LRRC15 ADC for solid tumors. More importantly, we have built a global R&D organization that combines speed, scientific rigor and quality expected of a global biopharma. On our commercial business in China, we are commercially profitable today and on a steady, profitable growth path. However, the pace has been slower than we expected. The environment is complex and dynamic. But at the same time, there are encouraging signs of progress. Regulatory reviews are faster and NRDL negotiations are more transparent. We have one of the strongest commercial teams in the industry, backed by a portfolio of differentiated, high potential assets, and we remain confident in the long-term potential of this business. This next chapter will take focus and persistence, but we have the right science, the right team and the right vision. Together, we are building a company that will make a lasting difference for patients and create long-term value for our shareholders. With that, I'll now hand the call over to Rafael, who will walk you through the progress of our R&D pipeline. Rafael? Rafael Amado: Thank you, Samantha. I will begin with a few highlights from our global pipeline, starting with ZL-1310 or Zoci. Two weeks ago, at the triple meeting conference, we presented updated Phase I data in previously treated extensive stage small cell lung cancer. This global study enrolled 115 patients across the U.S., Europe and China. At baseline, 90% of patients had received a PD-1 or PD-L1 therapy, nearly 1/3 had brain metastases and several had progressed on a prior DLL3 targeted therapy, including tarlatamab, making this a very difficult to treat heavily pretreated patient population. At the 1.6 milligrams per kilogram dose, we observed an overall response rate of 68% and a disease control rate of 94%, among the strongest efficacy signals reported in the second line setting. Importantly, we also saw robust activity in patients with brain metastases, including an 80% overall response rate in lesions, which had received no prior treatment of any kind, suggesting that Zoci may offer a new way to control both systemic as well as intracranial disease without interrupting therapy, a potential game changer in terms of speed to treatment for these patients whose tumors tend to be growing very fast. Across all doses and lines, the median duration of response was 6.1 months, and the median progression-free survival was 5.4 months, which is highly encouraging for a monotherapy in this refractory population across doses and lines of therapy. Data from the 1.2 and 1.6 milligrams per kilogram cohort continue to mature as enrollment continues and patients remain on treatment. Zoci also continues to demonstrate a best-in-class safety profile. At the 1.6 milligrams per kilogram dose, grade 3 or higher treatment-related adverse events were observed in only 13% of patients, far below the 35% to 50% rate seen with other ADCs in this setting. There were no drug-related discontinuations or deaths and only 2 Grade 1 interstitial lung disease cases across both expansion doses of 1.2 and 1.6 milligrams per kilogram. This combination of deep efficacy and favorable tolerability positions Zoci as an ideal candidate for the first-line combination where safety is paramount. We've now begun enrollment in our registrational Phase III trial in extensive stage small cell lung cancer with the potential for an accelerated approval submission. We're also advancing our first-line strategy with plans to initiate a Phase III study next year following results of our ongoing combination study evaluating Zoci plus PD-L1 with and without chemotherapy. In addition, we see significant opportunity for Zoci as a backbone therapy in novel mechanism combinations. We plan to initiate studies with agents with ethanol and complementary mechanisms of action, and we will share details once the studies are posted on clinicaltrials.gov. Beyond small cell lung cancer, Zoci is being evaluated in Neuroendocrine Carcinomas or NAC, which have poor prognosis and no targeted therapy despite high DLL3 expression. Early data with ZL-1310 are encouraging, and we plan to present results in the first half of next year and to move into a registrational study thereafter. Beyond Zoci, our next wave of innovative global assets continue to advance rapidly. ZL-1503, our internally discovered IL-13/IL-31 bispecific antibody for atopic dermatitis recently entered Phase I. Its dual mechanism targets both itch and inflammation and its extended half-life offers potential for less frequent dosing. A subcutaneous formulation is being developed. Preclinical results support its use in other inflammatory diseases. First-in-human data are expected in 2026. ZL-6201 is an internally discovered LRRC15 targeted antibody with a next-generation payload linker. It remains on track for a U.S. IND submission by year-end and a global Phase I study initiation early next year for patients with cancer that have tumor cell or tumor stroma expressing this target. ZL-1222 is another internally discovered asset. It is a next-generation PD-1 IL-12 immunocytokine designed to deliver cytokine signaling directly into the tumor microenvironment while preserving PD-1 checkpoint blockade. IND-enabling work is underway, and we expect to move quickly towards an IND once data are available. Now turning to our key late-stage regional programs in immunology and neuroscience. The Efgartigimod continues to expand across multiple autoimmune indications. The ADAPT SERON study in seronegative gMG was positive, the first global Phase III trial to show clinically meaningful improvements across all 3 gMG subtypes, MuSK+, LRP4+, and triple seronegative. Three additional Phase III readouts in Ocular myasthenia gravis, Myositis and Thyroid eye disease are expected next year with China contributing to global enrollment. For Povetacicept, our partner, Vertex recently received FDA breakthrough therapy designation for IgAN. Enrollment of the global RAINIER Phase 3 is complete with an interim analysis planned for the first half of 2026, where patients from China are included and potentially supporting an accelerated approval submission next year. The global pivotal Phase II/III study in primary membranous nephropathy was initiated in October, and we're on track to enroll patients in China this quarter. Together, these achievements reflect the depth and quality of our pipeline, one that is advancing with speed and efficiency and with a clear focus on novel mechanisms and clinical differentiation. In summary, over the next 12 months, we expect to reach several important milestones across our global portfolio. For Zoci, we expect a catalyst-rich year with updated intracranial data, first-line small cell lung cancer combination data and results in neuroendocrine carcinoma in the first half. In parallel, we plan to initiate registrational studies in first-line small cell lung cancer and other neuroendocrine carcinomas as well as starting studies with novel combinations across line of therapy. Beyond Zoci, we expect first-in-human data for ZL-1503 or IL-1331 and to advance ZL-6201 or LRRC15 into global Phase I development. We're also progressing ZL-1222 or anti-PD-1/ IL-12 agonist and look forward to sharing additional data in the coming year. And with that, I'll hand it over to Josh. Joshua Smiley: Thank you, Rafael, and hello, everyone. Before we turn to our third quarter results, I'd like to start by welcoming Dr. Yajing Chen, he as our new Chief Business Officer. Chen brings both deep scientific expertise and investment experience and will play a central role in expanding our portfolio and unlocking value through partnerships and out-licensing. I'd also like to sincerely thank Jonathan Wang for his many contributions over the past decade in helping build the strong foundation that now supports our next phase of growth. Now turning to our commercial performance. Total revenues were $116 million, representing 14% growth year-over-year. VYVGART and VYVGART Hytrulo contributed $27.7 million, which includes a $2.4 million reduction following a voluntary price adjustment on Hytrulo to align with NRDL guidelines ahead of national pricing negotiations. While this adjustment affected reported sales, the underlying fundamentals of the launch remain very strong. VYVGART continues to be one of the most successful immunology launches ever in China, ranking as the #1 innovative drug by sales among all new launches in the past 2 years. More importantly, the trends beneath the headline numbers point to durable long-term growth. There are 2 key growth drivers underpinning the trajectory of VYVGART in gMG, patient demand and treatment duration, the latter of which is particularly important given the chronic nature of the disease. First, on demand. We continue to see steady new patient additions each month with nearly 21,000 patients treated to date. VYVGART penetration in gMG remains only around 12%, meaning we are still in the early stages of market development with significant room for expansion. Second, on treatment duration. The updated MG guidelines published in July have been a meaningful catalyst to emphasize both the importance of rapid symptom control, where VYVGART has demonstrated strong efficacy and a minimum of 3 treatment cycles to reduce the risk of relapse and maintain durable disease control. Since publication, we have seen clear signs of positive impact in real-world practice. Physicians are becoming receptive to maintaining patients on therapy even after achieving symptom control, signaling a shift from episodic to maintenance use. As a result of our efforts, the average vials per patient have increased over 30% year-to-date versus last year, with a notable acceleration in Q3. And VYVGART volumes have grown sequentially in the mid-teens. We see this level of growth as realistic and sustainable as we head into 2026. Now admittedly, the pace of market build for this first-in-class therapy for chronic disease has been more measured than we initially anticipated. With VYVGART, we are shaping this new market thoughtfully, focusing not only on driving adoption, but also on redefining how gMG is managed over the long term. Through physician education and real-world experience, we aim to change long-standing treatment patterns. While the ramp is slower than expected, the long-term potential of VYVGART in gMG is substantial. Beyond gMG, we're making progress in CIDP, expanding access across both supplemental and commercial health insurance plans. We will continue to add new layers of growth with new indications and formulations with the most immediate being seronegative gMG and the prefilled syringe. Looking ahead, our next major launch opportunity is KarXT, currently under regulatory review. KarXT has the potential to redefine schizophrenia treatment in China, introducing the first new mechanism of action in more than 70 years. Notably, it has already been included in the China Schizophrenia Prevention and Treatment Guidelines 2025 Edition, the first national guideline globally to do so, underscoring its strong differentiation and anticipated clinical impact. Across the company, we remain disciplined in our operations, scaling efficiently while investing strategically in commercial execution and pipeline innovation. And with that, I will now pass the call over to Yajing to take us through our financial results. Yajing? Yajing Chen: Thank you, Josh. Now I will review highlights from our third quarter 2025 financial results compared to the prior year period. Total revenue grew 14% year-over-year to $116.1 million in the third quarter, primarily driven by higher sales of NUZYRA supported by increasing market coverage and penetration. Demand for XACDURO remains robust, and we aim to normalize supply by year-end. ZEJULA grew sequentially but declined year-over-year amid evolving competitive dynamics within the PARP class. Given this trend as well as VYVGART dynamics discussed earlier, we are updating our full year total revenue guidance to at least $460 million. Our continued focus on financial discipline and efficiency was evident in our cost structure with both R&D and SG&A as a percentage of revenue declining significantly year-over-year. R&D expenses for the third quarter decreased 27% year-over-year, mainly due to a decrease in licensing fees in connection with upfront and milestone payments. SG&A expenses for the third quarter increased 4% year-over-year, mainly due to higher general selling expenses to support the growth of NUZYRA and VYVGART, partially offset by lower selling expenses for ZEJULA. As a result, loss from operations improved 28% in the third quarter to $48.8 million and adjusted loss from operations, which excludes certain noncash items, depreciation, amortization and share-based compensation, was $28 million in the third quarter, a 42% improvement from the prior year. While we expect meaningful quarter-over-quarter improvement in adjusted operating loss, we now expect profitability to shift beyond the fourth quarter, reflecting the lower revenue base this year. Importantly, our fundamentals remain strong. Our China business is already commercially profitable and growing, and we are executing strong financial discipline and investing strategically in R&D. We are on a path to profitability, and we'll provide updated 2026 financial guidance when we report our full year 2025 earnings. Zai Lab is at a major value inflection point with a rapidly advancing global pipeline, a commercially profitable China business and a path to profitability. We also maintain a strong financial foundation, ending the quarter with $817 million in cash, which provides us with the flexibility to invest in both innovation and disciplined execution. And with that, I would now like to turn the call back over to the operator to open up the line for questions. Operator? Operator: [Operator Instructions] We will now take our first question from the line of Jonathan Chang from Leerink Partners. Jonathan Chang: First question, on the revised revenue guidance, how should we be thinking about the key drivers for growth and the path to profitability? And then second question on ZL-1503. Can you help set expectations for the initial data readout expected in 2026? And how are you guys seeing the opportunity in atopic dermatitis? Joshua Smiley: Thanks, Jonathan. It's Josh Smiley. Thanks for the questions. I'll take the first one on revenue drivers, and then Rafael will talk about 1503. I think as we think about revenue headed into the fourth quarter here, drivers will continue to be VYVGART, we expect continued good sequential growth driven by new patient additions and continued growth and durability in terms of the number of doses patients get. We are seeing, as I mentioned in the opening remarks, we're seeing good progress as a result of the national guidelines that were issued in July, which focus on getting patients into at least 3 courses of therapy. So, we'll see, we expect to see continued growth there. ZEJULA, we are seeing a return to growth. As we've mentioned throughout the year, the quarterly numbers, I think, will be a little bit choppy because of the generic entries for Lynparza, but we do expect VBP to kick in, in the fourth quarter here, and that gives us a chance to gain share in this class, and we're confident we will. So, we'd expect to see some growth there. rest of the portfolio continues to do well. We are excited about the progress we're seeing with XACDURO, but still face supply constraints. So, we'll be somewhat limited as we come into the fourth quarter here or there. But overall, good momentum in the portfolio and good growth drivers. We'll give more specific guidance for 2026 as we get into next year. But obviously, we're looking forward to the launch of KarXT, the potential approval of TIVDAK and continued growth in these, in the core part of the portfolio. As it relates to profitability, again, our profitability will be driven by growth in the business in China. The China business, of course, is profitable today. And as we continue to drive top line growth, that profitability will be enough to cover the R&D and corporate costs that we have. So, we're still on that path. It's just, we just need the growth to continue in the portfolio. With that, I'll turn it to Rafael to talk about 1503. Rafael Amado: Thanks, Josh. Thanks, Jonathan. So, 1503, we're really excited about this molecule. As you know, it's both dual IL-13/31 inhibitors. It traps IL-13, and we know that, that is a proven pathway. And 31 is a very potent pathway in initiating pruritus. So, we think the combination plus the long half-life is going to translate into a really brisk effect, which is very fast and sustained. We have initiated the IND already. We plan to do a multi-country study. And obviously, it's a first-in-human study. We will do single ascending dose in normal volunteers and then multiple doses in patients with atopic dermatitis. In the lab, we've been looking at other models of TH2 diseases, and we are very encouraged with what we're seeing on asthma, rhinitis and other disorders that affect [TH2]. So, in addition to this, we're going to be looking at efficacy endpoints given the half-life that is long, we think that we will be able to see effects on EASI scores as well as IgA/ID [Audio Gap] and so this is going to be measured very frequently. We hope to have the data available by the middle of next year, but it will obviously accumulate throughout next year, and we will present when we have sufficient data. It's a placebo-controlled trial. So, we'll be able to have comparisons. And obviously, we know what the landmarks are here with other products. So again, a very large opportunity. This is a very common disease, even a fraction percentage of capturing in AD would be a large opportunity. And also, the possibility of expanding into other TH2 diseases, I think make this a very promising product. Operator: We will now take our next question from the line of Anupam Rama from JPMorgan. Anupam Rama: This is Joyce on for Anupam. The press release today really led with progress on your own internal global development programs. Is this a shift in how you're thinking about the resource allocation in terms of your prior focus on external BD versus now the internal pipeline? Joshua Smiley: Thanks. It's Josh. I'll start. First, we are very excited about the pipeline that we have today with the global emphasis. And of course, that will be a priority to invest in and Rafael outlined our near-term focus in terms of 1310 and getting the registration trial up and running and expanding into first line and into neuroendocrine tumors. So that's going to be a focus. We've got a really exciting global portfolio behind that. We think we have the capacity here to fully invest in those programs. We have a strong balance sheet with plenty of cash to continue to pursue on a targeted basis, the right kind of external opportunities to bring in, both on a global and regional basis. And we have the capacity within the income statement on the R&D side to, I think, fully invest behind these exciting opportunities and still manage, I think, an R&D budget that's within the range of what we've seen the last few years. So, priorities are advance the pipeline, continue to build the pipeline and continue to drive the commercial business in China, which is profitable today and will be increasingly profitable over time. Operator: We will now take our next question from the line of Yigal Nochomovitz from Citi. Yigal Nochomovitz: This is Caroline on for Yigal. We were wondering where you're seeing the greatest opportunity and greatest likelihood for success for your internal global pipeline among LRRC and PD-1, IL-2 and others. I have a second question, if okay. Joshua Smiley: Rafael, jump in on this one, please. Rafael Amado: Sure. Obviously, the most immediate one is 1310. I mean, it clearly is quite active. It is well tolerated, very few related grade 3 and above treatment effects. treatment side effects, strong brisk effect on brain metastases in untreated brain metastases. And again, very high percent of patients responding. We are starting up the Phase III study for second line. We've had recent discussions with FDA, and we're sharpening the design to the point that it's already started. We will continue to do some work on the dose, but I think that is going to finish pretty quickly. With regards to the rest of the products, obviously, 1503, I mean, these are proven pathways. So, the bar for activity is pretty low. And also, the characteristics of the product with FC modification for long half-life makes it very ideal for patients with these chronic diseases. And then with regards to some of the other ones, LRRC15 is particularly interesting because it will be the first time where a tumor is being targeted where the target is not necessarily in the tumor. So, there will be these 2 groups of patients like sarcoma patients where the tumor does express LRRC15, but others in which the tumor only expresses the target in fibroblasts. And if that is the case, if we can actually abrogate tumors where the tumor is negative, but the tumor microenvironment is positive, then it opens a whole host of tumor types. So pretty excited about this. And I think we are with others leading in ADC, which is one of our focus in oncology. And then I'll finish with PD-1 IL-12. It's been very hard to target IL-12 because it's toxic. So, we've been able to engineer an IL-12 stimulated moiety, which actually is attenuated. So, it doesn't really cause side effects of T cell activation. And at the same time, with full blockade of PD-1. So, in animal models, we can see that we can actually restore PD-1 resistant tumors, which would be pretty exciting to see. And we are seeing, as you know, more enhancements on PD-1 as a checkpoint with other molecules. And we think that an IL-12 would be one of them. So, I'll just finish by saying that we can move these things pretty quickly. We'll have 2 INDs this year. One of them will enroll this year. The other one will start enrolling in January. And PD-1 IL-12 is a candidate that will have an IND next year and hopefully, the first patient as well in the second half. So yes, we're excited about all of them. But obviously, our strongest focus right now is making sure that we cover the lives on 1310. Yigal Nochomovitz: Got it. And on my second question, we're wondering what you're doing to set yourself up for a strong KarXT launch? And what more have you learned about the schizophrenia market in China to best position KarXT in the marketplace? Joshua Smiley: It's Josh. Yes, we're quite excited about the opportunity with KarXT. Regulatory reviews are going well. So, we are hopeful for an approval sometime in the near term here. First, I think if you look in China, there's a huge opportunity. Of course, there haven't been any new mechanisms approved in severe melan illness or schizophrenia in more than 70 years. So, the opportunity for a mechanism like KarXT that provides both efficacy on positive symptoms, negative symptoms and cognition is, I think, well anticipated and thought leaders are anxious for this drug to come. So, we'll launch with a targeted sales force. I think the difference in China versus what we see in some of the Western markets, certainly in the U.S. is it's a more concentrated approach. Patients tend to be in bigger institutions. So, with a relatively targeted sales force and education program, we should be able to touch a significant portion of the market at launch. And again, just to remind people that the opportunity here is quite significant with millions of patients today suffering from schizophrenia. Obviously, it's a lifelong disease. So, we're anxious to get the approval first to get up and running in 2026 and then move toward NRDL listing in 2027. Operator: Our next question comes from the line of Li Watsek from Cantor Fitzgerald. Li Wang Watsek: I have one commercial, one pipeline question. I guess just given some of the complex commercial dynamics in China and your revised guidance, can you provide your updated views on the $2 billion revenue target by 2028? And then second is for ZL1310, sounds like you're expanding to neuroendocrine tumors next year. I wonder if you can just talk a little bit about the pathway to approval and what would be the bar? Joshua Smiley: Thanks, Li. It's Josh. I think first on the $2 billion 2028 goal, we will look at all the moves that we had in the portfolio, and we'll provide a more fulsome update next year, maybe starting at JPMorgan. But to comment, we feel really good about the portfolio we have today. As Samantha mentioned upfront, I think the most exciting piece is the opportunity for sales outside of China in 2028. We mentioned that 1310, we see a path for an approval as early as late 2027. So, to have some significant sales in 2028 coming from the U.S. in small cell lung cancer, I think, quite exciting and certainly represents a new inflection point and phase of growth for us. The portfolio in China continues to grow. And we've talked about the dynamics with VYVGART, which we expect over the course of the next number of years to continue to grow at a good and steady rate, supplemented by additional indications. since we have talked about that revenue goal, we've added Pove and Veli, both of which can launch in the 2028-time frame. So, we're quite excited about the long-term growth potential of the portfolio and most excited this year about the progress on 1310 and what it means for sales, not just in China, but outside of China within this time frame. Yes, Rafael, if you can jump in, please. Rafael Amado: Yes. Thanks, Caroline. So, I'll talk a bit about NEC. So, the study that we have has 2 cohorts of carcinoma. So, these are highly proliferative tumors that have a poor prognosis. One is gastroenteropancreatic tumors or GEP, and the others are other NECs that can arise from other sites, other organs. We are seeing responses in both groups. It's still early days, obviously, and we're accumulating more and more evidence of activity. These are patients that have had more than one line of therapy, which tends to be platinum-based therapy. And there really isn't any standard for these patients. The tumors tend to grow fast and actually mortality is quite high. So, in terms of how we want to proceed with this, the idea would be to sort of circumscribe the tumors that have similar natural history like GEP, large cell non-small cell lung cancer and also tumors of a non-primary and do a study, a single-arm trial and try to characterize the response rate. I think anything above 30% to 40% would be of great interest because there really isn't any therapy. Many of these patients go to clinical trials with reasonable durability. So, we would plan to have discussions with regulatory authorities to see whether given the unmet need single-arm trial with these kinds of results could result in an accelerated approval. The alternative is to do a physician choice comparator, which also we will be prepared to launch. And given the activity that we are seeing, if it continues, it wouldn't be a very large study, particularly given the large unmet need and the fact that this is an orphan indication. So pretty excited about what the agency will see and opine once we have sufficient follow-up and sufficient patients to characterize the activity. Operator: Our next question comes from the line of Lai Chen from Goldman Sachs. Ziyi Chen: Two questions. The first one is regarding the guidance. We try to understand a bit more about compared to the expectations set in any guidance previously, in which areas has the company encountered deeper than anticipated challenges in China environment, particularly for VYVGART and ZEJULA. Could you elaborate a bit more? And also, I think beginning of the year, in terms of the guidance, not only about the top line, but also you mentioned about fourth quarter cash breakeven target. Is that still intact? That's my first one. Second is regarding the R&D because Zai Lab is really pivoting towards a global R&D company. So, in terms of the pipeline buildup, particularly for the early-stage pipeline buildup, now we got oncology ADCs, we have 2 different ADCs. We have PD-1, IL-12, and we also have immunology. So we're trying to understand a bit more about the strategy, the portfolio strategy when you're deciding what to go after and what not to do. So, could you provide a bit more color on that? Joshua Smiley: Sure. Thanks. First, on the performance this year, I would say, relative to our initial expectations, VYVGART, while growing well, and we're pleased with the underlying dynamics, as we've mentioned throughout the call, it's just taking longer to get to the rate that we, of treatment that we see in the U.S. market, for example. So, we're focused now on getting patients up to at least 3 cycles of treatment, and we're seeing progress there. It's just slow. So, I would say that's our sort of on the VYVGART piece, that's the piece that has been the slowest relative to our expectations. Again, I think this is what we're realizing is it's a long-term build the market opportunity. We have the long term with this product, and we're seeing good response to things like the national guidelines and our continued promotional and educational efforts. So just a slower ramp to get to the kind of treatment duration that we see in the Western markets. On ZEJULA, we expect to gain share as a function of Lynparza going generic, and we saw some delays there in terms of, relative to our initial expectations relative to VBP. Again, we expect that to kick in beginning in the fourth quarter and set us up well for next year. Certainly, again, there are dynamics related to affordability and hospital purchasing and otherwise that may make that a bit choppy. But I think the underlying opportunity for ZEJULA is to gain share from what had been Lynparza as it goes to generic. The third piece for us is then just we've talked about this through the year. It's a great product and our partner, Pfizer, is seeing really great response and demand in the