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Operator: Good day, ladies and gentlemen, and welcome to today's Iveco Group Third Quarter 2025 Results Conference Call and Webcast. We would like to remind you that today's call is being recorded. [Operator Instructions] At this time, I would like to turn the call over to Federico Donati, Head of Investor Relations. Please go ahead, sir. Federico Donati: Thank you, Razia. Good morning, everyone. I would like to welcome you to this webcast and conference call for Iveco Group Third Quarter Financial Results for the period ending 30th September 2025. This call is being broadcast live on our website and is copyrighted by Iveco Group. I'm sure you appreciate that any other use, recording, or transmission of any portion of this broadcast without the consent of Iveco Group is not allowed. Hosting today's call are Iveco Group CEO, Olof Persson, and me, Federico Donati, Head of Investor Relations, standing in for the financial section usually covered by our CFO, as Anna Tanganelli could not be present today. Please note that any forward-looking statements we make during today's call are subject to the risks and uncertainties mentioned in the safe harbor statement included in the presentation material. Additional information relating to factors that could cause actual results to differ from forecast and expectation is contained in the company's most recent annual report, as well as other recent reports and filings with the authorities in the Netherlands and Italy. The company presentation may include certain non-IFRS financial measures. Additional information, including reconciliation to the most directly comparable IFRS financial measures, is included in the presentation material. Furthermore, on the 30th of July 2025, Iveco Group announced the signing of a definitive agreement to sell its defense business, IDV, and Astra brands to Leonardo S.p.A. The transaction is expected to be completed no later than 31st March 2026, subject to the customary regulatory approvals and carve-out completion. In accordance with IFRS 5, noncurrent assets held for sale and discontinued operations, as the sale became highly probable in July, the Defense business meets the criteria to be classified as a disposal group held for sale. It also meets the criteria to be classified as a discontinued operation. In accordance with applicable accounting standards, the figures in the income statement and the statement of cash flow for the 2024 comparative periods have been recast consistently. Additionally, in 2024, the firefighting business was classified as a discontinued operation. Its sales were completely on the 3rd of January 2025. As a consequence, the 2025 and 2024 financial data shown in this presentation refer to the continuing operation only unless otherwise stated. Finally, please note that, subject to applicable disclosure requirements pending the publication of the final offer document, we will not comment on the tender offer. As per the joint press release on July 30, announcing the entering into the merger agreement and the press release by Tata on August 19, announcing the filing of the document with Conso, anyone interested is invited to refer to the offer notice published on July 30, 2025, which indicates the legal basis, rationale, condition, terms and key elements of the tender offer. All the aforementioned material and announcements are available on the Iveco Group corporate website, where any additional relevant information will be published in due time. We will not comment on the sale of the defense business to Leonardo either. The rationale, terms, and conditions of the sale, with the details as currently available, were disclosed on July 30. As announced, the transaction is expected to be completed in Q1 2026, subject to customary regulatory approvals and carve-out completion. Consistent with the agreement reached with Tata, Iveco Group will distribute the net proceeds of the transaction based on the enterprise value agreed with the purchaser via an extraordinary dividend estimated at EUR 5.56 per common share to be paid out to the company's shareholders before the tender offer is settled. With those points covered, I'd like to turn things over to our CEO, Olof. Olof Persson: Thank you very much, Federico. And let me add my own warm welcome to everyone joining our call today. I'll start with Slide 3, outlining the main highlights from our third quarter performance, excluding defense. Throughout the quarter, we maintained a high focus on our long-term vision and maintained discipline in the execution of measures that will help achieve it. These include tight control on inventory levels, diligent cost management, and the ongoing commitment to our multiyear efficiency program, as well as its acceleration for the current year, which is proceeding as planned. We have also identified additional areas of improvement, which will deliver further full-year savings. In our Truck business unit, we concentrated on balancing pricing and market share. The focus was on protecting our leadership position in the LCV chassis cap subsegment, where pricing dynamics were more challenging and maintaining a very strict pricing discipline in medium and heavy in support of the final phase of the introduction of our model year 2024 across European countries, and thereby ensuring the quality, performance, and the full potential of the product. I'd now like to break down our performance by business units. In the truck industry, demand in Europe remained particularly low in the chassis cab subsegment, which affected profitability in the quarter, which was only partially offset by strict cost control measures. European deliveries in the period were down year-over-year, particularly for light commercial vehicles, which were down 27% versus last year. At the end of the quarter, worldwide book-to-bill for trucks came in at 1.0, up 25 basis points versus the same period last year. In Powertrain, we began to see the first sign of a sustainable recovery in engine volumes as had been expected, supporting profitability improvements. In our bus business unit, profitability was impacted by costs associated with the ramp-up of production in our NNA plant in France. But despite this, our order book remains strong, providing us with a clear long-term visibility. Free cash flow absorption in the third quarter of 2025 was at EUR 513 million, broadly in line with last year's performance, when we exclude from last year the positive effect of the deployment of the higher inventory levels that we registered at the end of June 2024. You will recall that this was linked to the phase-in and phase-out of the new model year in trucks. Going forward, we will continue to remain very focused on quality and operations in line with our long-term pathway, maintaining tight control on production levels and inventory management, and on delivering our efficiency program. Slide 4 outlines our indicative timeline for the first half of 2026, with the sale of our defense business and the tender of the Veeco Group progressing in parallel. Regulatory filings for both transactions, including those required by the European Union, are currently underway and subject to final approvals. Both the sale of the defense business to Leonardo and the subsequent distribution of the net sale proceeds through an external ordinary dividend and the tender of [Bertata] are on track for completion within the first half of 2026, as we stated previously. If we're then moving on to Slide 6 and the Truck segment. We maintained pricing discipline and tight inventory control throughout Q3 in 2025. European industry volumes increased by 5% year-over-year for both light commercial vehicles and medium and heavy trucks. Iveco's third-quarter LCV market share was 11.7%, of which 29.7% was in the Chassis Cab subsegment and 65.8% was in the upper end of the segment. Industry growth overall was largely driven by the camper subsegment, where Iveco has limited exposure. Chassis Cab volumes, on the other hand, remained under pressure, yet we managed to protect our leadership position. In medium and heavy trucks, our market share reached 7.2% with heavy trucks accounting for 6.4%. In this segment, we implemented a selective sales mix strategy throughout the quarter to optimize channel profitability and support the final phase of the introduction of our model year 2024 across European countries and thereby ensuring the quality, performance, and full potential of the product. Our ability to adapt to segment dynamics while preserving pricing integrity and managing inventory effectively reflects the strength of our commercial execution and the strategic clarity of our truck business. Moving on to Slide 7. Our worldwide truck book-to-bill ratio reached 1.0 at the end of the quarter, registering a 25 basis point improvement year-over-year. This reflects balanced commercial performance across geographies and product categories. In light commercial vehicles, our European order intake rose by 17% compared to Q3 2024, supported by a book-to-bill ratio of 1.05. This increase, we believe, is a welcome first sign of a recovery coming on the heels of a prolonged period of production coverage well below last year's level, 7 weeks this year versus 12 weeks last year. And South America experienced even stronger growth with order intake up 37% and a book-to-bill ratio of 1.11. In medium and heavy trucks, European order intake declined by 3% year-over-year with a book-to-bill ratio of 0.82. South America saw a more pronounced contraction of 21% with a book-to-bill ratio of 0.94. While these figures reflect a softer demand environment, the backlog remains stable at 7 weeks of production coverage. Let's move to the next slide, #9, with bus industry volumes and market shares. Iveco Bus during the quarter continued to demonstrate strong competitive positioning across Europe. In the intercity segment, our leadership was reaffirmed with a 55.1% market share in Q3, representing a 5% point increase year-over-year. This gain can be attributed to the successful introduction of electric models, which are contributing positively to both volumes and brand perception. In the European city buses segment, our market share stood at 15.1% in Q3. We expect an acceleration in deliveries during Q4, consistent with the seasonal patterns and supported by backlog conversion. Overall, Iveco Bus maintained its consolidated #2 position in the European market with a 21.3% market share year-to-date. Moving on to Slide 10. In Q3 2025, our bus order intake declined by 17% following the strong momentum we enjoyed in the first half of the year. This front-loaded demand contributed to a 6% year-to-date increase as of September. Deliveries rose 20% compared to Q3 2024, demonstrating robust execution and sustained customer demand. The book-to-bill ratio stood at 0.77 at the quarter's end, a figure impacted by the scheduling of orders early in the year. Importantly, year-to-date order intake remained higher than in 2024 at 1.08, demonstrating the segment's resilience. On the 29th of October, Iveco Bus signed a framework agreement with Ildefrance Mobility, a leading public transport authority managing one of Europe's largest and most complex transit networks. Iveco Bus will supply Ildefrans Mobility with up to 4,000 low and zero-emission buses and coaches between 2026 and 2032. This is in line with the brand's long-term strategy to build on zero-emission and electromobility solutions. In conclusion, we maintained a solid long-term visibility for intercity and city bus with coverage now extending well into the second half of 2026. On Slide 12, we have the delivery performance for our powertrain business unit. And after nearly 2 years of consecutive year-over-year decline, engine volumes increased by 1% compared to Q3 2024. While modest, this improvement reflects the recovery we predicted last quarter. During the period, new third-party customer contracts were signed between Lindner and JCB. Production for these orders will begin in 2026. These contracts position FBT Industrial as one of the main references in the agriculture industry and are in line with our long-term strategy to grow the number of third-party clients. Operational discipline remains central to our approach. We continue to manage costs diligently and remain committed to our efficiency program. These efforts are helping us to protect margins and ensure sustainable delivery as volumes recover. Looking ahead, we expect the recovery in deliveries to third-party customers to continue throughout Q4 and beyond, supporting profitability improvements. Going to Slide 14, look at our electric vehicle portfolio, where year-to-date delivery volumes continue to grow across the business units despite the challenging market demand scenario. This clearly shows the competitiveness of our product lineup and our unique positioning in LCV, where Iveco is the only truck maker to offer a complete fully electric product lineup ranging from 2.5 to 7 tons. With that, I finish my opening remarks, and I will now hand over the call to Federico. Federico Donati: Thank you, Olof. Let's now take a look at the highlights of our third quarter 2025 financial results on Slide 16. Again, all figures provided in the presentation refer to continuing operation only, excluding defense, if not otherwise stated. Q3 2025 closed with EUR 3.1 billion in consolidated net revenues and EUR 3 billion in net revenues of industrial activities. These figures reflect a contraction of 3.6% and 3%, respectively, on a year-over-year basis, mainly due to lower volumes in Europe for trucks and a negative ForEx translation effect, primarily in Brazil and in Turkey. The group adjusted EBIT closed at EUR 111 million with a 3.6% margin, and the adjusted EBIT of industrial activities reached EUR 76 million with a 2.5% margin, both contracted by 210 basis points versus Q3 2024. The net financial expenses amounted to EUR 58 million in the third quarter this year, in line with the same quarter last year. Reported income tax expenses come to EUR 17 million in Q3 2025 with an adjusted effective tax rate of 25%. This resulted in adjusted net income for continuing operations at EUR 40 million, down EUR 54 million versus last year, with an adjusted diluted EPS of EUR 0.15. Moving to our free cash flow performance in the quarter. Q3 2025 closed with a EUR 513 million cash outflow absorption, which was broadly in line with last year's performance, when we excluded from last year the positive effect of the deployment of the higher inventory level that we registered at the end of June 2024, as Olof said in his opening remarks. I will provide more details further in the presentation. Finally, available liquidity, including undrawn committed credit lines, closed solidly at EUR 4 billion on the 30th of September, of which EUR 1.9 billion was in undrawn committed facilities. Let's now focus on the net revenue of industrial activities on Slide 17. As you can see from the chart on the right-hand side of this slide, all regions contracted compared to the prior year, excluding South America, which was flat versus Q3 2024. Looking at our net revenues evolution by business unit, Bus was solidly up versus the prior year at plus 31%. Powertrain was flat, and the truck contracted 11% versus Q3 2024. More in detail, truck net revenues totaled EUR 2 billion in this quarter, down 11% versus the prior year, primarily as a consequence of 2 factors: First, a lower delivery rate in light-duty trucks due to the continuing challenging environment in the chassis subsegment. Second, a selective sales mix strategy throughout the quarter in heavy-duty trucks in order to optimize channel profitability and support the final phase of the introduction of our model year 2024 across European countries. Additionally, the top line was affected by an adverse year-over-year foreign exchange rate trend, mainly in Brazil and Turkey. Our bus net revenues were up 31.4% in Q3 2025, reaching EUR 719 million, thanks to higher volumes. And finally, our Powertrain net revenues were broadly in line year-over-year at EUR 745 million with higher volumes offset by an adverse foreign exchange rate impact. Sales to external customers accounted for 49%, in line with Q3 2024. Turning to Slide 18. Let me briefly comment on the main drivers underlying the year-over-year performance in our adjusted EBIT margin of Industrial activities. Volume and mix contributed negatively, EUR 67 million in the period, mainly due to lower truck volumes in Europe. The decrease in deliveries of light-duty vehicles particularly impacted the overall truck profitability. The year-over-year net pricing contributed positively for EUR 15 million at the Industrial Activities level and was positive across business units. Production costs were negative EUR 7 million year-over-year, with negative performance in Truck and Bus, partially offset by solid positive performance in powertrain. Finally, the year-over-year improvement in SG&A costs totaling EUR 17 million in this quarter and EUR 50 million to date is again a result of the acceleration of the efficiency action announced and launched at the beginning of this year. Let's now take a look at the adjusted EBIT margin performance for each industrial business unit on Slide 19. Truck closed the quarter with a 2.9% adjusted EBIT margin. As already mentioned, this was a result of lower volumes and negative mix, mainly due to the continuing challenging environment in the chassis subsegment, which experienced lower volumes in Europe. The negative absorption due to the lower production level was only partially compensated by the cost containment action implemented in the period. Truck pricing in Europe was positive year-over-year, confirming our tight price discipline. The Q3 2025 adjusted EBIT margin for our bus business unit closed at 4%, down 110 basis points versus the prior year, with higher volumes and positive price realization offset by higher costs associated with the ramp-up of production in our Annonay plant. Finally, the Powertrain adjusted EBIT margin closed at 5.1% in the third quarter, resulting from continued and diligent cost control and operational efficiency as well as a slight increase in engine volumes. Let's now have a look at the performance of our Financial Services business unit during the quarter on Slide 20. The Q3 2025 adjusted EBIT for Financial Services closed at EUR 35 million with a managed portfolio, including unconsolidated joint ventures of EUR 7.5 billion at the end of the period, of which retail accounted for 45% and wholesale 55%. This figure is down EUR 106 million compared to the 30th of September 2024. Stock of receivable past due by more than 30 days as a percentage of the overall own book portfolio was at 2.1%, which is slightly up versus last year. The return on assets remained solid at 2.1%. Let's move to our free cash flow and net industrial cash evolution on Slide 21. As said previously, the Q3 2025 free cash flow absorption came in at EUR 513 million, which is broadly in line with last year's performance when we exclude the positive effect of the initial deployment of the higher inventory level that we registered at the end of June 2024. The lower adjusted EBITDA was offset by positive year-over-year swings in financial charges and taxes, the positive delta in working capital, and lower investments. The negative year-over-year swing in provision was driven by lower sales volume in our truck business unit. Lastly, investment totaled EUR 150 million in Q3 2025, down EUR 39 million versus the same period last year. This is in line with the already disclosed acceleration of our efficiency program and the reprioritization of some of our less strategic investments. Moving now to Slide 22. As of the 30th of September 2025, our available liquidity for continuing operations, excluding defense, stood solidly at EUR 4 billion with EUR 2.3 billion in cash and cash equivalents and EUR 1.9 billion of undrawn committed facilities. Looking at our debt maturity profile, the majority of our debt will mature from 2027 onwards, and our cash and cash equivalent levels will continue to more than cover all the cash maturities foreseen for the coming years. Moving now to my last slide for today, # 24, with the discontinued operational performance of our Defense business unit. The net revenues for Defense came in at EUR 293 million, up 9.7% compared to Q3 2024, driven by higher volumes. The adjusted EBIT was EUR 25 million compared to EUR 23 million in Q3 2024, resulting from production efficiency, partially offset by higher R&D costs. The adjusted EBIT margin was at 8.5%, down 10 basis points compared to Q3 2024. The funded order book level at the end of September 2025 reached almost EUR 5.3 billion, up close to EUR 300 million from the end of June 2025. Thank you. I will now turn the call back to Olof for his final remarks. Olof Persson: Thank you very much, Federico. And I'd like to conclude this presentation by looking at both the outlook for the industry and our own financial guidance. I will also, as usual, provide some takeaway messages from what you have heard today. We confirm our total industry outlook for the current year across the segments and regions. Specifically, we expect demand to remain low in the chassis cab subsegment and South America to continue to be negatively impacted by reduced consumer confidence and less willingness to invest in heavy-duty trucks, given the increase in interest rates in Brazil since the beginning of the year. The next slide has our full-year 2025 updated financial guidance, also expressed as continuing operations, which means excluding defense. Our full-year 2025 financial guidance has been revised across all key performance metrics, except for the industrial activities net revenue, which remains unchanged. This update reflects the year-to-date performance negatively affected by 2 main circumstances. Firstly, a slower-than-expected recovery in light commercial vehicles during the second half of 2025, particularly in the chassis cab subsegment, which has negatively affected our truck business units' year-to-date profitability. Secondly, we have allowed for extra costs associated with the ramp-up of production in our NMA plant, which negatively impacted our bus business unit's profitability in the third quarter. Implied in our updated guidance is increased Q4 profitability year-over-year across business units and an additional positive effect from the acceleration of our efficiency program compared to the initial EUR 150 million CapEx and OpEx. Based on these premises, the updated guidance for our full year 2025 is as follows: at the consolidated level, including Defense, group adjusted EBIT is now between EUR 830 million and EUR 880 million. And for Industrial Activities, net revenues, including currency effect, confirmed to be down between 3% and 5% year-over-year. Adjusted EBIT from industrial activities at between EUR 700 million and EUR 750 million, and industrial free cash flow is between EUR 250 million and EUR 350 million. On the slide, we have also shown what this guidance implies for continuing operations only. The free cash flow forecast, excluding Defense, is not included due to ongoing activities related to the separation that could affect some balance sheet accounts. We will continue to manage production levels for trucks in Europe in line with the retail demand, while at the same time, maintaining diligent cost management and leveraging the benefits of our efficiency program across business units. And now to Slide 28. Let me provide you with some takeaway messages from today's call. First, as I said, implied in our revised guidance is increased Q4 profitability year-over-year across business units. And if we break that down by business unit, in trucks, our LCV and medium and heavy vehicles are sold out, covering the remaining 2 months of the year. This, combined with strict control on pricing and cost management, will positively contribute to higher profitability compared to the fourth quarter of last year. In the bus, ramp-up costs are now behind us, and we expect higher volumes to contribute positively to the year-over-year performance. And lastly, in Powertrain, as mentioned earlier, third-party client volumes are expected to continue their year-over-year growth, supporting progressively profitable improvements. The increase in third-quarter order intake for light commercial vehicles is an encouraging early sign that the worst is behind us. In heavy-duty trucks, we will continue to maintain strict pricing discipline to support our model year 2024, ensuring the quality, performance, and full potential of the product. In Powertrain, new third-party customer contracts were signed, among which are Lindner and JCB, with production for these orders beginning in 2026. Our robust order book remains strong, providing solid visibility well into the second half of 2026, and the funded order book for our Defense business unit reached almost SEK 5.3 billion at the end of September 2025, demonstrating continued momentum in the industry. Thirdly, we are proceeding at pace with the acceleration of our efficiency program and reprioritization of certain investments, confirming the expected EUR 150 million in savings in CapEx and OpEx for the current year, as well as additional areas of improvement, which will deliver further full-year savings. And finally, we are on track to complete the sale of our defense business to Leonardo as per our original combination, and the tender offer by Tata is expected to be completed within the first half of 2026. In conclusion, as always, we are focused on our commitment to operational excellence. Each business unit remains laser-focused on its short- and long-term objectives, working to deliver lasting value for all our stakeholders. With that, I would like to thank you and hand it back to Federico. Federico Donati: That concludes our prepared remarks, and we can now open it up for questions. To be mindful of the time, we kindly ask that you hold off on any detailed modeling and accounting questions. For this, you can follow up directly with me and the Investor Relations team after the call. In addition, as already pointed out, pending the publication of the formal offer document on the tender offer by Tata, we will not comment on the legal basis, rationale, condition, terms, and key elements of the tender offer. In this respect, for the time being, you are kindly invited to refer to the materials already published in the ad hoc section of the company website. As for the sale of the defense business to Leonardo, the activities are ongoing and on track, consistent with the timeline commented during the presentation. The company will strictly comply with applicable disclosure requirements, but for the time being, it has nothing to add vis-Ã -vis what has already been announced. Operator, please go ahead. Operator: [Operator Instructions] We are now going to take our first question, and the questions come from the line of Akshat Kacker from JPMorgan. Akshat Kacker: A couple of questions, please. The first one is on the truck and LCV business. Obviously, the trends this year have been difficult to forecast and understand, given the pre-buy last year and also the changeover in the product family. Could you just help us understand how you're looking at the business going forward, probably into Q4, but also any early signs on how you expect the LCV business to develop going into 2026? And if you could just add some color regionally as well, between Europe and Brazil. We have heard from a few of your peers that inventories are high in the Brazilian and LatAm markets, and overall, there is some pricing pressure. So some details there would be helpful. The second question is on the powertrain business. You talked about a slight increase in engine volumes, the first signs of recovery. Could you just give us some more details in terms of where these green shoots are emerging from? And we now expect volumes to turn positive going into the fourth quarter, please? Olof Persson: Okay. So on the LCV market, I mean, as we said, the indications we're getting now, and also you saw on the book-to-bill and the increase in our order intake, give us confidence, and we believe that the worst is behind us, and we will see a gradual uptake. We see that also in the activity levels in the market. And as we said, we are sold out now for this year and going into next year. So I think it's always difficult to really judge where this is going, coming from such a long period of a lower market. But I feel the LCV side, I think we have the worst behind us. And exactly how that will pan out coming into 2026, we will have to see. We need a couple of more weeks or months to see that coming into it. But I would say so far, so good, and it's really good and encouraging to see that this is opening up. And that is, of course, then moving also in our key segments on the cabover and both in the medium and the upper side of it. On the LatAm, I didn't really -- LatAm pricing. Akshat Kacker: No, I was referring to the inventory level, if I understood correctly. correct? Federico Donati: Yes, that's right. Akshat Kacker: Some of your peers talk about the weakness in that market, specifically in the medium and... Olof Persson: Yes, when it comes to the inventory, both our own inventory, the dealer inventory and the whole chain, we manage that very carefully, as you know, and we do that also in LatAm when we see the order volumes going down we, of course, adjust production, and we do that rather quickly in LatAm because it's a simple one factory system where we can really manage that in a good way. So I don't have any concerns about the inventory levels in LatAm going forward, even though, of course, on the heavy-duty side, there is, as we said, a decline in the market and the order intake. Then the final question was around Engines. So the green shoots for the engine. I would say that there are a couple of things. One is, of course, that we are getting third-party business. The team in Powertrain has done a great job in actually capturing more third-party business, which is good. We also see, of course, and we have said that before, it's around the stock level of engines out there in the market and the time it has taken to destock that given the downturn that we've seen over the last basically 2 years. And that also gives you confidence that this is covering up for the destocking coming to an end, and thereby, the volumes are coming back up again. So it's a combination of that plus the fact that we actually are successful in getting third-party business. That's giving me confidence going forward in the Powertrain side. Operator: We will now proceed with our next question, and the next questions come from the line of Martino De Ambroggi from Equita. Martino De Ambroggi: The first question is still on the LCV. Olof, I understood your qualitative comments on LCV for next year. But could you provide what your feeling is in terms of Europe and South America if in '26, the market overall is able to have at least a small single-digit rebound in terms of volumes? And the second question is specifically on the defense business because you are providing guidance with and without defense. I was wondering if in implying what the defense EBIT and revenues, is it correct to take EUR 150 million of adjusted EBIT and probably close to EUR 1.3 billion sales, or there are intercompanies or other items that could affect these figures? And I clearly understand you are not providing any updated guidance without a defense on free cash flow. But could you comment on what is the normalized free cash flow or cash conversion for this business? What was in the past? Olof Persson: Okay. If I start with the LCV market, I think I need to stay a little bit on top and give you the feeling I have right now because we need a couple of, I would say, weeks or at least a month to really see where the activities are going to start with in 2026. I mean, we now have visibility for the rest of the year, sold out, and then we need to see how the activity is going. But as I said, so far, so good. I mean, the activity levels that we see from our customers, the tender activities we see are coming. We do see, as you've seen, an increase in the order intake coming from very low levels in Q2 and so on and so forth. So the indications are good. But let's see when we have got that all together, and we will come back to that with a more detailed market development on that one. On the other 2 questions, I'll leave it to you. Federico Donati: Yes. On the defense side, I think, Martino, on the EBIT side, yes, you can be rounded to the number you have mentioned, as well as on the top line. And in terms of the free cash flow of defense, as you know, we have never disclosed it by business unit. The only thing I can say is a cash-generative business, but on a full-year basis. I hope this helps. Operator: We are now going to take our next question, and the next questions come from the line of Nicolai Kempf from Deutsche Bank. Nicolai Kempf: It's Nicolai from Deutsche Bank. Also 2. Maybe coming back on your full year guidance, it does imply a significant step-up in Q4 of around EUR 250 million in Q4 earnings versus EUR 300 million in the first 9 months. I mean, you mentioned that all segments will be stronger in Q4, but can you just give a bit more color on which segment should drive that? And it's probably going to be the light trucks, but any help would be appreciated here. And the second one, if I look at the EU heavy truck market share, came in at 6.4%. I think historically, you were closer to 9% or 10%. And that is despite the fact that you have launched a new model here. Should we expect that next year, you will have a higher market share? Or why is it below the historic run rate despite having a rather new product in the market? Olof Persson: So on the Q4, I think I gave the guidance that -- I mean, I can give at this point in time. The basis for the improvements that we see is there in the truck side is, of course, good to see that we sold out. That means that we can improve. If you look at the backup of the slide, you can also see that the inventory with our dealers has gone down. We have managed the dealer inventory together with the dealers and our own dealer very well. So we're having a system set up for an increase on that side, which I think is promising and stable in that respect. Then, as I said, powertrain bus, increased volumes, the profitability, we have the cost behind us on the ramp-up in Annonay. And just a comment on that, it was absolutely necessary to make sure that we create a very stable, efficient Annonay plant in terms of quality, volume, and efficiency, and we have that behind us, and we are pushing forward now. And then, of course, on the powertrain side. On top of that, as I mentioned and has been mentioned a couple of times, an efficiency program. Don't forget the efficiency program, that's never a linear coming in the profit and loss. It's actually an accelerating program. It's always those programs that are very often. And of course, the majority or a big chunk of that program will now start to come in fully with all the activities we have done, not only on the SEK 150 million that we talked about, but also the activities that we have seen. So those are the things that are actually going to drive the Q4 in coming back and making the result up to the guidance we have. On the EU market side, I think we specified we are now entering into the final phase of the launch, and we have been in a market situation that has been really focusing on keeping the price level on this new vehicle, because I truly believe that we're going to live on this product for many, many years. And we need to make sure that it is in the market in the right way. We have had a very stringent price discipline. We will continue to have a price discipline to really ensure, as I said, all the different aspects of the product. So I definitely see this product going forward in the mid and the long term being a product that definitely has a potential for more market share than it has today. That's for sure. Operator: We will now take one final question. And our final question today comes from the line of Alex Jones from Bank of America. Alexander Jones: Two from my side as well, please. Could you talk a little bit about the medium and heavy-duty outlook that you see in terms of order trends also into 2026? I know you talked a bit more positively about LCV, but medium and heavy orders were down 3% year-on-year in Europe. So your thoughts would be interesting. And then the second question on defense. Can you be more specific at all on the mix factors that weighed on margins this quarter, at least sequentially, and whether you expect those to continue going forward, Q4, and into next year? Olof Persson: Well, on the medium and LCV, that was the feeling going forward into the fourth quarter and into next year. And again, I repeat what I said. On the LCV side, I have a good feeling about the activity level. Also, I would say, on the medium-heavy. And as we progress with our final implementation and launch of the model year '24, we're going to see impacts there as well, not only in terms of market, but also in terms of market share over time. And we're going to continue to keep a strict, selective approach, making sure that we get the pricing. So I would say we come back in the beginning next year, as we normally do, to have a view on the market and where the market is going for heavy and medium. But we're well-positioned in both of these markets. And I think, as I said, I feel comfortable that once we are really fully launched this product now, we're going to see the positive impacts coming, full confidence in that. It is a very, very good product in terms of all the different aspects. And I'll leave it to you, Federico, on the... Federico Donati: On the Defense, sorry, you were talking and referring to the mix, if I take your question correctly, correct, Alex? Alexander Jones: Yes, please. Federico Donati: Yes. But I think, in defense is more generally speaking, you need to consider that we have a very long and solid order book that just needs to be deployed. And so, probably looking at the defense just on a quarterly basis, it is much better to look at it on a full-year basis, and the marginality also. So this is just a question of looking at it on a yearly basis, and the mix can also change by region and by country, and by product itself. So as Olof said at the beginning, we are expecting the performance of each single business unit up year-over-year, and that will be the case for the Defense as well in Q4. That is what I can share with you. Operator: Thank you. That concludes the question-and-answer session. I will now turn the call back to Mr. Frederico Donati for any additional or closing remarks. Federico Donati: Thank you all, and have a nice rest of the day. Thank you. Bye. Operator: That concludes today's conference call. Thank you all for your participation. Ladies and gentlemen, you may now disconnect your lines.
Operator: Good day, everyone, and welcome to the PDF Solutions, Inc. Conference Call to discuss its financial results for the third quarter conference call ending Tuesday, September 30. [Operator Instructions] As a reminder, this conference is being recorded. If you have not yet received a copy of the corresponding press release, it has been posted to PDF's website at www.pdf.com. Some of the statements that will be made in the course of this conference are forward-looking, including statements regarding PDF's future financial results and performance, growth rates and demands for its solutions. PDF's actual results could differ materially. You should refer to the section entitled Risk Factors on Pages 16 through 30 of PDF's annual report on Form 10-K for the fiscal year ended December 31, 2024, and similar disclosures in subsequent SEC filings. The forward-looking statements and risks stated in this conference call are based on information available to PDF today. PDF assumes no obligation to update them. Now, I would like to introduce John Kibarian, PDF's President and Chief Executive Officer; and Adnan Raza, PDF's Chief Financial Officer. Mr. Kibarian, please go ahead. John Kibarian: Thank you for joining us on today's call. If you've not already seen our earnings press release and management report for the third quarter, please go to the Investors section of our website, where each has been posted. Bookings in the third quarter were strong as we continue to realize the benefits from our investments in product development and customer support. As we announced in the September press release, we signed an extension contract with a large customer that involves bringing our characterization vehicle infrastructure, Exensio characterization software and eProbe machines to their manufacturing sites as well as expand usage at their R&D site. The eProbe machines under this contract are provided under a subscription. Expanding beyond the machines they have in their R&D facility, we now have shipped 2 additional machines that are in the process of being installed at their first production site. Also in the quarter, we announced that we licensed Tiber AI Studio from Intel. With this license for source code, we are integrating the Tiber AI Studio's award-winning data science operations platform directly into Exensio. Tiber AI Studio enables engineers to build and manage hundreds of thousands of AI models. Coupled with Exensio's existing ModelOps, which enables model deployment in the fab and test floors, this integration is designed to enable engineers to use Exensio to both train models as well as deploy them. On a stand-alone basis, Tiber AI Studio already had hundreds of users. As we talk with our customer base, we are hearing the same message. They have great proof of concepts using AI, but scaling and maintaining large deployments remains elusive. We believe the integration of Tiber AI Studio with Exensio, which we call Exensio Studio AI is an important capability required to close this gap. Among the Exensio contracts signed in the quarter, notably, we signed an 8-figure contract with a large IC manufacturer. We are honored this customer selected Exensio as their data analytics platform, the primary repository of manufacturing data and the platform on which to integrate their internal systems using Exensio's big data APIs. As part of this contract, they will leverage Exensio Studio AI to manage their AI deployments in production. We also closed an 8-figure contract for secureWISE with one of the largest equipment OEMs in the world, which extends and expands their existing licensing. Finally, contributions to revenue from our Cimetrix connectivity and control software were the strongest since the acquisition closed at the end of 2020. Historically, the large equipment OEMs make their own control and connectivity software, however, as our market share has expanded and more equipment is now -- as our market share has expanded, more equipment is now shipped with our software installed on it than internally developed software of any single equipment vendor. This means, our software -- our customers enjoy software that is proven across more applications in the fab, test floor and assembly facilities. As we integrate Cimetrix, secureWISE and AI-enabled monitoring, we aim to enable equipment vendors to more easily deliver smart tools and value-added subscription services. Now, I'd like to turn to the environment. The industry is making significant investments in 3D manufacturing in front-end fabs and packaging facilities as well as product design. There is an increased geographic diversification of manufacturing locations. As those investments are ramping up, we see customers working to make the new processes, products and facilities economically viable. It is well understood that diversifying manufacturing comes with the risk of driving up production costs and slowing innovation. We see AI-driven collaboration as a critical capability to enable cost-effective and efficient manufacturing in many of these new locations. Last month, we were invited to present our vision of AI-driven collaboration at SEMICON CEO Summit in Arizona. My comments, which appear to resonate with the audience, outlined how the industry can leverage our secureWISE network, Sapience orchestration products, and Exensio AI to collaborate with their customers and suppliers. We have also noticed that our equipment, fab and fabless customers are looking for ways to move from human-driven collaboration to AI-driven collaboration, in part to enable more efficient production around the world. As we look to Q4, we are preparing for our users conference and Analyst Day. Since 2020, when we acquired Cimetrix, and began the journey to be a comprehensive analytics platform for the industry, we have driven results equal, or exceeding the long-term revenue growth, non-GAAP gross margins, and non-GAAP operating margin goals we set in 2019, and also have exceeded the revised goals we established in 2023. Before 2020, we had approximately 150 customers that were primarily fabs and fabless. We had few equipment companies and almost no cloud suppliers as customers. Today, we have over 370 customers, including most of the equipment industry and multiple cloud providers. It is a unique customer base as we bring analytics capabilities to every aspect of the semiconductor supply chain. Today, our cloud systems manage petabytes of data and secureWISE network transmitted exabytes. Our systems are used to control tens of thousands of tools. We believe the success we've achieved to date is due in large part to the relentless investments, including the acquisition of secureWISE and the build-out of our eProbe machines, both of which required us to use our balance sheet this year as investments were ahead of the growth they enabled. We expect the profits generated from these investments in 2025 will enrich our balance sheet in 2026 and beyond. Finally, I encourage you all to attend our Analyst Day and Users Conference. There you will see our customers, partners and PDF folks talk about the needs and opportunities for AI and analytics and manufacturing. We are honored to have Mike Campbell, SVP of Qualcomm; Aziz Safa, Corporate VP of Intel; Tom Caulfield, Exec Chairman GlobalFoundries; and Jean-Marc Chery, CEO of STMicro, among others, share their perspectives. Now, I'll turn the call over to Adnan. Adnan? Adnan Raza: Thank you, John. Good afternoon, everyone. Good to speak with you all again today. We are pleased to review the financial results of the third quarter and to bring you up to date on the progress of the business. We posted our earnings release and management report on the Investor Relations section of our website. Our Form 10-Q has also been filed with the SEC today. Please note that all of the financial results we discuss in today's call will be on a non-GAAP basis, and a reconciliation to GAAP financials is provided in the materials on our website. As you saw from our press release, with our Q3 results, we achieved another record for quarterly revenue. Our bookings for this quarter totaled over $100 million, as a result of multiple large deals signed across our product portfolio of leading-edge Exensio and secureWISE. During the third quarter, our bookings were greater than the prior 2 quarters combined. On a year-to-date basis, for the 3-quarter period, our bookings were 49% higher than the comparable period of last year. With the contracts John mentioned as well as additional business closed in the quarter, we ended Q3 with backlog of $292 million, which is 25% higher than last quarter and 22% higher than the same period a year ago. We are pleased that we were able to grow our backlog while delivering record quarterly revenue. Our total revenue for the Q3 period came in at $57.1 million or 10% higher than last quarter and 23% higher on a year-over-year basis. Our Analytics revenue came in at $54.7 million or 12% higher versus the prior quarter, and 22% higher on a year-over-year basis. The growth in Analytics compared to the prior quarter was driven by business from leading-edge customers and equipment software. Integrated Yield Ramp revenue was 4% of total revenue in Q3 and was lower by $0.5 million compared to the prior quarter and up on a year-over-year basis by $0.8 million. On gross margins, we reported 76%, or slightly ahead of last quarter, and down 1% versus last year's comparable quarter, which had meaningful perpetual software revenue in that quarter. As you will recall, our long-term target for gross margin is 75%. We're pleased that we were able to be ahead of that target for this quarter. Our operating expenses in Q3 grew 3% compared to the prior quarter, primarily due to spend related to development improvements for our platform and increased variable compensation accruals due to strong results. On EPS, we were able to deliver $0.25 per share for the quarter, our strongest quarter for the year. For the first 3 quarters of 2025, our EPS of $0.64 is now $0.06 ahead of the comparable period of last year. We generated positive operating cash flow of $3.3 million this quarter and $6.7 million for the first 9 months of this year. We ended the quarter with cash, cash equivalents and short-term investments of approximately $35.9 million compared to the prior quarter's ending cash balance of approximately $40.4 million. We repurchased $0.2 million of our stock this quarter at a per share price of $19.55 per share. During the quarter, we invested $6.3 million in CapEx, which is lower than the $8.5 million in Q2 and the $8.2 million in Q1 of this year. 2025 has been an important investment for us, like John said, as we use significant cash on the acquisition of secureWise and related integration expenses while only benefiting from a partial year of ownership. During the year, we also invested in building eProbe machines to meet customer demand in 2025 and 2026, without the benefit of full subscription run rate return on the investment within the year. Now with 2 additional machines shipped and going through qualification on a subscription model as well as the integration cost of the secureWISE acquisition largely behind us, we anticipate cash to grow over the next year. Given the strong business activity, the growth in our backlog and the customer opportunities in front of us, we reaffirm our prior guidance of 21% to 23% annual revenue growth range for this year. As we get ready for our Analyst Day and user conference on December 3, we look forward to sharing more details about our long-term targets for the next phase of PDF growth with you at that time. We are also thankful to our customers and partners for supporting the growth we delivered this quarter and look forward to growing sequentially again in Q4. With that, I'll turn the call over to the operator to commence the Q&A session. Operator? Operator: [Operator Instructions] Our first question comes from the line of Blair Abernethy from Rosenblatt. Blair Abernethy: Nice quarter. I just -- I wanted to just ask you a little bit about the BFI. I see that [indiscernible] more machines. The machines that are under the lease model, when does that start to generate revenue? Is that some point next year? Or is that first half of this year? Adnan Raza: Yes. We are going through the deployment and qualifications of those machines. Blair, as you know, those can take anywhere from 1 quarter or a little bit plus or minus on that time frame. So given that we have shipped, we expect within the next quarter or the quarter after, depending on the timing of those qualifications and the customer acceptances to start converting and generating the revenue. Blair Abernethy: Okay. Great. And how does the pipeline of opportunities look for the DFI right now? John Kibarian: Quite strong, actually. This is John, Blair. We do have other places where we would like to be able to ship machines. That's why if you did notice, we did spend some on CapEx this quarter in part to continue building machines, which we expect shipping in the first quarter of this coming year. We are hoping to squeeze in one more shipment this year, but it may be tight, just given the timing and what we're doing to bring up the machines already. So quite strong across a handful of customers. It's not a huge market for eProbes, but there's probably between 5 and 10 customers in the world, and we do have probably closer to 5 where we are actively engaged in discussion. Blair Abernethy: Okay. Great. And then just on the secureWISE, you won a large contract there this quarter. How is that -- how is the go-to-market there now that you've had it for a couple of quarters? Just kind of a sense of how that is building. John Kibarian: Sure. Yes. We actually had -- at SEMICON, right after SEMICON last in Phoenix this year, we had a little, what we called Connected Summit because in the past, the secureWISE team had had our users conference in conjunction. What was different about that was we had not just equipment companies come, but also fab companies attend. And in that conference, Intel presented how they are using secureWISE as their standard connectivity platform for both internally as well as to support the equipment vendors. We had felt that the way secureWISE had been run, it really only focused on the needs of the equipment vendors. And when we -- because of our DEX network, because of our work with the fabs and our -- just our general footprint, which, as I said in my prepared remarks, goes from everything from wafer makers through to system companies, we thought connectivity to the fabs was actually desired by lots of folks. In fact, when we announced that acquisition, the first congrats I got was from one of our largest fabless customers, who was very intrigued with the ability to get remote access at the OSATs and fabs. And so the Intel contract was a way of us, saying, okay, we're going to provide base capability on every machine at Intel. They announced that they're going to put this on every machine front end, back end and test facilities for their use as well as to make it available for some modest level of usage at every equipment vendor. When we talk to the equipment vendors that use secureWISE, one of their elements was not secureWISE itself, but the fact that they were not able to get it on every factory in the world, even if it was actually already installed at some factories, that factory may not give a specific equipment vendor access, maybe only the largest equipment vendors in the world typically got access at every factory in the world, and the smaller equipment vendors didn't feel like they were getting access, but they would much -- very much like it. They knew it makes them a lot more efficient, both for human-level collaboration as well as for AI-driven collaboration. So now that we've had this company in our hands for the product in our hands, for maybe 7 months now, if I think about it, what we started doing is selling it much more broadly into the fabs as well as into the equipment vendors, creating collaboration across them, which is what I talked about at SEMICON West. And we started piloting it at the OSATs and really merging it with our DEX network because the security and some of the features that secureWISE enables are very desirous, more broadly. So it becomes an integral part really within the first quarter, we were selling combined contracts, if you look at that first contract that we announced in Q2, which is really now that it's been announced, was effectively the Intel contract. And we see a lot more of that coming down the pipe. Operator: [Operator Instructions] Our next question comes from the line of Clark Wright from D.A. Davidson. Clark Wright: Quick question just around the customer concentration mix. Your Customer A that you guys referenced year-over-year went from 19% to 38%. I'd love to understand kind of how you're winning bigger and as well as how you're looking at using secureWISE as a potential point of the spear to expand the overall customer base? John Kibarian: Yes, that's a great question. If you look at our business, really, we kind of think about it in 3 categories. There is the fabs. They tend to buy almost everything from us. If you look at just the discussion I had around secureWISE as well as the test vehicles, the eProbe, Exensio, et cetera. And those are very large contracts, typically multiple contracts with the same account. And hence, you see the customer concentration. It's really not often of one contract, but of many contracts that gets those customers. They represent typically between 40% and 50% of our business in any given quarter, just looking at how things work. The fabless and system companies are around 35% to 45% of our business, and that's about 100-something, 150-ish companies. We are seeing more interest in AI on Exensio, the Exensio Cloud, the secureWISE connectivity and some of the what we call orchestration products, Sapience products. There, we've had a number of wins over this past year and continue to drive business there. And then lastly, about 15%, and we think in the long term, closer to 20% are the equipment vendors. We have about 200 of them with the acquisition of secureWISE that certainly grows our business with those customers. And they have access -- they have desire for the same access points that the fabless did. So the way we think about it over the long-term clock, you can think about fab customers as a nexus point. And they run factories and they control the data, but they need collaboration with their customers to get qualified, and their equipment suppliers to be able to reach effective use of the machines that they purchase and put into use in their factories. And so secureWISE, as you pointed out, is the point of that spear because it allows us the collaboration across a number of those customers. And the Exensio contract that we did this quarter, it has an element with regard to secureWISE because they want to be able to reach their customers through secureWISE on the Exensio platform from a collaboration standpoint. So this is how we see PDF becoming a platform for the industry rather than a platform for each individual company. And secureWISE is a very important element to that. Clark Wright: Awesome. Appreciate that color. And then just as it relates to the announcement made in the end of September around the landmark contract, you reaffirmed your guide for this year. Is there anything we should be considering as it relates to kind of the 2026 picture and what you can say so far around how that deal potentially sets up the company for kind of the next leg of growth? John Kibarian: Yes. We haven't given guidance for 2026 yet, and we'll do that as we get through Q4 and we do our Q4 call. But obviously, as we grow backlog, you asked a question about other, we do see a number of other opportunities on the horizon for the company over the next couple of quarters. We hope to have a strong 2026 on top of a very good bookings 2025. Operator: Our next question comes from the line of Gus Richard from Northland Capital Markets. Auguste Richard: I'm just curious on the systems you're sending to the production site. How many tools per fab do you think the customer is going to need? John Kibarian: Yes. I think it's early to say, Gus. Obviously, we've put two in the first site. Two is a good number because at least as these things are used in mission-critical manufacturing, if one were to go down, you would want to be able to at least route critical material to the other. So I think very rarely would it be one? I think the minimum number is two. And then the question is, with any inspection capability, how much of the dance card can you fill up? What we've noticed as we've installed machines around the world is it gets very quick to get these things filled at very high utilizations in part because they can see things that are very hard to see or maybe nearly impossible with other systems. So we'd like to go beyond the two, but right now, we think two. Auguste Richard: Okay. So these are near production, but not necessarily in line, not -- there's not... John Kibarian: Not in product, that's in your words. No. I said the reason why they want to is if one goes down, they want to be able to continue production, right? Auguste Richard: Okay. I just want to get it clear. And then of the -- you have several systems going out end of this year, beginning of next. I just want to understand, are these evaluation systems or are they for revenue? John Kibarian: These are mix. It will be a mix and then the next set of machines. There'll be a couple on eval and the remainder will be revenue machines. Operator: [Operator Instructions] We have a follow-up question from Blair Abernethy from Rosblat. Blair Abernethy: John, I just wanted to follow up on the Hybrid AI studio. Can you just -- you said there's 100-or-so customers for that. I'm just wondering if you can give us some sense of the time line of when that can go to market with the Exensio platform, i.e., when is the integration sort of ready for customers? John Kibarian: Sure. And I said actually hundreds of users. It's actually a very, very small number of customers, Blair. And -- but thanks for asking that clarification. We will have an integration at the end of this quarter. We actually signed this contract quite a long time ago, but due to timing of other contracts, we needed to wait before we could announce it. And we had had discussions with them going all the way back to 2024 around this opportunity, we had evaluated it in early Q1. As you can imagine, we were pretty busy in early Q1 because we're also closing secureWISE and then signed contract towards the end of Q1, then executed some activities in Q2 and announced in Q3, but we do -- so as a result, we've been working out with this code base for -- since all of Q3 and into Q4, and we expect to release some first level of integration with Exensio at the end of this quarter for some early access customers. Blair Abernethy: Okay. Great. Great. And then just on the Exensio Analytics business, what is the -- what's the renewal book look like as we kind of head into the end of 2025 here versus last year? And are you -- and maybe in recent contract signings, what sort of any changes in the term length of Exensio contract? John Kibarian: Yes. Typically, term lengths are 3 years. There are some that go as long as 5 and some that are short as 1 or 2. Our book is quite robust. The large contract we signed, the 8-figure contract we signed this last quarter was probably one of, if not the largest, stand-alone Exensio MA contract in the history of the company, as other larger contracts tended to have test operations or other components included in there. What we are seeing, we're going to talk about this at our user conference. Customers really want to have a scalable AI-first analytics capability. We're going to show our road map and what we're doing to have kind of analytics with AI-first, and what that means in terms of parallelization, the advances we're making around how to get to very large data sets interactively. They want the human interactivity with data still, but they want to be able to operate on data where you've got 1 million parameters and 10 million data points. And you really can't do that with conventional business intelligence tools, right? If you look at Exensio or any of the tools out there, you're limited by the compute. And -- we're going to show what we're doing to break through that problem. Studio AI is a very -- is an element to that, a very critical element to that because even when you're interacting with 1 million parameters, you need to use AI methods to screen and to tell you what part of that data set you should look at. And so what we'll demonstrate in December is ways of being able to operate interactively, leverage AI first and move -- work with data sets that you really couldn't do anything, but a batch mode in the past by leveraging basically a native AI approach and a natively parallel approach. You can think of a lot like moving algorithms from CPUs to GPUs, you get to scale with compute. What we will show is how you can leverage GPUs and other computing elements in an interactive analytics capability. And we are hearing from our customers that this is what is desired. We have a number of renewals that are coming up this year, and primarily next year that I think will benefit from this capability. Blair Abernethy: Okay. Perfect. Great. Yes, excellent. The other question I just had was around Sapience. Anything to report there or any progress with the partnership with SAP? John Kibarian: Yes. We've got a number of activities going on, on Sapience contracts. We do expect to announce something related to Sapience in Q4 in terms of customer -- additional customer business. And you'll see us announce something in the Sapience family at our user conference that's really building on top of Sapience some capability targeted to the fabless and system company that we expect to announce at our user conference. Operator: Our next question comes from the line of Clark Wright, D.A. Davidson. Clark Wright: Awesome. Appreciate the time. Look, any findings from SEMICON West in terms of how the end markets and the health of those sound relative to the beginning of the year or your expectations? John Kibarian: Yes. Clark, it's a great point. It was an interesting SEMICON, I think, because it's the first time SEMICON West was not in San Francisco, people couldn't go in and out. You're kind of stranded in Phoenix. So there was a lot more informal conversations. And we did meet with also a lot of our -- not just our equipment customers, but I would say our fabless customers and a lot of our fab customers. And what we heard were a few things. Yes, the build-out on AI is continuing to go on. All the equipment customers participating in advanced packaging, everything around advanced nodes, on logic side do see and on the DRAM side, do see a pretty rosy outlook for 2026. I do think they're in a pretty strong position. Our customers selling into automotive, industrials and communications, the ones with very differentiated products do seem to be talking about a robust 2026, I think that's still a mixed bag. There are customers in that sector that have some challenges to work through, but I would say for the first time, the kind of ones that have very differentiated products that are much more bullish. So I would say you start seeing kind of a more broad base of enthusiasm within the customer base, than, I would say, 3 months ago or 6 months ago, where it was really limited to just the people on the very advanced nodes and advanced packaging. So I do think it was more broad, not fully, I would say, not fully broad to everybody, but definitely more broad than where it was in terms of positiveness than where it was 3 or 6 months ago. And then lastly, I would say, our fabless customers as they are becoming more and more embracing advanced packaging are recognizing they're becoming a manufacturer. And that means ability to communicate with the OSAT, more complex test data feed forward and other test flows. We had a lot of dialogues with customers on that topic and how can they effectively become more aware of what's going on in manufacturing. In the past, they would order a wafer from the foundry. And once they hit wafer sort, there wasn't a lot to worry about. But now they've got everything from operationally make sure they have organic substrates available and manage the supply chain of that -- of the production post the wafer sort as well as having many more test insertion points and needing to be efficient in how they leverage. And we've heard a lot of dialogue from customers in that regard. And I think that will be a growing area, as we move from just the very few high-valued, not terribly high-volume chips driving advanced packaging today to a much broader set of customers trying to leverage these advanced packaging test flows. Clark Wright: Got it. And then in terms of Cimetrix and kind of the shadow backlog, last quarter, you kind of referenced the fact that tens of millions there, has that upticked as well this sequentially? John Kibarian: Yes. As I said in my prepared remarks, we had a very strong quarter. We referred to it as revenue because the booking and the revenue happened in the same quarter on the runtime licenses with secureWise. In other words, we get designed in on the SDK and then they ship. What we noticed is, as I said in my prepared remarks, at the end of 2024, and we see it again this year, is more equipment is shipping with our software than with any of the proprietary software systems that the companies build. And I think that's really giving our software the reputation of being very robust and very applicable. A lot of our equipment companies that used to be on the front end are now trying to bring in tools to the back end. Our software is already proven in back-end assembly facilities. Our tester companies are doing much more sophisticated system-level tests with more robots, and our software is very proven with that capability, too. So we do see a fair amount of activity, design activity in some of the customers evaluating our SDK. Net, when you look at our runtime licenses, Q3 was very significant. It was a good quarter for us, a very good quarter for us. We don't get a lot of visibility. So we hope to sustain that in Q4. We don't have as much visibility because we only see it when they ship. But overall, while quarter-by-quarter may be difficult to predict on an annual basis, the trend is quite positive as more and more equipment ships with our software, and they use our software for more functionality, which means they buy more of the Cimetrix modules. Operator: Our next question comes from the line of Andrew Wiener, Samjo Capital. Andrew Wiener: I wanted to maybe follow up on, I think you touched on it a little bit in the last answer, but I noticed that 2 of your partners in the test space, Advantest and Teradyne both posted very strong results and outlooks. And you've talked in the past about Advantest and the complexity around test being a strong secular driver for the company. Can you maybe elaborate a little bit on what you're seeing and how the opportunity for us? Is it coincident with -- as they see strong shippings, does our bookings or opportunities lag theirs and sort of any other color you could provide? John Kibarian: Sure, Andrew. Thank you for the question. Yes, you're right, it tends to lag. We see that, by the way, with our yield ramp business over the years, too. And kind of my prepared remarks saying we've seen lots of people building out 3D production and test and assembly with -- and now they're trying to figure out how to get a good return on a lot of these investments. We see that with -- that's part of what's driven our characterization vehicle and eProbe bookings over this year and a lot of our evals that are ongoing are folks recognizing they've got to get a return on what they've just put on the ground. So we would expect on the advanced test for advanced packaging, we will also lag our partners in that regard. The biggest application we see, and we've got a number of pilots going on with customers is data feed forward. And what this means is they have -- as there's many more packaging steps, they have a lot of test insertion points. So they test more than once at wafer sort, more than once at final test and once at system-level test. There's multiple wafer sort tests, multiple test points package, even sometimes as part of the package flow. And then finally, system-level test. And they do these at different temperatures and different conditions for these very large data center chips. The nature of that is they want to see forward data. Typically, they take the raw data, run an AI model, extract features and send it downstream to another test insertion point. And as the data is coming off that test, they will use that as a basis to decide to test more or test less. Our original strategy on this, Andrew, was to not be in the modeling business at all, but provide them the infrastructure for kind of orchestrating the data up and down the supply chain. We've got pilots ongoing with that. We actually have a customer deployed using that on tens of tools now over a year in production across multiple OSATs. And even that customer has come back to us and said, "Hey, we need capability to be able to build and maintain the models, not just move the data around." And that was really the Tiber studio -- Tiber AI Studio, I forget the name, right. We thought our customers would be able to do that on their own, or there were systems to do that on their own, but the reality is there's a lot of friction to getting that work done, too. And so the integration with Exensio Studio AI with Exensio ModelOps is to help them not only run the model in production, but manage the model through the build and through the life cycle in their central servers. So I don't think this is a 1-quarter bang and everything is going great. Andrew, we're going to see win by win by win with customers, but I would say we have a handful of pilots going on in data feed forward at this point. We've got some in production already, and we do anticipate that to becoming an increasingly important part of our Exensio test business. Andrew Wiener: Okay. And would you think that would be like a 2026 sort of time line? John Kibarian: Yes. I mean, the majority of that business impact will be in 2026, to be honest. This year, there may be some additional contracts won, but the revenue impact will be de minimis. Andrew Wiener: And then following just -- I want to clarify something. So the 2 tools -- 2 DFIs that were shipped and are in the process of qualification, it sounded like the way you described it, they could get qualified this quarter, or maybe not. Is it then fair to say that, Adnan, I think in the past, you've talked about multiple ways to get to guidance. You guys feel comfortable with the guidance, even if there -- these tool qualifications slip into Q1? Adnan Raza: Yes, Andrew, exactly. I mean, any time we're looking at a quarter, particularly when we're speaking to comments such as the ones that we put in my prepared remarks about, sequential growth for Q4, and also both in John's and my remarks about the reaffirmation of the 21% to 22% guidance, you're absolutely right. We're thinking about this and then other ways to get there. So look, if the timing happens this quarter, great, but like John said, there's many other opportunities we're working on across the product platform portfolio that we have. Andrew Wiener: And then maybe... John Kibarian: this is a little bit our timing. The timing on qualification would be towards the end of the quarter in any case. So the in or out is not a tremendous amount. Andrew Wiener: Okay. So again, the qualification of those tools regardless would be more of a tailwind to 2026 versus the earlier question about, correct. And then maybe just a little more color on -- I mean, obviously, you talked about rough engaged with 5 customers or potential customers on DFI. How -- is there memory customers in that bucket? Or are we still primarily focused on logic? And to the extent it's logic, is it -- you have 2 sort of other customers that have accepted tools? Are they looking at what your lead customer has done and the conversations around sort of a similar broader deployment along those lines? John Kibarian: Yes. It's actually all of the above. So with our existing customers, we see interest in more machines as they see the value, including the value of putting these in manufacturing and using these to monitor lines. They -- with new customers that are in the same areas our earlier customers, maybe at different feature sizes, but logic manufacturers. We do -- we started getting ongoing pilots with customers where they're sending us wafers and showing them what you can do. And it is a very unique capability. So we're able to show usually within a wafer or a few what you could see that's hard to see elsewhere. And then lastly, as I've said throughout the year, we have interested in doing pilots on DRAM for just about 12 months now, maybe 13 months. And you got by sending wafers to our facility here in California. And we're getting ready to be able to ship. I think the limiter on shipping is really us not at least one of those customers being in a position to ship given what we've been doing to bring up these machines and manufacturing this year. And at the engineering level, there's a lot of similarities to what we're doing in the logic side, but it's very, very different process technology, if it's memory versus a logic technology. But also exploiting the unique capability of the machine and the software. Andrew Wiener: Okay. And then just lastly on the Tiber. So just to be clear, like -- so it didn't -- we didn't come over with existing revenue. But in the press release, it said something about like supporting customers through this transition. Anything you -- sort of that contributes will be going out and selling once the integration is complete? John Kibarian: Yes, that's correct. The majority of the customers were not in semiconductors. Some have interest for us to support. And we may -- we are talking to only a very small handful about having them be supported on the stand-alone version of the product. Obviously, we licensed this from Intel. Intel itself was an internal user of the product. And for them, we will support it -- offer to support it both ways, both stand-alone and with Exensio. There's a lot, a lot of value getting it integrated in Exensio for a semiconductor customer, because it didn't really support any visualization of the data, the model, the results, just really visualization on running the models and algorithms. So Exensio and you didn't have a database for storing the data set you want to use. And then once you're done, you want to be able to store all of that information, so you could always go back and recreate it, and Exensio has capability for that model registration and things like that. So I think for that -- the user base, which is primarily at Intel, that was in semiconductors and using it, I think it's quite advantageous for them to use the integrated version. For the small number of non-semiconductor customers, they may use a stand-alone version. Operator: [Operator Instructions] There are no further questions. Ladies and gentlemen, this concludes the program. Thank you for joining us on today's call.