hospital setting for this drug. And we've had more supply constraints than we anticipated at the beginning of the year. We're working through those, and we're hopeful that as we come into 2026, those will be resolved, and we'll be able to fully meet the demand that we're seeing in the marketplace. Those things together, of course, will help and drive profitability. I think if you look at our path to profitability and focus on the noncash, I mean, on the cash sort of earnings, which is our non-GAAP number, you see continued good progress in that regard. And that progress should continue. We'll give you an update for 2026. But really, it's just going to be a function of continued growth on the top line. And I think at the numbers that we're suggesting here for the fourth quarter, we probably won't quite get there, but we'll still show good improvement, and we'll be on that path as we head into 2026. Rafael, if you can talk about how we think about the portfolio and the next opportunities. Rafael Amado: Sure. So, the portfolio will continue to grow as a blend of both internal as well as external opportunities. I'm really proud of the fact that many of the products that are now in development came from our protein science laboratories, which have been very productive. But in terms of strategy in oncology, we will continue with antibody drug conjugates, and we will continue to innovate there. There are other antibodies that we haven't mentioned that are in the pipeline at the moment, and we spend a lot of time trying to characterize the antibody vis-a-vis the target. and then use the right payload linker. So that's going to continue to grow. We also have an interest in immunocytokines, which I mentioned before. We have other immunocytokines that will come after the PD-1 IL-12. And then T cell engagers, we've made an effort in T cell engagers, and we will be reporting with time some of these candidates entering the clinic. Outside of oncology, you are right. I mean, we have been focusing on autoimmunity, neuroscience and immunology. In autoimmunity, we are focusing on cytokines, both antibodies or bispecifics perhaps cell depletion as well and then signal transduction of some of these cytokine pathways, which involve small molecules as well. And so overall, we will remain opportunistic, obviously, for either regional or global opportunities that have novel mechanisms of action, have differentiation and really make a big difference for patients. But the guardrails, if you will, are the ones that I just described to you. So, thanks for the question. Ying Du: Yes. I think, Joe, just like Rafael was saying, we, even though our pipeline in China, regional pipeline has oncology, autoimmune and neuro and anti-infectious. But for our global pipeline, we are focusing on oncology and autoimmune and anti-inflammatory specifically that Rafael was saying. So internally for global development pipelines, we are only focused on those 2 areas. Operator: Our last question today comes from the line of Clara Dong from Jefferies. Yuxi Dong: This is Jenna on for Clara. We have 2 questions, if we may. First, on VYVGART. I think previously, we were under the impression that sales will be back half loaded. So, I was just curious what kind of visibility or leading indicators you may have for Q4 and 2026? And more specifically, can you comment on, for example, pace, number of cycles on average patients are getting today? What does the pace look like over the next few years to reach the 3 average doses? And then our second question is on Bema in the context of the Amgen announcement. I was just curious if it's still possible to have a path forward for just China based on the trials you're running or the data you have in hand? Joshua Smiley: I'll start with VYVGART and then Rafael can talk about Bema. I think on VYVGART, what we're seeing is good underlying growth in terms of duration or number of vials or cycles patients get. I think as we started the year, on average, we were probably close to 1 cycle per year or per patient per year, and that represented the fact that at launch, we were getting lots of the acute patients and VYVGART, of course, works really well in an acute setting, but to get the full benefit for patients with gMG that allows them to work and live their lives fully, you need to get the maintenance benefits, which kick in at least 3 cycles. Through this year, we're seeing progress towards an average of 2 cycles per year. And as you mentioned in your question, the goal is to get to at least 3 and over time, aspirations toward 5, where we see the full benefits in clinical trial and real-world setting, so I think as we look into next year, we'd expect the underlying growth to continue probably at this, what we're seeing in terms of volume, so sort of number of vials in total is sequential quarterly growth in the sort of low teens. And I think that's reasonable to expect as we head into next year and continue to sort of climb towards that on average, 3 cycles of use; again, supplemented by, or accelerated by the national guidelines that were issued in July and our efforts to educate physicians in that regard. So, we're looking forward to the continued underlying growth here, and I think expect that to continue on a good basis as we head into 2026. Rafael, do you want to talk about Bema? Rafael Amado: Sure. So, we're still digesting the data. You saw the data at ESMO that was presented with the primary analysis of 096 and then the final analysis with this attenuated treatment effect. And then Amgen announced that 098 was a negative study in terms of not meeting statistical significance. So, we're looking at with Amgen and our partner at translational markers and subgroups, and we will be doing this in the upcoming weeks and make a decision. But our opinion is that it will be very challenging to get an approval in China with this data set. So as such, we're thinking about how to deploy these resources to the rich pipeline that we've been discussing today and try to capitalize on the fact that we will have this opportunity of time, people, resources and effort to advance the current pipeline. Operator: Thank you, we have come to the end of the question-and-answer session. Thank you all very much for your questions. I'll now turn the conference back to Dr. Samantha Du for her closing comments. Ying Du: Thank you, operator. I want to thank everyone for taking the time to join us on the call today. We appreciate your support and look forward to updating you again after the fourth quarter of 2025. Operator, you may now disconnect this call. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect your lines.
Operator: Thank you very much. Good morning. This is the Chorus Call conference operator. Welcome, and thank you for joining the MPS Group Third Quarter and 9 Months 2025 Results Presentation. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Luigi Lovaglio, Chief Executive Officer and General Manager. Please go ahead, sir. Luigi Lovaglio: Good morning, everyone. Thank you for joining us today for the presentation of our third quarter and 9 months 2025 financial results. This is a landmark moment for Monte Paschi. At the end of September, we successfully completed the acquisition of Mediobanca, a strategic move we have always believed in. And 86.3% of Mediobanca shareholders confirm that belief by tendering their shares. That's a clear endorsement of the industrial strength and the long-term value of this combination from both core shareholders and from Italian and international institutional investors. So first, let me thank all of our shareholders for their trust and confidence in our vision and in our ability to execute. I also want to thank our people. Our teams at Monte Paschi have stayed laser-focused through intense months, and they continue to serve clients, deliver strong commercial momentum and produce another solid quarter. They showed what that commitment to performance and integrity looks like. I also want to acknowledge our colleagues at Mediobanca as well. Their results this quarter demonstrate the resilience of their business model and the strength of their client relationship. That is exactly the kind of excellence we want to build with. Finally, thanks to our clients. Your continued trust is the foundation of everything we do. Together, shareholders, employees, clients, we made this possible. With Mediobanca, we have created a new competitive force in Italian banking. This combination brings together strong brands with deep client loyalty, exceptional professionals across both organizations, complementary business strength across Commercial Banking, Wealth Management, Corporate & Investment Banking, Consumer Finance and cutting-edge and scalable technology. This is an accretive combination financially, strategically and commercially. It accelerates growth and value creation. Our combination process with Mediobanca with more than 20 ongoing work streams is structured on track and is going smoothly with discipline. And I'm pleased to start working closely with Vittorio Grilli and Alessandro Melzi d'Eril, who will be key in ensuring that together, we reach new heights as an integral part of this project. We will present our group business plan in the first quarter of next year, that will be the moment to outline the full strategic and financial road map and potential power of the combined group. In the meantime, as you can see from the third quarter results, Monte Paschi continues to perform very well, thanks to the strength of our franchise and disciplined cost management. I am especially pleased to note that our people were not distracted by the Mediobanca transaction. Across the organization, they were able to stay focused and deliver on their business target to achieve profitable growth. We reached net profit at about EUR 1.4 billion, up by 17.5%, excluding net taxes. Our balance sheet as a consequence of the combination with Mediobanca continues to be stronger and stronger. We maintain a very solid level of core Tier 1 at 16.9%, including the preliminary impact of Mediobanca. This is higher than we expected when we announced the transaction in January. For the 2025 full year, we are setting new guidance on pretax profit. We now expect to well exceed EUR 1.6 billion. Let's move on to the 9-month results, which testify our capability to build sustainable value and deliver high returns to our shareholders. We closed the first 9 months with a net profit of EUR 1.366 billion, up by 17.5% year-on-year, excluding the positive net taxes in both periods, sustained by the solid growth fees, thanks to the clear focus on commercial activity. Third quarter net profit was EUR 474 million, up by 16.5% compared to the third quarter last year, confirming the solid progression while the quarterly comparison quarter-on-quarter was affected by the typical third quarter seasonality on revenues, while confirming a high level of profitability. Net operating profit increased by 3.7% year-on-year, reaching about EUR 1.4 billion in 9 months, thanks to resilient revenue sustained by fees, offsetting rate impact on net interest income almost totally, operating costs under control and improved cost of risk. Third quarter net operating profit at EUR 453 million, up by 2.4% year-on-year and decreasing by 7.3% quarter-on-quarter due to the seasonality. After 9 months, gross operating profit reached EUR 1.643 billion, almost stable year-on-year, thanks to the resilient revenues in a declining interest rate scenario sustained by fee income and cost well under control. Third quarter gross operating profit at EUR 532 million. 9-month cost-income ratio at 46%, stable year-on-year. Strong progression on bank's commercial performance in 9 months driven by the clear focus of Monte Paschi's franchise on key strategic areas. Wealth Management with gross inflow close to EUR 13 billion, up by 18% year-on-year. We granted mortgages to families worth EUR 4.8 billion, more than doubling last year volumes. New consumer loan showed a 17% increase compared to the same period of last year. These are tangible signs of bank deeply connected to its client and to the real economy. Our cost of risk dropped to 42 basis points in 9 months from 53 basis points last year. Gross NPE ratio 3.7% and net NPE ratio at 2% and NPE coverage at 48.7%. The combination with Mediobanca will lead to a further enforcement of the balance sheet structure of the new group. With a sound liquidity position with counterbalancing capacity above EUR 53 billion. Core Tier 1 fully loaded at a solid level of 16.9% including the preliminary impact of Mediobanca transaction, confirming best-in-class capital buffer and providing strategic flexibility. With the successful completion of Mediobanca tender offer, we are opening a new chapter in 553 years history of Monte Paschi. The 86.3% acceptance gives us clear governance from day 1 and the strategic flexibility to move quickly in implementing the combined industrial project. The new Mediobanca Board appointed on October 28 marks the start of the new phase of development for the combined group. But before we move forward, a warm welcome to our Mediobanca colleagues as we begin this new journey together. We are now one team, building the future. Now on third quarter and 9 months results. As I mentioned, net profit for the first 9 months reached EUR 1.366 billion, up by 17% year-on-year, excluding the positive net tax in both periods. We reported as well a solid quarter contribution for EUR 474 million, up by 16.5% year-on-year. Net operating profit after 9 months amounted to EUR 1.389 billion, showing a positive trend, growing 3.7% year-on-year, with resilient revenues, sustained by fee income. The net operating profit in the third quarter amounted to EUR 453 million, showing a 2.4% increase versus a year ago. Now let's move on to gross operating profit. We reached EUR 532 million in this quarter, showing resilience year-on-year. And cost/income ratio at 47%, basically stable year-on-year. Gross operating profit after 9 months reached EUR 1.643 billion, almost stable year-on-year, thanks to resilient revenues, again, driven by net fee income. All this confirms our disciplined approach to both costs and revenue generation, ensuring steady performance. For the first 9 months of 2025, we maintained the cost/income at 46%. Now I think it's important to underline the strong commercial performance, as you can see, after 9 months in this slide. Total commercial savings crossed EUR 174 billion and were higher by almost EUR 10 billion since September 2024. And Wealth Management gross inflows amounted to almost EUR 13 billion in 9 months, up by 18% year-on-year. new retail mortgages granted in 9 months reached EUR 4.8 billion, 2.2x compared to 9 months of 2024. As well, new Consumer Finance flows amounted to almost EUR 1 billion with a 17% year-on-year increase. I believe these are a confirmation of capability and effectiveness of our commercial network. And I would like once again to thank you, my colleagues, for the excellent results achieved. Now let's move on to the net interest income evolution. In the third quarter, it amounted to EUR 544 million, down by 1.3% quarter-on-quarter, confirming a certain resilience also in terms of overall spread. In the first 9 month of 2025, net interest income reached EUR 1.638 billion with an early trend in line with the guidance given to the market at the beginning of the year. Net loans dynamic in 2025 has been strong with the growth in retail and small business component by almost EUR 4 billion with a positive trend also quarter-on-quarter despite seasonality. The same performance we are observing in total savings with total commercial savings in September crossing the level of EUR 174 billion and are up by more than EUR 3 billion quarter-on-quarter, supporting an increase year-on-year, exceeding EUR 10 billion, with EUR 7 billion from the beginning of the year. Now on portfolio govies. As usual, this is stable, almost stable with a small decrease in fair value through OCI and with credit spread and sensitivity confirmed a very low level and slightly longer duration, reflecting reinvestment of maturities. Now let's move on to fees and commission income. If we look at the quarter, we reported an amount of EUR 382 million with a solid 7.4% increase versus third quarter 2024, with an excellent performance on the Wealth Management component, up by 10.6% year-on-year. And the positive dynamic also on the Commercial Banking component, up by 4.5% year-on-year. The quarterly evolution is affected, as I was already mentioning, by the typical third quarter seasonality on both Wealth Management and Commercial Banking Fees. If you look at the performance after 9 months, you can see that thanks to the excellent work of our commercial network, the total fees reached the level of EUR 1.185 billion, up by 8.5% year-on-year, with Wealth Management and Advisory Fees up by almost 13% year-on-year. And the positive dynamic also in Commercial Banking Fees increased by 4.4%. In the third quarter, operating costs amounted to EUR 468 million and were marginally lower quarter-on-quarter, driven by non-HR component decrease. Costs were flat year-on-year with the increase in HR costs related to labor contract renewal and increase in variable remuneration pool was completely offset by the effective management of non-HR costs. After 9 months, total operating costs amounted to EUR 1.411 billion and were higher by 1.4% year-on-year. As I mentioned, again, the growth was driven by the HR component due to the labor contract renewal and the variable part of the remuneration. And part of this increase was offset by effective cost management of non-HR costs. Now let's move to asset quality. The stock of nonperforming decreased to EUR 3.1 billion, reflecting a reduction of EUR 400 million in the quarter, mainly due to the sale of NPE portfolio completed in August. The gross NPE ratio is 3.7%, and the net NPE ratio at 2%, in line with the business plan targets. Cost of risk for 9 months was 42 bps, down versus 53 bps of full year 2024, confirming the good status of our asset quality. The breakdown on NPE stock shows a low incidence of bad loans on total NPE at about 30% (sic) [36%], and that's why this portion -- this proportion should be considered in analyzing the coverage that anyway is a very good level of 48.7%. You can see from the slide the solid liquidity position of Monte Paschi, leading to a more diversified funding structure and a lower ECB funding weight on total liabilities. Moving on capital. I believe that this is a very interesting set of figures. The strong capital position of the bank is confirmed also in this quarter. We have common equity Tier 1 ratio fully loaded at 16.9%, already reflecting the preliminary impact of the Mediobanca transaction. This ratio incorporates the net profit of the period and is calculated net of dividend, assuming 100% payout ratio on net profit. As you can see, the Mediobanca transaction is impacting around 2 percentage points, in line with our preliminary estimates. It is worth mentioning that we are not fully incorporating the purchase price allocation. As for example, we have not yet factored the valuation of financial asset and liability fair value. The capital ratio are, therefore, very strong with a large capital buffer compared to regulatory requirements and also our management target that we were indicating at the level of 13%, and that gives us strategic flexibility going forward. Now I would like to spend just a few words on the results that were already published of Mediobanca. I think it's important to underline the positive trend and the potential that is deriving from the combination. The commercial momentum remains solid with EUR 2.5 billion on net new money, robust merger acquisition activity in Corporate & Investment Bank division and EUR 2.3 billion of New Consumer Finance volumes, very remarkable results. The diversification of the business has supported resilient revenues even in a challenging macroeconomic environment. Now let's again go through some key important message regarding our combination. So we have really transformed into a new leader in Italian banking with the scale and credibility to compete at the European level. This transaction was driven by a clear conviction that Italy deserves a stronger, more innovative, more diversified financial institution, one capable of supporting families, SMEs, and large corporates across the country. On this slide, you see some of the key financial metrics of the combined group, EUR 8 billion in pro forma revenues and around EUR 3 billion in adjusted net profit. I would like again to underline the strong industrial rationale of our project. From the get-go, the industrial rationale has been clear and consistent. Monte Paschi and Mediobanca are different and therefore, complementary. Together, we combine leading capabilities in Retail & Commercial Banking, Consumer Finance, Asset Gathering and Wealth Management, Private Banking, Corporate & Investment Banking. The result is a more resilient, diversified and innovative group with a balanced source of profitability and multiple engines to invest, to grow and to better serve clients. On this slide, you can see an overview of our combined operating model and the strong industrial merits of the transaction in each business line. In Retail & Consumer Finance, we bring together Monte Paschi nationwide network encompass best-in-class product and risk expertise. In wealth and Private Banking, we now operate with greater scale and higher advisory capability, spanning Monte Paschi Premium, Banca Widiba, Mediobanca Premier, Mediobanca Private Banking Company, Compagnie Monégasque de Banque, Monte Paschi Family Office. This will allow the group to deliver more sophisticated solutions and attract high-value clients. And in Corporate and Investment Banking, our clients benefit from a stronger balance sheet, a deep adviser expertise in Italy and abroad through Messier Maris and Arma Partners. Insurance and Asset Management and stability -- add stability and optionality, diversifying our revenue base and supporting loan lifetime value creation. The combination creates a more resilient, diversified and innovative group. Then on the slide, the figures that you see represent a preliminary illustration of the pro forma business line on the basis of historical numbers and not including synergies. From revenues mix composition, asset gathering and Wealth Management represent almost 30% of the total revenues. Retail & Commercial Banking stands around 31%. Consumer Finance, 17%. And Corporate, Investment Banking, including the lending business for Mediobanca and Monte Paschi, large corporates represent almost 15%. While the Generali insurance contribution represents 7%. This is a first snapshot of what the combined entity will look once that we have complete our project. And we are working with our colleagues at Mediobanca to further optimize the target business model. Clearly, we will provide additional information and all details in the new business plan. We began the combination process immediately. We structured work streams and join teams across both organizations coordinated through regular cross-functional governance. The plan covers all key business and support functions with clear accountability, senior leadership oversight and the focus on maintaining business continuity and exceptional client service throughout. As a part of our integration strategy, a dedicated HR work stream has been established, focused on retaining key managerial talent. This initiative reflects our deep commitment to preserving and enhancing brand value during this transformative phase. We want to ensure continuity, safeguard institutional knowledge and support long-term leadership stability. Our objective is to build a solid, efficient operating model step-by-step, with disciplined project management and transparent communication. A detailed analysis, for example, is already completed on IT architectures, operating models and development priority, aiming at enhancing, the best solution for each area and planned IT investment for digitalization to ensure resilience and efficiency. And this is just an example of how the work is progressing at full speed. The EUR 700 million industrial synergies target we communicated is now in this preliminary assessment, reconfirmed on the basis of this work we are performing. Mediobanca remains a distinctive and highly valuable franchise within the group with its brand, client relationship and professional capability preserved and strengthened. The ambition is to unlock new opportunities for our growth across both organizations. The group will increase productivity, expand its product and service offering, invest in technology and digitalization and continue to attract and retain top talent. So Mediobanca is an accretive combination from all perspectives. Return on tangible is expected around 14%. We expected to confirm our payout ratio of 100%, and the capital position remain best-in-class in Europe, providing strategic flexibility. Now a short update about the process and indicative timeline. I have to say that our approach is quite methodical, step-by-step and transparent. All key milestones have been met, demonstrating disciplined execution and strong project management. In the first quarter of next year, we will present a combined business plan that reflects the full potential of our group. We will hold the Capital Market Day to present it to the market. Now going back to Monte Paschi stand-alone. Again, we reported another solid quarter with almost EUR 1.4 billion after 9 months, strong commercial performance, strong capital position with core Tier 1 at 16.9%. We are further improving our 2025 full year guidance with the pretax profit expected to be well above EUR 1.6 billion. The capital position is expected to be about 16% at the end of the year, a very sound level, which provides confidence in ensuring a 100% payout for the coming years. Monte Paschi plus Mediobanca creates a third competitive force in the Italian bank industry with potential to increase its European scale. We have organized teams with people from Monte Paschi and Mediobanca working together with a common strategic vision and spirit of collaboration, each bringing their skills, know-how and sense of responsibility to bear. The values are aligned around integrity, respect, customer focus and accountability. Now it is clear that together, we are capable of making things happen. Our goal is clear and within reach, to play a leading role in Italian and European banking with vision and the desire to create sustainable value for all our stakeholders. Thank you very much, and we are ready to answer to your question. Operator: [Operator Instructions] The first question comes from Antonio Reale of Bank of America. Antonio Reale: It's Antonio from Bank of America. Just a couple of questions from my side, please. The first one on distribution. Your capital ratio at 16.9%, as you said, incorporates the new dividend policy of up to 100% on net profit, which is a big change, I think, for you and as you were not previously paying the tax reassessment out. Now does this mean that you're now looking to pay out on a reported net profit basis, so including potential DTA write-ups and similar? Just trying to get a sense and better understand what this means for your dividend per share going forward. I remember during the tender offer, I think you mentioned that you wanted to try not to deviate too much from the DPS of last year. And related to that, if I may, pretty much if I look at all your peers, they pay dividends on an interim basis. I think it was the case also for Mediobanca. Do you think it's something you would look to consider for 2026 fiscal year? That's my first question. And then my second one is really trying to get a sense of how you're thinking about the reorganization of the new businesses that you plan to sort of reorganize following the deal with Mediobanca, both from a divisional and a legal entity standpoint, if I may. Your Slides 27 and 28, I think, show very clearly how -- well, in one go, you bought back all the product factories that Monte Paschi had lost over the years and more. So the question is, how do you plan to integrate all these businesses and at the same time, monetize Mediobanca's strong brand and achieve the synergies that you targeted? Luigi Lovaglio: Okay. I will try to be very clear. So yes, we confirmed that we expect to distribute for this year a dividend with the dividend per share, broadly in line with the one of previous year, ensuring to our shareholders yield among the highest in Europe. And afterwards, we are committed to deliver a growing DPS while preserving our strong capital position on which we want to leverage for industrial projects and additional remuneration for our shareholders. As far as interim dividend, it's clear that is one of the options we are -- we will consider, and we will be very precise once that -- we are going to present the business plan in the first quarter next year. Now as I was mentioning regarding the integration, yes, in our project, we were quite clear saying that we would like Mediobanca to be focused on Corporate & Investment Banking and high-level Private Banking. Let's simplify, as we believe there is a strong competency there, excellent capability in dealing with customer and a huge potential on which we can leverage in order to enrich our total level of profitability. And I have to say that from these few days where we are already working together, I feel even more comfortable that this is the right direction because we can create and build up a really unique potential additional powerful institution that will support the Italian economy with the competencies in terms of advisory capability to which we are going to add the balance sheet of Monte Paschi. On Private Banking, Mediobanca is a top player. Strong and excellent professional team is over there. And I strongly believe we have room for significantly increasing our