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: Ladies and gentlemen, thank you for standing by. Welcome to the Badger Infrastructure Solutions Limited Third Quarter 2025 Results Call. [Operator Instructions]. As a reminder, this event is being recorded today, November 6, 2025, and will be made available in the Investors section of Badger's website. I would now like to turn the call over to Anne Plaster, Director of Investor Relations. Anne Plaster: Good morning, everyone, and welcome to our third quarter 2025 earnings call. Joining me on the call this morning are Badger's President and CEO, Rob Blackadar; and our CFO, Rob Dawson. Badger's 2025 third quarter earnings release, MD&A and financial statements were released after market close, Wednesday, and are available on the Investors section of Badger's website and on SEDAR+. We are required to note that some of the statements made today may contain forward-looking information. In fact, all statements made today, which are not statements of historical facts are considered to be forward-looking statements. We make these forward-looking statements based on certain assumptions that we consider to be reasonable. However, forward-looking statements are always subject to certain risks and uncertainties, and undue reliance should not be placed on them as actual results may differ materially from those expressed or implied. For more information about material, assumptions, risks and uncertainties that may be relevant to such forward-looking statements, please refer to Badger's 2024 MD&A along with the 2024 AIF. I will now turn the call over to Rob Blackadar. Robert Blackadar: Thank you, Anne. Good morning, everyone, and thank you for joining Badger's 2025 Third Quarter Earnings Call. Before we get into the results, I'd like to take a moment to talk about safety, which is how we start all of our meetings here at Badger. As we move into the colder weather months, it is essential that our teams remain prepared for unexpected situations, including severe winter weather, equipment issues and any emergencies. We encourage all of our team members to review emergency response plans and ensure vehicles are equipped with winter safety kits. Staying informed about local conditions and having accessible, well-maintained safety gear can make a critical difference. We appreciate everyone's continued commitment to safety and the teamwork -- and teamwork as we prepare to enter into the winter season. Now on to the quarter's results. Building on the positive momentum from Q2, the team delivered another strong quarter of double-digit growth in revenue, gross profit and adjusted EBITDA. Our record Q3 top line revenue of $237.3 million grew by 13% company-wide over the prior year. We continue to see solid demand in our end markets in both local customer and project-based work. I will provide more detail and context on our broad and diverse end markets later in the call. Our positive results reflect the team's work to increase utilization while continuing to grow the fleet. Ongoing investments in sales and marketing initiatives, including consistent performance to capture pricing opportunities are also reflected in the results. Adjusted EBITDA grew at a faster pace than revenue, up 15% year-over-year. These results highlight Badger's continued strong operational efficiencies and the optimization of our overhead support functions. Accordingly, adjusted EBITDA margin increased by 40 basis points, to 28.2%. We achieved RPT or revenue per truck per month of $47,921 in Q3, up 8% compared to last year. This improvement reflects our fleet utilization and pricing efforts. Our Red Deer manufacturing plant delivered 57 hydrovacs this quarter versus 48 units in Q3 of last year. We are updating guidance for our full year fleet plan, mainly due to increased demand from our end markets. As Badger's growth in revenue and business volumes have risen, we have increased our rate of manufacturing to ensure we have the right capacity to meet our customers' needs. Accordingly, we expect 2025 hydrovac production at the upper end of our original 180 to 210 unit range. We also successfully consolidated a Badger franchise in Denver, one of our core markets and have accelerated the planned refresh of its fleet. As a result, we expect our 2025 retirements to be at the upper end of our original 90 to 130 unit range. We are excited to gain full control of the Denver market and bring Badger's size and scale advantage to accelerate market share. We retired 36 units in the quarter, bringing us to 98 hydrovac units retired year-to-date. We refurbished 5 units in the third quarter and have completed 23 so far in 2025. The refurbished program has lagged our expectations this year, mainly due to third-party facility capacity. We are reducing the 2025 refurbishment range from the original 50 to 60 units down now to 30 to 40 units for the full year. We plan to develop our own refurbishment facility in the Central U.S. to better control the pace and the cost of this program. This new facility is anticipated to be online and operational in 2026. The company ended the quarter with 1,703 hydrovacs in our fleet, growing the fleet by 5% since Q3 of last year. Revenue and profitability grew at more than double the rate of fleet growth, exemplifying Badger's operating leverage and capital efficiencies. With the increase in hydrovac production, the consolidation of the Denver franchise as well as targeted growth in strategic market branches, we expect our range of 2025 capital spend to increase from the original $95 million to $115 million range to now between $115 million to $130 million. I'll now turn the call over to Rob Dawson to discuss our Q3 financial results in more detail. Robert Dawson: Thanks, Rob. Our solid financial results this quarter reflect the strength of our business model and the continued disciplined focus of our team. As Rob noted, we have continued to grow our bottom line at a higher rate than revenue, reflecting the ongoing execution of our road map to build scalability. In addition to the continued advancement of our commercial and pricing strategies, steady improvements in the utilization of our fleet have contributed to our performance this year. The trend in our adjusted EBITDA margins continued to rise in the third quarter, up 40 basis points to 28.2%. In particular, the addition of our fleet module and our universal data platform are showing value in the management of both our fleet and labor force. We have also continued to scale our support functions and G&A spending. This margin expansion remains on track with Badger's long-term objectives. G&A expenses were $10.6 million or 4% of revenue compared to the $9.8 million or 5% of revenue last year. Finally, adjusted earnings per share was $0.91 per share, up 25% compared to last year. As Rob has already noted, revenues and adjusted EBITDA are growing at a faster rate than our fleet, adding to the bottom line profitability and longer term, continuing to drive higher returns on capital. With year-to-date revenue up 11%, adjusted EBITDA up 16% and adjusted EPS up 29%, we are encouraged by the continued scalability and growth in margins here at Badger. Turning to the balance sheet. Our compliance leverage ended the quarter at 1.3x debt to EBITDA, down from 1.5x in the same quarter last year. It is notable that we have the financial capacity to continue advancing our organic growth strategy and maintain a stable, strong balance sheet. We renewed our NCIB program in the third quarter, maintaining our ability to make opportunistic share purchases in addition to returning capital to our shareholders through dividends. During the third quarter, we did not purchase any shares under our NCIB. I will now turn things back over to Rob Blackadar for some final comments. Rob? Robert Blackadar: Thanks, Rob. So before we open up for questions, I'd like to share a few last comments regarding our market outlook. Badger's end markets have largely recovered following the slower activity we experienced in the back half of 2024 and early '25. As we move through the remainder of 2025 and into '26, we're seeing positive indicators of sustained growth, particularly in key U.S. regions and large metropolitan areas where demand remains robust. Our strategic focus remains unchanged. We continue to leverage our deep customer relationships, both locally and through our national accounts teams to drive market density and capture operational efficiency in our core geographies. The execution of our commercial strategy continues to help Badger capitalize on large infrastructure projects such as airports, light rail transportation, expansion of petrochemical and LNG facilities as well as data centers. Supporting all of these trends is the increased demand for power generation and transmission, particularly nuclear, natural gas and solar. These projects are in addition to the continued maintenance and renewal of existing aged infrastructure in many of our more mature markets. Overall, we expect to continue to benefit from these favorable tailwinds driven by significant and sustained growth in infrastructure and construction spending in our major markets. With one of the most capable fleets in the industry and a broad operational footprint spanning 44 U.S. states, 6 Canadian provinces, we were best positioned to capture long-term growth opportunities. As end market demand continues to strengthen, we remain committed to the disciplined execution of our strategy and to delivering sustainable value for our shareholders. So with those comments, let's turn it back to the operator for questions. Operator? Operator: [Operator Instructions] And our first caller is Krista Friesen from CIBC. Krista Friesen: I was just wondering if you could give us a little bit more color on the amount of work that you're doing around data centers and if you're willing to share kind of what percentage that makes up of your work right now? Robert Blackadar: Krista, so we -- and we've shared this at some recent investor conferences because we get asked this. Obviously, data centers are kind of the big buzz right now. It's been trending in that 5% to 8% range, direct work on the data centers themselves and then some of the support functions around the data centers, I think in terms of the subcontractors, et cetera, is probably another 3% to 4%. So I would say all in, including the ancillary support around the data centers, I'd say, in that 10% to 11% range, something like that. But directly on the data centers themselves, I'd say 6% to 8% right there. Krista Friesen: Okay. And then maybe just on a different topic. Do you have any update on how tariffs are impacting your business? And just given the announcement a little while ago on heavy trucks, if that's impacting your business? Robert Blackadar: Do you want to cover that, Rob? Robert Dawson: Yes, sure thing, Rob. Thanks for the question, Krista. We continue to monitor, obviously, the tariff situation very closely. I think a couple of things just overall with regards to tariffs. 100% of our business results are entirely unaffected by the tariffs, and that's mainly to deliver excavation services to our customers. And so it really only affects the supply of trucks to our business from our manufacturing facility in Red Deer and specifically to our businesses in the United States. We continue to monitor it very carefully. There has been no real clarity on the situation with heavy trucks right now. And so we don't really have a lot to say specifically about what the impact may or may not be. We continue to be fully CUSMA compliant, and we have not paid any tariffs to date on our truck builds. And I should also point out, I think we talked about this at Q1 that when we think about a worst possible case scenario where we would have, say, a 25% tariff on our entire manufacturing production for the year, it still would increase our CapEx for 200 trucks in the neighborhood of $10 million to $20 million. We'd still continue to be showing the same kind of balance sheet flexibility we have today, and the net impact on our earnings per share would be in that 1% to 3% range. So while we are closely monitoring the situation, we continue to believe that it's an issue that doesn't impact us to the degree of [indiscernible] third-party manufacturers and sellers of equipment across the borders. Operator: And our next caller is [ Joshua Bains ] from TD Cowen. Tim James: Yes. Actually, it's Tim James here from TD Cowen. Congratulations on the good results. My first question, I'm just wondering if you could comment on any findings that you've got or that you're seeing in terms of the longevity of the refurbished units that you're doing and putting back out in the field. I believe you expect an additional 5 years typically from those. Anything you're observing that would give you a reason to believe that, that could be actually extended or shortened? Robert Blackadar: Yes. Great question, Tim. We -- we're very pleased. Obviously, we're pleased enough that we're going to build our own facility to help even fast track even more units. Very pleased with the first 18 months of the program. And the thing that we're displeased with is the ability to get more through our current third-party facilities. But to frame it up, Tim, and some people on the call may not be aware of the context, we take a thoroughly inspected 9-, 10-, 11-year-old hydrovac that we've owned its entire life. We make sure that it has really strong frame rails, and the underbody components are very, very strong on it. And we replace four large components of the unit, which is the engine; the transmission; the transfer case, which is how you transfer the power from the engine to the hydrovac on the back; and then the blower, which provides the suction on that. To do that whole exercise, then we do repaint or touch up, put on new tires, new seats and cabs for our operators, so they have a good experience in a truck. We put it back on the road, and that's anywhere from 175,000 roughly to around 185,000. It gives us an additional, we believe, 5 years. So far, Tim, in our first 18 months of doing this, we've had wonderful success. And in fact, a few of our employees have said that the truck is running better than it did when it was new. And again, these are mostly our Gen 4 trucks, the previous generation of trucks. We are very pleased with their performance so far, very little maintenance or breakdowns on them other than just routine preventative maintenance, PMs. And then the last thing I'll share is, each one of those trucks on those new components -- and those are the most expensive components on the chassis. Those components come with a 3-year warranty unlimited miles. So there really is no downside to the investment we're making. As far as do we think it can go beyond 5 years and maybe it's 6 or many, many of our chassis are run on the same model chassis we use for dump trucks and flatbeds and various other over-the-road type environments, and trucks have around a 20-year life. We do believe, though, in certain applications, our trucks are run in a little bit higher duty. So we're not sure if it's going to be 5, 6, 7 because it's still early on, and we're through our first batch right now, but we're very encouraged right now. But we're going to stick with the 5-year life at this point. I don't know if you want to add anything on that. Robert Dawson: No, I've got nothing else to add. Robert Blackadar: So hopefully, that answers your question, Tim. Tim James: That's very helpful. I'll just have one more quick one, if I could. And I realize Canada is a relatively small portion of your business in North America. But I'm curious if Canada's budget released this week, if there's anything in there that caught your attention as surprisingly positive or negative in terms of opportunities for Badger in Canada over the coming years. Robert Dawson: Tim, it's Rob Dawson here. Thanks for the question. I don't think we would point out any one thing from that Canadian budget, but I would say that we are very encouraged by this government's support for the return of large project, an infrastructure project renewal in Canada that has slowed down so much over the past, say, 5 or 6 years. And we are already starting to see the benefit of some of those, just a change in tone. In particular, our Western Canadian business is back to growing. Our Central Canadian as in Ontario is also starting to show some signs of really solid performance. So overall, quite encouraged by the change in tone and the return to large project resource spending that has made Canada what it is. Robert Blackadar: And I'm going to add one thing, Tim. We have several of our larger construction customers there in Canada that, in a weird way, they're also kind of our peers, but they're our customers. I don't want to name them because the moment I start naming some customers, you always leave one or two out and make some crabby, so I don't want to do that. But we're very encouraged that several of our publicly traded customers are press releasing these large project wins, and we love supporting those customers and partnering with them. So just as Rob suggested, it seems like Canada is really making an effort to reinvest in some of the infrastructure and a lot of projects that we were seeing regarding -- around power as well as hospitals and some airports and stuff. So very encouraged what we're seeing coming out of Canada. Operator: Thank you. And that seems to be all of our callers. So I will turn it back over to you, Rob. Robert Blackadar: Thank you, operator. So on behalf of all of us at Badger, we want to say thank you to our customers, our employees, our suppliers and shareholders for your ongoing support that drives Badger's success. Operator, you may now end the call. Operator: Thank you. This concludes today's event. Thank you for participating.
Operator: Good day, and thank you for standing by. Welcome to the PureCycle Technologies Third Quarter 2025 Corporate Update 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 speaker today, Eric DeNatale, Director of Investor Relations. Please go ahead, sir. Eric DeNatale: Thank you, Kyle. Welcome to PureCycle Technologies Third Quarter 2025 Corporate Update Conference Call. I am Eric DeNatale, Director of Investor Relations for PureCycle. And joining me on the call today are Dustin Olson, our Chief Executive Officer; and Jaime Vasquez, our Chief Financial Officer. This evening, we will be highlighting our corporate developments for the third quarter of 2025. The presentation we'll be going through on this call can also be found on the Investor tab at our website at purecycle.com. Many of the statements made today will be forward-looking and are based on management's beliefs and assumptions and information currently available to management at this time. The statements are subject to known and unknown risks and uncertainties, many of which may be beyond our control, including those set forth in our safe harbor provisions and forward-looking statements that can be found at the end of our third quarter 2025 corporate update press release filed this afternoon as well as in other reports on file with the SEC that provides further details about the risks related to our business. Additionally, please note that the company's actual results may differ materially from those anticipated, and except as required by law, we undertake no obligation to update any forward-looking statements. Our remarks today may also include preliminary non-GAAP estimates that are subject to risks and uncertainties, including, among other things, changes in connection with quarter end and year-end adjustments. Any variation between PureCycle's actual results and the preliminary financial data set forth herein may be material. You're welcome to follow along with our slide deck or if joining us by phone, you can access at any time at.purecycle.com. We are excited to share updates from the previous quarter with you. With that, I will now turn it over to Dustin Olson, PureCycle's Chief Executive Officer. Dustin Olson: Yes. Thanks, Eric. Thank you all for joining today's call. It's been another quarter of meaningful progress for PureCycle across all parts of the business. We're ramping operations, we're starting to ship to key customers in Q4, and we're excited about the growth ahead. I'd like to begin with the recent board changes that we announced. I'm very pleased to welcome our newest Board member, Dr. Siri Jirapongphan. Dr. Siri has an impressive resume and I believe he is going to be instrumental in PureCycle's future success. He's the former Chairman of the Board for IRPC, this is our partner in Thailand and is currently serving as an independent director of Bangkok Bank, the largest bank in Thailand by assets. Dr. Siri is an incredibly bright individual. He's got degrees from both Caltech and MIT and chemical engineering, and he has already made an impact when interacting with the Board and the PureCycle team over the last few weeks. His polymer expertise has deep network in Southeast Asia and passion for PureCycle is bringing good energy and perspective to our decision-making process. He will serve a key role in our debt financing activities as well as support our technical and project teams. I'm excited to have him join the team. I'd also like to personally thank Jeff Feeler for his service on the Board over the last 4 years. He has been an instrumental part of getting PureCycle to where we are today. And from a personal perspective, he has taught me so much about how to think about our business, our activities and how to lead this organization effectively. His departure coincides with Dan Gibson of Sylebra Capital joining the Board 3 months ago. Operational performance has shown steady improvement. Ramp-up activities underway at both Denver and Ironton further reinforcing our confidence in the business trajectory. Q3 was one of the highest quarter of production in the company's history. September was the highest month at 3.3 million pounds and was limited by fee. At the end of Q3, we successfully added a second shift in Denver during the quarter and plan to add a third in Q4. This will bring Denver's capacity to approximately 100 million pounds annually. The compounding expansion at Ironton continues to be on track, and we expect this to significantly reduce complexity of supply chain, improve our product offering, lower our cost and meaningfully widen the market for available sales. On the commercial front, we continue to make a lot of progress. We scheduled to ship material in Q4 to P&G's converter for application production that are scheduled to the shelves in early '26. Additionally, we are working to finalize and ship for other P&G applications in Q1. We continue to add to the P&G funnel. We have made major strides on the operational front, and we believe we have alignment to meaningfully grow their volume in 2026. We have also made standout technical progress on numerous applications and are beginning to narrow the focus to high-value applications. One of the biggest successes have been with white thermoform coffee lids, this led to progress with 3 of the top 5 quick service restaurant companies or QSRs and we expect to be shipping into stores for a top 5 QSR group in the fourth quarter and ramping in 2026. We've made tremendous strides in the commercial and general trajectory is very positive. We've also made -- we also have a much better sense of what our customer volume expectations and needs are for the next year. While the timing of any ramp is always hard to pinpoint with certainty, we do see initial volume indications between Emerald, Procter & Gamble, QSR coffee lids and other converters in the range of about 40 million to 50 million pounds annually. To put a blunt point on it, we see significant volume converting from just 4 to 5 projects, and we have another 75 to 100 projects churning through the hopper. Given our technical successes and the product line that we've developed, we feel confident about the long-term demand for Ironton. The sales funnel continues to be very strong and successful conversion of only some of these would be large enough to sell out Ironton many times over. The focus has shifted more towards converting these large applications into sales and less towards growing the funnel. Even in a challenging consumer spending and petrochemical environment, we continue to see robust demand and pricing in line with the unit economics we have previously laid out. Our growth plan continued to progress during the third quarter. The personnel in Thailand continues to grow, and I'm excited about the team that is being put in place. The Antwerp permitting process continues on schedule, and it is extremely good news that our proposal to the EU Innovation Fund or EIF, was accepted. We expect to receive final grant approval of up to EUR 40 million by the end of Q1. We continue to progress our Gen 2 purification design work through Augusta and beyond and expect this to be completed in the first half of 2026. Overall, this has been another quarter of extreme progress. Branded shipments are moving. We're in the final stage of commercial negotiation with a number of very large potential applications, and we are accelerating. We are doing something that has never been done before. The operation Ironton and Denver continued to show progress during the quarter. Ironton produce 7.2 million pounds in this quarter and 3.3 million pounds in September, both new records. Denver continues to ramp as well, processing 9.4 million pounds of feedstock in Q3 and 4.4 million pounds in October. This was possible due to strong reliability performance and successfully adding a second shift in Denver. We have plans to add a third shift in the near future, and this will allow Ironton to continue to ramp to higher rates of production in coming quarters. We have developed a really strong relationship with our feedstock providers and are taking product from numerous locations, some of which are among the largest waste companies in the country. These companies value steady and ratable offtakes and thus, it makes sense to deliberately and systemically ramp Denver volumes in conjunction with Ironton production and sales, and speaks to our confidence in the commercial ramp in front of us. The amount of feed coming out of Denver was a constrained Ironton production in the quarter and with the additional shifts this should be relieved going forward. The 100 million pound compounding expansion at Ironton that we announced last quarter is on track for mechanical completion in December. And in addition to that, we've already installed the Co-Product 2 extruder on-site and started the operational commissioning. This compounding capacity that we're installing will allow for reduced complexity of supply chain, improved product offering, lowers our costs and should widen the market for available sales. The Co-Product 2 compounding expansion is already showing positive results. As you can see in the pictures on Slide 4, we can now take raw Co-Product 2 coming out of Ironton and compounded into a sellable pellet that we have already sold into the market for $0.20 to $0.30 per pound. As we have ramped Denver, we have developed market outlets to sell the non polypropylene co-products. As we have found markets for approximately 20% to 30% of the bale, that is non-PP, which results in approximately a net 20% reduction in feedstock costs. This is inclusive of the waste disposal costs for 18% of the bale that we are currently not selling. This is a really big deal. And I believe it's only the early innings of this co-product optimization and that it will be a big driver in our long-term low-cost story. Operations continues to make progress, and I feel increasingly confident about our ability to ramp production in coming quarters. To pace the commercial ramps, we expect to run the facility at 60% to 70% rates for the next 3 to 6 months and then ramp to near nameplate in the second half of the year. Now turning to the commercial update. Some of the largest brands and companies in the world are becoming interested in our products. This is a tremendous endorsement for the quality of our product and the future of our company. It's important for our teams to stay focused on developing these high-quality demand applications like this. While there have been some delays with respect to the overall rollout, it's important to note that none of that was driven by technical capabilities of our product or the market's underlying demand for it. The delays relate to developing regulatory dynamics in states, which are largely behind us as well as the natural delays that came from 2 mergers among the 4 largest global converters. Both mergers impacted the timing for a few contracts that we had initially expected to close, start moving in Q3. None of this has impacted the long-term progress or where things are going. Frankly, confidence in the end state of where Ironton is headed has only improved. I continue to see potential demand in the funnel, well exceeding our ability to supply it by multiple times over and a growing list of qualified products to take us there. If you combine the customers that we're beginning to ship to, with the ones we already have high visibility to ship to in the near term, this represents approximately 40 million to 50 million pounds annually at full ramp. I've spoken a lot over the past few quarters about how our resin continues to get qualified in numerous applications, especially those like film and fiber that traditional mechanical recyclers cannot serve. I've also talked about the value of compounding business and how it is a core component of how we can take our purified product and transform it into exactly what the customers require. So with that in mind, I think it's valuable to present to the market our current product portfolio with which we're going to market. There's a lot of technical data in there, but I think it's important to note a few things. First, all of our products serving food-grade end markets have FDA LNOs. Second, all of the material that we process has both Green Circle and APR certifications for post-consumer recycled content. Third, our general purpose material does not require compounding. However, we use compounding to augment the mechanical properties and to deliver a single pellet solution to customers. This product portfolio is a function of a lot of incredible work by our technical and R&D teams as well as demand and pricing discovery by our sales team over the last year and is a big part of why I'm so excited about the future of PureCycle. No other recycled PP producer can offer to the market what we can. Last quarter, we told the market that we had 17 applications that had successfully passed industrial trials and that we're in later stages before commercialization. I want to give as -- I want to give a detailed and update as possible on these. The key takeaways here is that we are progressing and converting the funnel. We completed negotiations with an unnamed consumer goods company during the quarter and expect to ship product for a thermoform application in Q4. 2 large applications for yogurt cups had to undergo lengthy odor and taste tests, but that's now complete. We successfully made industrial adhesive tape for a top 5 manufacturer during the quarter. This is very similar packaging tape consumers use every day when preparing for a remove or when shifting a gift to the postal service during the holiday time. They informed us that they do not -- that they do not -- that they -- sorry, they informed us that they want to do additional testing on a Brückner machine, which was planned for November. This will be our first commercialization of BOPP and believe this can be a double-digit annual volume opportunity for PureCycle. The only real disappointment in the funnel was the long brand adoption cycle we're seeing with fiber. We're fully technically qualified with numerous fiber app -- fiber producers, but this is a very fragmented market with literally thousands of small textile producers making decisions for apparel. It is taking longer to build out the new projects with end customers during the challenged market conditions. The only application of the 17 that PCT dropped out of the funnel with small consumer goods application. This is one of the smallest applications in our pipeline and PCT chose not to pursue due to the required internal resources to develop the project. What's really exciting to me is the number of new opportunities that have entered the later stages of the funnel. Many of them are with Fortune 100 brand owners, specifically across thermoform and BOPP. As I've mentioned, these last few quarters, part of the reason that we have qualified so many applications is to prove out the market depth across different segments and end markets. Not surprisingly, FDA flexible film or BOPP is toward the top of the list. Thermoforming for QSRs, namely for coffee lids and cups as well as for other food container opportunities are also emerging as one of the best places for us to focus. The demand from just 3 of these large QSRs for coffee lids alone could be enough to sell out Ironton. We have had a PO in hand -- we have a PO in hand to begin shipping for the first of these top 5 global QSRs in the fourth quarter and are closely working with the top -- with 2 top QSRs who have both told us that they want to move forward but are waiting for a couple of internal approvals before doing so. BOPP film continues to progress on schedule and trialing success with Brückner has unlocked with -- has now unlocked trials with brand owners of multiple top 5 snack brands. These are huge volume opportunities and currently cannot be served by mechanically recycled product due to the technical challenges of producing BOPP. We've also had virgin resin producers reach out to us for BOPP supply. The success we've seen with the first adhesive tape trial has led to interest and scheduled trials for other brands. To be clear, both white thermoform and BOPP film technical developments are very complex, and this is a very undersupplied market. We've proven that we can make them grades, we've tested it and it's working. And while they took additional time to complete the development of trials, the interest in this segment is strong and moving quickly -- moving more quickly than other applications. We believe that the single-use nature of many of these applications is driving interest and quicker adoption by QSRs and snack brands. Additionally, due to the lack of true recycled demand for these applications, we believe many of these companies are currently using -- currently buying ISCC Plus credits for roughly 70% to 80% per pound over virgin to cover their regulatory requirements. We continue to make progress with Procter & Gamble during the quarter. They are one of the most technically demanding companies due to their intense focus on quality and brand image. And I'm very excited that we expect to be shipping product in the fourth quarter with these caps making it to the shelves in early 2026. The relationship with Procter & Gamble is transitioning to an operational relationship. We meet weekly. We are well aligned and are both excited about this first application and the pipeline that's following. The partnership with Churchill continues to ramp with incremental end customers, and I'm very excited that we will be producing cups for the release of a very popular upcoming franchise film release. Additionally, there's a major sporting event taking place in the United States in 2026, and they have confirmed that they will be using our run-at-back cups during the entirety of that event. These are both nice volume additions, but even more importantly, I believe there will be great opportunities to showcase the PureCycle to a broader audience. It's also worth noting that one of the big 4 sports leagues has invited us to a Private Stadium Operations Conference where we'll have an opportunity to present our cups to all the franchise procurement teams at the same time. There's also a lot of positive news emerging from the regulatory front. 7 states covering about 20% of the U.S. population, have passed extended producer responsibility regulations or EPR for packaging over the past 4 years. On top of that, states like New Jersey have passed and are implementing laws that mandate recycled content. Further builds are also being introduced in numerous states across the political spectrum, including places like Tennessee and North Carolina. These bills were passed for the last 3 to 4 years and are just now being implemented. I believe this will force many large brands who operate an interstate commerce to ship to almost every state to adopt our material, and we expect will only accelerate as more states implement these policies in '26, '27 and beyond. We're ramping up our efforts to educate the steps on the positive role that the PureCycle can play in compliance to the new rules. Many new independent publications like the PRE White Paper for Dissolution and the NOVA Institutes Definitive Chart for recycled technologies are helping to place the right designations on plastic to plastic solutions at the regulations demand. PureCycle is very well positioned to be the premier solution for many brand applications. The regulation in Europe regarding PPWR as well as mandated recycled content for automotive continue to be planned for implementation towards the end of the decade and our recent successful application for the EIF grants speaks to the momentum PureCycle -- through the momentum for PureCycle in Europe. We will continue to educate all agencies and regulatory bodies on how PureCycle can support the legislative efforts around the globe. The growth plan we outlined to the market last quarter continues to progress. Since announcing the Thailand project earlier this year, key feedstock LOIs have been signed and the amount of material available appears to be more than required to run the facility at full capacity. In Europe, permitting for the Antwerp facility is progressing as planned, with construction expected to commence thereafter. Our proposal to the EU Innovation Fund has been accepted and we anticipate up to a maximum of 40 -- maximum grant of EUR 40 million by the end of Q1. Between the capital efficiency of the Thailand project, the EIF grant for Antwerp and the capital already spent on long-lead equipment, the remaining capital requirements are limited relative to the scope of these projects. We're in a good position to progress these 2 projects over the next 3 years according to our original plan. Additionally, we're on schedule to complete the final engineering for our Gen 2 purification line design work in early 2026. While not finalized yet, we still believe the capacity will likely fall between 300 million and 500 million annually. On the financing front, we have initiated debt financing efforts in Thailand in collaboration with local banks are making good progress to secure the financing and believe that we remain on track for financial close in line with prior communications. With that, I'll turn it over to Jaime for the financial presentation. Jaime Vasquez: Thank you, Dustin. As shown on Slide 16, we ended the quarter with just over $234 million of unrestricted cash. In addition to the cash on hand, we still hold about $87 million of revenue bonds that we plan to sell in the future to further support our growth initiatives. Also, as we mentioned in our June growth update, we have almost $25 million warrants outstanding that expire in March of 2026, must exercise at a price of $11.50 per warrant prior to that time. In addition to the potential proceeds from the warrants, our team is pursuing other nondilutive financing arrangements including the successful EUR 40 million grant application for our Belgium project that Dustin just mentioned. Our operations and corporate spend was around $37 million, which was slightly lower than the $39 million spent in the previous quarter. We anticipate that our operational spend will remain at similar levels adjusted for increased spend associated with the ramp-up of commercial sales. Additionally, we expect growth capital spend to increase beginning in early 2026. We are working on detailed project plans and we'll provide more insight once the spend curves associated with those plans are finalized. I would now like to turn the call back to Kyle, who will open the call for your questions. Operator: [Operator Instructions] And for your first question, it comes from the line of Andres Sheppard from Cantor Fitzgerald. Andres Sheppard-Slinger: Can you hear me okay? Dustin Olson: Yes, Andres. We hear you loud and clear. Andres Sheppard-Slinger: Wonderful. Congrats on the quarter and then all the progress. I think there's a lot to unpack, but I wanted to maybe start with all the progress with these QSRs. I was wondering if you can maybe give us some details as to where is the interest coming from? Any feedback you've received. Why have they been so interested as of late? Dustin Olson: Yes. I mean, thanks for the question, Andres. What I think is really exciting to me is to see the interest coming from these very recognizable brands around the world. These are not only brands people will recognize, but also brands that we can grow with globally. Sustainability is, quite frankly, really important to these companies and the brand value is core to their success. And ultimately, that's where the true opportunity lies. I think it's important to take a step back a little bit and helicopter up on recycling. I think when any individual thinks about recycling, they probably naturally go to their bin at home, okay? What are they throw in the bin? And where does it go? And everybody has this idea that they want to see that material go back in the products, but they don't see the scale of it. But that's what's interesting with PureCycle and quite frankly, our Denver facility. Our Denver facility is processing so many bales at that location. And when you really watch it for a while to stand on the line and watch the material move through, you see what's coming through. And there's just a tremendous amount of QSR material on the belts in Denver. And I think that when you see that and you share that with the QSRs, it really resonates with them. So I see these products, these companies, products running through the process in Ironton, and I see it as a real circularity opportunity. Not only can we give them high-quality product to make the product that they need, we can also take it back to Denver and show them that their material is coming back into their products. So when you see -- so when the companies see their product in the bales at Denver, it resonates. When they see it transform back into things like coffee lids, it moves them. And yes, I mean, as far as big companies are concerned, these QSRs are moving faster. And they're really excited about how we can work together, and these companies need a lot of material. Once we designed the white thermoform and the film brands, and we got them tested and showed that they could work, the excitement really started to grow. Thanks for the question, Andres. Operator: And for your next question, it comes from the line of Jeffrey Campbell from Seaport Research Partners. Jeffrey Campbell: Well, first of all, I wanted to congratulate you on strong progress this quarter. I'd like to ask a couple of questions if could. The first one is, I want to make sure I understood what you said earlier. Regarding the Co-Product 2, is the plan to sell what you separate from the feedstock to the market although you utilize any of it in your compounding operations? Dustin Olson: That's a very insightful question, Jeff. Thank you for that. The answer is both. While we see opportunities to take the Co-Product 2 that we separate out in our purification facility and compound that into a pellet form, so it's easier for customers to use. That's primarily what we're doing at Ironton right now with our newly installed compounding operations, which were commercialize or operationalizing right now. But you hit on something that's very interesting, and it speaks to where we're going to go with co-products. The concept of compounding is really about recipe management, and about taking lots of things and blending them together to make something better. And given the compounding of the capacity that we have with a third party as well as the compounded capacity we've installed in Ironton, coupled with the things that we make, both in Ironton and at Denver, it creates a lot of opportunities for us to find synergy. And so I think that your question is good, and that we will start taking some material from Denver and also bringing it into the Co-Product sales, which and how much that will be proprietary IP for the company to manage the recipe. But I think at the end of the day, it's going to lead to higher revenue from Co-Product sales and ultimately lower net feedstock costs to Ironton. Jeffrey Campbell: Right. Yes, that was kind of what I was thinking as well. I also wanted to ask you, you mentioned that some of your potential customers have to buy credits. Could you expand on that a little bit? And just give us a sense of the value of the PCT is going to provide these people. Hopefully by obviating the need for those credits. Dustin Olson: Yes, that's a good point. So this is one of the things that I'm not sure how much people are aware of what's going on out there. But there are ISCC credits being generated by several facilities across the industry, okay? And some of our customers, we believe, will buy those credits as part of the regulatory requirements for their company. Those credits, the best that we understand are valued at $0.75 to $0.80 per pound in the market, and that's effectively virgin pricing plus $0.75 to $0.80. So that's a really good proxy for the value proposition that we offer. And we should, at a minimum, be at those kind of levels in the long run. But quite frankly, we believe we should be over that. And here's why. ISC credits are not a plastic to plastic solution. It's effectively a plastic to fuel solution that is mass balance to plastic. And that's inferior for the brands. The brands really want to be able to -- the consumers, customers buying candy bar, snack bags and things like that. They want to know that the material that they threw into their bin has come back to the products that they're buying and that's a plastic to plastic solution that we offer. And so we offer our consumers, let's say, a real plastic to plastic solution, less regulatory risk and less litigation risk. You can see across the regulatory ecosystem that a lot of rules are coming in that limit the use of recycled material. And that limit the use of the ISCC material, and that's where we can come in and fill the gap. I think it's also notable that on many of the brands, the marketing for how they use recycled product becomes very complex, either they don't put the fact that they're recycling content on their packaging or they put a lot of legalese around it that complicates the overall message. And quite frankly, that's why brands like a simple plastic to plastic solution, and I think that's where we're going to start filling the gap. Jeffrey Campbell: Right. And the last question I wanted to ask is, are you -- right now, are you actively selling very much PureFive? Or are you building inventory for the compounding that you're going to be able to do when you get your equipment installed in the next quarter? Dustin Olson: Yes. I mean it's a little bit of both. I mean we sold some PureFive. We've sold some compounded products, but we've also built more inventory that we've sold. So I think that we've got an opportunity as these trials convert and the funnel starts to pull and the ramp extends, I think we'll pull that inventory down to show the revenue from that in the future. Operator: And for your next question, it comes from the line Hassan Ahmed from Alembic Global Advisors. Hassan Ahmed: So I wanted to focus both of my questions on the growth project side of things, right? So let me throw the first one out. This EIF grant that you guys were awarded. Would love to hear the process around that, what it entails, what this means for your sort of European growth projects? Dustin Olson: Yes. Look, I mean, this is a little bit third time's the charm. First of all, I want to compliment the team in Europe. We've got an incredible small but mighty team in Europe that has been building toward this project for 3 years. We've submitted 2 times in the past, and we're not selected, but we've continued to improve the quality of the project, economics of the project. And now we are -- we were awarded the EIF this year, and we're extremely excited about it. I think what it does -- I mean, look, it shows a lot of confidence in our ability to bring the technology to scale. I think it shows a lot of interest in Europe to -- it shows a lot of interest in Europe to continue to lean into sustainability. And I think from an economics perspective, the EIF is just a way to further reduce the overall CapEx for the project, which makes the project look more valuable to our shareholders. We continue to look at the overall CapEx of projects and work them very, very hard. And this will be another feather in the cap for the overall return when we put it to use for the development of the project. Thank you, Hassan. Hassan Ahmed: Very helpful. And just sticking to the growth side of things. On the Thailand side, it's -- you guys sort of flagged the sort of securing the feedstock letters. I mean, what does that entail? Can you talk a bit about the cost of it, the availability of it, particularly sort of in line with what you guys are thinking in terms of the capacity out there? Dustin Olson: Well, I think the punch line is it's just the tip of the iceberg, okay? One of the reasons that we found Thailand, and we leaned into it is that we believe that's a location for great growth. It's no surprise to anybody that Asia is an area of a tremendous population, and b, tremendous need for waste management, trash management, recycling. And so there's a lot of efforts going into, let's say, small cap projects to improve the handling of waste in Asia. We're starting to see the fruit of that. But quite frankly, all handlers of waste are looking for partners like PureCycle that can improve the net value of the product at the end. Look, at the end of the day, if we can't sell to a higher-margin business, then we can provide better economics to feed to continue pulling feed out of different systems. That will allow us to support the growth of the feed and also allow us to grow our business. So we're super excited about it. I mean, look, we've talked to -- we've talked to so many different people in Asia around the willingness to partner with us and there's a strong willingness to partner. But in many cases, they say things like I'm not limited by how much polypropylene I can find. I'm limited with how much polypropylene I can sell to customers like you. And I think that, that speaks really well to the prospects for our Gen 2 design and where we're going to place it and how we're going to grow around the world. Hassan Ahmed: And you're comfortable with the cost associated with it as well. Is it like the per pound, unit economics of procuring that feed stock? Dustin Olson: Yes, I think so. I mean you find it a little bit all over the map. It depends on what stage of preparation has been put into the pellet. But yes, I think the economics look pretty good for us there. We're still in the process of nailing down all of that to firm up the final economics, but they all look very, very, very positive for Thailand. Operator: And for your next question, it comes from the line of Jeff Grampp from Northland Capital Markets. Jeffrey Grampp: Was curious, Dustin, and I think you hit on this in your prepared remarks as well as the deck. A couple of applications are awaiting brand approval. It sounded like you guys have kind of jumped through all the hoops and just waiting for a couple of back office signatures effectively. Like what -- do you have any sense of what that timing looks like? Like what is the inflection point? Are we just literally just waiting on a couple of signatures and off we go? And what might that ramp look like for some of these where you guys sound like you're pretty close? Dustin Olson: I think we feel really good about it. I mean, if you look at what we've actually got kind of coming already, that's the green lines on our 2 slides. I mean that plus Procter & Gamble is enough demand to get to 40 million to 50 million pounds annually when ramped. And honestly, what's most exciting about the remaining opportunities and the highlighted is what we described on Slide 9. I mean these are really big and with some of the biggest brands in the world. Many of those are category leaders, Fortune 100 types and converting any of those will materially impact the 40 to 50. I think we're really encouraged by how the conversations are going and feel good about getting a few of these over the line and get us to a sold-out condition. These brands are very deliberate. They ramp in stages. It takes time, but their needs are real. Their interest is real. And that makes me feel good about what's to come. We are really excited not just to convert these guys quickly and get them in, in the short term. We're really excited to build a long-term relationship with them. So we're selling to them for decades. And so that takes a little bit more time on the front end, but we're doing that and we're successful so far. Jeffrey Grampp: Great. That's helpful color. For my follow-up on the Co-Product monetization side of things. Is that something that you guys think is feasible kind of across the spectrum as you guys get into new continents, is this something that has a depth of market, if you will, in future projects as well? Or do you guys have that level of, I guess, conviction or build out at this point? Dustin Olson: I think if you break it into prep Co-Products and purification Co-Products, for sure, the concept of purification Co-Products is directly applicable. I mean our Co-Product 1 is a very useful waxy-type product, and we're investigating different opportunities to move that into different applications. And I think the value of those applications will grow year-over-year as we find new opportunities to move that in. And the same thing with Co-Product 2. And both of those Co-Products we made off of every plant that we build in the future. With respect to prep Co-Products, I think it depends a little bit on the region and how sophisticated they are, okay? Generally speaking, I think the answer is yes. I think we're going to be able to take prep Co-Products also and bring them in, in various stages of our process, whether it be compounding or it's feedstocks into purification. We've got a lot of ideas and opportunities there and we'll handle them by a case-by-case basis. But I think the bigger takeaway here is that the ecosystem that we're building, both on the feed side as well as the compounding side is really transformative, and it's going to create so much optionality for our company to create full value chain value for the company and options to do different things to reduce overall yield loss from the prep process and overall value creation. We're really excited about the asset footprint we're putting down. Operator: And for your next question, it comes from the line of Eric Stine from Craig-Hallum Capital Group. Luke Persons: This is Luke on for Eric. So I guess, first. Could you maybe provide a little more color just high level on the financial impact that your shipments in 4Q will have or that you expect to have? And can you outline how quickly you expect to ramp towards full production levels for these contracts? Dustin Olson: Yes. That's a good question, Luke. Thanks for dialing in. I think what's most important is to focus on what we're shipping and growing with our customers in the fourth quarter and first quarter. It's always very tricky to know exactly which week or which month these type of shipments will ultimately fall in. But look, they're happening, okay? And the timing of the ramp is hard to pinpoint. But that doesn't mean that we're not -- that does not mean that we're wavering from the prior commentary around the $8 million target per month at the end of Q1 and into Q2. Listen, the bottom line is that the sales funnel continues to get stronger, the largest global brands are now fully engaged and interested. We're increasing revenue but what's most important is selling out Ironton with brands that are going to be there for -- with our customers for the next decade, as I said before. That's a good question. Luke Persons: Right. That's helpful. And just as a follow-up here, I guess, what's your thought process on just inventory and cash use going forward? So we thought we might start to see you build a little bit more inventory this past quarter, which is some of these contracts getting closer to the finish line. Should we expect to see that balance really start to build here in 4Q, 1Q? Dustin Olson: Yes. I think from an inventory perspective, I mean, we're going to be ramping rates at Ironton and Denver, consistent with what we see on the sales ramp. There might be a little bit of inventory build as we ramp into the customer sales funnel. But again, that's -- it's tricky to pinpoint exactly which month or which quarter that will happen. Yes. So that's how I go with that. Operator: And we have a follow-up question from the line of Andres Sheppard from Cantor Fitzgerald. Andres Sheppard-Slinger: Sorry, I think I got disconnected before. Dustin, I just wanted to follow up, if maybe you can give us a little more details around the 40 million to 50 million pounds run rate that you mentioned in the call. And also, I was wondering if you could maybe, maybe help us connect some dots with the REACH certification in Europe and then the joint presentation with Volkswagen on the bumper. How should we be interpreting that? And anything you can say to that effect? Dustin Olson: Yes, that's great. Yes. So on 40 to 50, I mean, I think we've hit that a little bit. But if you look at the, let's say, the green highlighted lines on the projects and you add Procter & Gamble to that, I think at full ramp, we're going to get to the 40 to 50. And it's just super positive, Andres. I mean like we're really moving forward with some big brands and good names. I mean these are top companies, big global brands that we can grow with, not only in Ironton and in Augusta, but also in Thailand and in Antwerp. I think it's going to be a really nice foundation for future plants, future sales, and that's going to be very positive for us. With respect to REACH and VW, look, I mean, we are going to -- we are a brand-new company. We're just emerging, and we're doing a lot of great things. And we're going to continue to click the box on lots of different certifications. We did it with GreenCircle. We did it with APR. We've done it multiple times with FDA LNO. I think we have 4 or 5 of those now. I don't know the exact number, but we've got several. And we just recently did with REACH. And so REACH is just a step to get your product into Europe, okay? If you don't have REACH, you can't ship appreciable volumes in Europe. And now that we have that, I think that we're starting to see already some interest in trials and getting things moving. And I think that will be very interesting for us. The European team has not only been working on the EIF submission, but they've also got a great outreach with different customers in Europe. And as we develop our product portfolio sheets with the white thermoform and the flexible packaging and the injection molding grades, things like that. We're going to start shipping samples over to Europe at scale and getting customers to really start biting off on those for trials. And I think that the REACH has enabled that. With respect to the 8-K that we put out a few weeks ago with VW, look, I mean I couldn't be more thankful of the partnership with that technical team. They really worked with us to develop the right recipe, the right compound to develop a beautiful bumper. I mean, we've got this bumper actually on display in our office in Orlando, and it's just beautiful, okay? And it's just -- it's a very difficult project to get post-consumer curbside recycled product into applications that are as sensitive as automotive. Remember, automotive is one of the most complex supply chains in the world and their precision to quality and just perfection is extreme. And so if you've got recycled product that varies in product quality or it has gels in it or it's got whatever contaminants in it that get to the surface to make it difficult to paint or make the paint crack when it's in cold weather, and make the paint crack what it's in hot weather. It's not going to work. And so the most exciting thing about the presentation that we published in the 8-K was the 1 slide that showed the picture. And then the next slide -- right next to that slide, it showed a whole bunch of green dots next to very complicated tests. And that's basically the 2 teams coming together and saying, not only did we build a bumper, but it passed all the required tests for another company that values quality, just as highly as is -- just above everybody else. I mean it's a really quality company. And so I think that -- I do not think that automotive is going to ramp quickly in the next 1 to 2 years for Ironton. I think we have other opportunities that are going to go faster and quite frankly, probably bring more value. But I fully believe that automotive is going to be a foundational component to our growth plan. It's going to be a stable volume for Thailand and for Augusta in the future. And I think that, that particular case is a good example for every automotive company in the world to see that our product works really well in an extremely complex application. And when the other automotive companies see that bumper, they say, "Wow, that's pretty amazing they're able to pull that off". Great question, Andres. Andres Sheppard-Slinger: Congrats again. Operator: This concludes our Q&A session. I would now like to hand the conference back over to Dustin Olson, PureCycle's Chief Executive Officer, for closing remarks. Dustin Olson: Look, thanks, everybody, for joining the call. I mean it's another good quarter for PureCycle. We've built a unique asset footprint on both ends of our process, feedstock processing and product compounding. This is unlocking opportunities to reduce costs and expand our customer base. We continue to deliver technical improvements to the pipeline. We're seeing strong adoption by major brands in the market, and the shipments are beginning to flow in Q4 of 2025. But most importantly, we're playing our part to improve our planet. We're converting post-consumer curbside waste from your waste bin into high-quality products that consumers can use. This is the holy grail for recycling and PureCycle is starting to achieve it. We're poised to execute on a very strong 2026. Thank you for your interest in PureCycle and your continued support. See you next time, everybody. Operator: This concludes today's conference call. You may now disconnect.