total asset and our penetration in the overall Italian landscape. Now it's clear that the approach we want to use in order to be very effective is already from the day 1, a sort of divisional approach. And already, we are setting our overall way in managing this opportunity in this way. Then we are going to consider, again, once that we have a clear view about the business plan, how we can optimize in terms of also legal structure, this exercise. Clearly, Mediobanca will be a legal entity with its brand because it's too important to preserve the value and the peculiarities that Mediobanca has that are, in some way, different necessarily from Commercial Banking. And we want to leverage on this diversity in order to increase the value and to be a player that is unique in the Italian landscape for the balanced approach we can have on the market compared to other big players. Antonio Reale: Very clear. Just maybe on the interim dividend, if I may, just follow up on that as part of the question. I don't know if you have any early thoughts on that. Andrea Maffezzoni: Antonio, Andrea speaking. Can you share again the follow-up question because we missed it? Antonio Reale: It was just, if you had any early thoughts on your interim dividend and observations.. Operator: Mr. Reale, we cannot hear you. Can you please speak closer to the phone? Luigi Lovaglio: I think I mentioned, right, that is an optionality we are going to consider with the business plan. When we are going to present, we will be clear on that. But clearly, we have a positive attitude towards the opportunity to have an interim dividend. Operator: The next question is from Marco Nicolai of Jefferies. Marco Nicolai: First question on -- again, on the DPS. Your comments about this year DPS broadly in line with last year, and growing DPS from this level. I'm just trying to understand the moving parts for the 2026 DPS because clearly, this year with the big positive one-off you will have at the end of the year in terms of DTA write-up, you can pay pretty much -- if I look at the amount of net income that will bring, you will be able to pay pretty much the DPS you want. But for 2026, I'm just trying to understand the moving parts there because the DPS you had in 2024 seems relatively high. So I was just trying to understand in terms of synergies, what do you expect, already coming through in '26, if any? And also how you plan to split the restructuring costs between this year and next year and in general, all the moving parts that can bring us to DPS in '26 above -- broadly above the one of 2024? So this is the first question. And the second question is if you can update us on your Asset Management partnerships. So my interpretation of Banco BPM management comments yesterday is that they are relatively open to a merger and/or any way to do something with you. And obviously -- so these comments were kind of at the crossroad with the -- with Anima as well as with the stake that they have into BMPS. So I was just trying to understand what's your view on this topic? And if you can help us understand what are the future plans in terms of M&A. So these are my two questions. Luigi Lovaglio: Okay. So thank you. We will provide clearly quite detailed information once we are going to present the business plan. Now we wouldn't like to go too much too deep in providing early drivers now in order to get this growing dividend, right? What -- we are confident that our level of synergies is even conservative starting from the first outcome from these work streams that we are practically developing together with the Mediobanca team. And so at least the level we already plan are, in our understanding, ensured, and then we will be, as I said, more precise one that we are going to finalize the business plan as well as on the integration costs on which we are now analyzing how to split them. But anyway, we believe that what has been planned from the very beginning when we launched the deal, is confirmed. And as I said, we are even more confident that we can get our goal. And also at the time, we will be speaking about growing DPS per share. Now Anima is for us an important partner. We are keeping growing in offering this product. And I believe this is also reinforcing our relationship with Banco for this common pattern that we work with and, clear for us, has an important value and also strategically is important to keep reinforcing this cooperation. Now anyway, we are completely focused in delivering this combination -- industrial combination. I'm not using the word integration because this is not an integration. It's a combination of two excellent institutions. And we believe that the more we are focused on this implementation, and the sooner we will get the results that we committed by launching the tender offer. So full speed on making all what we plan, implemented and effective. Operator: The next question comes from Ignacio Ulargui of BNP Paribas Exane. Ignacio Ulargui: I have two questions. One is coming back a bit to Antonio's question on the integration and your comments, Luigi, about Mediobanca being a legal company. I wanted just understand a bit better how do you think the listing is going to go, whether you will plan to further integrate by taking over the minorities and integrating that? And what would be the impact if you don't do that in synergies? Because I think it will be a bit more difficult to go ahead with all the planned cost savings. The second question is on the commercial activity of Monte Paschi in the quarter, has been super strong in lending and deposits. Just wanted to get a bit of a sense of where you're gaining market share in lending. And in terms of deposits, you mentioned in 2Q results that you were focusing on transactional deposits. And I think that -- I just wanted to get a bit of color on how do you think about your NII implications after the good quarter into coming quarters? Luigi Lovaglio: So let's start by saying that the success of the tender offer at the level of 86% acceptance rate is ensuring us effective governance from the very beginning. In the presentation, in some way, we already provided the first glance how we see this combination. We are working, as I said, with our Mediobanca colleagues, and the deep dive on the target business model we will provide, as I said, in the context of Capital Market Day in first quarter, next year. What is important to underline is that we will maintain and leverage the two strong brands, Monte Paschi and Mediobanca, with the respective entities focused on what we say the core business. On the current listing of Mediobanca, let me say that with the 14% free float, we see reduced volumes and liquidity on the stock. However, it's too early to take any decision of a potential delisting. That is part of the assessment in the context of the new business plan, as I was mentioning. As far as net interest income dynamic, I think that we expect in the fourth quarter to keep almost the level of the third quarter and then to have, again, a level of 2026, almost in line with the one of this year. We can have some positive upside, if you will, capable as we are now aiming to increase the level of our lending, thanks to the combination of -- with Mediobanca capability in advisory and the balance sheet of us. Clearly, the expectations are as well to keep under control the cost of deposits that are growing. But as we were mentioning, we are really intensifying our commercial efforts, leveraging on the very positive attitude that we have now observing in the network, that are very well motivated, we reinforce our capability in managing. We are getting continuous feedback, very positive, in new meetings with customers. So this will enable us also to keep growing in deposits without compromising the spread. So that's why we are very positive that we can continue. Clearly, we have to think that part of this deposit are collected with the scope then to convert in Asset Management product. So we can have some fluctuation just depending on the capability to make this kind of conversion, at the same time to replace what we are converting in Asset Management product or Bancassurance product with regular deposit. But anyway, we are, really, at this point, enjoying a very positive moment of all our network, our franchise. And so it's not only deposit that we see a good pace without compromising the spread, but also, as you saw in the presentation, inflows of Asset Management product, Bancassurance product. Overall, it's a very positive momentum for Monte Paschi. Operator: The next question is from Giovanni Razzoli of Deutsche Bank. Giovanni Razzoli: I have just one question. Sorry for asking you this detail, but in the broader context of your capital position and dividend policy is important in my view. So you have reported a 17.9% CET1 ratio, which includes a part of the PPA. I was wondering whether you can share with us what was the impact of the PPA. You've mentioned that there could be more in the coming quarter due to the fair value of assets and liability of Mediobanca. So if you can help us understanding what was the impact of the PPA in this quarter, and what could be the impact in the next quarter? I'm wondering, for example, whether the PPA this quarter includes or not the revaluation of Mediobanca real estate assets. Andrea Maffezzoni: Giovanni, Andrea speaking. Good morning to everybody. So as mentioned, the PPA as of 30th September '25 was partial and preliminary. So not including, for example, as mentioned by the CEO before, the valuation fair value of financial assets and liabilities. It includes mainly the revaluation of Generali that is anyway not impacting the capital position and a few hundred million regarding what you mentioned, the real estate, which is in line with the projections that have consistently been delivered throughout the public offer. Operator: The next question is from Hugo Cruz of KBW. Hugo Moniz Marques Da Cruz: I have a few questions, if I may. So first on, can you be a bit more clear on the CET1 ratio impact? So the impact coming in Q4. Do you expect that to be positive or negative? So that's my first question. Second, on -- related to this, so the DTAs, I thought all the DTAs would be fully brought on balance sheet on day 1. You still have EUR 1.1 billion off balance sheet. So why is that still off balance sheet? When do you expect that to come on balance sheet? It will be Q4 or not? Then a third question on clarification on your comments about the dividend for 2026, so out of 2026 earnings. So you still have a lot of DTAs, very strong capital ratio. So is there any possibility that you can manage the DPS to show that growth versus 2025 DPS? Or will it be just mechanical DPS out of 100% of payout? And then a final question on the bank tax. Some of your peers, BPER and BAMI have given a bit of an indication of the potential impact. Can you comment what could be the impact for you? Andrea Maffezzoni: Okay. So thank you for your questions. So on the first question, i.e., capital ratio -- common equity Tier 1 ratio end of the year. This will depend on the final impact of the PPA, that it is under assessment. What we can, let's say, confirm now is that we expect that it would be higher than 60% anyway. So that's the answer. Then about the DPS in '26, is what was mentioned by the CEO, so it's too early to give a guidance on net profit. What we can already confirm is that we expect to achieve a good chunk of synergies already in '26. Then on the tax law, the impact is definitely manageable in '26. '28, we expect based on the current draft of the law, an impact on the combined perimeter. So let me reiterate, on the combined perimeter, of around EUR 100 million per year. And then on top of this, this year, there might be the impact of the taxation of the so-called profit reserve that we expect would be accounted anyway directly into equity. The fourth question I missed. Hugo Moniz Marques Da Cruz: It was on the DTA. Andrea Maffezzoni: Sorry, the DTA. Sorry, the DTA. The DTA. No, actually, we have still EUR 1.1 billion of DTA of balance sheet when we update the new business plan. So end of the year, we expect that this amount will be basically written up. We expect in full. Hugo Moniz Marques Da Cruz: And sorry, if I may, a clarification, the EUR 100 million impact on the tax, that would be through P&L? Andrea Maffezzoni: The yearly one in '26, in '27 and '28, yes. It's additional tax, so yes. Operator: The next question is from Luis Manuel Grillo Pratas of Autonomous. Luis Pratas: My first one -- I have essentially a bunch of clarifications. The first one is on the -- so you essentially mentioned that you didn't include any fair value adjustments on the Mediobanca balance sheet. And if I'm not mistaken, the 2025 annual report of Mediobanca included a large positive effect there. So I wanted to hear any comments whether we should expect a positive in Q4 coming from this. And then you just mentioned to Hugo that maybe in Q4, we shouldn't expect any meaningful DTA capitalizations. Can you confirm that? So essentially, the large one, the EUR 1.1 billion will only happen when the business plan is released next year? And then I also wanted to ask you about the -- your comments on the combined entity. So it seems that you are not going to the approach of doing a merger buying corporation, if I read that correctly. I wanted to confirm if this has any impact on your synergies execution. I'm thinking, for instance, on the funding side, if there could be any MREL dis-synergies for maintaining both entities separate? And yes. Luigi Lovaglio: Okay. So I think I'm just confirming that we were very, very much conservative on this preliminary assessment of PPA. And as Andrea was mentioning, overall, at the current stage, being very much conservative and wanting to go deeper in making the analysis, we are hopefully expecting to complete this process for the main item within the end of the year. At the current stage, we are also confident that we can have a positive impact. But let's complete the work before being much more -- giving much more detail on that, right? Then regarding the reorganization and the combination, I want just to underline that we will implement actions in order to get all the synergies, and I was mentioning, even at the level that we expect now to be even higher than what we plan. The fact that we are speaking about legal entity doesn't mean that we cannot exploit all the potential we can have from the combination. But as I said, it is a work in progress and hopefully, will be soon completed. And as I said, in the first quarter, we'll be very precise about the option that we are going -- the target model we are going to implement. What should be clear that in our preliminary estimation, we see only positive upside in whatever we are going to implement in terms of synergies. Andrea Maffezzoni: And then there was a clarification requested on the DTA write-up since I mentioned the approval of the new business plan. Anyway, we expect to be able to write up the DTA already in Q4? That was your question, potentially also based on preliminary projections. So the expectation is that the write-up to the best of our current knowledge happens in Q4. As regards to MREL, we do not expect the synergies. We're expecting such synergies because the new entity will be a single point of entry. Operator: The next question is from Lorenzo Giacometti at Intermonte. Lorenzo Giacometti: So the first one is on your excess capital, which is seen growing year-by-year due to DTA's compensation and potentially even more with the merger or with the Danish compromise treatment. And so do you intend to distribute it to your shareholders? And if yes, do you see distribution via dividends or buybacks as more likely? And the second one is a more strategic one. And are you planning to expand abroad with some of your businesses? I was mainly thinking about Consumer Finance, but also Wealth Management and Investment Banking. Luigi Lovaglio: Okay. So let's start from, what is for me even more exciting that is the expansion of the business? So we strongly believe that Compass with this merger has the full potential to expand the business outside Italy. They have expertise. They have a very good technology, and they have a proven track record in terms of scoring. So I believe that this is an option that we are going to explore very quickly. And my personal view is also that for some part of the business as well Private Banking, investment bank already is there. We have a strong opportunity because once the Mediobanca will be completely focused on Corporate, Investment Banking and Private Banking, there will be additional opportunity to expand business not only in Italy, but also abroad. So that's why it's a nice project, because we are opening a new market and new potential revenue generation for the benefit of all the stakeholders. Yes, we have a nice excess of capital. And as you were mentioning, starting from this year, we will have also the EUR 500 million of DTAs that we are going to contribute to the increase to the overall capital level. As I was already mentioning, for us to have an important buffer of capital is an opportunity, and we would like to use in the best way or getting opportunity to expand additionally, our business, or we can say, and eventually further reward our shareholders with even high level of remuneration. Then, if it's through buyback or if through extraordinary dividend, whatever, is something that we evaluate time to time. What is important that this is a strong opportunity. And I believe, today, by showing the revenue stream with almost 1/3 of revenues coming from asset gathering and Wealth Management, it's clear that this part of business deserve a significant rerating as well the other component. And this is an additional evidence that our valuation deserve to be much more in line with our fundamentals and the potential of value that we can generate. And this kind of approach in exploring all the opportunity for better extract value from the combination will materialize. I believe, even earlier than what we plan. I think we have a strong expectation and again, confirmation that we are really representing an attractive case of investment. Operator: The next question is from Andrea Lisi of Equita. Andrea Lisi: The first one is on, if you can provide us a bit more update on the integration charges. If -- from your preliminary analysis, clearly pending the business plan presentation, you are still confident with what you have initially indicated. And if you can provide us some preliminary indication at least of how many years these integration charges will be split? If it is reasonable to see already a big portion in the last quarter of this year and then the rest through 2026 and maybe some portion also in 2027? And the other question is on capital. If you can confirm that your preliminary indication of kind of 50 bps additional contribution in case of obtainment -- in case of regulatory treatment of the insurance component like in Mediobanca? And last question is regarding, if you can provide us a further update on the management of the stake in Generali? Luigi Lovaglio: Okay. So integration charge is something that we are assessing, clearly, looking at what now -- we are considering. We are going to invest money clearly in retention package. And then it depends how we complete the assessment, particularly on IT. That is one of the main area where practically we are going to have some cost. But overall, we are confident first that we can -- the estimation we fixed when we launch a transaction is absolutely actual. And the second is that given the work of the teams that are now analyzing the combined business, we believe that we are going to have even room for having even a positive outcome from the overall cost we plan. The impact on core Tier 1 regarding the potential Danish compromise is 50 plus. And on Generali, we are focused on Mediobanca. And as I was mentioning, the Generali is for us, a nice, correlated bulk of revenues. And for the time being, we are, as I said, completely involved and committed to deliver what we were mentioning earlier regarding the combination of the two entities. Operator: [Operator Instructions] Mr. Lovaglio this time, there are no questions registered, sir -- excuse me, we do have a follow-up question from Luis Manuel Grillo Pratas, the Autonomous. Luis Pratas: Sorry, just a quick clarification on the Generali treatment. When do you expect to receive those more than 50 basis points impact? Luigi Lovaglio: No. As I was saying, we like to be very conservative. All the figures we were mentioning are without this benefit. So we are working in order to have this kind of benefit. Honestly, it's difficult to predict when this can be completed. But I believe we deserve it. So we will do our best in order to get as quick as possible, but it depends not exclusively on us. For the time being, we manage everything without considering this benefit. That should be obvious and should come to us. Operator: Gentlemen, there is a final question from Ignacio Ulargui of BNP Paribas Exane. Ignacio Ulargui: I just was wondering whether you could consider entering a total return swap as BPER has done on their own shares given the confidence that you have about integration and the strength of the franchise and the combined franchise. Could that be a possibility or is something that you don't explore at this stage? Andrea Maffezzoni: Sorry, Ignacio, I have not understood what do you suggest we can consider. Ignacio Ulargui: So whether you could consider doing equity derivative buying your own shares like BPER did on the 9.9% of the capital. If that could happen? Luigi Lovaglio: We are focused on what we know better, that is doing banking, honestly. So we -- for the time being, we are not considering any kind of transaction like that. And we want to be really focused in getting the best from the two entities. Operator: Gentlemen, at this time, there are no questions registered. Back to you for any closing remarks. Luigi Lovaglio: No other questions, right? So thank you very much. And see you in next presentation. Operator: Ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect your telephones.
Operator: Good day, and welcome to the United Parks & Resorts Third Quarter Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Matthew Stroud of Investor Relations. Please go ahead. Matthew Stroud: Thank you, and good morning, everyone. Welcome to United Parks & Resorts Third Quarter Earnings Conference Call. Today's call is being webcast and recorded. A press release was issued this morning and is available on our Investor Relations website at www.unitedparksinvestors.com. Replay information for this call can be found in the press release and will be available on our website following the call. Joining me this morning are Marc Swanson, Chief Executive Officer; and Jim Forrester, Incoming Interim Chief Financial Officer and Treasurer. This morning, we will review our third quarter financial results, and then we will open the call for your questions. Before we begin, I would like to remind everyone that our comments today will contain forward-looking statements within the meaning of the federal securities laws. These statements are subject to a number of risks and uncertainties that could cause actual results to be materially different from those forward-looking statements, including those identified in the Risk Factors section of our annual report on Form 10-K and quarterly reports on Form 10-Q filed with the Securities and Exchange Commission. These risk factors may be updated from time to time and will be included in our filings with the SEC that are available on our website. We undertake no obligation to update any forward-looking statements. In addition, on the call, we may reference non-GAAP financial measures and other financial metrics such as adjusted EBITDA and free cash flow. More information regarding our forward-looking statements and reconciliations of non-GAAP measures to the most comparable GAAP measure is included in our earnings release available on our website and can also be found in our filings with the SEC. Now I would like to turn the call over to our Chief Executive Officer, Marc Swanson. Marc? Marc Swanson: Thank you, Matthew. Good morning, everyone, and thank you for joining us. We're obviously not happy with the results we delivered in the quarter. Performance during the quarter was negatively impacted by an unfavorable calendar shift, poor weather during peak holiday periods, a decline in international visitation, and less than optimal execution. The consumer environment in the United States appears to be inconsistent as has been outlined by a number of other leisure and hospitality businesses. Nonetheless, we can and expect to do better. Attendance in the third quarter was negatively impacted by approximately 150,000 visits from unfavorable calendar impacts, particularly the timing of the 4th of July holiday, and was also impacted by poor weather over peak 4th of July and Labor Day weekends. We saw a decline in international visitation of approximately 90,000 guests during the quarter, which was a reversal of earlier trends we saw in the first half of the year. Adjusting for these calendar shifts and the international visitation declines, attendance would have been roughly flat for the quarter. On the positive side, we are pleased to report growth in in-park per capita spending, which has grown in 20 of the last 22 quarters. Our Halloween events just concluded last week, and we saw meaningful year-over-year growth from our separately ticketed Howl-O-Scream events, including record attendance in Orlando and San Diego for these events. Looking forward, we are encouraged by the forward booking revenue trends into 2026 for our Discovery Cove property and our group business, both of which are up over 20% compared to the same time last year. We are also happy to report that our attendance at SeaWorld Orlando is up year-to-date. We're also pleased that during the third quarter, stockholders granted authority to the Board of Directors to approve and implement additional share repurchases. The Board previously announced a $500 million share repurchase program contingent on receiving this approval, and we have already repurchased 635,020 shares for an aggregate total of $32.2 million through November 4, 2025, underscoring our strong balance sheet, significant free cash flow generation, and our strong belief that our shares are materially undervalued. Later this month, we will begin our award-winning Christmas events at our SeaWorld, Busch Gardens, and Sesame Place Langhorne Parks. This year, we believe our Christmas events will be our best ever with the popular rides, attractions, and exhibits our guests have come to expect, plus additional new and exciting events, specialty food and beverage offerings, and holiday shopping for everyone. I want to thank our ambassadors for their dedication and efforts during our busy summer season and as well during our Halloween events and upcoming Christmas events. As we move into 2026 and beyond, we firmly recognize there is significant opportunity to execute better and drive meaningfully more attendance to our parks, grow total per capita spending, and continue to reduce costs and find efficiencies. While this year has been disappointing to date, we have high confidence in our ability to deliver operational and financial improvements that will lead to meaningful increases in EBITDA, free cash flow, and shareholder value. We are focused, well-positioned, and confident in the investments we are making, the operational efficiencies we expect to achieve, and the value we plan to build for stakeholders. We have announced several of the upcoming new rides, attractions, and events and upgrades for 2026. This includes the following: SeaWorld Orlando is pushing the boundaries of family thrills once again with its new attraction, SEAQuest: Legends of the Deep. Guests will embark on a vibrant, submersible adventure through dazzling undersea ecosystems where they will encounter extraordinary life forms, breathtaking environments, and inspiring stories of the sea. This groundbreaking attraction plunges explorers into an environment of awe and mystery, guided by the SeaWorld Adventure team. SeaWorld San Diego is creating a reimagined and immersive version of the Shark Encounter, which will debut in the spring of 2026. SeaWorld San Antonio is making waves once again with an all-new thrill ride, Barracuda Strike, Texas' first inverted family coaster. The one-of-a-kind attraction invites guests of all ages to dive into the deep and experience the ocean's most agile predator like never before. With every twist, drop, and tight turn, Barracuda Strike will deliver a rush of excitement that's bold enough for thrill seekers yet built for the whole family. Suspended beneath the track, riders will glide above the park's iconic water ski lake in a high-speed pursuit that captures the speed, power, and precision of the Barracuda. Busch Gardens Tampa Bay is roaring into 2026 with an all-new Lion & Hyena Ridge, an extraordinary new addition to the park's award-winning animal care portfolio and the most ambitious new habitat in more than a decade. This reimagined area of the park expands the existing space to more than double its previous size, creating nearly 35,000 square feet of dynamic Savannah terrain where two of Africa's most iconic species will thrive, a pride of 5 young male lions and a pair of playful hyenas. Busch Gardens Williamsburg will be announcing their upcoming attraction later this week. Our balance sheet continues to be strong. On September 30, 2025, net total leverage ratio was 3.2x, and we had approximately $872 million of total available liquidity and approximately $221 million of cash on hand, including restricted cash. This strong balance sheet gives us flexibility to continue to invest in and grow our business and to opportunistically allocate capital with the goal to maximize long-term value for shareholders. I'm