Operator: Good day, ladies and gentlemen, and welcome to today's Iveco Group Third Quarter 2025 Results Conference Call and Webcast. We would like to remind you that today's call is being recorded. [Operator Instructions] At this time, I would like to turn the call over to Federico Donati, Head of Investor Relations. Please go ahead, sir. Federico Donati: Thank you, Razia. Good morning, everyone. I would like to welcome you to this webcast and conference call for Iveco Group Third Quarter Financial Results for the period ending 30th September 2025. This call is being broadcast live on our website and is copyrighted by Iveco Group. I'm sure you appreciate that any other use, recording, or transmission of any portion of this broadcast without the consent of Iveco Group is not allowed. Hosting today's call are Iveco Group CEO, Olof Persson, and me, Federico Donati, Head of Investor Relations, standing in for the financial section usually covered by our CFO, as Anna Tanganelli could not be present today. Please note that any forward-looking statements we make during today's call are subject to the risks and uncertainties mentioned in the safe harbor statement included in the presentation material. Additional information relating to factors that could cause actual results to differ from forecast and expectation is contained in the company's most recent annual report, as well as other recent reports and filings with the authorities in the Netherlands and Italy. The company presentation may include certain non-IFRS financial measures. Additional information, including reconciliation to the most directly comparable IFRS financial measures, is included in the presentation material. Furthermore, on the 30th of July 2025, Iveco Group announced the signing of a definitive agreement to sell its defense business, IDV, and Astra brands to Leonardo S.p.A. The transaction is expected to be completed no later than 31st March 2026, subject to the customary regulatory approvals and carve-out completion. In accordance with IFRS 5, noncurrent assets held for sale and discontinued operations, as the sale became highly probable in July, the Defense business meets the criteria to be classified as a disposal group held for sale. It also meets the criteria to be classified as a discontinued operation. In accordance with applicable accounting standards, the figures in the income statement and the statement of cash flow for the 2024 comparative periods have been recast consistently. Additionally, in 2024, the firefighting business was classified as a discontinued operation. Its sales were completely on the 3rd of January 2025. As a consequence, the 2025 and 2024 financial data shown in this presentation refer to the continuing operation only unless otherwise stated. Finally, please note that, subject to applicable disclosure requirements pending the publication of the final offer document, we will not comment on the tender offer. As per the joint press release on July 30, announcing the entering into the merger agreement and the press release by Tata on August 19, announcing the filing of the document with Conso, anyone interested is invited to refer to the offer notice published on July 30, 2025, which indicates the legal basis, rationale, condition, terms and key elements of the tender offer. All the aforementioned material and announcements are available on the Iveco Group corporate website, where any additional relevant information will be published in due time. We will not comment on the sale of the defense business to Leonardo either. The rationale, terms, and conditions of the sale, with the details as currently available, were disclosed on July 30. As announced, the transaction is expected to be completed in Q1 2026, subject to customary regulatory approvals and carve-out completion. Consistent with the agreement reached with Tata, Iveco Group will distribute the net proceeds of the transaction based on the enterprise value agreed with the purchaser via an extraordinary dividend estimated at EUR 5.56 per common share to be paid out to the company's shareholders before the tender offer is settled. With those points covered, I'd like to turn things over to our CEO, Olof. Olof Persson: Thank you very much, Federico. And let me add my own warm welcome to everyone joining our call today. I'll start with Slide 3, outlining the main highlights from our third quarter performance, excluding defense. Throughout the quarter, we maintained a high focus on our long-term vision and maintained discipline in the execution of measures that will help achieve it. These include tight control on inventory levels, diligent cost management, and the ongoing commitment to our multiyear efficiency program, as well as its acceleration for the current year, which is proceeding as planned. We have also identified additional areas of improvement, which will deliver further full-year savings. In our Truck business unit, we concentrated on balancing pricing and market share. The focus was on protecting our leadership position in the LCV chassis cap subsegment, where pricing dynamics were more challenging and maintaining a very strict pricing discipline in medium and heavy in support of the final phase of the introduction of our model year 2024 across European countries, and thereby ensuring the quality, performance, and the full potential of the product. I'd now like to break down our performance by business units. In the truck industry, demand in Europe remained particularly low in the chassis cab subsegment, which affected profitability in the quarter, which was only partially offset by strict cost control measures. European deliveries in the period were down year-over-year, particularly for light commercial vehicles, which were down 27% versus last year. At the end of the quarter, worldwide book-to-bill for trucks came in at 1.0, up 25 basis points versus the same period last year. In Powertrain, we began to see the first sign of a sustainable recovery in engine volumes as had been expected, supporting profitability improvements. In our bus business unit, profitability was impacted by costs associated with the ramp-up of production in our NNA plant in France. But despite this, our order book remains strong, providing us with a clear long-term visibility. Free cash flow absorption in the third quarter of 2025 was at EUR 513 million, broadly in line with last year's performance, when we exclude from last year the positive effect of the deployment of the higher inventory levels that we registered at the end of June 2024. You will recall that this was linked to the phase-in and phase-out of the new model year in trucks. Going forward, we will continue to remain very focused on quality and operations in line with our long-term pathway, maintaining tight control on production levels and inventory management, and on delivering our efficiency program. Slide 4 outlines our indicative timeline for the first half of 2026, with the sale of our defense business and the tender of the Veeco Group progressing in parallel. Regulatory filings for both transactions, including those required by the European Union, are currently underway and subject to final approvals. Both the sale of the defense business to Leonardo and the subsequent distribution of the net sale proceeds through an external ordinary dividend and the tender of [Bertata] are on track for completion within the first half of 2026, as we stated previously. If we're then moving on to Slide 6 and the Truck segment. We maintained pricing discipline and tight inventory control throughout Q3 in 2025. European industry volumes increased by 5% year-over-year for both light commercial vehicles and medium and heavy trucks. Iveco's third-quarter LCV market share was 11.7%, of which 29.7% was in the Chassis Cab subsegment and 65.8% was in the upper end of the segment. Industry growth overall was largely driven by the camper subsegment, where Iveco has limited exposure. Chassis Cab volumes, on the other hand, remained under pressure, yet we managed to protect our leadership position. In medium and heavy trucks, our market share reached 7.2% with heavy trucks accounting for 6.4%. In this segment, we implemented a selective sales mix strategy throughout the quarter to optimize channel profitability and support the final phase of the introduction of our model year 2024 across European countries and thereby ensuring the quality, performance, and full potential of the product. Our ability to adapt to segment dynamics while preserving pricing integrity and managing inventory effectively reflects the strength of our commercial execution and the strategic clarity of our truck business. Moving on to Slide 7. Our worldwide truck book-to-bill ratio reached 1.0 at the end of the quarter, registering a 25 basis point improvement year-over-year. This reflects balanced commercial performance across geographies and product categories. In light commercial vehicles, our European order intake rose by 17% compared to Q3 2024, supported by a book-to-bill ratio of 1.05. This increase, we believe, is a welcome first sign of a recovery coming on the heels of a prolonged period of production coverage well below last year's level, 7 weeks this year versus 12 weeks last year. And South America experienced even stronger growth with order intake up 37% and a book-to-bill ratio of 1.11. In medium and heavy trucks, European order intake declined by 3% year-over-year with a book-to-bill ratio of 0.82. South America saw a more pronounced contraction of 21% with a book-to-bill ratio of 0.94. While these figures reflect a softer demand environment, the backlog remains stable at 7 weeks of production coverage. Let's move to the next slide, #9, with bus industry volumes and market shares. Iveco Bus during the quarter continued to demonstrate strong competitive positioning across Europe. In the intercity segment, our leadership was reaffirmed with a 55.1% market share in Q3, representing a 5% point increase year-over-year. This gain can be attributed to the successful introduction of electric models, which are contributing positively to both volumes and brand perception. In the European city buses segment, our market share stood at 15.1% in Q3. We expect an acceleration in deliveries during Q4, consistent with the seasonal patterns and supported by backlog conversion. Overall, Iveco Bus maintained its consolidated #2 position in the European market with a 21.3% market share year-to-date. Moving on to Slide 10. In Q3 2025, our bus order intake declined by 17% following the strong momentum we enjoyed in the first half of the year. This front-loaded demand contributed to a 6% year-to-date increase as of September. Deliveries rose 20% compared to Q3 2024, demonstrating robust execution and sustained customer demand. The book-to-bill ratio stood at 0.77 at the quarter's end, a figure impacted by the scheduling of orders early in the year. Importantly, year-to-date order intake remained higher than in 2024 at 1.08, demonstrating the segment's resilience. On the 29th of October, Iveco Bus signed a framework agreement with Ildefrance Mobility, a leading public transport authority managing one of Europe's largest and most complex transit networks. Iveco Bus will supply Ildefrans Mobility with up to 4,000 low and zero-emission buses and coaches between 2026 and 2032. This is in line with the brand's long-term strategy to build on zero-emission and electromobility solutions. In conclusion, we maintained a solid long-term visibility for intercity and city bus with coverage now extending well into the second half of 2026. On Slide 12, we have the delivery performance for our powertrain business unit. And after nearly 2 years of consecutive year-over-year decline, engine volumes increased by 1% compared to Q3 2024. While modest, this improvement reflects the recovery we predicted last quarter. During the period, new third-party customer contracts were signed between Lindner and JCB. Production for these orders will begin in 2026. These contracts position FBT Industrial as one of the main references in the agriculture industry and are in line with our long-term strategy to grow the number of third-party clients. Operational discipline remains central to our approach. We continue to manage costs diligently and remain committed to our efficiency program. These efforts are helping us to protect margins and ensure sustainable delivery as volumes recover. Looking ahead, we expect the recovery in deliveries to third-party customers to continue throughout Q4 and beyond, supporting profitability improvements. Going to Slide 14, look at our electric vehicle portfolio, where year-to-date delivery volumes continue to grow across the business units despite the challenging market demand scenario. This clearly shows the competitiveness of our product lineup and our unique positioning in LCV, where Iveco is the only truck maker to offer a complete fully electric product lineup ranging from 2.5 to 7 tons. With that, I finish my opening remarks, and I will now hand over the call to Federico. Federico Donati: Thank you, Olof. Let's now take a look at the highlights of our third quarter 2025 financial results on Slide 16. Again, all figures provided in the presentation refer to continuing operation only, excluding defense, if not otherwise stated. Q3 2025 closed with EUR 3.1 billion in consolidated net revenues and EUR 3 billion in net revenues of industrial activities. These figures reflect a contraction of 3.6% and 3%, respectively, on a year-over-year basis, mainly due to lower volumes in Europe for trucks and a negative ForEx translation effect, primarily in Brazil and in Turkey. The group adjusted EBIT closed at EUR 111 million with a 3.6% margin, and the adjusted EBIT of industrial activities reached EUR 76 million with a 2.5% margin, both contracted by 210 basis points versus Q3 2024. The net financial expenses amounted to EUR 58 million in the third quarter this year, in line with the same quarter last year. Reported income tax expenses come to EUR 17 million in Q3 2025 with an adjusted effective tax rate of 25%. This resulted in adjusted net income for continuing operations at EUR 40 million, down EUR 54 million versus last year, with an adjusted diluted EPS of EUR 0.15. Moving to our free cash flow performance in the quarter. Q3 2025 closed with a EUR 513 million cash outflow absorption, which was broadly in line with last year's performance, when we excluded from last year the positive effect of the deployment of the higher inventory level that we registered at the end of June 2024, as Olof said in his opening remarks. I will provide more details further in the presentation. Finally, available liquidity, including undrawn committed credit lines, closed solidly at EUR 4 billion on the 30th of September, of which EUR 1.9 billion was in undrawn committed facilities. Let's now focus on the net revenue of industrial activities on Slide 17. As you can see from the chart on the right-hand side of this slide, all regions contracted compared to the prior year, excluding South America, which was flat versus Q3 2024. Looking at our net revenues evolution by business unit, Bus was solidly up versus the prior year at plus 31%. Powertrain was flat, and the truck contracted 11% versus Q3 2024. More in detail, truck net revenues totaled EUR 2 billion in this quarter, down 11% versus the prior year, primarily as a consequence of 2 factors: First, a lower delivery rate in light-duty trucks due to the continuing challenging environment in the chassis subsegment. Second, a selective sales mix strategy throughout the quarter in heavy-duty trucks in order to optimize channel profitability and support the final phase of the introduction of our model year 2024 across European countries. Additionally, the top line was affected by an adverse year-over-year foreign exchange rate trend, mainly in Brazil and Turkey. Our bus net revenues were up 31.4% in Q3 2025, reaching EUR 719 million, thanks to higher volumes. And finally, our Powertrain net revenues were broadly in line year-over-year at EUR 745 million with higher volumes offset by an adverse foreign exchange rate impact. Sales to external customers accounted for 49%, in line with Q3 2024. Turning to Slide 18. Let me briefly comment on the main drivers underlying the year-over-year performance in our adjusted EBIT margin of Industrial activities. Volume and mix contributed negatively, EUR 67 million in the period, mainly due to lower truck volumes in Europe. The decrease in deliveries of light-duty vehicles particularly impacted the overall truck profitability. The year-over-year net pricing contributed positively for EUR 15 million at the Industrial Activities level and was positive across business units. Production costs were negative EUR 7 million year-over-year, with negative performance in Truck and Bus, partially offset by solid positive performance in powertrain. Finally, the year-over-year improvement in SG&A costs totaling EUR 17 million in this quarter and EUR 50 million to date is again a result of the acceleration of the efficiency action announced and launched at the beginning of this year. Let's now take a look at the adjusted EBIT margin performance for each industrial business unit on Slide 19. Truck closed the quarter with a 2.9% adjusted EBIT margin. As already mentioned, this was a result of lower volumes and negative mix, mainly due to the continuing challenging environment in the chassis subsegment, which experienced lower volumes in Europe. The negative absorption due to the lower production level was only partially compensated by the cost containment action implemented in the period. Truck pricing in Europe was positive year-over-year, confirming our tight price discipline. The Q3 2025 adjusted EBIT margin for our bus business unit closed at 4%, down 110 basis points versus the prior year, with higher volumes and positive price realization offset by higher costs associated with the ramp-up of production in our Annonay plant. Finally, the Powertrain adjusted EBIT margin closed at 5.1% in the third quarter, resulting from continued and diligent cost control and operational efficiency as well as a slight increase in engine volumes. Let's now have a look at the performance of our Financial Services business unit during the quarter on Slide 20. The Q3 2025 adjusted EBIT for Financial Services closed at EUR 35 million with a managed portfolio, including unconsolidated joint ventures of EUR 7.5 billion at the end of the period, of which retail accounted for 45% and wholesale 55%. This figure is down EUR 106 million compared to the 30th of September 2024. Stock of receivable past due by more than 30 days as a percentage of the overall own book portfolio was at 2.1%, which is slightly up versus last year. The return on assets remained solid at 2.1%. Let's move to our free cash flow and net industrial cash evolution on Slide 21. As said previously, the Q3 2025 free cash flow absorption came in at EUR 513 million, which is broadly in line with last year's performance when we exclude the positive effect of the initial deployment of the higher inventory level that we registered at the end of June 2024. The lower adjusted EBITDA was offset by positive year-over-year swings in financial charges and taxes, the positive delta in working capital, and lower investments. The negative year-over-year swing in provision was driven by lower sales volume in our truck business unit. Lastly, investment totaled EUR 150 million in Q3 2025, down EUR 39 million versus the same period last year. This is in line with the already disclosed acceleration of our efficiency program and the reprioritization of some of our less strategic investments. Moving now to Slide 22. As of the 30th of September 2025, our available liquidity for continuing operations, excluding defense, stood solidly at EUR 4 billion with EUR 2.3 billion in cash and cash equivalents and EUR 1.9 billion of undrawn committed facilities. Looking at our debt maturity profile, the majority of our debt will mature from 2027 onwards, and our cash and cash equivalent levels will continue to more than cover all the cash maturities foreseen for the coming years. Moving now to my last slide for today, # 24, with the discontinued operational performance of our Defense business unit. The net revenues for Defense came in at EUR 293 million, up 9.7% compared to Q3 2024, driven by higher volumes. The adjusted EBIT was EUR 25 million compared to EUR 23 million in Q3 2024, resulting from production efficiency, partially offset by higher R&D costs. The adjusted EBIT margin was at 8.5%, down 10 basis points compared to Q3 2024. The funded order book level at the end of September 2025 reached almost EUR 5.3 billion, up close to EUR 300 million from the end of June 2025. Thank you. I will now turn the call back to Olof for his final remarks. Olof Persson: Thank you very much, Federico. And I'd like to conclude this presentation by looking at both the outlook for the industry and our own financial guidance. I will also, as usual, provide some takeaway messages from what you have heard today. We confirm our total industry outlook for the current year across the segments and regions. Specifically, we expect demand to remain low in the chassis cab subsegment and South America to continue to be negatively impacted by reduced consumer confidence and less willingness to invest in heavy-duty trucks, given the increase in interest rates in Brazil since the beginning of the year. The next slide has our full-year 2025 updated financial guidance, also expressed as continuing operations, which means excluding defense. Our full-year 2025 financial guidance has been revised across all key performance metrics, except for the industrial activities net revenue, which remains unchanged. This update reflects the year-to-date performance negatively affected by 2 main circumstances. Firstly, a slower-than-expected recovery in light commercial vehicles during the second half of 2025, particularly in the chassis cab subsegment, which has negatively affected our truck business units' year-to-date profitability. Secondly, we have allowed for extra costs associated with the ramp-up of production in our NMA plant, which negatively impacted our bus business unit's profitability in the third quarter. Implied in our updated guidance is increased Q4 profitability year-over-year across business units and an additional positive effect from the acceleration of our efficiency program compared to the initial EUR 150 million CapEx and OpEx. Based on these premises, the updated guidance for our full year 2025 is as follows: at the consolidated level, including Defense, group adjusted EBIT is now between EUR 830 million and EUR 880 million. And for Industrial Activities, net revenues, including currency effect, confirmed to be down between 3% and 5% year-over-year. Adjusted EBIT from industrial activities at between EUR 700 million and EUR 750 million, and industrial free cash flow is between EUR 250 million and EUR 350 million. On the slide, we have also shown what this guidance implies for continuing operations only. The free cash flow forecast, excluding Defense, is not included due to ongoing activities related to the separation that could affect some balance sheet accounts. We will continue to manage production levels for trucks in Europe in line with the retail demand, while at the same time, maintaining diligent cost management and leveraging the benefits of our efficiency program across business units. And now to Slide 28. Let me provide you with some takeaway messages from today's call. First, as I said, implied in our revised guidance is increased Q4 profitability year-over-year across business units. And if we break that down by business unit, in trucks, our LCV and medium and heavy vehicles are sold out, covering the remaining 2 months of the year. This, combined with strict control on pricing and cost management, will positively contribute to higher profitability compared to the fourth quarter of last year. In the bus, ramp-up costs are now behind us, and we expect higher volumes to contribute positively to the year-over-year performance. And lastly, in Powertrain, as mentioned earlier, third-party client volumes are expected to continue their year-over-year growth, supporting progressively profitable improvements. The increase in third-quarter order intake for light commercial vehicles is an encouraging early sign that the worst is behind us. In heavy-duty trucks, we will continue to maintain strict pricing discipline to support our model year 2024, ensuring the quality, performance, and full potential of the product. In Powertrain, new third-party customer contracts were signed, among which are Lindner and JCB, with production for these orders beginning in 2026. Our robust order book remains strong, providing solid visibility well into the second half of 2026, and the funded order book for our Defense business unit reached almost SEK 5.3 billion at the end of September 2025, demonstrating continued momentum in the industry. Thirdly, we are proceeding at pace with the acceleration of our efficiency program and reprioritization of certain investments, confirming the expected EUR 150 million in savings in CapEx and OpEx for the current year, as well as additional areas of improvement, which will deliver further full-year savings. And finally, we are on track to complete the sale of our defense business to Leonardo as per our original combination, and the tender offer by Tata is expected to be completed within the first half of 2026. In conclusion, as always, we are focused on our commitment to operational excellence. Each business unit remains laser-focused on its short- and long-term objectives, working to deliver lasting value for all our stakeholders. With that, I would like to thank you and hand it back to Federico. Federico Donati: That concludes our prepared remarks, and we can now open it up for questions. To be mindful of the time, we kindly ask that you hold off on any detailed modeling and accounting questions. For this, you can follow up directly with me and the Investor Relations team after the call. In addition, as already pointed out, pending the publication of the formal offer document on the tender offer by Tata, we will not comment on the legal basis, rationale, condition, terms, and key elements of the tender offer. In this respect, for the time being, you are kindly invited to refer to the materials already published in the ad hoc section of the company website. As for the sale of the defense business to Leonardo, the activities are ongoing and on track, consistent with the timeline commented during the presentation. The company will strictly comply with applicable disclosure requirements, but for the time being, it has nothing to add vis-Ã -vis what has already been announced. Operator, please go ahead. Operator: [Operator Instructions] We are now going to take our first question, and the questions come from the line of Akshat Kacker from JPMorgan. Akshat Kacker: A couple of questions, please. The first one is on the truck and LCV business. Obviously, the trends this year have been difficult to forecast and understand, given the pre-buy last year and also the changeover in the product family. Could you just help us understand how you're looking at the business going forward, probably into Q4, but also any early signs on how you expect the LCV business to develop going into 2026? And if you could just add some color regionally as well, between Europe and Brazil. We have heard from a few of your peers that inventories are high in the Brazilian and LatAm markets, and overall, there is some pricing pressure. So some details there would be helpful. The second question is on the powertrain business. You talked about a slight increase in engine volumes, the first signs of recovery. Could you just give us some more details in terms of where these green shoots are emerging from? And we now expect volumes to turn positive going into the fourth quarter, please? Olof Persson: Okay. So on the LCV market, I mean, as we said, the indications we're getting now, and also you saw on the book-to-bill and the increase in our order intake, give us confidence, and we believe that the worst is behind us, and we will see a gradual uptake. We see that also in the activity levels in the market. And as we said, we are sold out now for this year and going into next year. So I think it's always difficult to really judge where this is going, coming from such a long period of a lower market. But I feel the LCV side, I think we have the worst behind us. And exactly how that will pan out coming into 2026, we will have to see. We need a couple of more weeks or months to see that coming into it. But I would say so far, so good, and it's really good and encouraging to see that this is opening up. And that is, of course, then moving also in our key segments on the cabover and both in the medium and the upper side of it. On the LatAm, I didn't really -- LatAm pricing. Akshat Kacker: No, I was referring to the inventory level, if I understood correctly. correct? Federico Donati: Yes, that's right. Akshat Kacker: Some of your peers talk about the weakness in that market, specifically in the medium and... Olof Persson: Yes, when it comes to the inventory, both our own inventory, the dealer inventory and the whole chain, we manage that very carefully, as you know, and we do that also in LatAm when we see the order volumes going down we, of course, adjust production, and we do that rather quickly in LatAm because it's a simple one factory system where we can really manage that in a good way. So I don't have any concerns about the inventory levels in LatAm going forward, even though, of course, on the heavy-duty side, there is, as we said, a decline in the market and the order intake. Then the final question was around Engines. So the green shoots for the engine. I would say that there are a couple of things. One is, of course, that we are getting third-party business. The team in Powertrain has done a great job in actually capturing more third-party business, which is good. We also see, of course, and we have said that before, it's around the stock level of engines out there in the market and the time it has taken to destock that given the downturn that we've seen over the last basically 2 years. And that also gives you confidence that this is covering up for the destocking coming to an end, and thereby, the volumes are coming back up again. So it's a combination of that plus the fact that we actually are successful in getting third-party business. That's giving me confidence going forward in the Powertrain side. Operator: We will now proceed with our next question, and the next questions come from the line of Martino De Ambroggi from Equita. Martino De Ambroggi: The first question is still on the LCV. Olof, I understood your qualitative comments on LCV for next year. But could you provide what your feeling is in terms of Europe and South America if in '26, the market overall is able to have at least a small single-digit rebound in terms of volumes? And the second question is specifically on the defense business because you are providing guidance with and without defense. I was wondering if in implying what the defense EBIT and revenues, is it correct to take EUR 150 million of adjusted EBIT and probably close to EUR 1.3 billion sales, or there are intercompanies or other items that could affect these figures? And I clearly understand you are not providing any updated guidance without a defense on free cash flow. But could you comment on what is the normalized free cash flow or cash conversion for this business? What was in the past? Olof Persson: Okay. If I start with the LCV market, I think I need to stay a little bit on top and give you the feeling I have right now because we need a couple of, I would say, weeks or at least a month to really see where the activities are going to start with in 2026. I mean, we now have visibility for the rest of the year, sold out, and then we need to see how the activity is going. But as I said, so far, so good. I mean, the activity levels that we see from our customers, the tender activities we see are coming. We do see, as you've seen, an increase in the order intake coming from very low levels in Q2 and so on and so forth. So the indications are good. But let's see when we have got that all together, and we will come back to that with a more detailed market development on that one. On the other 2 questions, I'll leave it to you. Federico Donati: Yes. On the defense side, I think, Martino, on the EBIT side, yes, you can be rounded to the number you have mentioned, as well as on the top line. And in terms of the free cash flow of defense, as you know, we have never disclosed it by business unit. The only thing I can say is a cash-generative business, but on a full-year basis. I hope this helps. Operator: We are now going to take our next question, and the next questions come from the line of Nicolai Kempf from Deutsche Bank. Nicolai Kempf: It's Nicolai from Deutsche Bank. Also 2. Maybe coming back on your full year guidance, it does imply a significant step-up in Q4 of around EUR 250 million in Q4 earnings versus EUR 300 million in the first 9 months. I mean, you mentioned that all segments will be stronger in Q4, but can you just give a bit more color on which segment should drive that? And it's probably going to be the light trucks, but any help would be appreciated here. And the second one, if I look at the EU heavy truck market share, came in at 6.4%. I think historically, you were closer to 9% or 10%. And that is despite the fact that you have launched a new model here. Should we expect that next year, you will have a higher market share? Or why is it below the historic run rate despite having a rather new product in the market? Olof Persson: So on the Q4, I think I gave the guidance that -- I mean, I can give at this point in time. The basis for the improvements that we see is there in the truck side is, of course, good to see that we sold out. That means that we can improve. If you look at the backup of the slide, you can also see that the inventory with our dealers has gone down. We have managed the dealer inventory together with the dealers and our own dealer very well. So we're having a system set up for an increase on that side, which I think is promising and stable in that respect. Then, as I said, powertrain bus, increased volumes, the profitability, we have the cost behind us on the ramp-up in Annonay. And just a comment on that, it was absolutely necessary to make sure that we create a very stable, efficient Annonay plant in terms of quality, volume, and efficiency, and we have that behind us, and we are pushing forward now. And then, of course, on the powertrain side. On top of that, as I mentioned and has been mentioned a couple of times, an efficiency program. Don't forget the efficiency program, that's never a linear coming in the profit and loss. It's actually an accelerating program. It's always those programs that are very often. And of course, the majority or a big chunk of that program will now start to come in fully with all the activities we have done, not only on the SEK 150 million that we talked about, but also the activities that we have seen. So those are the things that are actually going to drive the Q4 in coming back and making the result up to the guidance we have. On the EU market side, I think we specified we are now entering into the final phase of the launch, and we have been in a market situation that has been really focusing on keeping the price level on this new vehicle, because I truly believe that we're going to live on this product for many, many years. And we need to make sure that it is in the market in the right way. We have had a very stringent price discipline. We will continue to have a price discipline to really ensure, as I said, all the different aspects of the product. So I definitely see this product going forward in the mid and the long term being a product that definitely has a potential for more market share than it has today. That's for sure. Operator: We will now take one final question. And our final question today comes from the line of Alex Jones from Bank of America. Alexander Jones: Two from my side as well, please. Could you talk a little bit about the medium and heavy-duty outlook that you see in terms of order trends also into 2026? I know you talked a bit more positively about LCV, but medium and heavy orders were down 3% year-on-year in Europe. So your thoughts would be interesting. And then the second question on defense. Can you be more specific at all on the mix factors that weighed on margins this quarter, at least sequentially, and whether you expect those to continue going forward, Q4, and into next year? Olof Persson: Well, on the medium and LCV, that was the feeling going forward into the fourth quarter and into next year. And again, I repeat what I said. On the LCV side, I have a good feeling about the activity level. Also, I would say, on the medium-heavy. And as we progress with our final implementation and launch of the model year '24, we're going to see impacts there as well, not only in terms of market, but also in terms of market share over time. And we're going to continue to keep a strict, selective approach, making sure that we get the pricing. So I would say we come back in the beginning next year, as we normally do, to have a view on the market and where the market is going for heavy and medium. But we're well-positioned in both of these markets. And I think, as I said, I feel comfortable that once we are really fully launched this product now, we're going to see the positive impacts coming, full confidence in that. It is a very, very good product in terms of all the different aspects. And I'll leave it to you, Federico, on the... Federico Donati: On the Defense, sorry, you were talking and referring to the mix, if I take your question correctly, correct, Alex? Alexander Jones: Yes, please. Federico Donati: Yes. But I think, in defense is more generally speaking, you need to consider that we have a very long and solid order book that just needs to be deployed. And so, probably looking at the defense just on a quarterly basis, it is much better to look at it on a full-year basis, and the marginality also. So this is just a question of looking at it on a yearly basis, and the mix can also change by region and by country, and by product itself. So as Olof said at the beginning, we are expecting the performance of each single business unit up year-over-year, and that will be the case for the Defense as well in Q4. That is what I can share with you. Operator: Thank you. That concludes the question-and-answer session. I will now turn the call back to Mr. Frederico Donati for any additional or closing remarks. Federico Donati: Thank you all, and have a nice rest of the day. Thank you. Bye. Operator: That concludes today's conference call. Thank you all for your participation. Ladies and gentlemen, you may now disconnect your lines.