disappointed in our management of costs during the quarter. We have made changes to address our execution issues in this area and have implemented new processes and initiatives to address cost opportunities across the enterprise. Moving on to an update on select strategic initiatives. On the sponsorship front, we have made good progress on several partnerships that we expect to announce in the coming months. As a reminder, we have over 21 million annual visitors across our park portfolio and the average length of stay is over 6 hours. We continue to expect approximately $20 million of annual sponsorship revenue in the coming years. On our international opportunities, we are in active discussions with multiple potential partners. We signed one MOU during the quarter with an international partner and have since entered a development advisory agreement and have begun concept development work. We expect to sign at least one additional MOU in the coming months. In regards to the mobile app, we continue to make progress on functionality, adoption, usage, and financial impact. The app is being used by an increasing number of guests in our parks to improve their in-park performance. The app has now been downloaded more than 16.8 million times, up from 15.6 million at the end of Q2. Total revenue generated on the app continues to grow, and we are now seeing an approximate 37% increase in average transaction value for food and beverage purchases made through the app compared to point-of-sale orders. We're excited about the potential of the app and its ability to improve the in-park guest experience, drive increases in revenue, and decreases in costs. On real estate, we continue to discuss alternatives with potential partners and have recently received specific proposals that we are actively evaluating. As we have discussed, we own over 2,000 acres of valuable real estate in desirable locations, including approximately 400 acres of undeveloped land adjacent to our parks, including significant developable land in Orlando. We do not believe that the public markets have or are appropriately giving credit to these attractive and valuable 100% owned real estate assets. I'm excited about the significant investments we are making and the many initiatives we have underway across our business that we expect will improve the guest experience, allow us to generate more revenue, and make us a more efficient and more profitable enterprise. We are building an even stronger, more resilient business that we are confident over time will deliver improved operational and financial results and meaningful increases in value for all stakeholders. With that, Jim will discuss our financial results in more detail. Jim? James W. Forrester: Thank you, Marc, and good morning. During the third quarter, we generated total revenue of $511.9 million, a decrease of $34.1 million or 6.2% when compared to the third quarter of 2024. The decrease in total revenue was primarily a result of decreases in attendance and admissions per capita, partially offset by an increase in in-park per capita spending. Attendance for the third quarter of 2025 decreased by approximately 240,000 guests or 3.4% when compared to the prior year quarter. The decrease in attendance was primarily due to an unfavorable calendar shift, including the timing of the 4th of July holiday and a decrease in international visitation compared to the prior year quarter. In the third quarter of 2025, total revenue per capita decreased 2.9%. Admission per capita decreased 6.3% and in-park per capita spending increased 1.1%. Total revenue per capita lowered due to decreases in admissions per capita, partially offset by increases in in-park per capita spending. Operating expenses increased $7.1 million or 3.4% when compared to the third quarter of 2024. Selling, general, and administrative expenses increased $5.3 million or 9.6% compared to the third quarter of 2024. We reported net income of $89.3 million for the third quarter compared to net income of $119.7 million in the third quarter of 2024. We generated adjusted EBITDA of $216.3 million in the quarter. Looking at our results for the 3 quarters of 2025 compared to 2024, total revenue was $1.29 billion, a decrease of $51.9 million or 3.9%. Total attendance was 16.4 million guests, a decrease of approximately 252,000 guests or 1.5%. Net income for the period was $153.3 million, and adjusted EBITDA was $490 million. Now turning to our balance sheet. As Marc mentioned, our September 30, 2025, net total leverage ratio is 3.2x, and we had approximately $872 million of total available liquidity. We had approximately $221 million of cash on hand, including restricted cash. The strong balance sheet gives us flexibility to continue to invest in and grow our business and to opportunistically allocate capital with the goal to maximize long-term value for shareholders. Our deferred revenue balance as of the end of September was $145.5 million. Through October 2025, our pass base, including all pass products, was down approximately 4% compared to October 2024. We have launched our 2026 pass program, which includes our best-ever pass benefits program. We're excited about our new 2026 pass program and expect to see improvement in growth in our pass base as we progress into next year. We started our Black Friday sale earlier this week. It's one of our bigger selling periods for the year, and we are encouraged with the preliminary results so far. Finally, as of September 30, 2025, year-to-date, we have invested $167.2 million in CapEx, of which approximately $142.2 million was on core CapEx and approximately $25 million was on expansion or ROI projects. For 2025, we expect to spend approximately $175 million to $200 million on core CapEx and approximately $50 million of CapEx on growth and ROI projects. Now let me turn the call back over to Marc, who will share some final thoughts. Marc? Marc Swanson: Thank you, Jim. Before we open the call to your questions, I have some closing comments. In the third quarter of 2025, we came to the aid of 192 animals in need. Over our history, we have helped over 42,000 animals, including bottlenose dolphins, manatees, sea lions, seals, sea turtles, sharks, birds, and more. I'm really proud of the team's hard work and their continued dedication to these important rescue efforts. I'm excited about the opportunity set in front of us, both in the near term, where we see a clear path to drive meaningful progress, and over the medium term, where the growth potential is greater. We are focused, well-positioned, and confident in the investments we are making, the operational efficiencies we are realizing, and the value we are building for stakeholders. Now let's take your questions. Operator: [Operator Instructions] Our first question comes from Steve Wieczynski with Stifel. Steven Wieczynski: So Marc, if we go back to your last call, which was early August, I think you noted then that attendance was up on a day-to-day basis through early August. So I'm just wondering maybe what happened from early August through the end of the quarter because that would kind of tell me that you witnessed somewhere low to mid-single-digit declines for the rest of the quarter. And this was also off of an easier comp since the third quarter of '24, I think you had a weather headwind of somewhere around 300,000 guests or somewhere in that range. So maybe just trying to figure out what kind of happened through August and September. Marc Swanson: Yes, Steve, I can help you with that. So look, August is where we started to see -- I should say, we expected to get more of the weather recovery. We got some early in the month, early on, and then we did not get as much as we expected over Labor Day and obviously into September. You also had the international attendance impact in there as well. And that was there a little bit -- it was there in July as well, but obviously, there in August and more pronounced in September and here in the October. And I think that's been pretty well reported that we view that as more of a macro issue. And I'm sure there's things we can be doing better, too, but more of a macro issue. You also have at kind of the end of the quarter, and this is just a function of how we report our results, we report at the end of the month regardless of what day a week it is. So if you kind of go back and look at the days in the quarter, right there kind of at the end of the month, you have a negative calendar shift that happens, and that's just unique to us. Some of that, we will get some benefit of that back in Q4. But that was another pretty meaningful impact in the quarter, obviously. Steven Wieczynski: Okay. Got you. And then second question, Marc, you noted -- in your words, the consumer is inconsistent. And just maybe want to understand what that means a little bit more. And then maybe if you could kind of touch on as well the impact from -- or lack of impact from Epic through the summer and into the fall so far. Marc Swanson: Sure. So I'll take your second one first. So on Epic, I mean, you heard me say in the prepared remarks that year-to-date attendance was up at SeaWorld Orlando. I'm not going to really comment much beyond that, obviously. But the thesis hasn't changed. We still view the Epic opportunity as a very good opportunity. We welcome investment into the market. We think it benefits the market in general. And obviously, we can share in that market improvement, if you will. And that's evidenced by more than 50 years of being in Orlando and continuing to grow and adding our own additional parks and things like that. So that has not changed. Obviously, it's going to ebb and flow from quarter-to-quarter, I'm sure, and they're going to do things, and we're going to do things and others in the market are going to do things. But I think we're going to continue to optimize and learn and take advantage of what will be more people coming to the market, obviously. As far as the consumer, I said last quarter -- what I look at a lot of times is the in-park spend and our in-park spend was up in this quarter. So people are -- at least in our park, the in-park spend is growing. We recognize that there's a lot of companies talking about the consumer and the health of the consumer. So it's hard for us to pinpoint if it's having a significant impact on us, but we're not ignoring that. Obviously, a lot of people are talking about it. So I'm sure there is some impact to certain guests across our portfolio. It's just really hard for us to tell. And like I said, we see our per cap on an in-park basis up in the quarter. And I can tell you, it was up again in October. So that's kind of the commentary there around. It's just a little bit mixed. We're going to continue to move forward on our end. And like I said, the things we got to do to continue to drive our results. And we know there could be some challenges with consumers, obviously, but at least from where we sit, looking at our in-park per cap, which is the one thing I do look at, that is positive in the third quarter and positive in October as well. Steve, I'll add -- sorry, just one quick thing to add to that. I kind of mentioned it, but if you do look at our pass base, we know that's been down. And look, I'm sure when we -- some of the peak selling seasons for our passes were around when the tariff noise was happening. I said this last quarter, it's hard to know if that had an impact on us. I'm sure it didn't help us is, I think, what we're trying to say. And so we have opportunities to close that gap, and I can talk more about that I'm sure a little later. Operator: Our next question comes from Arpine Kocharyan with UBS. Arpine Kocharyan: I have a couple of quick ones. First, what do you think drove the reversal in international visitation you were seeing in the first 6 months of the year? It seems like you're saying it is not Orlando. What do you think drove that? And then I have a quick follow-up. Marc Swanson: I think the -- if you're asking specifically about international attendance, I mean, we saw it up in the second quarter and then obviously, a decline in the third quarter. And I know I think Visit Orlando has put out some projections that it's going to be -- to the market in Orlando for the year. And so I think it's more macro factors. Obviously, there's always things we can do better, but I think this one is pretty well understood on the macro side that international visitation to the United States is slowing, and we see that mentioned. I think some of you guys even mentioned that in some of your reports this morning, so... Arpine Kocharyan: Okay. And you don't see that tied to some of the immigration stuff and harder to get visas and whatnot versus macro? Marc Swanson: No. All those things you said, I'm sure, are factors. That's what I'm saying. I think there are more macro factors that aren't necessarily in our control. So whether it's visas or immigration costs, whatever it may be, that's what I'm saying. I think all those things are a drag for just the international visitation in general. Operator: Our next question comes from Thomas Yeh with Morgan Stanley. Thomas Yeh: Yes, I just wanted to follow up a little bit more on that Orlando market comment. Can you maybe just flesh out what you're seeing at the regional level a little bit more because you did cite SeaWorld Orlando attendance up year-to-date. And I would imagine most of the international visitation headwind you cited stems from that market. Is that fair? And if so, then were the other markets kind of underperforming even relative to that? Marc Swanson: Thomas, I think you can, as we've said in the past, assume that the international attendance is, as you noted, more of an impact to the Florida market and Orlando. So the fact that we're up year-to-date at SeaWorld Orlando with that headwind, I think you could view that as a positive. We'll see where we shake out, obviously. But your point is a valid one on a relative basis, there's other parks that we need to see do better that are outside of the Orlando market. Thomas Yeh: Okay. That's helpful. And then for October, you cited per caps growing. How is attendance pacing? If you can comment on that, particularly given I think you're comping the Hurricane Milton issues that you were facing in early October last year. Marc Swanson: Yes. So on October attendance, we had the hurricane recovery in Tampa, which we got a good portion of that and to some extent here in Orlando as well. There's been a couple of headwinds against that, mainly the weather in Williamsburg, which is one of our more popular Halloween parks. You guys might remember over Columbus Day, a pretty big nor'easter up the East Coast that really impacted that park and to some extent, our Sesame Park in Langhorne for a number of days. And then we did have a couple of rain weekends here in Orlando. So we did get -- and then we have the continued international decline as well. I mean when you net it all up, attendance was up in October, not as much as we'd like because the weather recovery was not as strong in part due to just poor weather in other places and the international decline. I will say, I think it's important to note, I said in-park per cap was positive for October. Admissions per cap was also positive as well for the month. No one has asked me yet about this, but the comment I'd make around that is I think we're doing a better job of managing the admissions per caps here in October, and we'll see where that goes going forward, but that's a couple of data points for you. Operator: Our next question comes from Chris Woronka with Deutsche Bank. Chris Woronka: Marc, I guess, as you guys kind of collect feedback from guests and any surveys you do, your marketing approach. I mean, do you get the sense that you need a more strategic pivot, whether it's in part of offerings or marketing approach and thinking about things like social media versus traditional. But really, the gist of the question is, as you're collecting feedback from customers, is there something more different they want to see outside of price value situation? Marc Swanson: Well, look, Chris, thanks for the question. I mean when you kind of back up in the quarter and you take out the weather and the calendar shift, those are things that just kind of happened. So I don't think that has to do with necessarily what we offer in the parks or anything. The international impact is a new emerging thing, and that's more macro related. So look, there's obviously things we can do better in our parks, and we got to execute better on some things. But I think as far as the events and the rides and the attractions we offer are compelling, and we're going to continue to do that. We saw, like I noted for our Howl-O-Scream event in San Diego and Orlando, record attendance for those events. And we have a good Christmas event ready to start this weekend in one of our parks and then the rest of the parks later on. But one of the, I think, key things, I don't know that pivot is the right word, I think we will continue -- and I think this is really important. We are going to continue to invest in our parks. We're going to continue to drive improvements in putting new attractions in, updating venues, aesthetics, all those things that have been things we've done for years. And so we're not ever going to neglect the parks or anything. We're going to make sure they're fresh and reasons to visit. So we'll continue to make that capital investment. So there's no change in that strategy. That will attract people if you give them some good reason to come and it's new and exciting and things like that. Where I think we could do a better job is obviously on the execution around that. And some of that comes down to marketing. Some of that comes down to the different ticket offers we have and whatnot. So we've got to do a better job on some of those areas. But the core of what we do to our parks, the rides, the attractions, the collection of assets still remains really strong, and we'll continue to invest in those. Chris Woronka: Okay. And then as a follow-up, I think you mentioned the MOU being signed internationally in the third quarter and one, I think you said you expect to sign soon. Can you maybe give us just a little bit of an overview of the overall size of that pipeline and knowing that things may or may not happen, but how big can that get over the next 3, 5 years? And then also on the sponsorship side, you gave us kind of a run rate number you expect I think in the next couple of years. Same question, is there a -- is the pipeline growing there as well? Marc Swanson: Sure. So on international, I think what's exciting is people continue to reach out to us. And so we talked about in our release or in my prepared comments, the two things that we're comfortable mentioning the 2 MOUs, one signed, one we expect to sign in the coming months. So I think that outreach should continue. I don't want to guide you to anything. Obviously, these things can take a while to develop. But certainly, I think having people see the potential in our product, the park in Abu Dhabi, if you've not seen it, go there or look online, it's a really well-done park. I mean it just really showcases the brand well, in my opinion. And I think people see the potential of what our kind of know-how and knowledge can bring to wherever they may be located, right? And it doesn't just have to be SeaWorld. I mean we have obviously other brands, whether it's Busch Gardens or Aquatica or even Discovery Cove. So I expect outreach will continue. And -- but I don't have anything specific to guide you to. We'll update you each quarter. On the sponsorships, similar. I mean, people recognize that we have over 20 million visitors coming to our parks on an annual basis. It's somewhat of a captive audience, and there's a lot of activation and different things we can do. And so there's a list that we're working through, and we're excited about those opportunities going forward. So I expect we'll continue to find more opportunities in that over the coming years. Operator: Our next question comes from James Hardiman with Citigroup. Sean Wagner: This is Sean Wagner on for James. I guess you've talked somewhat about the international weakness. Are you able to break down domestic visitors? Are you seeing any differences there between destination of fly-in versus local drive-in? Marc Swanson: Yes. I don't know that we'll comment a whole lot on just the nuances. I mean just a lot of our parks get visitation from closer in, right? So even here in Florida, where we're sitting today, a lot of our attendance is coming from the state of Florida. And things move around from quarter-to-quarter. I think the most pronounced thing like we saw, which is why we called it out was the international attendance changing. Sean Wagner: Okay. On the attendance per cap front, are you able to provide any more color on how that breaks down by park? Are you more aggressive in Orlando versus other markets given some of the international and competitive headwinds there? Marc Swanson: Yes. I don't think we're going to break it down by park. But I think a couple of comments since you kind of asked. I mean, obviously, you have a lot of things that impact your admissions per cap. So you kind of mentioned international decline. That's typically a higher per cap guest. So when that -- for all the reasons that were mentioned earlier, why those folks -- when that attendance goes down, that can have an impact on your per cap, obviously. The weather and the holiday shift as well, you can't wait around for weather to get better in a compressed summer. I think summer is, in my opinion, getting more compressed. So you don't have a whole lot of time. You have to react somewhat quickly. And then obviously, with our pass base down, you're looking to fill the gap, and we do -- there's different strategies for doing that, which we went after. We also -- when I talk to our revenue management team. We have a little team that manages this process. They see more competitive offers, if you will, more promotions from some of our competitors in several markets, right? So I think we're not the only ones -- or maybe said another way, we're sometimes having to react to some of those offers that other competitors are putting out in more than one of our markets. The good news, as I said, is we did see improvements in the per cap in October. And I mentioned -- or I think Jim mentioned in his prepared remarks that we just launched our 2026 passes and one of the big kind of acquisition periods is around Black Friday. And that's kind of our first kind of big time of the year where we start to acquire passes for the following year. And so that sale has just started this week. It's very early, but obviously, we're encouraged by the trends, as Jim said, that we see there. We know it's very important that we close that gap. And early on here, we're encouraged, still a long way to go and still that gap can live with you for a little while because it's a yearly pass. So that will start to cycle through as we go into next year and into the spring and summer of next year and hopefully become more of a tailwind for us. And we -- I'm not going to give you specific what we did. But obviously, we've done a few things differently with some of our pass products that we think are going to be compelling to guests. And we continue to have very good benefits as well. And I think most importantly, to give you a really long-winded answer is the key thing you need -- one of the key things you need for a strong pass program is to have reasons to visit. And I said this already, but we have another exciting lineup of new things coming to our parks next year, whether it's attractions, rides, events, refresh venues, that type of thing. That you fundamentally need to have, I think, in most years to continue to have pass members visit and continue to also give them reasons to come. The second thing would be continue to give them a compelling value proposition. Our passes are among, I think, one of the best values you can buy for entertainment, for your family and friends and things like that. If you look at the kind of the value you get in a season pass for coming to our park. So the investments in the product is there. The value proposition is there. We have to do a better job of driving the awareness around those pass products, the -- how we're marketing those products and how we're driving people to buy that product. Operator: Our next question comes from Lizzie Dove with Goldman Sachs. Elizabeth Dove: I guess just to go like bigger picture for a second, it feels like as an industry and for you guys, like attendance isn't back to 2019 levels and for you guys not back to the peak levels either that you've kind of laid out in the past. Like what do you think is the kind of gating factor to growing attendance longer term? Like is it something structural, more competition, maybe not even from other parks, but just other kind of in-home, out-of-home entertainment? Or how do you kind of think about that forward trajectory? Marc Swanson: So look, I still have a lot of confidence in the industry as a whole. It's a good industry. And there's a lot of -- I kind of mentioned on the last question about the value proposition and things of going to a theme park. And I think we line up very nicely with that. And we're continuing to make the investments in the product, which I think is really important to do that, and we'll continue to do that. In our case, we've not had the best weather over the last several years here. We know there's a lot of competition for people's time more than ever. And I think we've got to continue to kind of break through on the awareness and why you should have a ticket or a pass to our park. We sometimes talk about like if you moved into town, if you moved into Tampa and you were a new resident, like it should almost be like your neighbor should be telling you like, hey, you got to get a pass to Busch Gardens. It's a great value. Everybody has a pass. So we've got to, I think, market that better, give people reasons to buy our product. And we will -- the way to do that is to continue to invest in the parks, continue to give a strong value proposition and people reasons to visit. And so I'm still real confident in not only our business, but obviously, the industry as a whole. Elizabeth Dove: Got it. That makes sense. And then just to kind of ask one of the other cost questions in a slightly different way, but you've got these kind of cost saving targets. Your margins are still higher generally than the rest of the industry. And look, I know there's nuances with footprint and operating days and all of that. But I guess just can you maybe speak to the confidence of being able to kind of grow margins from here or whether there is some reinvestment needed, whether that's events, marketing, anything like that? Marc Swanson: Sure. Well, look, you know that we hold ourselves to a pretty high standard, and we've executed over the years, I think, reasonably well with some of the cost initiatives. Now obviously, I said I was disappointed in the quarter with the cost saves and efficiencies, and I was. And we've got some new efforts around kind of how we're processing some of that, how we're managing that. And I think we're going to do a better job of managing that going forward. There's obviously, as you noted, always new costs and new things that emerge, and we have to do a better job of managing those things as well. So I think the stuff that is in our cost plan, we're managing. It's some of the new things that emerge that we've got to address more quickly and be more able to mitigate those as much as possible. So I don't know -- I'm not going to guide you to where margins can go. Margins, we're not guiding to that. But what I can say is a core kind of piece of our strategy going forward is continuing to find cost efficiencies and managing our costs. Like you said, the margins are still strong for the industry. And if you look at the cost -- I call them the adjusted EBITDA cost, the difference between revenue and adjusted EBITDA. If you look at that growth this year, it's, I think, under 2%. So it's not like we're out of control or anything. We've managed to a fairly low level. But we know we can do more, and we got to execute better on that, and we're addressing that as we speak. Operator: Our next question comes from Patrick Scholes with Truist. Charles Scholes: I got on to the call a little bit late, so I apologize if any of these have been asked already. Any initial expectations or how should we think about CapEx spend for next year? Marc Swanson: Yes. So I can take that. I mean, I think you would expect us to be in a similar range to where we are this year. And that -- it might move around slightly, but that's been our kind of target somewhere in that range. For the most part, we haven't given you anything specific. I think the key thing for you, and I know I've said this already, but we're going to continue to make investments in the parks. We're not going to suddenly change that mindset. So we'll continue to invest in the parks with capital, with new events, with aesthetics, whatever it may be to keep our parks fresh and reasons to visit. Charles Scholes: Okay. And then -- my next question is just sort of a high-level sort of thematic question. Certainly, attendance in the last quarter was soft, but then you point out some really strong initial metrics for next year with Discovery Cove and group up 20%. When I think about especially Discovery Cove, a really high-end type of exclusive type of product, would you say that -- in your business, you're seeing these bifurcated trends where, say, Discovery Cove doing initial bookings looking really well, but then sort of last minute, more mass market attendance softer. Is that something that you also see in your business, this K-shape bifurcation? And then any other those types of trends that you see? Marc Swanson: Yes. Sure, Patrick. So look, I'm glad you called out Discovery Cove. And that park is on pace this year to have record attendance and revenue. And as I mentioned in my prepared remarks, the revenue trends for next year are up. The bookings and revenue for next year are up over 20% compared to the same time last year. So that's a good sign. It's a really good park, and it's our most expensive park, right? So that kind of feeds into the comment about we look at that park, it's solid bookings. We look at our in-park per cap growing in the quarter and again in October. So there's -- are there consumers that are being impacted as part of our kind of guest mix? I'm sure there are. So I don't want to say they're not. But we see other things, like I said, like Discovery Cove and our in-park per cap that tell us there's also consumers who are fine, right? So kind of the mixed bag there, as you noted. But I think the takeaway, Discovery Cove, which is in Orlando, pacing well this year to a record attendance and revenue and looking solid for next year as well. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Marc Swanson for any closing remarks. Marc Swanson: Yes. Thank you. On behalf of Jim and the rest of the management team here at United Parks & Resorts, I want to thank you for joining us this morning. As you heard today, we're confident in our long-term strategy, which we believe will drive improved operating and financial results and long-term value for stakeholders. So we thank you, and I look forward to speaking with you next quarter. Operator: This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Ladies and gentlemen, good morning, and welcome to the HELLA Investor Call on the results for the 9 months of fiscal year 2025. This call will be hosted by Bernard Schaferbarthold, the CEO; and Philippe Vienney, the CFO of HELLA. [Operator Instructions] Let me now turn the floor over to your host, Bernard Schaferbarthold. Please go ahead. Ulric Schäferbarthold: Good morning to everybody. Very warm welcome to our 9-month results call. And I'm here together with Philippe Vienney, our CFO; and Kerstin Dodel, our Head of IR. So starting off the presentation on Page 4. So if we look at our sales development, we are at end of September in line with what we expected. So positively, our electronics business is continuing to grow. We had a growth now in the first 9 months of 8.3%, specifically our Radar business, but as well our business in our product center, energy management is continuing to grow. On the Lighting side, we are not growing. So we are down 8.4%. We mentioned also earlier mid of the year that the end of some larger projects, but also the reduction on volumes on some programs in our order book is the reason for that. And I will come back to that and actions we have now taken for Lighting. On Lifecycle Solutions, our business is still down in the 9 months. But positively, we have now seen in the third quarter that we are back to growth. We had quite a decent development in that segment in Q3. So overall, sales is quite stable, FX adjusted. So a slight growth of 0.4%. And considering or looking at reported sales, we are at minus 1.1% considering the strong FX headwind we had. On our operating income margin, we are at 5.8% in the first 9 months. Overall, I can state we continue to have a strong cost discipline. We are implementing the structural programs we have initiated in the last 2 years. So overall, considering the environment, we are in line what we planned also in our budget. Net cash flow has improved on a year-on-year comparison is at EUR 68 million to the end of the year, 1.2%. We have reduced CapEx. And within that number, if we look at factoring, the increase in factoring is at EUR 23 million in comparison to last year, EUR 30 million less. If we move on to the order intake, we are good on track. The third quarter was again a good quarter in terms of order intake. We had a strong momentum, especially in the lighting business, 2 areas where we wanted to grow. More broadly in the U.S. and also in Asia and specifically China, we could win important programs. But as well in Europe, we were quite successful. We are now attacking the market as well in the mass market, so in the volume markets, and we were able to win significant program volumes for the European regions in the third quarter. On the electronics side, we continue to be very successful. So we are highlighting here some of the programs. But what I can state overall that within our Electronics business, we continue on a strong growth path, and this should also support our growth trajectory in the upcoming years. And to finish off, our Lifecycle was also quite successful in the last month. We are highlighting here some of the programs. So bus, agriculture remains important business areas and customer segments for us to continue to grow and as well here also to highlight to get broader in terms of our market reach. So we are happy to win also projects outside of Europe and to gain market shares there as well. So overall, we are on track in terms of our order intake achievements after 9 months. Going to Page 6, some highlights. So on the Lighting side, we continue to see that we are differentiating with our lighting technologies. We are present also in different -- on the different shows and fairs. Here, we are highlighting one, and we are advertising and showing our newest technologies also to the different customers. I think from my perspective, feedbacks are quite good. We are getting. So this should support our growth we are envisaging in the upcoming years. In the electronics, one important milestone now we had is the launch of our iPDM, so of our eFuse technology in one large platform. We are engaging ourselves much stronger now into the whole sonar architecture of the car. And this technology, which manages the power in the car and which is embedded in the sonar architecture and in the new E/E architecture overall of the car is a big milestone for us. And this is one very important technology we envisage will give a strong growth potential in the upcoming years, and this is why we are highlighting it here in a strong way. The other thing I want to mention is on the structural changes. So I mentioned we continue to reduce our cost base. In the last month, we announced the structural change in one of our plants in Germany, which now we are going into execution. Other than that, we are now in execution in terms of our new SIMPLIFY program. So this is a global program where we are reducing in all white-collar functions in the upcoming 3 years, around 15% on headcount. And so we are well on track. We already started on that program. The target is to be at least at 20% of reduction to the end of this year and around 50% on the reduction to the end of next year. And I can say that we are ahead of the target as of today, and we are trying to accelerate on that as well. And you can see that as well in the headcount development. If you only look at the last 9 months, we have already reduced close to 5% on headcount as of today in comparison to the start to the year at a quite comparable sales level, and we will continue on these adaptions. If we move to Page 7, let's say, one of the big challenges we are facing actually is the crisis on the shortage on Nexperia. So it's clear that if we look at our portfolio of products, we have a lot of Nexperia parts in our products. So in general, I can say we are strongly impacted. So we have organized our way -- us in a way also with task forces and are managing the situation in the way that we are building up the alternative suppliers. And in the meantime, for sure, we use -- we still use Nexperia parts. So our relationship today with Nexperia China is still stable, and we also managed to buy broker parts, which in the meantime, supports our supply. So far, I can say that the month of October was in line with our plan. So there was little impact. The start into the month of November showed a little more impact in terms of the full coverage against the plan. And the most difficult weeks now from our side will now be the next ones where in the meantime, where before being able really to ramp up the second sources, we are seeing some of the shortages. So we are working intensively also on the application on export licenses and also taking advantage and the support also on the OEM side, which are going for these applications as well. So this could help to support also on parts we have in China who could be exported to the U.S. and Europe and help there on the shortages. So far, China for us is not impacted. We have enough parts. So this is something difficult to quantify overall. But as I said, so far, the impact was very limited, and we have now to see how next weeks will be and specifically if with -- on the Chinese authorities, the customs and MOFCOM, we are able now to get the necessary applications to the exports to support Europe and the U.S., as I said. But as you can imagine, a lot of intensive work we are doing and managing the situation to keep our delivery promises to the customers. So having said that, we will move on with some more details on the financial results. Philippe will take over. Philippe Vienney: Yes. So good morning to all. So looking at the sales, so we are publishing sales at EUR 5.868 billion, so which is representing a decrease of 1.1% versus prior year. And excluding the exchange rate, this would be at plus 0.4% versus last year and versus the market, which is showing a growth of 3.8%. So here again, as I said, we have a good momentum in all region on electronics, whereas we are suffering on the lighting side with lower sales, which are affected by end of production on some programs and mainly in North America and Asia. And Lifecycle was reducing -- showing reducing sales, but which we are also -- where we are also seeing a good momentum in Q3 with some slight recovery. So looking at the sales per region and versus the market. So Europe, where we still have more or less 56% of our sales, we have a growth of 1% versus the market of -- which is showing a decrease of 1.7%. So we are overperforming versus the market for Europe. For Americas, where we have sales which are above the 20% of our sales, we are seeing a decrease of our sales of 1.1%, slightly impacted as well by the FX impact versus the market, which is reducing by 0.5%. So here also, we have the -- again, the impact of lighting, where we have this impact of some end of production series, which are not fully compensated by new launches. And we have Asia, which is also a bit above 20% of our sales. where we have a decrease on our published sales of 6.4%, also slightly impacted by the FX versus a growth in this region of 7.2%. So here again, we have the same topic on end of production of series project in lighting, but not fully compensated by new sales and new launches with local OEMs in Asia. And we still have, again, growth momentum in China on the electronics with radar and battery management. So now looking at the profitability per segment. So lighting, we are at EUR 2.7 billion of sales, which is representing an organic decrease of 7.3%, excluding the exchange rate. So here, I said again, we have the impact of end of production of some series projects in China and North America. We have some increase on the headlamps and rear combination lamps in Europe and Americas, but which are not enough to compensate the drop that we are seeing in Asia and North America on the rundown programs. So the operating income for Lighting is at EUR 73 million or 2.7%. So here, we are impacted by the volume drop, which is clearly impacting the gross margin and the operating margin, which we are partially compensating by lower material costs, also some reduced R&D cost and SG&A costs, but not enough to compensate the volume drop that we are facing where we still have to reduce and continue to reduce our fixed cost to absorb this and face this volume drop. Electronics. So we are publishing sales of EUR 2.5 billion or EUR 2.6 billion, which is representing plus 9.5%, excluding FX rates on an organic basis. So here again, we have growth in all regions and growth -- thanks to the radar business. We have also growth in the car access system in Europe and Asia. And we have also some growth, thanks to the battery management system as well in Asia. So good momentum on the sales in Electronics. And this is leading us to an operating income of EUR 196 million or 7.6% of operating margin. So here, we have the benefit of the volume, which is helping the gross margin and the operating margin. And we have been able to be stable on the R&D spend and also thanks to reduction of external spend and external provider. And we have also been able to maintain or even reduce the SG&A percentage in this segment. So all in all, leading to the 7.6% of operating margin. The Lifecycle, where we have sales of EUR 739 million, which is representing a decrease of 1.5%, excluding FX rates. So yes, as we said, we have a low demand, especially coming from the H1 and especially on the commercial business vehicles. But we see some recovery, a slight recovery in Q3. So especially also on the commercial business with some stable business on the after market. And this is leading us to an operating income of EUR 74 million or 10%. So here, we are impacted also slightly by the volume. And we have been able to maintain or even decrease the R&D expense and with SG&A, which are slightly increasing mainly due to distribution costs. Profit and loss for HELLA? Yes. So we have a gross profit of EUR 1.3 billion, which is 22.8% versus 23.2% last year. So here, we have the weight of the volume decrease in Lighting and Lifecycle, which is impacting us and not fully compensated by the improvement on the Electronic segment. On the R&D side, we are at 9.4% versus 9.8% last year. So here, we continue to see the benefit of our adjustment and structural adjustment on the R&D side and cut on the external provider, as I mentioned, for Electronic. On the SG&A, we are at 7.7%. So here, we see a decrease on the administration costs, where we have a slight increase on the distribution costs. So I think the good trend is the administration costs which are decreasing and showing some effect of the program which have been launched to reduce this cost. On the earnings before tax, so we are reaching EUR 208 million versus EUR 409 million last year. So here, we have the impact -- negative impact of all the restructuring programs, which are booked and are part of the EUR 129 million. To mention that last year, we also had some restructuring costs, but which were more than compensated by the sales of the BHTC business and the net gain that was booked last year. And this is leading us to a net income of EUR 108 million versus EUR 310 million last year. On the net cash flow, we are at EUR 68 million, so versus minus EUR 8 million for the same period last year. So here, we are increasing our net cash flow. So we have higher cash from operations. We are also having a good momentum on the working capital with some negotiated and good payment terms with suppliers. And we are also reducing our tangible CapEx. You can see that we are at minus 23% versus what was cash out last year and spent last year for the same period. So this is benefiting to our cash flow, leading us to have a EUR 68 million cash flow for the 9 first months of the year. With that, I think we are finishing the financial details, and we can go to the outlook. Ulric Schäferbarthold: Thank you, Philippe. So on the outlook, so on Page 17, if we look at volumes, so the actual outlook on S&P is 91.4 million cars. I would expect that specifically on Europe and Americas, we would see some reductions in the fourth quarter due to the shortages on Nexperia parts. China is quite stable in terms of volumes. This is also what we see actually now in the fourth quarter. On Page 18, so we confirm our outlook in terms of sales in the range of EUR 7.6 billion to EUR 8 billion. On the operating income (sic) [ operating income margin ] 5.3% to 6% and the net cash flow of at least EUR 200 million. We are stating that this assumes a sufficient supply situation on -- especially in Nexperia parts. As I said, in terms of -- today, if I look at the month of October and the start into November, the impact were limited, but I also mentioned that the next weeks will be the crucial ones. So summing it up on the key takeaways. So, so far, looking at the 3 quarters, from our point of view, a robust sales development in line in terms of profit and net cash flow, what we expected, strong focus on the structural changes we have done and still a good momentum on the order intake side. So we -- outlook I mentioned, we see us on track for the guidance we have given. And if it comes to the top priorities, so we continue to work on the structural programs. One important new program we have now initiated is in the lighting area. We have started a transformation program now with -- starting into the second half of the year. Mainly, we focus on 3 big topics. One is on the business growth. So we need to come back to growth again for that. We are broadening our reach and focusing significantly also on the regions where we see a strong potential, especially the U.S., but also beside of China, Japan, Korea, India. And we already see now in the third quarter, the first successes and programs we could book in quite a sizable numbers. So first, let's say, proof points are given, but I think this is a very relevant point to come back to growth. And on top of that, we are -- we have initiated the operational transformation. We see significant potentials in terms of reductions on our footprint or on our costs within the operations, including also the supply side and logistics. We have initiated a structured program on that, which is specifically for Europe and also for our Mexican operations. And the third element is the improvement in D&D productivity and efficiency where as well we initiated a program also with a focus on cost reductions on our technology, where we see also a big potential to reduce on the cost side as well here, too. So this should help to bring our Lighting business into a much better profitable situation in the years to come. Having said that, we are happy to take your questions. Operator: [Operator Instructions] And the first question comes from Christoph Laskawi from Deutsche Bank. Christoph Laskawi: The first one, coming back a bit to what you just said on the Lighting performance. Obviously, Q3 margin around 1% is very low. When you've implemented all the measures that you talked about, what do you think is in the midterm a realistic margin potential? Could it be around 5% plus? Or any thoughts on that would be appreciated. And then in contrast to that, electronics is actually quite strong in Q3 with 9% plus margin. Was there any specific one-timers in there or just really capitalizing on growth and showing the margin potential of that business? And then the third question would be on Nexperia. It sounds like you didn't face production shutdowns on your own yet, and you haven't cost any so far. Still you're expecting production cuts to come. Do you already see that in the schedules? Any volatility you can highlight there? And then just on the cost of going to brokers and others, those have been quite high in the semi shortage. Is this something which could be a meaningful impact on earnings in Q4, just the sourcing alternatives? Ulric Schäferbarthold: Thank you for your questions, Mr. Laskawi. So on the Lighting performance, our target is to come back to 6%. But this will not be possible on the short notice. So this is a target we have set ourselves. It will take until '28, '29. So before we are at this 5% level, you said, probably '28, '29 to come closer to the 6%. So we have now seen that, as I said, so we are struggling a lot because, first of all, we are not growing. Secondly, we have also been impacted now in the second half by a warranty topic, which was quite significant as well. So it is partially in the third quarter and will also hit the fourth quarter. So this is a topic which lasts now from the years '22, '23, where now finally, we got to an agreement with -- and the settlement with the customers. So we are close to, but this was an impact as well. And overall, on the full, let's say, second half, it will have an impact of around EUR 25 million, which is quite significant for the Lighting business. But the overall, let's say, if I look at Lighting, we are -- the business is declining. And this is something which will also continue into the next years and will be a headwind also in the next year before now we see with the momentum we have on the order intake, we will be able to grow again in the -- starting from '27. What I have to say positively is that in lighting, we are very strong in China. So the transformation also we need to do for Europe and specifically also our Mexican operations, we already have done in China and also the adaption to competitiveness. So I see us very strong in Asia today. And now we need to do the work we have -- we need to do in Europe and also South America. So we changed also the responsibility. So I have taken over in combination of tasks now from the 1st of July. And so we are now starting on this transformation program, as I said. On Electronics, I'm very pleased about how our business is developing also in terms of performance. So what we now see is basically that we see now the payoff of the business now where we see now the growth coming with the launches and the new programs, which are going into serial production. So the growth supports the profit development. And what we as well see is that the structural changes we have done in terms of -- on the cost side helps as well. So with that, we see immediately a very strong profit development. There was no really specific one-off in the third quarter. So -- but it was quite a good quarter. So I wouldn't say now every quarter will be the same. So also no negative impact, I have to say. But I have to admit also, it's a good development, and we are building on that and trying to continuously to improve on that. On the Nexperia, so I think that -- I stated so far with the coverage or with the stocks we had, with the coverage we had. We also bought some -- quite early on some broker parts. So this helped really to cover the period of time until now. We see now that some shortages on some products, they are already there. On the call offs, basically, you do not see yet that customers are changing anything. But for sure, on the -- in the systems, but for sure, we are in very intensive discussions with all of our customers. And today, the situation is as follows that the weekly -- the decisions are taken now on a weekly base, what can be produced and how much reduction will we see. And I mentioned the next weeks will show reductions. And the magnitude is still not absolutely clear. So what is in the next, let's say, 3 to 4 weeks. And it certainly will now also depend on how -- are we now able really to get exports on Nexperia parts with these exemptions or with export licenses granted now to the OEMs or to us. And we are already trying out the test shipments and working with MOFCOM and the customs, as I said. So there is some hope that now it should work and that certainly will help a lot immediately. But this is the uncertainty we have. If this is not working, I mentioned it, then the reductions on the volumes in the next weeks will be much higher. And on the cost side, on the broker so far, I would say, for sure, it goes fast. The last broker -- broker offers I saw between factor 600, factor 800, also factor 1000 I already have seen. The difference to the semi is that the original price is much lower. So there, we are only talking cents, but sure, if we are talking factor 500, 600 or higher, then you talk immediately some millions. So far, it has not such a big impact. The market today is still -- there are not so many volumes any longer in the broker market. So I would not expect that this should have such a hit, which is comparable to the semi today or to the semi crisis we had some years ago. But it's -- again, still we are talking some money. It's some millions we are discussing. That's for sure. But not comparable, as I said, to the semi crisis. Operator: And the next question comes from Sanjay Bhagwani from Citi. Sanjay Bhagwani: Maybe to begin with, so on the Nexperia situation, this morning, there seems to be several articles suggesting like -- so yes, I mean, on the Nexperia situation, this morning seems to be like several like constructive articles typically like quoting some of these Dutch ministers that things will be okay in the coming weeks and chip supply should resume. Is that providing some comforting messages to you as well? Maybe let's say, if there is a disruption, there can be just 1 week disruption or something like that? Or it's probably too early to look at these headlines or something like that? Ulric Schäferbarthold: So there are 2 things for me. One is does China now allow that Nexperia China -- the parts which are still produced at Nexperia China that we can export these to Europe. And this -- we are still working -- I mentioned it. We are still working on how process-wise, the application and the export needs to be executed. And this is where I said we are now just running now with custom, the discussions we have with MOFCOM doing these test shipments to try out how we have now to handle and practically do it. And there are some signs now. This I can at least also confirm that -- I hope that it will be possible soon. Let's put it like that. Still today, it has not worked out, but we are getting signals that there is hope that it could be possible. So that is one thing. So I would take that as a positive note, but still to be seen if then really it works out. Because just practically, I can tell you the custom were not aware that they are allowed to do. On the other hand side, MOFCOM is allowing it. So I think we are still, let's say, it's an administrational point, but you never know. So that is one thing. The other thing we are also working on, and this is as well, let's say, a critical path, we are still getting a lot of parts from Nexperia China, and they are dependent still on the wafers they get from Europe. And there apparently, they are not coming along. So that these wafers, which are needed for the further production, if they -- if China do not have any longer wafers from Nexperia Europe, they couldn't continue on their production. And they will run out at a certain point of time if there is no agreement. And this is the second path we are working on to get a solution between the 2, Nexperia Europe and China, to stabilize the situation so that Nexperia China is able to continue to deliver. And this is important because, as I said, we are working on the alternative suppliers. And for most of the suppliers, it can be -- we can find, let's say, good agreements and to ramp up quick. But for some of the parts, it will take a little longer, and this is why it's important to have a stability on Nexperia China as well. Sanjay Bhagwani: That's very helpful. And I think on the broker parts, you mentioned that so far, this has not been a major impact. But in terms of the pricing pass-throughs, I understand in the previous like chip crisis, you had to actively go and negotiate the price increases. In this case, is it easy to like kind of have some sort of indexation for these components now? Or this again, will be subject to negotiation if the, let's say, inflation becomes material? Ulric Schäferbarthold: So in the actual situation, because we need to be quick, we take the decision with the customer, so with our customer, with the OEM together. And the agreement is that in terms of who takes which part, we agreed that this will be then discussed later. But it's clear that we will have a comparison as it was in the semi crisis where we agreed on the, I would call it, pain share, who takes which proportion. So you can assume that what we have seen similar in the semi crisis should -- at least from our perspective, should also be true now for this one. Sanjay Bhagwani: And then my final one is on the Q3 margins. Just a kind of follow-up to Christoph's question, but more at the group level. So Q3 group margins have like sequentially gone down to, I think it's 5.3% versus H1 was 6%. So are you able to provide some color in terms of the Q4? Is it sequentially looking better as of now? And in terms of divisions, how the Q4 versus Q3 margins are looking? Ulric Schäferbarthold: So month of October was okay. It was in plan. So -- and normally, the months, October and November are very strong in the industry. So we have seen quite a good month in October so far, even we had this Nexperia situation. So the month of November will certainly be impacted now. And it's difficult to say on the margin -- so really to say now what does it now mean for the full quarter because it will depend on volumes at the end. And we will lose volumes. The question is how much. So I would not feel so comfortable now to say how it will go. I think in terms of our cost savings, all what we are doing there, we are in plan. At the end, it will depend on sales. Operator: [Operator Instructions] So it looks like there are no further questions at this time. So I would like to turn the conference back over to Bernard Schaferbarthold for any closing remarks. Ulric Schäferbarthold: So thank you to all of you who participated, and thank you to showing the interest on HELLA again. And I wish you a pleasant remaining day and after that, a good weekend. Hope to see you and speak to you soon. Bye-bye.