Operator: Good morning, everyone, and welcome to the Stabilis Solutions' Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Now at this time, I would like to turn the conference over to Mr. Andy Puhala, Chief Financial Officer. Mr. Puhala, please go ahead, sir. Andrew Puhala: Good morning, and welcome to Stabilis Solutions' Third Quarter 2025 Results Conference Call. I'm Andy Puhala, Senior Vice President and CFO of Stabilis, and joining me today is our Executive Chairman and Interim President and CEO, Casey Crenshaw. We issued a press release after the market closed yesterday detailing our third quarter operational and financial results. This release is publicly available in the Investor Relations section of our corporate website at stabilis-solutions.com. Before we begin, I'd like to remind everyone that today's conference call will contain forward-looking statements within the meaning of the Private Securities Reform Act of 1995 and other securities laws. These forward-looking statements are based on the company's expectations and beliefs as of today, November 6, 2025. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those projected. The company undertakes no obligation to provide updates or revisions to the forward-looking statements made in today's call. Additional information concerning factors that could cause those differences is contained in our filings with the SEC and in the press release announcing our results. Investors are cautioned not to place undue reliance on any forward-looking statements. Further, please note that we may refer to certain non-GAAP financial information on today's call. You can find reconciliations of the non-GAAP financial measures to the most comparable GAAP measures in our earnings press release. Today's call is being recorded and will be available for replay. With that, I'll hand the call over to Casey Crenshaw for his remarks. J. Crenshaw: Thank you, Andy, and good morning to everyone joining us on the call. We executed according to plan in the third quarter, capitalizing on continued demand for our integrated last-mile LNG solutions across our markets. Third quarter volume increased by more than 20% year-over-year, driven by strong demand across our growing base of marine, aerospace and power generation customers. We continue to see healthy demand trends across these sectors, supported by increased commercial space flight activity, seasonally strong demand for distributed power and robust throughput from cruise activity in the late summer months. Commercially, our team remains highly engaged with both new and existing customers, particularly in the aerospace and marine markets. We also see growing opportunity in the power generation as domestic investment in new data center capacity increases the need for on-demand distributed power solutions. As announced in October, we secured the largest customer contract in the company's history, a 10-year marine bunkering contract for LNG, produced at our proposed 350,000 gallon per day LNG facility in Galveston, Texas. Subject to the finalization of project financing, we expect to break ground on the Galveston facility in the first quarter of 2026 and are targeting the facility to come on stream in late 2027. In parallel, we plan to construct a Jones Act compliant LNG bunkering vessel to serve customers in the Port of Galveston, Houston Ship Channel, and surrounding areas, consistent with a focus on building a vertically integrated marine bunkering solution in the local market, and this will serve as a template for what we seek to replicate in additional markets over time. Beyond this initial bunkering customer, who will represent approximately 40% of the planned offtake capacity at the Galveston facility, we're in late-stage negotiations with another marine bunkering customer for an additional 20% of our planned production capacity. We expect to have approximately 75% of the total capacity sold under long-term customer contracts by the time we reach final investment in early -- final investment decision in early 2026. In recent months, we've worked closely with our engineering and design partners to secure long lead-time items and develop detailed engineering designs for the LNG facility and the related bunkering vessel. Additionally, we are finalizing contracts for equipment, plant and vessel construction and related items such as pipeline access, putting us on track for the final investment decision in early 2026. Stabilis has engaged a leading investment bank to arrange the financing for this project. We have evaluated a variety of potential financing options and intend to prioritize a structure that maximizes value creation for all shareholders. At this time, we intend to pursue a joint-venture structure, supported by project level debt and equity from third-party investors. Through this structure, we intend to retain operational control of the project, positioning us to realize meaningful economic upside and long-term returns on our investment. We intend to share periodic updates with our shareholders as key project development milestones are achieved. This is a transformational moment in the history of our organization, and we're excited to take this next important step in our company's growth. In the meantime, we'll stay focused on day-to-day execution required to deliver profitable growth. This means continuing to expand commercial contracts across our vertical markets, continuing to improve operational excellence and staying disciplined around how and where we deploy capital as we seek to maximize value for our shareholders. With that, I'll turn the call over to Andy to review our financial performance in detail. Andrew Puhala: Thank you, Casey. As customary, I'll begin with a discussion of our third quarter performance, followed by an update on our balance sheet and liquidity. Third quarter revenue increased 15% year-over-year, driven by a 21% increase in LNG gallons sold and higher average commodity prices, partially offset by less favorable customer mix and lower rental and service revenues. At an end market level, revenues increased in our three target growth markets with aerospace revenues increasing by more than 88% compared to the same quarter last year, and power generation and marine revenues increasing by 31% and 32%, respectively. This strong performance was partially offset by the scheduled end of an industrial customer contract that concluded late last year. During the quarter, approximately 73% of total revenue was derived from aerospace, marine and power generation customers, up from 60% in the prior year quarter, reflecting the continued strength and diversification of demand across these high-growth markets. Adjusted EBITDA was $2.9 million during the quarter compared to $2.6 million last year. Adjusted EBITDA margin was 14.3%, down from 14.6% in the third quarter of last year. The decrease in our adjusted EBITDA margin primarily relates to the roll-off of the high-margin industrial project previously mentioned. Cash from operations totaled $2.4 million for the quarter. Liquidity at quarter end was $15.5 million, consisting of $10.3 million of cash and approximately $5.2 million of availability under our credit facilities. We ended the quarter with $9.5 million of total debt and lease obligations, resulting in a net positive cash position. Overall, our balance sheet remains strong and provides ample flexibility to support our ongoing operations. Capital expenditures totaled $3.9 million, primarily related to early engineering and design work for the Galveston LNG facility and related bunkering vessel. We expect investment to accelerate over the coming quarters as we progress toward construction and a final investment decision in early 2026. Once project FID is made, we expect all project funding requirements to be met through project-level financing. In the interim, we anticipate investing an additional $3 million to $5 million in CapEx on the project. This concludes our prepared remarks. Operator, please open the line for the Q&A session. Operator: [Operator Instructions] We'll go first this morning to Martin Malloy of Johnson Rice. Martin Malloy: Great to see all the progress you're making on the Galveston LNG project. My first question, just on the permitting side here. Are there any key permits that we should be watching for, for you all to receive regarding this project? J. Crenshaw: Well, first of all, thanks for joining, Martin. We appreciate you being on this morning. And yes, it's a good question on the Galveston project. There's a number of different permits that we track and work through. We already have the export license, it is already in our possession for any gallons that need to be exported. So that's kind of an already a benefit. And -- but all the normal permits are being worked, and they're already being in process and being worked in our project today. So they're being progressed. Andrew Puhala: Marty, just to add a little bit to what Casey said, I mean there's a number of permits, as you could imagine, for a facility like this. We've got a detailed list of them all and we're tracking them and know what we need to do there. The main one is probably our Texas Railroad Commission for the facility and then the Coast Guard for the bunkering operation. J. Crenshaw: And we're tracking them all and we don't think that, that changes our timeline. Martin Malloy: Okay. Terrific. Just for my follow-up question, it's great to see the growth also in the aerospace and the power side. And I was wondering if you could maybe talk about what you're seeing there in terms of end market demand and potential capacity expansion to meet that demand. I think you all have a second LNG train to double capacity George West, some of the long lead time equipment that's there. Any plans for that? That would be great if you could talk about that. J. Crenshaw: Why don't I start, and I'll let Andy come in with any color or detail around it. I mean I think I really agree with what you're saying is that not only is the marine super exciting as one of our big verticals, but the aerospace and the power generation is just really exciting right now. And you're just seeing additional -- on the space activity, you're seeing additional launches and the primary fuel being used is now LNG as it relates to how they're operating those vehicles. Our demand there is expected to be up. We expect it to be up for 2026 from what we've seen in the past. And how that offtake happens there versus the need for power generation fuel versus what the timing of the plant in Galveston comes online are all things that we're working on in conjunction right now. So lots of demand for both space, lots of the -- when I say, it's aerospace for rocket launches, lots of demand power generation as it relates to distributed power needs for data centers or grid redundancy, et cetera. And most of those jobs are bridge or backup, but some of the bridge and backup is 5-plus year type conversation. So they're even talking about potentially needing that asset deployed in different spots. So we're basically waiting to see what the most customer-centric locations for that additional train is and just waiting on that demand to firm on who's going to contract it to make sure that capital has contracted offtake against it. But we're still working on it, both in George West and in other locations. Operator: [Operator Instructions] We'll go next now to Bill Dezellem at Tieton Capital. William Dezellem: A couple of questions here to begin with relative to the new marine facility. You referenced here in late-stage discussions with a prospective customer that will represent 20% of the capacity. What industry is that customer in? J. Crenshaw: With the marine bunkering client, and so they're in the -- this is a cruise customer. William Dezellem: And then that leaves an additional 15%, if our math is correct, to reach your 70% capacity being committed prior to or at FID with -- so with that remaining 15%, how do you -- how does that look like that will develop? Is it a single customer that represents 15% or is it multiple? And what industries would you expect them to be in? J. Crenshaw: Yes, Bill. So let me just touch on it from a macro. I mean those are plus or minus goals of us having 75% of that offtake, firm, 10-year, good credit quality customers because that generates the best structure for Stabilis in the project. We hope to have an even higher utilization at that time, but that's our goal by the first quarter to go FID. And so that customer could be anywhere from more clients related to cruise. It could be clients related to container ships. It could also be a third-party trader that's in the bunkering space. So those are all three options on that. We expect it to be one or two, and it could be north of the projected volume that we put out there in that target of 75%. That's just what we wanted to kind of give you on what our goals was at the timing for FID. William Dezellem: So essentially, that last 20% is a bit more fluid at this point and -- but you have options that you're working on. J. Crenshaw: Yes. Look, we're under discussions with multiple customers, and I think with what we have, the first contract and the second one that we're really close on, I think we can move on the project. I think it makes it a better project to have the balance of it taking off and then offtake there. And we're talking to a number of people. We've got advantage. Remember, we've got advantage of natural gas. We're going to have advantaged product on the water with a really well-developed facility and Jones Act vessel, so we've got a cost advantage. And I think when you have a cost advantage and an advantage like that, I think, makes the selling part of it easier. William Dezellem: That's helpful, Casey. And then did you -- changing gears here, did you all win additional marine business here this quarter to have that up 30-some percent and space up 88% and power gen at 30%? J. Crenshaw: Look, we're doing numerous marine clients, not just cruise, but we've got some other areas that we're servicing, offshore supply vessels, et cetera. There was a lot more throughput due it to being the late summer months through some of our existing clients. And so kind of a combination of both is to answer your question. William Dezellem: Great. And that's helpful relative to the marine. And how about in space and power generation, those strong growth rates. Were those a function of new contracts? J. Crenshaw: Power generation was a function of temperature and the existing contracts we had. Those are always -- we have some new ones and some falling off, and we have a number of them coming off in the fourth quarter. But the -- in the space, we did pick up another strong aerospace client, which increased volumes and opportunity in the third quarter. William Dezellem: And does that client -- was that a one-off or a temporary? Or is that now repeatable for many quarters going forward? J. Crenshaw: It's repeatable for many quarters going forward. And it's one thing, we work extremely hard with those customers. And I would say, all three of these customer groups, marine, aerospace and distributed power, they're all super sensitive to what they need and how they need it. The space people are specifically -- because it's propellent fuel, they're specifically intense around that. So we expect it to be a long-term additional new client that we look forward to doing a lot of work with over a long period of time. William Dezellem: Great. And kind of trying to tie that all together, was there any sort of a strategy change to use more third-party gas or is the growth that we saw this quarter in third-party gas really a function of having won these contracts, and longer term, you'll figure out how the most optimal way to serve those clients? J. Crenshaw: Well, I'm going to start and then let Andy kind of finish it up. I mean we ran high utilization on both of the company-owned facilities this quarter. And I think the answer is yes to all of that. We try to optimize ours first, but it also depends on logistics and some of the spec of quality depending on what type of client and where, but we like and have always, Stabilis has been in business for -- since 2012, acquired Prometheus share of interest. They've been in business for over 20 years. So in the whole history of our company, acquiring Encana's gas [indiscernible], we use third-party supply. That's all as a way to build demand and then figure out if we can drop a facility in there to do it ourselves. So consistent with what we've done, what's not -- I think our operations team worked really hard to optimize our current manufacturer supply and then third-party supply this quarter. And I think we're pretty proud of that. It's an ongoing process, and they did a nice job this quarter, and Andy, anything to add to that? Andrew Puhala: No, I think you covered it. I mean we -- as you mentioned, we try to prioritize our own molecules, our utilization was good this quarter. We use third-party molecules to flex up and down depending on customer demand and location. So that's pretty much it. Operator: [Operator Instructions] We'll go next now to Spencer Lehman, private investor. Spencer Lehman: Great news here in the last few weeks. And a couple of questions, just maybe on the stock share structure. I've been with you for many years, and it's always been an interesting little company because there's 80% inside control and it's very thin. And that's been -- there's an advantage and a disadvantage to that. And I've always sort of -- when that subject has come up in the past, there's always been a suggestion that some day, of course, you'd come out with some full-blown, not an IPO, but like a secondary and raise some money. And I'm just wondering this new project in Galveston, is this the project that might initiate that kind of development because, of course, that would be a great way to also to raise the financing for the project? J. Crenshaw: Spencer, thank you for being on the call. We appreciate your long-term engagement with the company and holding of your positions. So first of all, thank you for that and your supportive questions and intellectual thoughts and challenges on different things that we're working on. So we appreciate that, first of all. Certainly, yes. I mean we need -- we're a public company because we're hoping to have growth and either be distributing capital to -- distributing dividends to shareholders or needing to grow and raise additional capital to do that growth. In the current structure that we've got proposed here, we believe we can do this project without a large dilution or any adjustment to the current shareholder base in the parent company, Stabilis. However, this is an opportunity once the project is FID'd to go communicate with the market and shareholders about our different growth plans, what our activity is and some of the next stages of growth and what we're doing there. At that point in time, I think we have the company available to use all tools at our disposal to grow the company and meet our mission of providing clean LNG solutions to our clients. And we've got three markets that are dynamic and growing right now. And we've been working on this company for the past 13 to 20 years, this is not an overnight success, but our markets are coming on really strong right now, which may give an opportunity to do something around the capital structure there. But we don't want to commit or make any guarantees or anything of that nature. We're really focused right now, Spencer, on the customers and on the revenue and earnings and on the current projects. And once that has clarity, then we've got, with Andy and our team will absolutely bring in people and advisers to make sure that we're optimizing this for all the shareholders to create the right return for the shareholders. It's a long answer to the question, but I wanted to touch on it for you. Spencer Lehman: Yes. And I certainly like the idea of no dilution or very little dilution except at much higher prices, of course. And it would be a way of raising money, but not here. The -- just a small question, though, when you came out with the announcement, I don't know if you noticed it, Andy, you might have noticed a few days afterwards, there was a 100,000 share block at $5 that came on. And I've never seen that. I'd been watching, been involved with the stock. I was just curious if you knew what that's all about and it has been there. It stays there every day. And it's been nibbled out a little bit, so it's down -- it's down to 94,000 now. But any idea what that's all about? Andrew Puhala: Spencer, we don't know who that block is, who's offering that. Spencer Lehman: Yes. Because there could be an institution or a fund or something. But is this -- it's a little bit of a cap right now on the price, but just curious. Well, anyway, great, hope everything works out, and thanks for keeping us informed. J. Crenshaw: Well, Spencer, we appreciate you being a long-term holder. We're a long-term holder. We believe that the company will over time rerate what the future value is seen with the company, and we'll have some turnover of some of the shareholders during that period of time. And everybody has different bases for different reasons. But we're believers in the long-term value of the company, we're holders right now. As Andy stated, I can't help to be really positive on the company, the future of the company, the outlook for the value. And so I'm always -- I'm super long, super believer in it. And -- but have a long view and believe that these projects and growth and customers will drive that value over time. And that's what we're super focused on here is to those. Spencer Lehman: And just a quick second part of that is you don't mention data centers too much, but is that included when you say power generation? Is that what you're... J. Crenshaw: Absolutely. We call about distributed power, what we're talking about is the increased demand on the grid and on how power is distributed to projects. And where the LNG is really working is when they want the power closer to the project or they can't get grid, they can't get pipe and LNG comes into bridge that natural gas power solution. So data centers or computing demand on power are driving a lot of the increased needs. And secondly, I just think the reshoring and the increased manufacturing in the United States is also adding some increased demand and draw on the grid. The grid has been really stable for a long time. It's not shown a ton of increase, but we think it is coming. And from what we're seeing, distributed power is a good solution on both timing and cost for these projects. Spencer Lehman: Okay. Yes, I think energy is a great place to be right now, so good. J. Crenshaw: We like it. Operator: [Operator Instructions] And gentlemen, it appears we have no further questions this morning. Mr. Puhala. I'd like to turn the conference back to you, sir, for any closing comments. Andrew Puhala: Well, thanks, Boe, for everyone who joined us today. I appreciate your time and your support of the company. We look forward to giving you updates on some of these exciting projects in the future. If you have any questions in the interim, please feel free to reach out to me or our Investor Relations contact number, and we'll be happy to talk to you. Thanks a lot, everybody. This concludes our call. You can now disconnect. J. Crenshaw: Thank you. Operator: Thank you, Mr. Puhala. Thank you, Mr. Crenshaw. Again, ladies and gentlemen, this will conclude the Stabilis Solutions' third quarter earnings conference. Again, thanks so much for joining us, everyone, and we wish you all a great day. Bye.
Operator: Good morning. My name is Dustin, and I will be your conference operator today. At this time, I would like to welcome everyone to Oscar Health's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I will now turn the conference over to Chris Potochar, Vice President of Treasury and Investor Relations. Please go ahead, sir. Chris Potochar: Good morning, everyone. Thank you for joining us for our third quarter 2025 earnings call. Mark Bertolini, Oscar Health's Chief Executive Officer; and Scott Blackley, Oscar's Chief Financial Officer, will host this morning's call. This call can also be accessed through our Investor Relations website at ir.hioscar.com. Full details of our results and additional management commentary are available in our earnings release, which can be found on our Investor Relations website at ir.hioscar.com. Any remarks that Oscar makes about the future constitute forward-looking statements within the meaning of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by those forward-looking statements as a result of various important factors, including those discussed in our annual report on Form 10-K for the period ended December 31, 2024, and the quarterly report on Form 10-Q for the period ended June 30, 2025, each as filed with the SEC and other filings with the SEC, including our quarterly report on Form 10-Q for the quarterly period ended September 30, 2025, to be filed with the SEC. Such forward-looking statements are based on current expectations as of today. Oscar anticipates that subsequent events and developments may cause estimates to change. While the company may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so. The call will also refer to certain non-GAAP measures. A reconciliation of these measures to the most directly comparable GAAP measures can be found in the third quarter earnings press release available on the company's Investor Relations website at ir.hioscar.com. We have not provided a quantitative reconciliation of estimated full year 2025 adjusted EBITDA as described on this call to GAAP net income because Oscar is unable without making unreasonable efforts to calculate certain reconciling items with confidence. With that, I will turn the call over to our CEO, Mark Bertolini. Mark Bertolini: Good morning. Thank you, Chris, and thank you all for joining us. Today, Oscar announced third quarter results and reaffirmed updated 2025 guidance. We reported total revenue of approximately $3 billion, a 23% increase year-over-year. MLR increased approximately 380 basis points to 88.5% due to higher market morbidity, partially offset by favorable prior period development. Our SG&A expense ratio of 17.5% meaningfully improved by approximately 150 basis points year-over-year. Overall, Oscar reported a $129 million loss from operations and adjusted EBITDA loss of $101 million. Net loss for the third quarter was $137 million. We remain confident in our ability to expand margins and return to profitability in 2026. Scott will walk through our financials in details in a few moments. Before I get into our results, I want to underscore the long-term importance of the individual market. The individual market is the only source of affordable health coverage to 22 million Americans who power our economy. The majority of members are from the small businesses, service and farming sectors, which together generate nearly half of U.S. GDP. These hard-working people do not have access to employer coverage and rely on enhanced premium tax credits to fill the gap. For example, the average farmer making $60,000 a year now pays $75 a month for health insurance compared to $300 a month before the enhanced premium tax credits. That $225 is the difference between paying for health care or paying the bills. Limiting access to affordable coverage in the individual market undermines Main Street and rural America. This market is critical regardless of policy changes, and we are engaged with policymakers on both sides of the aisle to ensure Americans have access to the coverage they need. Now I will update you on current market dynamics. As we said last quarter, 2025 is a reset moment for the individual market. Overall risk adjustment data from Wakely in the third quarter show continued higher market morbidity, which we attribute to Medicaid lives entering the market and the initial impacts of program integrity efforts. Looking ahead, we see rational pricing in the 2026 open enrollment period. We also see the overall market to contract due to the expiration of enhanced premium tax credits and program integrity efforts. However, we remain optimistic Congress will reach a compromise on tax credits to address affordability issues many Americans will face without them. The Oscar team is well positioned to profitably grow share and improve margins. Our 2026 pricing strategy remained disciplined, balancing membership and profitability. For 2026, we resubmitted rate filings in states covering close to 99% of current membership. And our weighted average rate increase is approximately 28%. Our rate filings reflect elevated trend, significantly higher market morbidity in 2025, the expiration of enhanced premium tax credits and program integrity initiatives. Our teams are actively directing members to plans at affordable price points to ease this transition. We have a strong opportunity to capture share profitably as other carriers retreat or price themselves out of the market. Oscar ended the first nine months of 2025 with more than 2 million members, a 28% increase over last year. We are now in the first week of the 2026 enrollment period. The Oscar experience will be available in 20 states, including 2 new states, Alabama and Mississippi. We are also entering new markets and expect to grow share in existing markets in core states next year. Our total addressable market for plan year 2026 is approximately $12 million, up 500,000 year-over-year. Oscar offers consumers more choice in the individual market. We continue to diversify our product mix, evolving from condition-specific plans to plans tailored to meet different phases of life. Our long-standing clinical plans for members with diabetes, asthma, COPD and multiple chronic conditions remain strong performers in the book. Now our new product, HelloMeno, helps women take control of the menopause experience. Today, nearly 5.4 million women over the age of 45 are enrolled in the ACA, a rapidly growing demographic with limited support. Oscar is the first individual market carrier to offer this type of product in partnership with leading women's health clinics and menopause-certified clinicians across the U.S. We help members save up to $900 per year by getting them into the right plans with $0 benefits, early intervention programs and high-value treatments that improve outcomes at lower costs. Oscar also continues to shape the future of employer coverage through ICRA. Our pricing is competitive across our major markets compared to group plans. We expect to see continued conversion from small and midsized employers who are suffering from double-digit group rate increases. Our Hy-Vee Health with Oscar product is now live in Des Moines, Iowa for plan year 2026. This innovative plan is the first of its kind. The plan offers $0 concierge-type care at an affordable fixed price and in-store rewards for buying healthy food. We plan to expand this partnership in additional markets. Our momentum in ICRA reflects the growing demand among employers for a wider range of affordable and innovative benefits. Finally, Oscar is infusing an industry-first health AI agent, Oswell, into our entire product portfolio. Oswell is powered by OpenAI and helps members manage their health on demand. Unlike other AI tools, Oswell is connected to Oscar's cloud-native tech platform. It draws from claims, medical records, care guide notes and other member data for a personal experience. Members can better understand symptoms, common test results, medications and preapprovals tied to plan benefits. Owell also provides doctors with data to improve care paths and members with questions to ask their doctors so they are informed on their care. This is just the beginning of what we will do with leading AI models to redefine the health care experience. In summary, Oscar's highly innovative products, superior member experience and disciplined pricing set us up to grow market share. We remain front-footed and know how to run a successful company in dynamic markets. Oscar will continue to lead the individual market regardless of the outcome on enhanced premium tax credits. All of our attention and resources are focused on executing against our strategic plan. We are well positioned to expand margins and return to profitability in 2026. The ACA and ICRA have the potential to meet the health care needs of approximately 120 million working people. The individual market aligns with major macroeconomic workforce and consumer trends. More Americans work in the service economy than ever before. More businesses want affordable benefit options. More people want greater choice. Oscar is ahead of the demand, and we are creating the future of individual health care for all Americans. I want to thank the entire Oscar team for their hard work during our busiest time of the year. I am proud of how we consistently show up for our members, partners and the business community. I will now turn the call over to Scott. Scott? Richard Blackley: Thank you, Mark, and good morning, everyone. This morning, we reported our third quarter financial results and reaffirmed our full year guidance. 