Operator: Good day, everyone, and welcome to the Leatt Corporation Third Quarter 2025 Results Conference Call. [Operator Instructions] Please note this call is being recorded, and I will be standing by should you need any assistance. It is now my pleasure to turn the conference over to Michael Mason. Please go ahead. Michael Mason: Thanks, Nikki. Good morning, and welcome to the Leatt Corporation investor conference call to discuss the financial results for the third quarter 2025. The company issued a press release today, Thursday, November 6, 2025, at 8:00 a.m. Eastern and filed its report with the SEC. The press release is posted on Leatt's website at leatt-corp.com. This call is being broadcast live and may be accessed on the company's website. An audio replay of this call will be available for 7 days and may be accessed from North America by calling (844) 512-2921 or (412) 317-6671 for international callers. The replay pin number is 11160350. A replay of the webcast will be available immediately following this call and will continue for 7 days. Certain statements in this conference call may constitute forward-looking statements. Actual results could differ materially from those discussed in this call. Leatt Corporation does not undertake any obligation to update such statements made in this call. Please refer to the complete cautionary statement regarding forward-looking statements in today's press release dated November 6, 2025. The company will make a presentation on the quarterly results and then open the call to questions. I would now like to turn the call over to Mr. Sean MacDonald, CEO of Leatt Corporation. Good afternoon to you in Cape Town, Sean. Sean MacDonald: Good morning, and thank you, Mike, and thank you all for joining us today. The third quarter of 2025 was a solid quarter on a global basis. We achieved double-digit revenue growth for the fourth consecutive quarter and double-digit profitability. It was the fifth consecutive quarter of year-over-year growth following the post-COVID industry-wide revenue contraction and inventory overhang. Revenues for the quarter were $14.34 million, an 18% increase over last year's third quarter. Net income was $539,000, a 366% increase. International distributor sales increased by 17% as demand for our products and market conditions continue to improve. All of our product categories and our core head-to-toe markets, MOTO, MTB and ADV grew by double digits on a year-to-date basis compared to last year, which is especially encouraging. Our recent expansion into the ADV market with a range of products designed for off-road adventure riding has been exceptional, and we believe ADV is a growing and exciting market that represents an important growth opportunity for us. Gross profit as a percentage of sales continued to improve from 43% to 44% when compared to last year's third quarter as domestic trading conditions continue to improve despite some tariff uncertainty. Our U.S. MOTO and MTB sales teams are gaining momentum at the dealer level, and our supply chain team is managing shipping costs and logistics costs efficiently. We continue to build and refine the multichannel selling organization and consumer-facing brands and have added some promising new team members like our new Head of Brand, Marketing and Creative, Nick Larsen, who has a proven track record of building and driving iconic global brands. Continuing to build out a great team is a cornerstone of our future growth plans, and we are excited to have Nick as a key member of our team. For the first 9 months of 2025, our revenues increased by $13 million or 40% to $45.89 million. Net income for the 9 months increased by $4.56 million or 259% to $2.8 million. Cash flows generated from operations was $1.45 million as our liquidity continues to improve. All of our product category revenues have grown by double digits on a year-to-date basis. Body armor has grown by 30%, helmets by 60% other products, parts and accessories, including apparel, goggles and components by 49% and neck braces by 18%. We are confident that consumer direct sales will continue to be a highlight in terms of growth as brand momentum continues and consumer demand remains strong. For the third quarter of 2025, consumer direct sales increased by 61%. And over the first 9 months of 2025, sales increased by 37%. Our digital team continues to focus on building innovative digital platforms and consumer engagement strategies. Now I will turn to more details on sales of our product categories for the third quarter of 2025 compared to 2024. Sales of our flagship neck brace were $860,000, a 14% increase, primarily attributable to a 39% increase in the volume of neck braces sold when compared to the third quarter of 2024. Neck braces represented 6% of our total revenues for the quarter. Our body armor products are comprised of chest protectors, full upper body protectors, back protectors, knee braces, knee and elbow guards, off-road motorcycle boots and mountain biking shoes. Body armor revenues were $6.1 million, a 6% increase, primarily attributable to a 46% increase in revenues from the sales of footwear, including motorcycle boots and mountain biking shoes. Body armor sales represented 43% of our revenues for the quarter. Helmet sales were $3.33 million, an 11% increase, primarily attributable to strong ADV helmet sales. Our ADV helmets are designed for off-road adventure riding. Helmet sales represented 23% of our revenues for the third quarter. Our other products, parts and accessories category is comprised of goggles, hydration bags and apparel items, including jerseys, pants, shorts and jackets. Revenues were $4 million, a 53% increase, primarily attributable to a 49% increase in sales of MTB, ADV and motor apparel when compared to the third quarter of 2024. Other products, parts and accessories accounted for 28% of our revenues for the quarter. Now I will turn to our financial results in a bit more detail. Total revenues for the third quarter of 2025 were $14.34 million, up by 18% compared to $12.14 million for the third quarter of 2024. This increase in worldwide revenues is primarily attributable to a $360,000 increase in body armor sales, a $320,000 increase in helmet sales, a $1.41 million increase in other products, parts and accessory sales and $110,000 increase in neck brace sales. Income from operations for the third quarter was $630,000, up by 2,333% compared to $20,000 for the third quarter of 2024. Net income for the third quarter was $539,000 or $0.09 per basic and $0.08 per diluted share, up by 366% as compared to net income of $116,000 or $0.02 per basic and $0.02 per diluted share for the third quarter of 2024. Leatt continued to meet its working capital needs from cash on hand and internally generated cash flows from operations. And at September 30, 2025, the company had cash, cash equivalents and restricted cash of $12.39 million and a current ratio of 5:1. Looking forward, we remain very enthusiastic about our future. Although there are still some challenging geopolitical conditions globally and economic risks in the U.S. that may potentially impact inflation and demand, inventory continues to be digested. Our domestic sales are gaining strong traction. Participation remains strong and international ordering patterns continue to improve and deliver strong revenue growth. The consistent growth in all of our product categories is being driven by strong demand for Leatt products around the world. We expect this trend to continue. In conclusion, while we monitor the international trade situation, we are continuing to invest in Leatt as a global consumer-facing brand and to build out a strong and diversified global multichannel sales organization. All of us at Leatt's are energized by the growth of our product categories and our pipeline of cutting-edge products and categories for a much wider rider community. With a strong portfolio of innovative products in the market and in the pipeline, a return to profitability and a robust balance sheet to fuel brand and revenue growth, we remain confident that we are very well positioned for future growth and profitability. As always, I'd like to thank our entire Leatt family, our dedicated employees, business partners and team riders for their continued strong support. With that, I'd like to turn the call over for any questions. Operator? Operator: [Operator Instructions] We'll take our first question from Nick Fisher with Pilot Capital. Nick Fisher: First of all, just wanted to get some color on the plan for stock buybacks, what your framework is, et cetera. I see that you were able to purchase some shares here in the quarter. Sean MacDonald: Yes, correct. So we did manage to purchase some shares in the quarter. And I believe that will be open until the end of December. And we're going to continue, obviously, through our plan with the broker to try and buy back some shares within a range. Nick Fisher: Got you. Okay. I appreciate that. Obviously, marketing and sales has been a focus here. I was a little bit surprised to see advertising and marketing decrease in the quarter. Could you just talk a little bit about future plans and investments from that perspective, if you're able to? Sean MacDonald: No, absolutely. So I mean, marketing, sure, was down. A lot of that is primarily just for timing reasons and some cost efficiencies that we've had on the marketing side with video production and photographic production. Having brought Nick Larsen on board, he's a very focused and experienced marketing professional. And I'm expecting to get really great return on investment on all of our marketing activities moving forward. Things are going to be a lot more focused, a lot more driven in terms of creating more consumer demand, creating more brand awareness to a much wider rider audience. So you can expect a strong drive to add fuel to the marketing fire and to the brand fire to generate demand for Leatt products moving forward. Nick Fisher: I see. Got you. And then my last question is with regards to impact of inflation and tariffs and things like that. Are you able to comment on plans for price increases and the like? Sean MacDonald: Sure. So we have increased pricing marginally across the board, 8% to 10%, which is very much in line with industry norms at the moment. We've been following the competitive landscape very, very carefully. So we've managed to increase pricing without having too much of an impact on sales and inventory holdings at the dealer level. I think it's obviously expected that pricing will go up. I think from a general inflationary perspective, I think quite a lot of inflation has still been -- is still to filter through into the market. Just generally, I think a lot of consumers have been shielded by -- basically by companies up until now. So we are expecting to see inflation potentially increasing in the short to medium term. We don't expect it to have a huge impact on our margins or on our profitability or on our demand. I think if the tariffs remain relatively stable moving forward, I think we'll be in a strong position to have strong margins and also to retain strong demand. So I think hopefully, the impact of tariffs so far has been -- we're over the worst of it. And moving forward, things will continue to improve. Operator: We will move next with Christopher Muller, private investor. Christopher Muller: Just a few questions, if I may. First, with regards to the international distributor revenues, I believe you historically had some seasonality there with a stronger back half of the year, Q3 and Q4 benefiting from the initial stocking of next year's line. Looking at the modest sequential decline today in Q3, I'm trying to understand whether those orders were pushed more into Q4 this year or if those distributor order cycles have changed or whether that past seasonality is even applicable to the business today? Sean MacDonald: Yes. I mean I think you can expect a strong Q4 international distributor deliveries. A little bit of a timing impact there. I think some of the seasonality has moved slightly into Q4. I certainly am expecting, as I said, a strong distributor revenues in Q4, and that should all, of course, even out over the year. So when you look at the whole year, international distribution is going to be a strong part of the business as our distributors continue to restock with demand increasing. Christopher Muller: Okay. Very good. And then second, regarding the MTB components line, how is that performing relative to your expectations at last year's launch? Sean MacDonald: Yes, we're continuing to push there. I think exceeded our expectations in terms of the initial push. And we're busy right now refining a lot of those products and a lot of the supply chain around those products, which I think is going to help us to be able to meet the demand that is out there. So I think performing well, expecting further growth in the future as we continue to improve efficiencies around that product line. Christopher Muller: Okay. Very good. Regarding the share repurchase, could you maybe speak to the Board's decision-making that led to the $750,000 size? Was this dictated by market factors like the limited trading volume and float? Or was this just purely the Board's assessment of excess cash after your operational needs? Sean MacDonald: Yes. I think obviously, we had some -- we do have cash on our balance sheet, and I think there's no better investment in Leatt. We do believe that there's still a lot of value potential in the stock price. We just felt that this would be a great investment actually for the company at the moment, considering some of the plans that we have in the pipeline moving forward. So the decision was taken to give some of that cash for those shareholders out there that would like some kind of an exit with the limited liquidity and it really just made sense in terms of the optics right now for us to reinvest back into Leatt and into the shareholders. So that's really why we took the decision. We felt that it was a good valuation opportunity right now. Christopher Muller: Okay. Understood. And then finally for me, it seems like there's quite a wide range of outlooks and forecasts being issued by bicycle brands this year and really across the outdoor recreation space. You've been in a strong financial position to reinvest in recent years when others have been pulling back. So I'm just wondering, today, when you're thinking about product expansion, marketing spend, pricing discipline, how does the competitive environment feel today relative to recent years? Sean MacDonald: Yes. I mean I think on the bicycle side, it's -- I mean, I think it's still tough for many bicycle brands. But I do feel that there's a huge amount of opportunity. So we are continuing to invest in product development, in research and development for new exciting products and absolutely in marketing. I think there's a huge amount of potential for you to reach a much wider group. We still have market share in many, many categories that are still in its infancy and we are doing solid numbers. So my reading is that participation is still strong across the board in terms of riding. And I think that's really what we are focusing on. We do believe that, I mean, riding is the future and off-road riding, which is where our focus is, has been very strong for us, continues to be strong. MTB is recovering quite nicely. MOTO is our most established category and market, and that's also growing on a year-to-date basis. So that's great to see. And of course, ADV has been fantastic. We're quite diversified now, of course, with these 3 different markets, different demographics that we're selling to. And I think that diversification is a strength. And of course, with NCD coming back, I think that's going to really have a positive impact on our results moving forward, Chris. Operator: We will move next with Aaron Gelband with Warren Street Capital. Aaron Gelband: I had one question on the direct business. So big -- last quarter was pretty good with 35% year-on-year growth, and then we accelerated to 60% year-on-year growth. You talked a little bit about digital marketing initiatives. But can you just give a little more color on what's going on to drive that big acceleration? Is it sustainable? Is it concentrated in any specific products? Or is it just a result of the digital marketing campaign? Any color on that would be very helpful. Sean MacDonald: Sure. I mean there's a couple of reasons. I mean, particularly in Q3, we actually launched a new web platform. We're using a new platform now, which has got a lot of capabilities in terms of consumer engagement and creating brand awareness across the Internet, and that's been pretty strong for us. And also, I think a lot of this is about focus, Aaron. We have a new digital department that we set up at the beginning of the year, and they are driven by consumer direct business. And that means this is targeted marketing. It's very specialized. There's a blend between, of course, reaching end consumers with targeted online campaigns and e-mail campaigns. And also, of course, the website is also the home of the brand. So there's fantastic content on there now. So I think it's really about focus. The new digital team is doing really, really well, exceeding our expectations in terms of growth. I think moving forward, direct-to-consumer business is going to be a more important area of our business just in terms of growth and also just in terms of contribution to overall revenues. And I think I'm talking primarily in the U.S. and in South Africa, where we have direct online channels. And I think it's -- as I said, of course, there's the selling opportunity, but there's also the marketing opportunity. I think it creates a lot of brand equity when you can actually target consumers. And it's been exciting to see how the demand has continued to surge online. It's really exciting to be able to see the return on investment when you do, do marketing campaigns that are targeted and to see that filtering through to your revenue. So we've got some specialist skills on board, and we pulled that all together now into a strong digital team that's very focused on the direct-to-consumer business. Of course, it's not only about the website. It's also about having customer service in the back end that can satisfy the needs of consumers when you are used to being a distribution business and traditionally, we've been in distribution and selling, of course, to dealers who might have been online or brick-and-mortar. In order to move over to the consumer space, especially with consumers these days that have got very high expectations in terms of service levels, we've had to invest in customer service, and we have a full customer service department now in the U.S. and also in South Africa to take care of consumers' direct needs. So it's a growing area. It's a focus area for us. We've been putting a lot of energy into it, and it's great to see the increase in demand. And we do expect this to be an important area for us going forward where we are expecting double-digit growth. Aaron Gelband: I'd also assume that the gross margins are higher on that. If this becomes a much meaningful piece of the business, would you expect that to have a positive impact on the company gross margins? Sean MacDonald: Absolutely. When you're selling direct, your margins are better. There are costs involved, obviously, in terms of the marketing. And there's a blend in terms of the margins because you're selling full price items, but when you have Black Friday and those kinds of events, of course, it's also an opportunity to turn some of your inventory into cash if it's maybe a little bit slower moving. We don't have a lot of that. But if it is a bit slower moving, it's an opportunity because you have margin available. So for sure, it should have a positive impact on margins moving forward. Aaron Gelband: Got it. And then one more question on -- so overall performance of the company, 18% growth, I think we'd be happy with that if that continues for sure. But there was a big kind of deceleration, especially in international, which had grown 79%, 74%, and then it dropped off to 17%. And so I think -- and you've been very positive on your comments for international ordering patterns, both last quarter and this quarter. And so maybe just to parse your language a little bit. I mean, when you talk about good international ordering patterns, are you just talking in an absolute sense? I mean, a big deceleration from 74% to 17% would -- it seems inconsistent with kind of saying that the ordering pattern is continuing to improve. But maybe you can just give some color on that. And maybe that just ties into Chris' question about kind of the timing of shipments. Sean MacDonald: Yes, sure. I mean I think when I talk about ordering patterns continuing to improve, I'm talking about like on an annual basis. I'm not talking about a 3-month period of a particular quarter. So when I look at the ordering patterns in general, there's a real strong improvement. So if you look at it on a year-to-date basis, and we've had fantastic growth in terms of ordering patterns, and I do expect that to continue. A little bit of it is timing, as I said. I don't think that our current ordering patterns at 17% is really a reflection of where we're at on the international side. And I think it will be good to also discuss this maybe when we get to the end of Q4 and then we can look back on the year and we can make a real solid assessment because that will take into account all of the seasonality and all of the shipping timing differences. We'll be able to see how the international distribution business has grown on a year-to-date basis at 31 December. Aaron Gelband: Got it. That's helpful. And just to be clear in your response, you said the ordering pattern was up 17%, but you meant that the shipping. Sean MacDonald: Shipping, sorry. The shipping, correct. I meant -- yes, correct. I meant the shipping, correct. So the shipping, which is obviously driven by the orders that we got actually probably a few quarters ago. So absolutely, it's the shipping. Operator: And this concludes our Q&A session. I will now turn the call over to Sean MacDonald for closing remarks. Sean MacDonald: Thank you all for joining us today. We look forward to our next call to review the results of the 2025 fourth quarter. Operator: Thank you. And this does conclude today's program. Thank you for your participation. You may disconnect at any time.
Operator: Hello, everyone, and welcome to today's TBC Third Quarter and 9 Months 2025 IFRS Results Conference Call. My name is Sam, and I'll be the call moderator today. [Operator Instructions] I'd now like to hand you over to today's host, Andrew Keeley, Director of Investor Relations, to begin. So Andrew, please go ahead. Andrew Keeley: Thank you very much, Sam. And welcome, everybody, to our third quarter results call. I'm joined on today's call by Vakhtang Butskhrikidze, our CEO; by Giorgi Megrelishvili, our CFO; and by Oliver Hughes, our Head of International. As usual, we'll have a presentation, and then we'll run through and have a Q&A session afterwards. And with that, I'll hand over to Vakhtang. Thank you. Vakhtang Butskhrikidze: Thank you, Andrew. Hello, everyone, and thank you for joining us today. I am pleased to present another highly profitable quarter with record quarterly earnings. As you can see, our group's net profit in the third quarter reached GEL 368 million, up by 6% year-on-year, while return on equity was 24.4%. Our revenue growth was very respectable, 7% year-on-year growth. In Georgia, we had a strong and stable quarter with 24% plus return on equity, 9% growth in our loan book and net interest margin reaching 6%. Over the same period, Uzbekistan’s, net profit was GEL 41 million, up by 30% year-on-year with return of equity exceeding 23%, while the loan book has almost doubled year-on-year to close to $1 billion. Our digital ecosystem continued to expand its reach with registered users totaling almost reached 22 million, up by 28% year-on-year. As a result of our strong operating performance and a solid capital base, the Board has declared a quarterly dividend of GEL 1.75 per share, bringing the total 9 months of 2025 dividend to GEL 5. Now turning to Georgia. Georgia's economy continued to perform strongly. Real GDP growth stood at 6.5% in the third quarter, bringing 9 months growth to 7.7%, while our macro team has revised its 2025 GDP growth forecast upwards to 7.3%. The inflation rate reached 4.8% in September, surpassing the National Bank of Georgia's 3% target, but we expect this to ease slightly over the next few months. Next slide highlights the highly consistent performance of our Georgian Financial Services business as we continue to deliver close to mid-20s return on equity. The reason for this consistency, as you can see that we continue to be a leading player across most of the key banking segments in Georgia. In the third quarter, our gross loans were up by 9% year-on-year. And I'd like to highlight particularly strong performance in fast consumer lending, a key focus for us where our loan book portfolio grew by 42%, and we have gained 3 percentage points of market share over the past year. Meanwhile, our Georgian customer deposit increased by 11% over the same period. We continue to maintain a strong position in both lending and deposits while constantly improving how we serve our retail and business clients. Next slide illustrates the growing digital engagement among our retail customers in Georgia. By the end of September, our digital monthly users reached 1.2 million, accounting for 2/3 of our active customers. And our digital MAU continues to increase by around 50,000 users per quarter. What's also important is that our digital users are highly engaged with us on a daily basis as it reflected in a very impressive 46% DAU to MAU ratio. The increasing take-up of digital banking by our customers is also reflected in the very high levels of digital loans and deposit issuance. Now let's turn to our Uzbekistan business. Starting with the economy, much like Georgia, the Uzbek economy also remains highly dynamic with real GDP growth of 8.2% in the third quarter, bringing 9 months 2025 growth to 7.6%. What is very encouraging is that inflation is also easing dropping to 8% in September and even lower in seasonality adjusted terms, supported by tight monetary policy, and we have also seen local currency strengthening this year. Next slide provides an overview of the progress that we have made over the past 2 years across all major metrics. We have almost 22 million unique registered users, out of which almost 6 million are monthly active users. Our loan book continues to almost double year-on-year and now tops $970 million, while our deposits increased by 71%, reaching over $540 million. Our operating income reached a record $70 million in this quarter and increased by 69% year-over-year. In the third quarter, net profit of our Uzbekistan business reached $15 million, up by 30% year-on-yea. Now let's turn to some of our recent business updates in Uzbekistan. We continue to expand our digital banking in the third quarter. We -- in the third quarter, we announced our planned acquisition of majority stake in OLX, the country's largest online classified platform. This will unlock powerful synergies with our financial services platform and help increase our share of customer retention. We also saw a great progress in the uptake of Salom card. By the end of September, we issued 700,000 cards, of which 500,000 have been funded as customers are increasingly choosing TBC for their daily banking needs. In addition, we have been deepening customer engagement in Payme with Payme Plus subscriptions reaching 300,000 MAU. We keep scaling the use of AI throughout our business. As a result, we have reached 90% automation in early-stage delinquency cos, and we have conducted over 100,000 sales per month with our AI voice chatbots. Evidence of the popularity of our ecosystem can be seen in it being the top of mind brand in Tashkent and #3 in Uzbekistan as a whole, a great achievement in just a few years of operating. Next slide shows our increasing market share and contribution to the group. By the end of the third quarter, market share of our retail loans and deposits stood at 4.9% and 4.2%, respectively. In the third quarter, Uzbekistan contributed 11% of the group's net profit, while the contribution in operating income was 21% . Next slide provides an update on the targets we set ourselves for Uzbekistan business. I think it is worth stepping back for a moment and considering what we have achieved in Uzbekistan over the past 6 years. During this time, we have built one of the fastest-growing digital banking ecosystems globally. Our registered users have increased tenfold to 22 million, and we have built a $1 billion loan portfolio. Our digital bank broke even in the just 2 years and is already generating 20% return of equity despite being a early stage business. This year, we have scaled up launch new products and announced highly value accretive M&A with BILLZ and OLX, and we are a top 10 player in retail banking and even the top of mind bank in Tashkent. But of course, there has been some challenges this year. As you know, we had issues around fraud and asset quality in the first half, while in the second half, we had pivoted our business from micro loans to SME lending more quickly than we had anticipated, in line with the changing regulatory agenda. As a result, we expect to below our 2025 net profit guidance. I firmly believe that we have a flexible and resilient business model and an excellent team that will enable us to adapt quickly to the evolving environment, and we remain highly positive on the long-term growth opportunities in the country. Finally, I'd like to provide an update regarding group's targets. First of all, I'd like to stress that the group's overall performance remains strong and resilient. Our return of equity has consistently been running ahead of the challenging 23% target. And since the start of 2023, we have almost doubled our digital MAU to close to 7 million as our customers choose TBC. Over the past 3 years, we have increased gross profit annually by 10% despite investing heavily in building out Uzbekistan. However, given that we are running below our profit targets in Uzbekistan, group's net profit was slightly below our GEL 1.5 billion target. As a group, we are well positioned for the future. We combine consistently and proven leadership in Georgia with a dynamic digital ecosystem in Uzbekistan that is well placed to capture the huge opportunity available and remain highly positive on the long-term growth opportunities in both markets. With that, I pass over to Giorgi. Giorgi Megrelishvili: Thanks, Vakhtang, and thanks all for joining our quarterly call. Now I will go into more details for our financial performance, and we'll start with Slide 18. So it has been a strong quarter with a record profit, as Vakhtang mentioned, with GEL 368 million. That is up 6% both quarter-on-quarter and year-on-year basis. Our 9-month profit surpassed GEL 1 billion threshold, and that's actually again 6% up compared to the same period last year. So that translated into a very nice and strong 24.4% ROE. So if you go to next slide, Slide 19, I would like to discuss the drivers of this performance. As you can see, our top line growth has been very strong, 17% year-on-year. That was mainly driven by our net interest income growth, [ 24% ], really solid growth. Our noninterest income also grew by 6% on quarter-on-quarter and 3% year-on-year. This, I would say, slowdown in growth driven mainly by 2 factors, fee and commission income in Georgia because of the increased card network fees. And also, we do invest a lot into our TBC card, cash backs, loyalty that becoming a go card, and we do expect this trend to continue. The second reason is that Lari has been very stable this year, a good sign. However, the margins compressed significantly compared to last year. But despite that, we still delivered and we were flat as last year for the 9 months. So Andrew, if you go to next slide, Slide 20. So and if we look now our NIM dynamics, we are very pleased to see that we retained 7% level and we expect to stay at this level for a while. And actually, another nice development is that in Georgia, we are back to 6% handle from 5.9% last quarter. And also, we do expect to retain around this level in Georgia, maybe high 5s, low 6%, but more or less the level we are in Q3. So let's move to Slide 21. Our cost dynamics. Our OpEx was up by 18%, probably the trend we have seen nothing unexpected because we do continue to invest into our businesses in both countries, particularly into Uzbekistan. However, our cost/income ratio remains broadly very stable. So it was 37.7% more or less the same as in Q2 last year and also 9 months trend is kind of more or less the same and in line. Now if we go to Slide 22, turning there, our credit quality. Cost of risk remains the same for the group and for Georgia as well. For group, it was 1.6%, for Georgia, 80 basis points. So that's the level we have seen for the last few quarters, a very good level. We are very comfortable with this level with our credit quality. Uzbekistan cost of risk ticked down slightly, 20 basis points to 9.7%. However, we still do see the less impact of our thin file consumer segment and long tail post merchant. So we do expect this trend to remain for a quarter or 2 going forward. Now going to Slide 23. Our balance sheet growth, it was very healthy, 13% for the group, both for customer funding and loans. However, I would also like to comment on Georgian growth that was a bit subdued this quarter. That was driven by one-off, a large repayment in our corporate business. In Q4, we do expect to go back to our normal growth mode, and we do expect this year to be double-digit growth. Now turning to Slide 24. I mean our capital positions, they remain very strong in both countries. We are well above our regulatory limits in both countries. And exactly the strong capital levels, if you go to Slide 25, turn to that, will allow us to continue returning capital to our shareholders. We repaid GEL 1.75 in Q3. That brings our overall distribution to GEL 5 this year. and that combined with GEL 75 million buybacks that's still ongoing, we are more than halfway through. So on this note, I would like to thank you, and now we can deep dive more into our TBC Uzbekistan business. Oliver, please go ahead. Oliver Hughes: Thanks, Giorgi. Yes. So I'm going to give you a bit more color on what's happening in Uzbekistan and what's been happening over the last 3 quarters. As you know, it's been a mixed year for TBC Uzbekistan in 2025 with lots of positive developments happening operationally, but a fair number of challenges as well. This sometimes happens in business and the important thing is how the team reacts to these situations when they arise. I'll start with the positives. We've scaled our business considerably and launched new products. Our loan book has grown by over 90% year-on-year and isn't far off $1 billion. We are now a top 10 retail bank in Uzbekistan in both lending and deposits. We've made great progress in building one of the best consumer daily banking offerings in the market. We already have over 700,000 issued and 0.5 million funded Salom cards, which is our flagman debit card. We've launched business lending, which already accounts for above 10% of our loan book and digital insurance with over 300,000 policies issued. We've announced 2 great M&A deals, as Vakhtang mentioned, a partnership with BILLZ, which gives us access to a huge network of retailers and the acquisition of a majority stake in OLX, the country's largest online classifieds, which will unlock powerful synergies with our own financial services platform. These deals help us deepen our relationships with our B2B and B2C customers. We've made great progress in building an AI-powered bank with our proprietary AI stack and our own AI voice assistant coming soon. We more than doubled our gross revenue year-on-year in 9 months to $350 million. And despite investing heavily in all aspects of the business, we've also increased earnings by almost 30% year-on-year with close to 20% ROE, which isn't bad for a digital bank that has just celebrated its fifth birthday. We've also had several challenges, which I will describe in brief here. In quarter 1, we were hit by an external market-wide fraud. The P&L impact was $9 million. We owned it, dealt with it in quarter 1 by provisioning the loss and moved on. In quarter 2, our cost of risk increased mainly from tests that we've been conducting to find new segments and channels in which to grow our business going forward. There were also some scaling-related issues in collections. We made adjustments to our operations, took a more conservative approach to underwriting, and we believe that our credit risks have now more or less topped out. The loans that we booked were overwhelmingly NPV positive, but we understand that optics are also important. Also in quarter 2, the regulator tightened the KYC requirements for payments platforms, meaning that in effect, we had to reregister all of our 3.9 million Payme MAU. Not only did this cause a dip in MAU, which is now recovering, it also led to a slowdown in payments volumes and fee and commissions income. In quarter 3, in line with the regulator's agenda of pivoting the national loan book towards SME, we had to slow down our disbursement of micro loans or unsecured personal loans. This, in turn, has had an impact on cost of risk because the front book is not growing as planned, which means that the risk in the back book is not being diluted as quickly as anticipated. This also hit our revenue and in turn, our bottom line. As we have been highlighting, retail lending and particularly unsecured consumer lending is at a very early stage of development in Uzbekistan. Total retail loans to GDP are just 12%, while unsecured consumer loans to GDP are just 4%, albeit this has been the fastest-growing segment over the last past couple of years. Back at the end of last year, we were working under the assumption that consumer-facing products, including unsecured consumer loans of different types, will be a key driver of our portfolio growth for the next few years. However, since the beginning of this year, there has been a major change in the regulatory agenda in favor of promoting SME lending whilst becoming increasingly negative towards consumer loans, in particular, micro loans, which are perceived as inflationary and something that the population is not yet ready to adopt widely. After the shift in the Central Bank's agenda, a fairly rapid but nonetheless staged market rebalancing from consumer lending to SME lending was implemented through the announcement of market-wide portfolio caps to be introduced by the 1st of January 2029, as we discussed on our first quarter call. Over the past couple of months, the regulators requested that we accelerate our disbursement of business loans. In addition, the CBU has recently proposed new risk weights on unsecured consumer loans. These risk weights are based on the portfolio share of unsecured consumer loans, micro loans, credit cards and overdrafts and will be introduced from the 1st of July 2026. According to the CBU letter, which could still be subject to change. If a bank's share of micro loans or credit cards is higher than 25%, the risk weights applied to that part of the unsecured consumer loan book will vary from 150% to 250% depending on the share of these unsecured loans in the total loan book. As things stand, we expect to have 50% to 75% share of micro loans in the loan portfolio. It now stands at 79%, which would imply 200% risk weighting for the micro loan book. If introduced in the current form, this would, a, have a negative impact on our capital ratios and b, worsen the economics of micro loans. So this is the regulatory environment in which we are working. As you know, in response to the CBU's introduction of portfolio caps and strong desire for the market to recalibrate, we accelerated the launch of SME lending in April. This now accounts for around 15% of our total loan book, and we are ramping up this business. However, it is now clear that we will have to further pivot away from unsecured consumer lending to business lending and secured lending. As Vakhtang covered earlier on this call, this all means that while we are on track to hit our 5 million MAU guidance and 80% loan CAGR targets, we're going to be below the highly ambitious net profit guidance we set ourselves back in 2023, for which I apologize. As you know, we will be holding a Strategy Day in late February, on which we will update the market on our longer-term outlook, but it feels appropriate to outline some of our very initial thinking on 2026. First of all, we still see massive long-term potential in Uzbekistan as we continue to build out the largest digital banking ecosystem in Central Asia. As previously communicated, the SME banking opportunity is huge in Uzbekistan. This will be a key business priority in 2026 and beyond, providing us with new sources of growth as well as aligning us with the priorities of the government and the regulator. We will look to move into new business lines in secured lending in 2026. We have the expertise and platforms to do this, and it provides another large opportunity in the country. We will continue to grow our loan book in segments of unsecured lending, such as credit cards and BNPL or installment loans. We have already issued 85,000 Osmon credit cards, accounting for 5% of our loan book. In 2026 and beyond, we hope that Salom card will become the go-to product for affluent and mass affluent customers to conduct their daily banking. We will further integrate our 2-sided ecosystem, connecting our 22 million registered users on the one side with our exposure to tens of thousands of enterprises on the other. In 2026, we will integrate our CRM and loyalty platforms and start leveraging the opportunities created by our acquisitions of BILLZ and OLX. We have a strong, largely proprietary tech platform, including our speech tech platform on the base of which we're launching a range of interesting AI-driven services over the coming months, including first and foremost, our own in-app voice assistant called Lola. Last but not least, we have an amazing experienced and ideas-driven team that has been through many different situations in many different markets. We know how to build good product and [ CX ], which is exactly what we will continue to do. So thank you. And now over to Q&A. Andrew Keeley: Thanks very much all of you for the presentation. Okay. So we can start with questions. I think first up is Piers Brown from Investec. Piers Brown: Can you hear me okay? Andrew Keeley: Yes, we can. Piers Brown: Yes. So I have one on Uzbekistan and one on Georgia. So this is probably one for Oliver. Thanks for all of the background information on the risk rating changes, Oliver. That was very helpful. I'm just thinking in terms of the -- I mean, you mentioned this increase up to, I think you said 200% on the micro loans. How impactful is that for your capital ratio in Uzbekistan? And I guess the question is, do you have sufficient capital in place currently to absorb that level of risk weighting increase? And then allied to that, how likely is it these caps may be amended or the risk rating proposals may be amended -- and are you still covering your cost of capital at that level of risk rating? So those are my questions on Uzbekistan. I don't know should I ask the question on Georgia? Would you like to address that first and then. Oliver Hughes: Let me answer the Uzbek piece first, yes. So thanks for the question Piers. So the first question was on the impact on the capital ratio of the proposed risk weights, which we have been notified will come into effect from the 1st of July next year. And the answer is we have capital to cover it. So the way this works is that it's based on the share in the loan portfolio, in the loan book. So our share of micro loans, which is obviously -- so these are unsecured personal loans or cash loans is going down because our share of other products is going up, first and foremost, SME, which is growing at a clip. And we will be accelerating that. We're gathering data, we're getting better at it. We're learning how to do the job, which will bring our share of micro loans as they call in Uzbekistan, down below 75%. And depending on how it goes, maybe below 50%, maybe not by the 1st of July because that's only in 7, 8 months, but certainly not long thereafter. So there will be a reduction in our capital adequacy ratio for a period of time. But as our share of micro loans goes down, then it will reset. So there will be a period of time from the 1st of July, let's say, for a few months, while we're still above 50%. But then micro loans will go below 50% and our capital adequacy ratio will go up organically as the risk weights run off. So that's how you should think about this. We don't need to inject additional capital. So that is on the risk weights. And just maybe another piece of relevant information is that 1.5 years or so ago, the risk weights were 200%. They were reduced down to the current level, which is around 100% based on PTI. But now the Central Bank with its revised agenda in terms of driving SME and reducing consumer lending or slowing the pace of consumer lending growth across the system has now put them basically back up to where they were. But if we have a very high share, i.e. 75% or more than it's up to 250%. So that's the [ live of land ]. Could these be amended further? I think it's unlikely because these have been communicated, but you can see that the Central Bank in Uzbekistan is -- has a very firm stance on where it wants to see consumer lending and what it wants to see happening with SME lending. So I can't rule it out completely, but I think it's unlikely. Andrew Keeley: Piers, do you want to ask on Georgia? Piers Brown: No thanks Oliver, that's very helpful. Yes. So on Georgia, I guess this is for Giorgi. I think you mentioned a NIM sort of guidance level or realistic level of somewhere in the 5 highs or maybe 6%. I'd just be interested in the components of that because I guess if I look at the Georgia business, the portfolio growth is coming mostly now in the very strong growth in the fast consumer loans. So I guess structurally, that's shifting the margin higher. But just if you could give some insights on to the components of NIM over the next year or so, that would be very helpful. Giorgi Megrelishvili: Yes. Thanks Piers. Good question. So there are different dynamics from currency [indiscernible] from Lari and FX. If you consider Lari over time, we are still in quantity easing cycle, we do expect the [ FX ]rate to come down. Maybe it's paused a bit. So that probably will put additional pressure. However, it's more than compensated, as you rightly mentioned, like the change of our portfolio structure. That's number one. Also change of our FX composition. Now our Lari is going up. We have more focus on Lari loans that also have higher yields. On FX side, we do also see the benchmark rates coming down. That's maybe marginally negative. However, we also -- like on the FX, we have our wholesale funding more on a floating basis. Therefore, we are more hedged on that side. So overall, that's what I saying that taking into consideration all these components, growth and our plus, we do expect to remain high, as I said, high 5s, like around 6% level. Andrew Keeley: Okay. Next up, we have Stuart from Peel Hunt. Stuart Duncan: Hopefully, you can hear me. I've got 2 questions as well, actually almost similar to Piers. The first one on Georgia. Giorgi, you sort of mentioned about some of the pressures on the fee and commission income. I'd just be interested to know whether these trends continue and persist or whether at some point you start to see some sort of reversal and you start to see growth in that line again? And then the second question is on Uzbekistan for Oliver. And you've obviously spent quite a bit of time talking about some of the regulatory interventions, a fairly detailed regulatory agenda. I'd just be interested if there's any sort of other potential implications you see over the next 12 months or so from a regulator, which feels like it's doing quite a detailed work around the sector. Giorgi Megrelishvili: Probably fee and commission income is the outcome of our strategy, and I hand back to Vakhtang to kind of elaborate more wider. But generally, what I can say, our focus on top line growth given, we do expect our top line like gross NII and net fee and commission income combined to grow at healthy levels, maybe mid-teens, but there will be a composition change for which I'll pass to Vakhtang to elaborate more. Vakhtang Butskhrikidze: Yes. As you understand, main drivers of our fee and commission income, Georgia, is the debit cards and after that coming other type of income. So on that side, you know that at the end of the last year, we began to issue new type of the TBC card, and we are doing very well. So until today, we already issued more than 800,000 TBC cards and this is a very good tool for us to attract and to bring new customers on the one hand, new customers to TBC or passive customers who did not use historically our debit cards. So on that side, we are looking that it's a good tool for us to bring them and this TBC card is mainly has a free of charge on some of the operations. But indirectly, it's very valuable for us because a lot of consumer loans or the credit cards -- by the way, we are doing very well for the mortgages, other type of the loans. It's a very tool just to bring it up to us to offer different kind of the products. And to summarize my answer, so we will continue to issue more and more TBC cards, which is very important to bring new customers. And we want to build on that to sell more different kind of the products, especially where we have a high profitability such as credit cards or consumer loans to these new customers. And to summarize, so probably we could not see growth in fee and commission income during 2026, but indirectly, it will influence our high growth in most profitable segments such as credit cards, consumer lands -- loans. And indirectly, it means that we will increase materially our net interest income in 2026. Oliver Hughes: And taking your question on Uzbekistan, could there be more regulatory changes, Stuart? So the answer is obviously, yes. So I would preface my answer by saying that the regulatory framework in Uzbekistan is pretty well formed as we've been saying a lot over the years. So on the consumer lending side, they have risk weights, PTI regulation, rate caps, ban on FX lending to consumer. So I think it's unlikely that major new changes to the regulatory framework are going to be introduced. But it's clear that the regulator has particular objectives that it's following that it's trying to achieve in the near to medium term. So it's trying to change the shape of the national loan book and push SME lending, get banks to focus their efforts on pushing SME lending as opposed to unsecured consumer lending. And part of this is inflation targets. Part of it is making sure that the national loan book is balanced in the way that the Central Bank wants to see. So if they see the consumer lending growth and SME lending growth are not in the proportions that they want, then it's possible they will do more. But right now, we can't tell you what else they might do given that there's already quite a lot being done. So we'll keep you informed, obviously. Andrew Keeley: So we have next up from Simon at Citi. Simon Nellis: Maybe just one more for Oliver. I mean the risk cost has remained elevated. How much of this is kind of testing your kind of micro loan client segments? And how much of it is testing the SME? And I guess going forward, if you have to accelerate faster in SME, is it fair to assume that continued testing is going to lead to continued high risk costs for quite some time? Oliver Hughes: So our loan book is predominantly unsecured consumer loans. It's mainly what they call micro loans, which is unsecured personal loans. And there that's as a result of the tests predominantly, as we said earlier. Obviously, there's the fraud hit that we took in quarter 1, but it's mainly tests, which matured a little bit of operational stuff in quarter 2 and quarter 3. Our SME loan book is growing from 0 fairly quickly. And there is definitely elevated cost of risk, but that's not what you see coming through the numbers there because it has very little effect because it's a small share of the loan book. As we change the proportions going forward, obviously, we have to do a lot more testing to understand what lies where in micro business, small business and let's say, the larger end of SMEs who will be tackling predominantly through bills. We will obviously try and manage risk in a way that doesn't affect the numbers. We think that we'll remain -- in the corridor that we communicated earlier, 7% to 10%. Certainly, the consumer lending book has topped out, and we think that will start coming down as we go into the beginning of next year. But in SME, depending on the pace of growth, obviously, you'll see some risk coming through that. So I can't guide you in any numerical way at the moment, but we will have to keep on top of that. Andrew Keeley: Thank you, Simon. There's a couple of questions that come through on the chat. One is about coming back to Uzbekistan, I think you've more or less answered on the kind of cost of risk about kind of normalized cost of risk, but also should we expect revisions to longer-term targets after the challenges that the bank has faced in Uzbekistan? And then a question on Georgia was just why was Q-on-Q growth -- loan growth in Georgia so muted. We've kind of covered that already, but you may want to add some more. Giorgi Megrelishvili: Maybe I'll answer the third question about the growth. So in Georgian operation in our CIB business in corporate business, we have 2 big one-offs and that influenced our growth. Others, if we extract the one-offs from the corporate business, we are following the growth of the total bank, especially for us, very important that we are winning market share in the consumer loans and credit. Oliver Hughes: And on the Uzbekistan question about longer-term outlook. So we reiterate our confidence in the potential in Uzbekistan and our ability to capture that potential medium to long term. But as you can see, right now, we've got a lot of moving parts. And so it's very difficult to give any meaningful guidance until things settle down into some kind of more predictable pattern, which we hope will happen in the next few months. So by the time we get to February next year on the Strategy Day, we hope the dust will have settled, and we'll be able to give some more meaningful longer-term projections. But right now, it's moving around. Andrew Keeley: And Oliver, maybe just another one for you about the micro loans and whether we can classify micro loans sort of maybe to very small businesses as SME kind of loans to help kind of grow the share of the SME loan book that way? Oliver Hughes: Sure. And it's a great question, absolutely the right question. So we have so far 2 lines, let's call them, business lines in SME. So there's, if you like, a true origination of SMEs who are new to bank. And that's a business we're learning. It's at the moment, it's working capital loans. We want to try and test secured loans to SMEs, and we'll start doing other stuff as well as we go through the year next year. And then there's what you can maybe term as kind of business consumer or consumer business loans, which is your question, where generally in an unsecured mass market consumer loan book, you'll have 25% to 30% of those customers wearing a consumer hat but actually borrowing for business purposes. And that will be a big driver of our SME lending growth next year. So basically, we're hiving off some of the cash loan or the ICL business and reclassifying it as SME because these are either individual entrepreneurs or self-employed customers who indicate that the loan they're taking for business purposes, which means that they will be classified as SME from Central Bank reporting purposes. Andrew Keeley: Thanks, Oliver. Simon has his hand raised. I don't know if that was -- Simon, do you have another question? Simon Nellis: Yes, I do actually. Just I was hoping you could elaborate a bit on the insurance business in Uzbekistan. You've booked some revenue there this quarter. Is that expected to grow nicely going forward? I assume it is. And then maybe just on the Georgian business, I think the FX revenues went up quite nicely in the quarter. If you could comment on that and how sustainable that is? Oliver Hughes: Would you like to take Georgia first? Giorgi Megrelishvili: Okay. I was [indiscernible] but I can take. So business, as I mentioned, like generally, margins this year went down significantly. The Lari has been very stable. It's just seasonality. So if you look how the flows are. So it has been higher flows during Q3, also a bit higher margins. Generally, what we can say is that 9 months is like truly conservative run rate for us on FX because with the subdued margins, we still delivered that level that as I mentioned during my call was flat compared to 9 months last year. Vakhtang Butskhrikidze: But in addition to that, what is Giorgi saying, we have very comfortable level of growth of the transactions in FX. But as Giorgi said, margins went down dramatically compared to 2024. And as you know, we have a very stable exchange rate during this year. So that influenced the FX. Otherwise, the transactions in the number and the volumes of transactions we are doing very well. Oliver Hughes: And very briefly on insurance, TVC, [indiscernible], which is the word for insurance. It's new. So we launched it basically in March, April this year. It's captive insurance. So basically, these are products which we are selling to our existing customer base, credit linked, but we have ideas, obviously, to add new insurance products and sell them to our existing customer base, which is obviously very large in Uzbekistan and growing. And then at some point, we will get around to selling insurance products into the market, which are not captive insurance products. But at the moment, that's where we're starting. Simon Nellis: So that's credit protection primarily. Yes. Great. And who's your partner there? Oliver Hughes: So it's our in group. Simon Nellis: In-house. Okay. Andrew Keeley: Thanks very much, Simon. Sam, are there any calls on the phone lines? Operator: There are not, no. Andrew Keeley: No. Okay. We don't have any other questions at this time. Yes, nothing coming through. So I'd just say thank you all very much for joining this call. As always, we are around and available to answer any follow-up questions that you have. And I'm sure we'll be meeting and catching up over the coming months, and we'll be publishing our full year numbers in February next year. So thank you very much, and goodbye. Giorgi Megrelishvili: Thank you very much. Operator: This concludes today's webinar. Thank you all for joining. You will now be disconnected. Have a great day.