2025 has been a dynamic year for the ACA marketplace. We've observed higher average market morbidity attributable to strong ACA growth from Medicaid redeterminations and ACA program integrity efforts that were implemented after the completion of 2025 pricing. We have taken disciplined actions to manage costs this year and to position us to ensure we return to profitability next year. Turning now to third quarter results. Total revenue increased 23% year-over-year to approximately $3 billion, driven by higher membership. We ended the quarter with 2.1 million members, an increase of 28% year-over-year. Membership growth was driven by solid retention, above-market growth during open enrollment and SEP member additions. The third quarter medical loss ratio was 88.5%, an increase of approximately 380 basis points year-over-year. We received a risk adjustment report in the third quarter for claims through July, which showed a further increase in market morbidity across several states. The third quarter MLR was impacted by a $130 million increase to our risk adjustment payable for 2025, partially offset by $84 million of favorable prior period development, primarily related to claims run out from the prior year. As discussed during our second quarter earnings call, we observed a sequential decrease in utilization each month throughout the second quarter. This trend persisted into early 3Q before stabilizing to be more in line with our expectations. Overall year-to-date utilization is modestly above our expectations. By category, inpatient utilization remained elevated but moderated meaningfully throughout the first 9 months of the year. Outpatient and professional were slightly elevated, while pharmacy remained favorable. Switching to administrative costs. We continue to deliver strong improvements in the SG&A expense ratio. The third quarter SG&A expense ratio improved by approximately 150 basis points year-over-year to 17.5%. The year-over-year improvement was driven by fixed cost leverage, lower exchange fee rates and disciplined cost management, partially offset by the impact of higher risk adjustment payable as a percentage of premium. In the third quarter, the loss from operations was $129 million, a change of $81 million year-over-year, and the net loss was $137 million, an $83 million change year-over-year. The adjusted EBITDA loss was $101 million in the quarter, a change of $90 million year-over-year. Shifting to the balance sheet. We have taken opportunistic steps to strengthen our capital position and optimize our capital structure. During the third quarter, we completed a $410 million convertible notes offering due 2030. Net proceeds were $360 million, inclusive of the cost of a capped call transaction, which increased the effective conversion price to $37.46. In addition, subsequent to quarter end, we entered into an agreement to redeem the vast majority of our outstanding $305 million convertible senior notes for shares. We ended the third quarter with approximately $4.8 billion of cash and investments, including $541 million of cash and investments at the parent. As of September 30, 2025, our insurance subsidiaries had approximately $1.2 billion of capital and surplus, including $564 million of excess capital. Turning now to 2025 full year guidance. Based on our results through the first nine months of the year, we are reaffirming all of our guidance metrics. For total revenue, we now expect to be towards the low end of our guidance range of $12 billion to $12.2 billion, driven by the third quarter ACA Marketplace morbidity that increased by more than our prior estimates. Membership growth has been strong through the first nine months of 2026.For the fourth quarter, our outlook contemplates a sequential decline in membership, driven by more historical churn patterns as the continuous monthly SEP for those at or below 150% of federal property level ended in the beginning of September. Our outlook also assumes risk adjustment as a percentage of direct and assumed policy premiums is in the high mid-teens range. Shifting to the medical loss ratio. We continue to expect a full year MLR in the range of 86.0% to 87.0%. The full year MLR guidance reflects higher average market morbidity, year-to-date utilization patterns and continues to assume a modest increase in utilization in the fourth quarter as members may seek additional care ahead of anticipated coverage changes next year. On administrative expenses, we continue to expect an SG&A expense ratio in the range of 17.1% to 17.6%, driven by greater operating leverage and variable cost efficiencies. We expect a loss from operations in the range of $200 million to $300 million and an adjusted EBITDA loss of approximately $120 million less than the loss from operations. While the third quarter risk adjustment true-up is expected to drive total revenues towards the low end of our full year guidance range, favorable prior period and in-year claims development and administrative expense efficiencies substantially offset the impact. So net-net, our outlook for the loss from operations remains unchanged. Now I'll spend a moment on our planning assumptions for 2026. While it is too early to provide formal guidance, we have taken appropriate actions to ensure we can deliver meaningful margin expansion and return to profitability next year. Our 2026 pricing strategy balanced growing market share and improving profitability. As Mark mentioned, our weighted average rate increase is approximately 28% for 2026. This increase anticipates above-average trend and is significantly higher market morbidity driven by increased market morbidity in 2025, the expiration of enhanced premium tax credits and the current ACA program integrity initiatives. We believe our disciplined pricing strategy captures the changing market conditions we've observed this year and the expected changes next year. Based on a review of final rates, our competitive positioning is in line with our expectations, and we are confident in our ability to profitably grow market share next year. As previously mentioned, we also took actions to eliminate approximately $60 million in administrative costs for 2026. In closing, we remain committed to bringing consumers affordable, innovative products and building an even larger ACA market over the long term. 2025 is a reset for the ACA marketplace. We've taken necessary pricing and cost actions and are confident in our ability to meaningfully expand margins and return to profitability in 2026. With that, I will turn the call over to the operator for the Q&A portion of the call. Operator: [Operator Instructions] And we will take our first question from Michael Ha from Baird. Hua Ha: Regarding the September weekly report, I understand there's worsening market morbidity shifts. But curious, is there any indication in that report how much of that might have been from things like FTR rechecks and removal of duplicative members heading into fourth quarter? I'm curious to hear how you view the potential risk of there being maybe more market morbidity shifts in the December weekly report. So thoughts there would be great. Richard Blackley: Michael, thanks for the question. So the Wakely report that we received had market morbidity increases by about 1.5 points to 2 points across several of our markets. We think that the drivers of that increase are the same types of things that we discussed last quarter, obviously, to a lesser magnitude. As you think about that report captures claims through July. And so it wouldn't capture the impacts of FTR or dual enrollment churn that really happened in the third quarter. On those two topics, I would say that we've seen about 45% of the people who were part of CMS' list to us on FTR or dual enrollments with 45% of that list has churned. When we look at the nature of those members, they actually have higher risk than our average book. So if we -- if the whole industry had similar types of characteristics in their populations, that actually would be a tailwind to market morbidity. So we don't see any reason to change our expectations that market morbidity will stay consistent through the end of the year. Hua Ha: Great. And just one more question. So G&A, if I take a step back, has been such a bright spot in your fundamental story. I think it's shined a really powerful light on +Oscar as well. So I'm thinking ahead regarding your longer-term G&A target for '27, 16% I wanted to ask if you still feel confident on achieving this target even with the magnitude of expected member attrition over the next couple of years. So I'm curious on the target. And I guess, more broadly as well, how to think about decremental margins. Mark Bertolini: Thanks, Michael, Mark here. We actually believe we have more room in our SG&A as we go forward. The AI models we're creating, we've got well over two dozen models on the back end. We've just launched our first agentic. We have another one coming out of the lab. We have a lot of really good opportunity with AI to streamline our operating costs. And of course, the discipline we have on making sure that our variable costs, first and foremost, are fit to the size of our business. So if there is market shrinkage, then we believe that we have plenty of time to be able to adapt our variable costs to fit our cost structure going forward. Operator: Our next question comes from the line of Josh Raskin from Nephron Research Joshua Raskin: I was wondering, Scott, if you could just elaborate a little bit more on the underlying cost trends in the quarter and maybe any changes you saw from the first half? And within that, what areas drove that favorable development and seemed like a pretty sizable number for the prior year? And then I guess, I know it's super early, but any sense of that expected increase in utilization that you mentioned as we're entering fourth quarter? Are you seeing any of that as members get their new rates? Richard Blackley: Josh, let me go through those questions. So I'll start with the PPD, which was $84 million in the quarter. And that was -- about half of that was related actually to risk adjustment where we had some favorable development around some of our estimates for rebates. I know you wouldn't expect that we have rebates because we're a large payer, but we do have some markets where we do pay rebates, and we got some clarity on a few topics that allowed us to true that up. So that was about half of it. The remainder was favorable development from claims, and that just is, I think, encouraging for us that we continue to see both prior year development that's favorable and in-year development. So we feel like those are positives in terms of that we're appropriately reserving for the risk that we're seeing. And if I shift then to what's going on in utilization and trend, I would say that utilization continues to moderate year-over-year. it's still modestly elevated versus our pricing expectations. Inpatient remains elevated, continued to moderate into the third quarter. Outpatient professional, slightly elevated. I would say that we believe that some of the changes we're seeing in terms of shifts between categories is a result of some of the total cost of care initiatives that we're running, where we're really focused on driving appropriate site of care transitions. So not much there that we're seeing that gives us pause. And generally speaking, I think that we look at utilization softening throughout the year and approaching kind of where we expected in pricing to be a good thing. Joshua Raskin: Perfect. Perfect. That's helpful. And then is there some -- if there is some sort of compromise that extends the enhanced subsidies, what should we be looking for that would create a more stable reenrollment process? What mechanisms do you think would be helpful for consumers in getting their insurance for 2026? Mark Bertolini: Josh, I think a couple of points I would make. First, we have been very careful with our plan design and their strategies to create $0 goal plans, $0 bronze plans and have spent a lot of time with the broker community helping educate them on the types of products that they can move people to. And we're seeing good activity on that in the early innings of the open enrollment period. Secondly, if enhanced tax credits are extended, we don't think there will be any real meaningful way to change prices the longer it goes. And I think we're probably beyond that now, but we shall see. But I think there are a couple of things that could happen. One is that we have this minimum MLR in the ACA market. And then a minimum MLR would require us to rebate if the plans made "too much money" based on having lower MLRs. And we would see that as a positive thing for the community and for our members to get a rebate back from their plan as a result of having these enhanced tax credits continue. We don't know what the price effect is until we know what the plan is and quite frankly, how it's going to fit. But that's how we think about enhanced premium tax credits. Operator: Our next question comes from the line of Jessica Tassan from Piper Sandler. Jessica Tassan: I was wondering maybe if you could talk about the enrollment in 2025 in diabetes, asthma, COPD specific plans. Maybe just remind us of the increased risk adjustment visibility and favorability of MLR in these plans, if any, and then the extent to which these plans were expanded for 2026 and whether they've got better retention or different metal mix. Richard Blackley: Jess, thanks for the question. So the thing about these plans is that we create them to draw into the plans, people who are interested in managing their conditions, and it allows us to have really better-than-average engagement with those members, which helps us to manage costs for them and for us. So that's why we really think that these are both creative to help people manage their specific conditions. We continue to roll out new ones because we do see success with retention when we have people with these conditions. They have a high NPS on these plans. So it's still not a large portion of our membership, but it's an important part of our membership in terms of our ability to attract and retain members. Jessica Tassan: Got it. And then just maybe do you have any early thoughts on how Oscar's morbidity in 20 -- I know it's five days in, but how Oscar's morbidity in '26 might evolve relative to the market? Or maybe just anything in your pricing or product design or commercial strategy that you'd call out that would give you maybe more control over your morbidity relative to the market? Mark Bertolini: Well, on the first point, we have priced as if premium tax credits are gone. '25 impact of morbidity, '26 potential impacts on morbidity given the shrinkage of the market, which we think is anywhere between 20% and 30%. 20% is the lower end without a number of these things, 30% being the highest, but that has an impact on our morbidity and program integrity efforts as if they were implemented. And we stack those in our pricing. We did not look for any duplication. And so we believe we're well covered depending on whatever happens next year relative to the morbidity in the market. Anything to add on that, Scott? Richard Blackley: No. And I think it's too early to say much about '26 morbidity. I think that when I look at the core performance of the company this year and I strip out kind of what happened with the impacts of market morbidity shifting higher this year, we're really pleased with the underlying trends, right? We're seeing an MLR when I strip out kind of the impact of what was happening with market morbidity, the MLR -- underlying MLR is pretty consistent with the guidance that we gave at the beginning of the year in the low 81% range. And so when I step back from that and look at the dynamics in the company, our ability to influence what's going on with our medical expenses, we feel like we're really well positioned to continue to navigate this marketplace. And as Mark talked about, we feel like our pricing captures the risk. We feel like the company is getting ever better at delivering our services. So we feel really well positioned for '26. Operator: Our next question comes from the line of Scott Fidel from Goldman Sachs. Scott Fidel: First question, and I understand it's still very early into the OEP here. But could you maybe just sort of walk us through the initial intelligence and feedback that you're getting from all your channels? What -- how that may inform the -- how sort of enrollment may be or sign-ups may be tracking relative to the industry expectations and then the expectations, Mark, that you just mentioned around that down 20% to 30%. Obviously, very early here, but just curious on sort of the initial indicators that you're getting from the OEP. Mark Bertolini: Thanks, Scott. We have seen a lot of activity more than we thought we would see at this point in time. However, you have to look at the structure of bonus programs and the broker network and all the education we did, and we are not banking on anything based on what we've seen in the first five days, quite frankly, that we'll be willing to leverage off of and say we expect our enrollment to be x for 2026. And so we're pleased with the progress so far, but we're not banking any of it as a future perspective on what our enrollment will be -- in the beginning of the year. Richard Blackley: And Scott, I'd just add, Mark talked about this, but I think it's an important thing. We did a significant amount of preparation with our brokers, training, mapping members. So we went into open enrollment with a pretty sophisticated game plan about where do members who are going to lose subsidies map to. We've got -- brokers have all of the information about people who may lose subsidies. So should the enhanced premium tax credits get extended. We know who the members today are who would be impacted by that. The brokers know who they are. We would certainly be able to quickly outreach to them and try to bring them also into the marketplace. So the early days are certainly showing that the preparation and the work we did is proving successful. Mark Bertolini: And also, I would add that we had in November or late October, it was auto mapping on the plans that are leaving the market, and we received the share that we thought we would receive. Scott Fidel: Okay. Got it. And then for my follow-up question, curious to what extent just as you've gotten the latest Wakely data and has shown variation in morbidity and sort of your positioning around risk adjustment in different states. How much were you able to, I guess, sort of factor or inform your pricing and your positioning strategy for 2026? Just curious around how much that may have sort of fed into your go-to-market strategy for '26 to try to sort of operate against some of those changing morbidity dynamics? Richard Blackley: Yes. Well, as Mark said, we're expecting the market is going to contract by 20%, 30%. We actually -- our best estimate is towards the lower end of that range in terms of impact, but we price towards the high end of that range. So we think we've got some -- the potential for some buffer already in there. Based on the way that we built the pricing for '26, Mark went through that we didn't attempt to look for overlaps in the way we measure. We think that creates some natural cushion in terms of the ability to absorb the change that we've seen. So net-net, I think that we continue to believe that our '26 pricing is resilient against what we've seen so far and it positions us well to return to profitability and see margin expansion next year. Operator: Our next question comes from the line of Stephen Baxter from Wells Fargo. Stephen Baxter: I guess the first question would just be trying to dive into the competitive dynamics a little bit more for next year. It seems like maybe some of your large peers have rate increases that are at or maybe above your 28%, but then maybe some of the not-for-profits could be a little bit lower. Just to kind of boil it down, like is there any kind of metric you have where you kind of have an analysis of what percentage of your markets you're going to be in a low-cost position, either just in the silver market or maybe across all your markets and how that compares to 2025? And then I have a follow-up. Richard Blackley: Steve, so when we think about competitive position relative to last year, first of all, all these increases in prices, you've got to start with last year's price position where last year, we were only, I think, in 15% of our markets, we were the lowest or second lowest silver price plan. This year, that's moving up to 30%. We still think that, that's less than some of the other large competitors that we see in the marketplace. So while we're competitive, we're not as competitive as some others. When I think about that relative price position, we think we can grab share in several of these markets. We think that the average price increase nationally is around 26% based on research by the Kaiser Family Foundation. So we think that we've done a nice job of putting our pricing into the market in a way which is competitive, allows us to grow margin, but also is disciplined and allows us to protect ourselves as well. Mark Bertolini: And one more point, Steve, because we believe the enhanced tax -- we priced without the enhanced tax credits being in place. Our metal strategy is fundamentally different than where we were last year. While we still think we'll have a lot more -- we'll still have the majority of our people in silver plans, we have priced gold and bronze plans that fit certain profiles in certain markets based on our underlying provider networks that allow us to have differential pricing from our competitors that are hard to compare by looking at average rate increases. Stephen Baxter: Got it. That's very helpful. And then just two quick numbers follow-ups. I guess, first, the risk adjustment, as you spoke to, is now 17% of direct premiums year-to-date, just making sure that's the right way to think about the full year at this point. And then what is cost trend running at this year? And what are you assuming cost trend is next year? Richard Blackley: Yes. So Steve, I think that the 17% risk adjustment year-to-date is probably a reasonable estimate for the full year, plus or minus. And with respect to cost trend, I won't go further than to -- than I did in terms of my discussion of utilization and what we're seeing in that and kind of it's slightly above our pricing expectations for last year. We have for 2026, assumed a trend increase that is higher than what we've seen historically. And so we are expecting, at least in our pricing to see trend, and this is excluding the impacts of all the market morbidity shifts, but just core cost trend that would be higher than what we've seen in the past. Mark Bertolini: I think that last point is an important one because we stack these things and our morbidity includes a lot of these program efforts and the impact on the population as a result of how risk adjustment came out. So that's separate than the pure underlying trend of our relationships with providers. Operator: Our next question comes from the line of Jonathan Yong from UBS. Jonathan Yong: I guess under the premise of a possible extension of the enhanced subsidies and whatever it may or may not include, how are you thinking about operationalizing this? And what may or may not be included in G&A at this moment, if anything? And what kind of step-up would you need if it were to occur? Mark Bertolini: I think the SG&A piece is not relevant to the enhanced premium tax credits, it's really around growth. So we look at both our fixed cost leverage and our variable cost leverage. We manage the variable cost leverage very close to membership, and then we impact fixed cost leverage, we actually already have going into '26 and expectations for '27. And that's part of what we're doing with our AI capabilities. In the end result, how we're going to operationalize it, we think we're in a good place I mean we look at this every day. We actually met on it yesterday to go over how do we have to think about growth up or down based on our projections. And I think we have the right tools in place with BPOs, for example, and other capabilities that we can use to meet the needs of the people we have on board or to pull back if we need to. Jonathan Yong: Okay. Great. And then I know, again, it's early on the enrollment period. But in terms of the members that are kind of showing up, are these kind of the typical members that would naturally have a 0 -- effectively not be paying anything and kind of for the members that are losing their enhanced subsidies, are they trying to downgrade? Or are they just kind of leaving the market altogether? What are you kind of seeing and hearing with respect to that? Mark Bertolini: Way too early to tell. We don't have that level of detail yet. We will get it, but it's going to be long. Operator: Our next question comes from the line of Andrew Mok from Barclays. Andrew Mok: You mentioned that your competitive pricing was in line with expectations and that you expect to take market share next year. Can you help us understand that strategy a bit more? Why is taking market share the right strategy in 2026? And do you think that is more likely or less likely to hurt from an adverse selection standpoint? Mark Bertolini: Taking market share really means taking advantage of people who priced way out of the market. And I think there's a subtle difference here between the group market that I hope you all understand. Given the risk adjustment mechanism and the way it works, it's almost impossible or just not -- it's not worth underwriting the members in the network. It's about the network itself and underwriting that provider network. And so some of our competitors who have priced way out of the market or left the market, we're using commercial networks at commercial prices where we have been using narrow networks in every market. And in the individual purchasing decision, people at the local market have the opportunity to buy their network and the plan design that works for them versus having an employer offer them a broad area of network, which costs more and a benefit plan that doesn't meet anyone's needs specifically. And so for that reason, we believe that looking at taking share from people that are pricing at 30%, 40% higher, we have an opportunity to take that share, put them into our networks and our underwriting and make it work better and effectively for us. And that's how we price. We're pricing off of the underlying cost of the network because we get covered on the risk adjustment side. Richard Blackley: And I'd just reiterate something that Mark said earlier. We think this is -- what we see is evidence of a very rational marketplace, right? So it's -- we don't think that there's been anyone who's tried to do a land grab and price dramatically lower. We feel like we're right in the pack. So from an adverse selection perspective, that's not something that is at the top of our list of worries. Andrew Mok: Great. And if I could just follow up on membership. I think last quarter, you said that you expected membership to trend down in the back half of the year. It looks like 3Q membership was up about 90,000 members or 4.5% sequentially. So I just wanted to get more color on what's driving that change versus your expectation and the implications of that higher membership on 4Q MLR. Richard Blackley: Yes. I appreciate that question. So membership was stronger than what we had expected in the third quarter. A good portion of that was driven just by lower churn. And so that is a positive that helps, obviously, with the MLR dynamics. We did have SEP member additions as well, but that ended as of September in terms of the continuous SEP, as I said in my comments. So overall, we continue to expect MLR to drift up in the fourth quarter. You can obviously do the math. We give you the full year guidance of MLR, so you can figure out what the point estimate is there. But we build -- when we reviewed our guidance for the year, we looked at all of the trends that we're seeing. We're looking at the details of is there anything that caused us to believe that we needed to increase the full year guidance of MLR, including the SEP performance. And we just haven't seen anything in the details that makes us concerned and we're able to reaffirm our guidance. Mark Bertolini: And one more thing I'll add is that we are very supportive of the program integrity efforts and the things that happened this year in program integrity had less and less impact on us as an organization than others because we spend a lot of time validating as much as we can the membership that comes into our plan. And if we see what we see as potential fraud, we sideline those brokers and those members and evaluate whether or not it's appropriate to bring them on board. So given that, when we received our dual eligible information, it was low double-digit thousands, very low double-digit thousands versus the headline report put out by certain people in the press of 2.4 million people. And so the obvious impact to us was a lot less than we thought it was going to be because we had done the homework upfront. We think this is a key part of making sure risk adjustment works well is that everybody uses these same tools to make sure that the people we're bringing on board belong on board, not because somebody else was able to get commission. Operator: Our next question comes from the line of Craig Jones from Bank of America. Craig Jones: So a follow-up on the fraud comments there. There's been a lot of talk about the -- out of the current administration around the various ways to root it out. So if you were advising Congress on maybe what they could do with a negotiated deal on the enhanced subsidy extension, what would be some of the most effective tools that could be implemented for 2026, maybe during a special enrollment period alongside enhanced subsidy extension to help root out some of that fraud? Mark Bertolini: Again, we support all the program integrity efforts that were put forward this year. We were prepared and we have priced as if those were in place. We have kept that pricing in place because we expect some of them may come along through regulatory action by CMS throughout the year. We want to be prepared to handle that. Of course, we would prefer that the industry get the opportunity to work with CMS to do this within the pricing cycle so that we're having all of these impacts fit and that we aren't disadvantaging our members as a result, disadvantaging working Americans as a result of having to have these huge morbidity jumps because we did it in the middle of pricing. So if we could do it before we price and work together on it, we're more than happy to support the program integrity efforts put forward by CMS. Operator: Our next question comes from the line of Steven Couche from Jefferies. Steven Couche: Is there any way you can quantify what you believe your cost advantage is from your narrow network strategy versus peers? Mark Bertolini: Yes. Richard Blackley: Look, I think, obviously, we're not going to get into the details of our competitive positioning on that. And we think that many of the -- of our competitors do have particularly the more successful competitors have similar strategies around narrow networks. What's most important is really making sure that you have the right network, you have the right providers, you have the right systems in the markets where you're trying to grow. And we think that's one of the important reasons why we can have similar cost, but grow above the market average because we do spend a ton of time in making sure that we curate our markets and that we have the right set of doctors, the right set of hospital systems that are attractive in those markets. Steven Couche: Great. And then is there any way you can help us or share what your assumptions were for the impact of the program integrity measures because we've seen estimates anywhere from sort of a de minimis impact to something quite meaningful. And then are there specific program integrity measures that you think are going to have the most impact? Richard Blackley: Well, look, I don't think that we'll get into the specifics of that. We do think that the state program integrity provisions would have been in place, had an adverse market or an adverse impact on the total size of the market. So we built that into our expectations, as Mark talked about, for pricing, but we'll have to see how those things play out, but we are prepared in terms of the pricing and for '26 that they may come back into practice at some point during the year. Operator: There are no further questions. That concludes our question-and-answer session. That also concludes this call for today. Thank you all for joining. You may now disconnect.