Operator: Hello, and welcome to StepStone Group's Q2 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to Seth Weiss, Head of Investor Relations. Please go ahead. Seth Weiss: Thank you, and good evening. Joining me on today's call are Scott Hart, Chief Executive Officer; Jason Ment, President and Co-Chief Operating Officer; Mike McCabe, Head of Strategy; and David Park, Chief Financial Officer. During our prepared remarks, we will be referring to a presentation, which is available on our Investor Relations website at shareholders.stepstonegroup.com. Before we begin, I'd like to remind everyone that this conference call as well as the presentation contains certain forward-looking statements regarding the company's expected operating and financial performance for future periods. Forward-looking statements reflect management's current plans, estimates and expectations and are inherently uncertain and are subject to the various risks, uncertainties and assumptions. Actual results for future periods may differ materially from those expressed or implied by these forward-looking statements due to changes in circumstances or a number of risks or other factors that are described in the Risk Factors section of StepStone's periodic filings. These forward-looking statements are made only as of today, and except as required, we undertake no obligation to update or revise any of them. Today's presentation contains references to non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are included in our earnings release, our presentation and our filings with the SEC. Turning to our financial results for the second quarter of fiscal 2026. Beginning with Slide 3, we reported a GAAP net loss attributable to StepStone Group, Inc. of $366 million or $4.66 per share. As a reminder, GAAP accounting requires us to factor the change in fair value of the buy-in of the StepStone Private Wealth profits interest to our income statement. This option is expected to be accretive to EPS, and we plan to exercise the call option as soon as it's available in September of 2027. This quarter's GAAP loss was significantly larger than prior periods and is a direct function of the progress of our Private Wealth platform, which Scott will speak to in more detail. Moving to Slide 5. We generated fee-related earnings of $79 million, up 9% from the prior year quarter, and we generated an FRE margin of 36%. The quarter reflected retroactive fees from our infrastructure secondaries fund. Retroactive fees contributed $0.3 million to revenue, which compares to retroactive fees of $14.9 million in the second quarter of the prior fiscal year. When excluding the impact of retro fees, core fee-related earnings were $78 million, up 34% to the prior year quarter and core FRE margin remains at 36%. We earned $66.7 million in adjusted net income for the quarter or $0.54 per share. This is up from $53.6 million or $0.45 per share in the second quarter of the last fiscal year, driven by higher performance-related earnings and higher core fee-related earnings. I'll now hand the call over to Scott. Scott Hart: Thank you, Seth. Our second quarter was strong on all fronts. We continue to deliver for our clients, both in the form of strong investment performance and value-added services. We produced a record quarter of subscriptions within our Private Wealth platform. We generated robust institutional fundraising within both managed accounts and focused commingled funds. We generated strong financial results, and we continue to enhance our data and technology offerings and partnerships. Starting with Private Wealth, where our momentum is nothing short of spectacular. We generated $2.4 billion of new subscriptions, a record result for StepStone and nearly double our previous highest quarter. There are several drivers of the strength this quarter. First, we continue to generate growth in our existing suite of products. SPRING, our venture and growth fund, was a standout this quarter with over $800 million in new subscriptions. It's a true one-of-a-kind product whose popularity is continuing to grow. Second, we launched STPEX, a pure-play private equity interval fund that enables daily subscription through a ticker. We constructed STPEX to address the request of several channel partners, leading to over $700 million in gross subscriptions in the first 30 days. This is an incredible result that frankly exceeded our own expectations. While subscriptions will moderate after this initial surge, we expect STPEX to become a significant source of private wealth inflows. Third, we are accelerating internationally as we continue to build on our syndicate, establish a track record of our international funds and grow the StepStone brand. Last month, we were thrilled to announce a partnership with Aviva to be 1 of 5 specialist managers in its U.K. trust-based pension scheme. We believe this solidifies the StepStone name as a trusted partner in private markets for retirement savings, a trend we expect to develop globally. Moving to institutional. This was another solid quarter for fundraising within both managed accounts and commingled funds. We generated $3.8 billion in managed account gross additions in the quarter and over $10 billion for the first half of our fiscal year, continuing the momentum from our record-setting fundraising last year. Our strength in managed accounts has been a differentiator for StepStone and as a result of nearly 2 decades of investment and relationship building across the globe. We are generating a healthy mix of new mandates as well as retention and growth in existing mandates. Over the last 12 months, more than 1/3 of our managed account inflows have come from new and expanded relationships, which not only contribute to gross inflows today, but plants the seeds for growth as those LPs re-up with us in the future. As we have consistently said since our IPO over 5 years ago, we are very proud of our success with existing clients. Our re-up rate remains above 90% and on average, those re-uped accounts have grown in each successive vintage at nearly 30%. These are incredibly strong numbers and are even more powerful when you consider the compounding growth that results when we get to the second, third and fourth re-up cycles. StepStone's success with both new and existing clients is a result of strong investment performance and the high level of service we provide. A key means of achieving this is by placing senior and experienced professionals in the asset classes and geographies where our limited partners reside. Over the last 6 months, we have opened new offices in the Netherlands, Spain, South Korea and Saudi Arabia, representing increasing footholds for StepStone in Europe, Asia and the Middle East, and highlighting the importance of our partnership with key clients in those regions. Pivoting to commingled funds, we generated $3.4 billion of gross additions. In addition to record private wealth subscriptions, we executed the first close of our PE co-investment fund. We're also now in the market with our PE secondaries fund, which invests in both LP and GP-led secondaries and with a first-time dedicated GP-led private equity secondaries fund. Mike will speak about these funds in more detail. The fundraising momentum has led to continued growth in our fee-earning AUM, which is up more than $5.5 billion in the quarter to nearly $133 billion. The strong progression of fee-earning AUM translates to growing earnings power. We generated $78 million of core fee-related earnings, representing 34% year-over-year growth. On the strategic front, we are continuing to make strides in leveraging our data and technology. In September, we announced the launch of the Kroll StepStone Private Credit benchmarks. These benchmarks and analytic tools provide up-to-date data and analysis on a wide pool of loans with insights down to the loan level. Last week, we were pleased to announce the launch of the FTSE StepStone Global Private Market Indices. We are beginning with 3 indices: a U.S. buyout index, a U.S. infrastructure Index and an all private markets index, which offer daily index performance based on comprehensive institutional grade inputs. We believe this lays the groundwork for additional indices across other sectors and asset classes and ultimately for establishing index tracking investment products. I'll now turn the call over to Mike. Michael McCabe: Thanks, Scott. Turning to Slide 8. We generated $29 billion of gross AUM additions over the last 12 months. $18 billion of these inflows came from separately managed accounts and $11 billion came from our commingled funds, including private wealth. During the quarter, we generated over $7 billion in gross additions, including approximately $4 billion of managed account inflows and approximately $3 billion of commingled fund inflows. Notable commingled fund additions included $150 million final close for our corporate direct lending fund, SCL III, and a $550 million close in our PE co-investment fund. As Scott mentioned, we are now back in market with our PE secondaries fund, and we are also in market with the debut GP-led PE secondaries fund. The flagship secondaries fund will continue to invest across a diversified array of both LP-led and GP-led investments, while the dedicated GP-led fund will provide access to a more concentrated set of high-quality GP-led investments. We expect first closes in these funds by the end of our fiscal year. The GP-led dedicated fund will be smaller than the flagship secondaries fund, but we anticipate the combination of both funds will increase over the prior vintage size of $4.8 billion. Turning to our Evergreen fund platform. We generated $2.4 billion of subscriptions in our private wealth suite of offerings, growing the platform to $12 billion as of the end of the quarter. Additionally, we have grown our Evergreen non-traded BDC SCRED to over $1.5 billion in net assets. We have expanded our Private Wealth platform to approximately 650 individual distribution partners. And among our partners that have been with us on the platform for at least a year, 50% are selling more than one Evergreen product. Slide 9 shows our fee-earning AUM by structure and asset class. For the quarter, we increased fee-earning assets by nearly $6 billion or an annualized growth rate of 18%. Our undeployed fee-earning capital, or UFEC, grew by over $1 billion to nearly $30 billion. The combination of fee-earning assets plus UFEC grew to approximately $163 billion, which is up $7 billion sequentially and is up over $28 billion from a year ago. This translates to a healthy 20% annual organic growth rate since fiscal 2021. Slide 10 shows our evolution of fee revenues. We generated a blended management fee rate of 63 basis points over the last 12 months, down slightly from the 65 basis points in fiscal year 2025, driven by the moderation in retroactive fees. Now before turning the call over to David, I would like to briefly address recent capital market trends and client sentiment. While private market returns have stayed strong, distributions have been low for 3 consecutive years, shifting client focus from IRR to DPI. Slower exits have led to fundraising declines industry-wide, and 2025 could see another down year unless fundraising picks up in Q4. StepStone's results, however, stand out, raising nearly $30 billion annually over the last 2 years, a significant jump from previous years. We credit this growth to our client-focused customized approach and our data-driven insights as a major market participant. Clients worldwide, including those who attended our largest ever StepStone 360 conference, have echoed this feedback. We believe current low distributions in private markets are temporary. Indicators like increased IPOs, rising investment banking activity and a major recent buyout point toward better realizations ahead. Our analysis finds bid-ask spreads narrowing, improving sentiment and a growing pipeline of future transactions. Despite geopolitical and market challenges, we're committed to monitoring conditions and providing solutions for clients in all environments. With that, I'll hand it over to David for our financial results. David Park: Thanks, Mike. Turning to Slide 12. We earned fee revenues of $217 million, up 17% from the prior year quarter. Excluding retroactive fees, which were very small this quarter, fee revenues grew by 27% year-over-year. The increase was driven by growth in fee-earning AUM across commercial structures. Fee-related earnings were $79 million, up 9% from a year ago, while core FRE was up 34%. Sequentially, FRE declined slightly, driven primarily by lower retroactive fees and lower advisory fees. Advisory fees of $16 million were below the elevated $20 million level of the prior 2 quarters, which benefited from a higher-than-normal level of project-based fees. We view this quarter as a more normalized level of advisory fees in the near term. FRE margin was 36% for the quarter, both on a reported and core basis. Core FRE margin moderated slightly as compared to last quarter due to lower project-based advisory fees. Shifting to expenses. Adjusted cash-based compensation was $100 million, representing a cash compensation ratio of 46%, in line with the expectation we set out at the beginning of the fiscal year. General and administrative expenses were $34 million, up $2 million from last quarter. The sequential increase was driven by higher travel, IT and other general operating expenses. As a reminder, the G&A of our next 2 quarters tends to be seasonally elevated, driven by our StepStone 360 Conference in October and our Venture Capital conference in February. Gross realized performance fees were $65 million and $34 million net of related compensation expense. We expect strong gross performance fees next quarter, driven by the annual crystallization of incentive fees in our SPRING Evergreen fund. As a reminder, a relatively small portion of SPRING incentive fees drops to the bottom line after accounting for performance fee compensation and the Private Wealth profits interest. Adjusted net income per share of $0.54 was up from $0.45 a year ago and $0.40 last quarter, driven by growth across fee-related and performance-related earnings. Moving to key items on the balance sheet on Slide 13. Net accrued carry finished the quarter at $842 million, up 8% from last quarter. Our net accrued carry is relatively mature. Approximately 70% are tied to programs that are older than 5 years, which means that these programs are ready to harvest. Our own investment portfolio ended the quarter at $314 million. This concludes our prepared remarks. I'll now turn it back over to the operator to open the line for any questions. Operator: [Operator Instructions] Our first question comes from the line of Alexander Blostein with Goldman Sachs. Unknown Analyst: This is Anthony on for Alex. I wanted to click into the recently launched PE product, STPEX, which saw a very strong first 30 days of fundraising. So I was curious what drove such strong demand here? And how do you think about any cannibalization risk with your existing product suite? Jason Ment: Thanks, Anthony. Jason here. So yes, we were ecstatic with the traction that STPEX received out of the gate. As was mentioned in the prepared remarks, the product was designed specifically in response to demand from several channel partners who highlighted a couple of things. One, they were looking for PE exclusive exposure as opposed to the model portfolio that's in SPRIM. And two, we talked about it previously, but SPRIM's ticker was not available on all custodians and certain of our channel partners over-indexed to the custodians that were not allowing the ticker for SPRIM and the ticker was very important to them. So that was, we think, the main drivers of the initial uptake, i.e., it was developed in response to demand we knew was there. In terms of cannibalization, we did see some rotation out of SPRIM and into STPEX, and that was planned for in advance, and we knew that was coming. But we think we've seen the majority of that rotation occur already in the initial month here. Operator: Our next question comes from the line of Kenneth Worthington from JPMorgan. Kenneth Worthington: I'll continue on Wealth. So you've got 5 flagship products now. Can you talk about next steps to broaden and deepen distribution? So maybe number one, you've got 650 distribution partners. How far along are you through selling through either the biggest or your target distribution partners? Like how much room do you have to run for the big ones? And then two, I think, Mike, to your comments, 50% of your distribution partners are selling more than one Evergreen product. I assume that the dream would be to get 650 distribution partners to sell all 5. So maybe bridge where you are today and the maybe unrealistic dream scenario of getting everybody to sell everything. How do you bridge that gap? Jason Ment: Don't kill our dreams, Ken. This is Jason. In terms of the 50% statistic that Mike cited during the prepared remarks, that 50% is those that have been -- that have had a product on platform for more than 1 year. And so we're always adding new partners. And so that presents additional cross-sell that will happen over time with those groups. To your point, the 50% cited is an aggregate of those selling 2, 3, 4 or 5 of the funds. As you would imagine, the number selling all 5 funds is less than that selling 2 funds, et cetera. So we've got plenty of room to run in that regard. We are also always focused on ensuring that we're meeting each channel partner exactly where they are. So we don't expect that all channel partners would want or need all 5 funds given they have different client bases, of course. As we look at the largest of our distribution partners, most of those really large groups are not selling all 5 funds for sure and are really focused on 2 or 3 funds at present. So there's still room there as well. Operator: Our next question comes from the line of Brennan Hawken of BMO. Brennan Hawken: I believe you've made a comment about STPEX, this new product that you launched and that maybe the strong subscription rate above expectations. And it seemed like you're suggesting it's above your expectations for what the run rate is. Did those subscriptions sort of like flatter the overall SPW subscriptions in the quarter? And should we expect a pullback on the back of that? I'm just trying to get an understanding of fully contextualizing those comments. Jason Ment: Sure. So STPEX in the initial month was around $750 million of subscriptions. We would not expect that to be the run rate for the fund in the near term going forward. And so yes, we would expect a quarterly pullback from this past quarter due to that onetime initial subscription surge from the launch. Brennan Hawken: Great. And then G&A expenses were a little higher than we were looking for. Can you talk about maybe what drove some of that quarter-over-quarter increase? And how much of that would be expected to be durable going forward? David Park: Yes. Thanks for the question. It's David. I think in the prepared remarks, we had mentioned that the quarter-over-quarter increase was largely driven by travel, IT and just general operating costs. And you've heard us talk about data and tech benchmarks, the new office openings we've had. So we continue to invest in our business for growth. So I think as you see top line continue to grow, we're going to continue to invest in infrastructure and other costs there. For the next couple of quarters, like we said in the prepared remarks, you should expect a step up in the G&A costs for our StepStone 360 conference for the next quarter. In the fiscal fourth quarter, you see some costs for the VC conference there. If you look at last year, the StepStone 360 conference was actually held in September. So it's not really a good proxy. But if you look back a couple of years to fiscal '24, and you can see the step-up from fiscal 2Q to 3 and 4, that should be a better proxy of what you should expect to see in the next couple of quarters. Operator: Our next question comes from the line of Ben Budish from Barclays. Benjamin Budish: Maybe first, Scott, I think in your prepared remarks, you mentioned the partnership with Aviva that was announced maybe a month or so ago. Can you talk a little bit about what you're doing there? How big is the potential opportunity? And how do you see maybe other opportunities to participate in the retirement channel perhaps unfolding outside the U.S.? Jason Ment: Ben, Jason here. With respect to the U.K. opportunity, it's obviously a very big market in terms of the defined contribution market there. Aviva is one of the top 5 players. So we're ecstatic to be one of their partners. The initiation of that channel, we don't expect to see material flows this calendar year. So think of that as a calendar '26 event, and it's going to build over time. This is a new area for Aviva, and we're going to have to see how it develops as they roll it across their book. Outside of the U.K. market, we are having conversations in those geographies where it's potentially conducive to include private markets in the defined contribution space and obviously, spending a lot of time focused on the U.S. opportunity as well. But this is all very early days, obviously. Benjamin Budish: Got it. Maybe a separate follow-up just on the indexes. So it's nice to see a number of products now launched. Can you maybe talk about from here, what does the path look like to more commercial relationships? How do these get monetized? I imagine that is still far off as well. But with the products out there, just curious what next steps look like on that path. Michael McCabe: Thanks, Ben. Mike here. Just as a reminder, our data and technology platform really revolves around our proprietary technology that we call SPI, which has 4 use cases, primarily being, one, driving our investment decisions and track record; two, enabling our existing clients to make better decisions around asset allocation and portfolio construction as well as monitoring returns. The third use case is to develop new client and LP relationships by offering SPI as a value-added service. But last but not least, relating to your question, we're using data and technology to power our benchmarking indices and analytical tools for data partnerships like the one we announced with FTSE Russell and Kroll. To be clear, our posture toward benchmarking indices is quite a bit different than others in the marketplace. The first is we're using our data to develop and power these benchmarks from a very comprehensive database that includes venture capital, private equity, infrastructure, real estate and credit. The second is the indices that we announced with FTSE Russell are priced daily, meaning cash adjusted and market adjusted on a daily basis. And as a reminder, we've had quite a bit of experience with a daily priced product by virtue of our tickerized Evergreen product called SPRIM. The commercialization of all of this comes in lots of different forms. But as it relates to the indices, the initial revenue case is a licensing opportunity in partnership with FTSE Russell that will be shared between the 2 organizations. Longer term, the potential use case for building asset management products around our reference benchmarks is on the come. But to be clear, not a replication strategy. Rather, we see asset management products around these indices being a much longer-term opportunity, which is why on previous calls, I've described this as more of a walk before you run approach. But we believe there is plenty of opportunity out there to develop some asset management products around these indices in the longer term. Operator: Our next question comes from the line of Michael Cyprys from Morgan Stanley. Michael Cyprys: Just given all the success in the Private Wealth channel, I was hoping you could speak to how you're expanding your sourcing -- deal sourcing capabilities to put all this capital to work, so it does not compromise returns for the retail customers as well as for the institutional accounts and customers that you're already managing, how you're thinking about that? Scott Hart: Mike, Scott here. Look, it's a great question and something that, look, whether it's driven by the growth of the Wealth business or the growth of the separate account business or the commingled fund business that we have always been very, very focused on. And it really comes down to the flywheel and the amount of capital that we are committing across the private markets ecosystem, really starting with primary fund commitments that are a big driver of ultimately the deal flow and our position in the market, also a big driver of the data and the information that we have to inform our decision-making. So one of the things that we have always had to do is to make sure that the various different elements of our deal flow remain balanced. And one of the ways that I've often thought about that is whereas you may have some investors in the market that are looking for, for example, $1 of free co-invest for every dollar of primary capital they commit, I think we offer a very different and a more appealing ratio to our GP partners, which is that across the board, we have been allocating about $70 billion per year into the private markets. If I take just private equity, for example, represents about $35 billion with a few billion going into co-investments each year, probably $5 billion to $6 billion going into secondaries, but the rest into primary funds. And so that, in my mind, is a very balanced approach, but I think maintaining the activity on the primary side, in particular, is one way we balance that. I would say the other thing that we keep a very close eye on is just the conversion or the approval rates across our deal flow. And so one of the ways that we have been able to invest successfully over time here is that the pipeline has been growing significantly. You think about different parts of our business, for example, private equity secondaries where we had a record year at $160 billion of volume last year, expected to grow to $200 billion this year. Our approval rates, particularly on LP secondaries is very low single-digit percentage and has kind of remained there for a period of time. So across each of our strategies, each of our asset classes, those are the types of stats that we are constantly monitoring to make sure that we have sufficient deal flow to maintain that selective ratio. Michael Cyprys: Great. And just a follow-up question on the Private Wealth channel. Curious how you're seeing and expect your product set to evolve over the next 12 to 24 months from the 5 products that you have today. What other solutions, product vehicle strategies could make sense? Maybe you could update us on some of your thoughts and progress around models in the Private Wealth channel. You've had a lot of success with ticker. Curious what might be next as you think about innovation. Jason Ment: So in terms of the core portfolios or products that we're putting together, we think that the ones that we have available today are the ones we'll have available for the next 12, 24 months, and it will be a doubling down on distribution, but as you alluded to, let's call it, the wrapping paper around that and models being a good example of it, but not the only one. We continue to have a very engaging dialogue on inclusion in existing model programs, most of which are in the common parlance, paper models, although some are dynamically reallocating as well and continue to have conversations with some technology innovators that are really looking to bring private markets into the model world in a really robust way, and we're one of the thought partners around how to do that operationally because it really, at this point, is more an operational challenge as opposed to a CIO challenge in the models world. Michael Cyprys: If I could, just one follow up to that point. Just curious what the time frame might be for inclusion in models and how you see some of those hurdles being overcome? Jason Ment: Yes. Well, we're already included, and we've seen very modest but double-digit millions of flows inception to date within the models already using our existing products. So that's not a separate portfolio. It's the existing Wealth products. It was one of the drivers for the creation of STPEX as well as to have that pure-play private equity exposure for CIOs to be able to fine-tune within a model structure. In terms of the technology developments, the systems that many of these models rely on didn't contemplate the idea of, let's call it, delayed gratification on redemption and putting the orders and having that settled later. And so there's -- that's one example of where the technology solutions need to work out the pipes, so to speak, to make that all work properly so that everything flows through. Operator: Our next question comes from the line of John Dunn of Evercore. John Dunn: I wonder if you could talk to any different areas of geographical strength and any differences between strategy preferences among the region? Scott Hart: John, sure. Happy to touch on the geographical areas of strength. And you heard us make a couple of comments about some of the new office openings, specifically in the Middle East and parts of Europe, and we've had some recent ones in Asia as well. Those would probably be the geographies I would call out. I mean if you look at in our earnings presentation, how the geographic mix has evolved over time, you will actually see that the U.S. is starting to represent a slightly larger percentage than historically. Part of that is driven by the growth in Wealth. But if I break it down and just focus, for example, on separately managed accounts, really over the last quarter or if I look at it over the last 12-month period, in order of size, it would have been Middle East, Asia and then pretty balanced across Europe, Australia and the U.S. So look, I think it's broad-based. It's not any one geography that is driving the success, but continued development across various different regions here. In terms of the specific asset classes or strategies, again, it's been fairly balanced. I think the main thing I would call out, though, maybe having had the chance to travel with our private credit leadership team over the last several months, I'd say the interest that we are seeing, particularly out of Asia and some of the Asian insurance companies and in the Middle East, where certain asset owners may just be setting up a private credit allocation for the first time as opposed to managing out of other asset classes, be it fixed income, be it private equity, et cetera. And so that's maybe the one thing I would call out is just the interest we are seeing in private credit in a couple of those markets. Operator: At this time, I'm showing no further questions in the queue. I would now like to hand it back to Scott for closing remarks. Scott Hart: Great. We just wanted to thank everyone for joining today and appreciate your continued interest in the StepStone story. We look forward to connecting again next quarter. Thank you. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.