Todd Seyfert: Good morning, and welcome Sturm, Ruger & Company's Third Quarter 2025 Earnings Conference Call. I'm Todd Seyfert, President and Chief Executive Officer. Before we get started, I would like to turn it over to Sarah Colbert, our Senior Vice President and General Counsel, for the caution on forward-looking statements. Sarah Colbert: I would like to remind everyone that some of the statements we make today will be forward-looking in nature. These statements reflect our current expectations, but actual results could differ materially due to a number of uncertainties and risks. You can find more information about these factors in our most recent Form 10-K and other filings with the SEC. We do not undertake any obligation to update these forward-looking statements. Todd Seyfert: Thanks, Sarah. This quarter's results reflect both the realities of a challenging market and the early progress we're making as we continue to execute the strategic plan we began earlier this year. The broader market continues to face headwinds from tariff and interest rate uncertainty, inflationary pressures and a softening job market, all of which are affecting discretionary consumer spending and manufacturing costs. The firearms market is experiencing similar pressures. The overall market trending down 10% to 15% this year, while NICS checks, often used as a proxy for the market, down roughly 4% year-to-date versus 2024. Additionally, the market continues to be influenced by the availability of used firearms at retail. Despite these challenges, I am pleased with our top line performance for the quarter where we achieved year-over-year sales growth. As we continue to make progress on our strategic plan, we are actively focused on key operational initiatives and innovation activities. As top line performance trends upward, these disciplined actions are critical to accelerating return to sustained profitability and enhancing long-term success. Now Tom Dineen, our Chief Financial Officer, will take us through the financial results for the quarter. Thomas Dineen: Thanks, Todd. Net sales for the quarter were $126.8 million and diluted earnings were $0.10 per share. For the corresponding period in 2024, net sales were $122.3 million and diluted earnings were $0.28 per share. On a pretax basis, the company lost $2.1 million in the third quarter of 2025, driven by $1.9 million of acquisition and operating costs at the new Hebron, Kentucky facility that was acquired in July, increased costs associated with material and technology and increased sales promotional expenses. During the third quarter of 2025, we revised our estimated annual effective income tax rate for 2025, and recognized a $3 million increase to our year-to-date income tax benefit. This increased third quarter net income by $0.19 per share. Without this increase, our EPS would have been a loss of $0.09 per share. For the 9 months ended September 27, 2025, net sales were $395 million, and the company lost $0.48 per share. For the corresponding period in 2024, net sales were $389.9 million and diluted earnings were $1.15 per share. In the second quarter of 2025, the company rationalized and price repositioned several product lines, reduced the number of models offered and implemented an organizational realignment, which adversely impacted the results of operations for the 9 months ended September 27, 2025. On an adjusted basis, excluding the impact of these nonrecurring expenses, diluted earnings for the 9 months ended September 27, 2025, were $0.65 per share. On an adjusted basis, excluding the reduction in force expense of $1.5 million incurred in the first quarter of 2024, diluted earnings per share for the 9 months ended September 28, 2024, were $1.22. On September 27, 2025, our cash and short-term investments totaled $81 million. Our short-term investments are invested in United States treasury bills and in a money market fund that invests exclusively in United States treasury instruments, which mature within 1 year. On September 27, 2025, our current ratio was 3.5:1, and we had no debt. In the third quarter, we generated $13 million of cash from operations. In the first 9 months, we generated $39 million of cash. Year-to-date, capital expenditures totaled $28 million, including $15 million for the Anderson acquisition in Hebron, Kentucky. The company expects capital expenditures to total $35 million for the year for continued investments in new product introductions, expanded capacity for product lines in greatest demand, upgraded manufacturing capabilities and strengthened facility infrastructure. For the third quarter, we returned $13 million to our shareholders through the payment of $3 million of quarterly dividends and $10 million through the repurchase of 288,000 shares of our common stock at an average cost of $34.33 per share. In the first 9 months of 2025, we returned $36 million to our shareholders through the payment of $10 million of quarterly dividends and $26 million through the repurchase of 731,000 shares of our common stock at an average cost of $35.60 per share. The company also announced that its Board of Directors declared a dividend of $0.04 per share for the third quarter for stockholders of record as of November 17, 2025, payable on November 28, 2025. This dividend is approximately 40% of net income. Now back to you, Todd. Todd Seyfert: Thanks, Tom. When I stepped into the CEO role earlier this year, we began a comprehensive assessment of our operations and a full review of our product portfolio. Those activities continued into the third quarter where we realized top line growth from many of the actions taken in the second quarter while identifying additional opportunities to strengthen our foundation moving forward. Operationally, we are executing several key initiatives designed to improve efficiency and profitability across the organization. This quarter, we advanced into the next phase of that work with a rigorous evaluation of product line performance, conducting detailed line-by-line reviews of our portfolio and assessing profitability facility by facility to ensure our resources are deployed where they create the greatest value. This includes realigning our manufacturing footprint to maximize efficiency and reduce costs by balancing production lines across facilities to improve delivery and resource utilization. At the same time, we continue our product line analysis and rationalization to ensure that every product earns its place in our lineup and every facility operates efficiently and accountably. A great example of this is our newest facility in Hebron, Kentucky, which we acquired in July of this year. Following our product line review, we identified the need for additional capacity to support our modern sporting rifle category. We purchased Anderson to provide that capacity, which in turn freed up capacity in Maiden for one of our most in-demand products, the second-generation Ruger American Rifle. With the additional resources in Hebron, we are actively working to in-source components that were previously purchased, a move that will improve our cost structure, shorten lead times and give us greater control over quality and delivery. Additionally, product innovation continues to be the most important factor in remaining successful in a tough economic market. As I've said before, our greatest opportunities lie in delivering new relevant products that resonate with consumers and position us for sustained growth. For the quarter, new product sales accounted for $41 million or 34% of net firearms sales, which reinforces the popularity of our innovative products. As always, new product sales include only major new products that were introduced in the past 2 years. These are high-demand platforms that continue to resonate with customers across a variety of segments, including the award-winning RXM pistol, a modular polymer-frame striker-fired pistol developed in collaboration with Magpul. The second-generation Ruger American Rifle, an update to the American-made rifle that has been the benchmark for accuracy, durability and performance in bolt-action rifles for over a decade. Marlin lever-action rifles, which remain a staple for collectors, hunters and traditional enthusiasts. The Ruger 10/22 with carbon fiber barrel, a lightweight model featuring a stainless steel tensioned barrel with a carbon fiber sleeve. And the fourth-generation Ruger Precision Rifle, refined through years of feedback from competitive shooters. With that said, our pipeline remains strong and demand for new products continues throughout the channel. In Q3, we made meaningful progress to position ourselves for success in the future. Already in October, we have reintroduced Glenfield Firearms, an iconic value brand that offers hunters of all experience levels with a no nonsense American-made rifle; expanded the second-generation Ruger American Rifle line with the Prairie and Patrol models, the first Ruger American Rifles featuring a heavy barrel; and broadened Marlin caliber offerings with the launch of the first-ever 10-millimeter lever-action rifle in the market. These launches build on our most successful product families, and we're just getting started. Looking ahead, the coming months will bring even greater opportunity, including building out the popular RXM pistol family with new grip frames, sizes, accessories and configurations; launching a new line of modern sporting rifles manufactured in our Hebron facility; and bringing back the classic Ruger Red Label shotgun, making us once again a full-line manufacturer of firearms. As you can see, Ruger is well positioned for continued success. We remain focused on building a stronger, more agile company, one that consistently delivers value to our customers, employees and shareholders. I'm encouraged by the progress we've made and excited about what's ahead. With that said, we continue to take a disciplined and thoughtful approach to capital allocation, ensuring that every dollar deployed serves a clear strategic purpose and creates long-term shareholder value. Our priorities remain unchanged: maintain a strong debt-free balance sheet, invest in core product innovation and operational efficiency and return capital to shareholders responsibly. This disciplined capital approach ensures the company has the flexibility to invest when opportunities arise while continuing to reward shareholders over time. Ruger's future success will be measured by improved returns for our shareholders, and we are taking the right steps to get there, building a company designed for long-term strength rather than short-term reactions. Thank you for your time, continued support and confidence in Ruger. Operator, can we please have the first question? Operator: [Operator Instructions] Our first question comes from the line of Mark Smith with Lake Street. Mark Smith: I wanted to ask first just about gross profit margin and what was kind of putting downward pressure on gross profit margin here in the quarter, if it was a mix issue or if there's still some of the transformation things that are putting some pressure on gross profit margin this quarter. Todd Seyfert: Before I answer that, just apologies. It sounds like we had some technical difficulties with the video this morning, which we encourage you to go to the website. It will be posted after the call today. But there's a lot of good content there. So again, apologies for the issues for those of you that couldn't access it or see it this morning. So with that, Mark, in terms of margins, really, it's a combination of things. I would tell you, it's not a lot of the things that we saw in Q2. It's more about some of the volumes. And really, the biggest thing I would say is the Hebron, Kentucky, the work that we're doing there to get that facility up and ready for production. And so we had about $1.4 million of costs associated with that facility without any revenue coming out of it. And so that's really the driver. We continue to go through our product line rationalization and our SKU consolidation, but you're not seeing a lot of that in the quarter. Mark Smith: Okay. And I did want to ask about Hebron on just kind of an update on where you're at in getting that facility up and running and production in that facility. Todd Seyfert: Absolutely. We're making great progress, Mark. Our goal was to be in production with firearms by year-end, and we're on pace for that target still. Mark Smith: Okay. Perfect. And then can you just talk a little bit about mix and price. As we think about -- it looks like sales price on orders received was down a decent amount as well as some of the items that were shipped, but very good production and units shipped. But I'm curious just kind of where your mix came in if RXM had maybe higher mix at a lower-priced item. And then I'd love to hear your thoughts on -- as we think about the new line coming out here of Glenfield and kind of your thoughts around mix and price and how that fits within the strategy. Todd Seyfert: Absolutely. So I think really the way to think about it in the quarter, Mark, was heavy LCP orders and shipments. We did do a program. And so that was a thoughtful program in terms of the quarter. And so that's really the driver within the quarter. When we talk about the Glenfield expansion, that's actually an opportunity for us in terms of the facility in Newport. What we did there, Mark, is, as you know, that the original American Generation -- American Gen I Rifle was produced in that facility. It's been produced for over a decade, fantastic entrance for Ruger into the bolt-action marketplace, affordable quality, value. As we pivoted to the Gen II Rifle, obviously, there was some confusion in the market, why are you still producing both. So a decision was made. Listen, when we bought Marlin, we acquired the assets and the trademarks for Glenfield. So what we did is we said, listen, we've got this opportunity, we've got this capacity. Let's go ahead and figure out how we enter at a new price point where Ruger hasn't played, round out the product offering, good, better, best, and that's where we came out with the Glenfield. And so that will be produced on upgraded machinery and equipment on the Gen I line, we're in production as we speak. And I will tell you that the acceptance in the marketplace has been fantastic. Mark Smith: Perfect. And I think the last one for me. Just curious about kind of steel and other input prices, where they're at and any pressure on margins that we maybe have seen from rising input prices? Todd Seyfert: Yes. I would say fairly flat. The good news is, is we had some -- we bought ahead in terms of supply, in terms of how much we had on hand, Mark, with some of the uncertainty. So that helped us a little bit. There is some noise around aluminum right now. Obviously, with the continued tariff uncertainty, we're positioning ourselves to be reactive to whatever is happening. And as you know, following this, it seems to be either by the day or by the week, we're seeing new information. And so we track it very closely, but not a significant amount of pressure on our costs to date. Operator: And our next question comes from the line of Rommel Dionisio with Aegis Capital. Rommel Dionisio: Two questions. One, if I could just follow up to Mark's question on the Glenfield line. How do you guys think about the positioning of that brand and that product line going forward to not cannibalize existing sales of like Marlin or the other products that you have in place? Is it more just a pricing issue? Or is there kind of a different demographic you're targeting with that new product line, or sorry, revamped or rejuvenated product line for Glenfield that's got a heritage brand there. And the second would be on the Patrol line you just announced. I wonder if you -- is that towards law enforcement? I wonder if you could just give us some granularity on the type of consumer you're targeting with those two products? Todd Seyfert: Sure. Absolutely. So back to Glenfield first, Rommel, really, the whole idea around Glenfield was as we stratify our product line, we have the Marlin at the top of the pyramid, we have Ruger in the middle, and we didn't really have kind of the "opening price point." And so that is where Glenfield will play. It will be kind of the first gun. It will be the value to get into the Ruger brand and the Ruger company. And so our thought there was, again, we didn't have products at that price point. And so we created a variant of the Gen I with improved features and benefits at a price point that the Gen II does not play at. And so really focusing on attracting a new segment of the market, that's where we're focused on. And we're not cannibalizing anything because we don't have anything else near that price point. And so to us, this is kind of greenfield new opportunity, white space in the market. When it comes to the Patrol rifle, that's really a name. It's really not law enforcement focus, Rommel. It's really a variant of the incredibly successful Gen II. We've never had a heavy barrel version of the Gen I or Gen II to date. And so this really opens up that product line into categories in the marketplace that we have not gone to yet in terms of the Gen II rifle. So it's really a new variant, not focused on law enforcement, really focused on kind of that Western hunting general all around consumer, if you will. Operator: Our next question comes from the line of James Kostell with Cuyahoga Capital. James Kostell: Sorry, we had a little technical problem there. Yes, two unrelated issues. Firstly, 1976 was the 200th anniversary of the Declaration of Independence. Next year will be the 250th. And '76, Ruger imprinted on the barrels made in the 200th year of Liberty. And will you be doing something, a similar promotion for next year? And it's my perception when I go to sporting goods stores that in the aftermarket, firearms with that imprint on them trade at a premium. And do you agree with that? Furthermore, if you're going to be doing a promotion of this sort and you compare it to what happened in 1976 versus 1975, can you give us an idea of what sort of increase in unit volume you saw back then and perhaps may see next year? Todd Seyfert: Well, first off, thanks for remembering what we did, and we're excited about it. So we're in the process right now evaluating what is possible across the product families. As you know, technology has changed, our volumes increased. And so we got to be thoughtful about how we would imprint and what lines. And so we're going through that analysis. There will be something. We're just not exactly sure which and how many. And then in terms of the premium that we see in the marketplace, we have seen when Ruger does special make ups or special builds that it does create a premium in the marketplace, and we believe that helps build the brand over time. And so we're very happy and very excited when we can do these things because it does give that consumer, that Ruger consumer that's used to these special types of firearms and other options to come in and buy another Ruger. So we're excited about that very much. In terms of kind of the other, the last question. It's a little bit more about -- we have to be a little bit careful about forward-looking statements and what we can and can't say. But I will tell you, again, we're very excited about next year. We're excited about the opportunity for the country and the brand and how we bring those two things together. James Kostell: Can you help me with what unit volumes did in 1976 versus '75 and kind of what happened there? Todd Seyfert: Gee, I can't off the top of my head to be honestly. I wish I anticipated this question and I could have helped you out. But I don't have those numbers at my fingertips. James Kostell: Okay. Second unrelated issue. You're going to reintroduce the Red Label. Do you -- I mean, is that somehow related to your new large shareholder, which is sort of the elephant in the room? Todd Seyfert: No, actually. It really is, for us, upon my arrival, we have really talked about the product families and where Ruger is and where Ruger wants to go. And it was really important to all of us in the company to become, once again, a full-line firearms manufacturer. And the one area that we were missing was the shotgun market. And so really, it's our way back to being the only full-line manufacturer of firearms, and that was the impetus for the reintroduction, as well as I'm a big shotgunner and I'm excited about it as well personally, so. James Kostell: Well, I mean, looking at it across the industry, SKB as an example, and Mossberg both import their target guns, I think, mostly from Turkey. I mean do you -- would you have a problem with somebody else manufacturing the gun and you're selling it under the Ruger name? Todd Seyfert: No, we wouldn't. Ours are U.S. made. So that's I think the differentiator for us and what Ruger is trying to do is we stand behind, we're very proud that we're a U.S. manufacturer of firearms and we'll continue to be that. Obviously, if an opportunity came up, it's something -- obviously, if it makes sense for the business and it makes sense for our shareholders, we would look at it. But our focus right now is building guns here in the U.S. James Kostell: So you think the Beretta interest had nothing to do with the Red Label? Todd Seyfert: That was -- these things happened way, way before the Beretta investment in Ruger. So this was on our road map. This is something that the company had been working toward, and we're at the point now where we're ready for it to launch, and we're ready to have guns, which we are launching here shortly. so. James Kostell: Would you have any update on the Beretta situation that you'd like to share with us? Todd Seyfert: I mean I think the answer is, listen, we appreciate their investment and confidence in our company. We reported in our press release last month that we issued a shareholder rights plan to kind of preserve the status quo, what we try to engage. And we're happy to engage with anybody that wants to have a conversation. And so we're a public company. We're always for sale, and we look forward to engaging with them when they're right. Operator: I'm showing no further questions. So with that, I'll hand the call back over to President and CEO, Todd Seyfert, for any closing remarks. Todd Seyfert: Thanks, everyone. We appreciate your attention. Again, apologies on the video. Please go to the website. The team did a great job putting that video together, a lot of good content. We appreciate your investment in Ruger and your trust, and we look forward to speaking to you next quarter.
Operator: Good afternoon, everyone, and thank you for joining OptimizeRx's Third Quarter Fiscal Year 2025 Earnings Conference Call. With us today is Chief Executive Officer, Steve Silvestro. He is joined by Chief Financial and Strategic Officer, Ed Stelmakh; Chief Legal and Administrative Officer, Marion Odence-Ford; and Chief Business Officer, Andrew D'Silva. At the conclusion of today's call, I will provide some important cautions regarding the forward-looking statements made by management during today's call. The company will also be discussing certain non-GAAP financial measures, which it believes are useful in evaluating the company's operating results. A reconciliation of such non-GAAP financial measures is included in the company -- in the earnings release the company issued this afternoon as well as in the Investor Relations section of the company's website. I would like to remind everyone that today's call is being recorded and will be made available for replay on audio recording of the conference call on the Investor Relations section of the company's website. Now I'd like to turn the call over to OptimizeRx's CEO, Steve Silvestro. Mr. Silvestro, please go ahead. Stephen Silvestro: Thank you, operator, and good afternoon to everyone joining our third quarter 2025 earnings call. We had a strong third quarter with results ahead of both consensus estimates and our internal expectations. Our Q3 revenues increased 22% year-over-year to $26.1 million, and our adjusted EBITDA was $5.1 million, an improvement of over $2 million from the same period last year. Our contracted revenue remains well ahead of last year's pace, underscoring the success of our focus on operational excellence, our dedication to delighting customers and deepening relationships with trusted partners. Before we move on, I want to take a moment to thank the OptimizeRx team. We deeply appreciate their dedication and hard work as we navigate an increasingly complex and rapidly evolving digital pharma marketing landscape. The industry is in the midst of a major transformation and the company's products and services are positioned to fundamentally redefine how pharmaceutical companies, patients and prescribers connect. Our mission-driven culture fuels this progress and enables us to attract, retain and strengthen the relationships that make us a trusted and enduring technology partner. With that said, I'm happy to report we are increasing our guidance for the year and are looking for revenue to come in between $105 million and $109 million, with adjusted EBITDA to be between $16 million and $19 million. Moreover, while it is still very early, we are seeing favorable RFP trends for 2026. As a result, we are introducing initial fiscal year guidance 2026 with revenue expected to be between $118 million and $124 million and adjusted EBITDA expected to be between $19 million and $22 million. In addition, subsequent to the end of our third quarter, we paid down an additional $2 million of our term loan principal on top of the debt payment schedule. At this time, given the cash flow we are seeing, we intend to continue to pay down our debt at an accelerated rate and do not believe we will need to access the equity capital markets for the foreseeable future. As evidenced by our strong results, we are firmly hitting our stride. Disciplined cost management and targeted cross-selling strategies grounded in enabling customers to optimize budget allocation and maximize script lift are driving sustained momentum into Q4 2025 and beyond. Our strong third quarter performance makes it clear that our goal of becoming a sustained Rule of 40 company is within our sights. Perhaps most notably, average revenue for our 5 largest customers over the last 12 months continues to grow and now stands at over $11 million. We believe OptimizeRx is uniquely positioned to drive meaningful long-term growth and sustainable shareholder value. With one of the nation's largest point-of-care networks, we provide pharmaceutical manufacturers the ability to reach health care providers directly at the moments that matter most. Building on this foundation, we've developed a purpose-built omnichannel technology platform that integrates advanced patient finding tools like DAAP and micro neighborhood targeting. These capabilities are redefining how pharmaceutical companies, physicians and patients connect, communicate and act, helping to improve patient outcomes while transforming engagement across the health care ecosystem. Our reach across both the point-of-care and direct-to-consumer channels provides a durable and defensible competitive advantage. OptimizeRx is the only player with the scale, technology and data integration to engage providers and patients seamlessly, enabling us to deliver the industry's most comprehensive commercialization platform. This allows us to support customers across the full product life cycle, deepen client relationships and capture greater share of long-term value. As we've discussed on previous calls, a key focus moving forward is to further showcase our reach, scalability and our role as a trusted strategic partner, helping pharma manufacturers address some of their most pressing commercialization challenges. These include enhancing brand visibility, reducing script abandonment, improving interoperability and supporting the growing shift toward complex specialty medications. I believe our success in helping our customers address these challenges is best evidenced by our strong ability to build on the relationships and increase our engagements with our largest customers. I'm confident that continued execution in these areas, combined with our ability to deliver strong ROI and drive impact and script lift for our customers will translate into meaningful long-term shareholder value. We believe our momentum positions us to capture greater market share and expand our participation in the pharma industry's multibillion-dollar digital ecosystem. Our customers remain deeply connected with our integrated HCP and DTC offerings, and our goal is to keep them engaged across the full patient care journey. And with that, I'd like to turn the call over to our CFSO, Ed Stelmakh, who will walk us through our financial results. Ed? Edward Stelmakh: Thanks, Steve, and good afternoon, everyone. A press release was issued with the financial results of our third quarter ended September 30, 2025. A copy is available for viewing and may be downloaded from the Investor Relations section of our website, and additional information can be obtained through our forthcoming 10-Q. Third quarter revenue was $26.1 million, an increase of 22% from $21.3 million during the same period in 2024. Gross margin for the quarter increased from 63.1% in the quarter ended September 30, 2024, to 67.2% in the quarter ended September 30, 2025. Year-on-year gross margin expansion is tied to a favorable product mix, economies of scale as well as a favorable channel partner mix. Our operating expenses for the quarter ended September 30, 2025, decreased by $6.5 million year-over-year to $15.5 million as the third quarter of last year was impacted by a $7.5 million impairment charge. Meanwhile, our cash OpEx increased to $12.4 million from $10.8 million, largely due to higher bonus and commission payouts, which is directly tied to the company's strong year-to-date performance. As a result, we had a GAAP net income of $0.8 million or $0.04 per basic and fully diluted share for the 3 months ended September 30, 2025, as compared to a GAAP net loss of $9.1 million or $0.50 per basic and fully diluted share for the same 3-month period in 2024. On a non-GAAP basis, our net income for the third quarter of 2025 was $3.9 million or $0.20 per fully diluted share outstanding as compared to a non-GAAP net income of $2.3 million or $0.12 per fully diluted share outstanding in the same year ago period. Our adjusted EBITDA came in at $5.1 million for the third quarter of 2025 compared to $2.7 million during the third quarter of 2024. Operating cash flow was $11.6 million for the first 9 months of 2025, and we ended the quarter with $19.5 million cash balance as compared to $13.4 million on December 31, 2024. The remaining principal on our term loan debt financing at the end of the third quarter was $28.8 million. And subsequent to the quarter's end, we paid down an additional $2 million in principal with our total principal paydown for the year standing at $7.5 million. At this time, we intend to pay down the principal on our term loan faster than originally expected as we look to continuously lower our cost of capital. With that said, we continue to believe that our healthy balance sheet will help us execute against our operational goals. Now let's turn to our KPIs for the third quarter of 2025. Average revenue per top 20 pharmaceutical manufacturer now stands at $3.1 million as compared to $2.9 million for the third quarter of 2024. Net revenue retention rate remained strong at 120% Meanwhile, revenue per FTE came in at $820,000, topping the $732,000 we posted in the third quarter of 2024. We're encouraged by the improvements of our KPIs as we continue to execute against our strategy of driving profitable growth as a leader in our space. Now with that, I'll turn the call back over to Steve. Steve? Stephen Silvestro: Thank you, Ed. Operator, now let's move to Q&A. Operator: [Operator Instructions] And the first question comes from Ryan Daniels with William Blair. Ryan Daniels: Sorry, guys, can you hear me now? Yes. Can you guys hear me now? Stephen Silvestro: We can hear you, Ryan. Ryan Daniels: Okay. Sorry, about that. Congrats on the strong print. I want to start with the 2026 outlook. It's nice to see that so early in the year, one of the few companies doing that. And I'm curious if you could just offer a little bit more color there on why you're providing it at this time. I assume it's due to some enhanced visibility with the contracts. And then maybe question number two, you mentioned the strong RFP activity being part of that. Are you just seeing more new clients? Is it more shift towards digital, more omnichannel, more shift towards HCP given some of the D2C challenges? Any color on what's driving that? Congrats again. Stephen Silvestro: Thanks, Ryan. Good to hear your voice. So I'll start with the first one. We've been really articulating to the Street and also to our clients and investors that we're going to give more visibility on our visibility into the future as we've been migrating more toward a predictive model we've quoted in the past, subscripted momentum. And so we're going to continue to push that throughout the remainder of the year. And as a result of that, we're now getting more visibility into the out years, including 2026. In terms of the RFP situation, Ryan, RFP season has been very strong for the business. We do see more people coming into the digital space and making investments on the client side. And we're seeing equal parts, HCP and DTC at this point, interest in the RFP cycle. I would say the parts of DTC that we cover at OptimizeRx are CTV, ATV, the pieces that you're aware of. And in the event that we have a linear television ban or reduction or any of those pieces, our view and thesis is that our solutions that will continue to benefit disproportionately from those types of moves. So I would say, at this point, both DTC and HCP are looking very healthy. I appreciate the question. Operator: And the next question comes from Richard Baldry with ROTH Capital. Richard Baldry: When you look at the implied guidance for fourth quarter revenue, it'd be actually slightly down year-over-year at the top end of guidance. Talk about either any onetime year-ago issues or other things because your net retention would argue that, that's sort of difficult to do. Stephen Silvestro: Yes. Thanks for the question, Rich. Good to hear from you. So I mean, what we're looking at is really a full year guide at this point and trying to give a good range of what we believe will come in at. We moved away from quoting pipeline as everybody on the call knows and have moved principally towards contracted revenue and what our real visibility is. And so the new guidance that we've updated with is truly what our visibility is. It doesn't count bluebirds that might happen, buy-ups that might happen that are not accounted for right now where we don't have visibility in years past, we would have thought about that more in terms of on pipeline and probabilities. But what you're seeing in the guidance now is, I think, reflective of our true visibility that we know we can deliver on. Again, we're going to continue to be very transparent, very conservative, not sandbagging, but look to beat the numbers that we put out there every time. So hopefully, you appreciate the transparency and conservatism. Edward Stelmakh: Just to add a little bit. As Steve said, I think we do need to look at it on a full year basis rather than quarter-by-quarter. As you know, Q1, 2 and 3 have been extremely strong. So it is more of a smoother sort of phasing this year than it was in the past. So again, I would just encourage you to look at the full year performance versus last year. Stephen Silvestro: And part of it is the enhancement to the revenue model, right, Rich, part of it is we've been successful at migrating away from periodic revenue drops and getting to a more smooth revenue model. And so that's what Ed is referring to there. Richard Baldry: Got it. It's just implicitly a little hard to look at it as a full year, you only have 90 days left. So same question I think I'm going to get a similar answer. But if you look at the adjusted EBITDA guidance, you'd have an up revenue quarter, maybe 10% plus sequentially, but the adjusted EBITDA either be slightly down to narrowly possibly up Again, is there any like onetime expenses year-end things that true up higher that create more of a headwind because it wouldn't -- it'd still be down year-over-year as well. Stephen Silvestro: Sure. Ed, do you want to take that one? Edward Stelmakh: Yes, I can take that one. Yes, look, I mean, we're assuming a conservative gross margin number. There's nothing really in the operating expense line that's going to pop. So it's more of just being a little bit more conservative on what you think is going to happen with the channel and product mix. We do believe that we were shooting for hitting or beating the top end of the range. Operator: And the next question comes from David Grossman with Stifel Financial. David Grossman: Maybe we could just expand a little bit on the line of questioning you just went through. And maybe, Steve take a minute just to remind us fundamentally, what may be going on in the business that maybe smoothing out the quarters or maybe giving you better visibility? And then I have another question after that, but just curious, again, fundamentally, some of the changes that you guys have made that may be creating a little better visibility and again, giving you the confidence, for example, to guide to 2026 at this point. Stephen Silvestro: Sure. Yes, happy to talk to it and then Andy and Ed can chime in also. But I mean, if you think about our business data the way that we've talked about it over time, you've got our audience businesses, which is GAAP principally, and then you've got micro neighborhood audience, which is that targeting capability for DTC. Both of those are data-driven technologies that are -- lend themselves to becoming more subscriptive in nature. Then you've got our execution functions, both at point of care and the other omnichannel components for HCP and you've got that for DTC. And those are obviously going to be transactional largely because that's the way that component of not just our business, but the ecosystem operates. And so what we've seen is outsized growth in DAAP, like we've talked about in months past, and we've seen a resurgence of micro neighborhood audience growth. And so those pieces not only give us a smoothing of the revenue because of the revenue models, but they also give us a renewable view into what 2026 will look like and those contracts start earlier than we would normally do for transaction level contracting. So that's the big part of it. Andy, Ed, feel free to chime in if you want to add more. Andrew D'Silva: Yes. I mean, it's really -- go ahead, Ed. Edward Stelmakh: No, I was going to say, I mean, as you guys know, I mean, vast majority of our business comes from renewals. So if you take that into account and then add some of the successes that drove this year, on top of it with more visibility into next year in terms of signed contracts as we sit here today, we feel like we're in a position to say, right, looking at next year, we can start to make at least a general guide around bookends that we're going to shoot for. And as things progress forward, we'll continue to tighten that range. Yes, go ahead, Andy, you can add to that. Andrew D'Silva: No, you got it. You both you nailed it. David Grossman: So thanks for all those details. So if I recall, like last quarter, we talked about these managed services type of contracts that come in. How much of that was present in the third quarter? And are you kind of making the same assumption that you did last quarter where you're not assuming any of that comes to bear in the fourth quarter in terms of the guidance that you provided as well as the outlook for '26. Is that the way to think about it? Stephen Silvestro: Yes. Andy, why don't you take that one? Andrew D'Silva: Yes. So it went back to more of a normalized rate in the third quarter as it relates to that managed services business. The only thing that we're including in the forecast period for managed services business is stuff that we've already won and is starting to burn into revenue right now. We're not really including anything that's in pipeline and we don't have visibility to. So again, we're taking a very conservative approach to providing guidance with bookings that we feel very comfortable with. David Grossman: Right. So as we kind of think of your guidance for '26, can you help us kind of bracket the kind of retention that is the baseline, if you will, to achieve that range? Andrew D'Silva: Yes. So historically, between 5% and 15% of our business comes from new logos every year. So the remaining would be what you would consider net revenue retention on a normalized basis. David Grossman: Okay. And that's the same assumption underlying your '26 guidance? Stephen Silvestro: It is. Andrew D'Silva: Yes. We don't really guide based on net revenue retention, right, but that's kind of how it just shakes out as every year progresses. Stephen Silvestro: And David, on that note, just one other quick bullet for you. Just -- and you and I spoke about this last time we were together. We are seeing good growth in the mid-tier segment of our business, meaning the mid-tier segment of clients coming to the table who may not be in that top 20, 25, 30 manufacturers that are coming in with outsized spend, mostly because we're able to provide capabilities that can supplement -- not just supplement, frankly, replace a lot of the stuff that they can't afford to do internally. . Whereas the big manufacturers might have kind of Cadillac support, so to speak, the mid-tier businesses do not. But using the technology that we've got allows them to compete on level ground. And so that's why we're seeing such a drive there. In our commercial organization, that Theresa is leading, has done a wonderful job of driving that. So I just wanted to call that out as a key point. Operator: And the next question comes from Eric Martinuzzi with Lake Street. Eric Martinuzzi: I wanted to dive in on the RFP trends. You 0talked about they are improved. I was just curious, though, is that your win rate is the same and the number of RFPs has improved? Or is your win rate improving on a flat RFP trend? What can you tell us there? Stephen Silvestro: Yes, I'll start, and then I'll have Andy chime in, too. But all of the above, Eric, we're seeing more RFPs coming and the RFPs are more directly pointed at what we want them to be, which I think is good. The market is seeing what we are shifting the business model to over time. So the RFPs are definitely reflective of what we're providing the market, providing our clients. And I would say our win rate as a result of that is getting better. Again, I want to give some credit to our commercial team. They're doing an excellent job of getting out ahead of all of this stuff and engaging with clients. And when you're engaging with clients more intimately, you can tend to drive the crafting of the RFPs so that they get written at an appropriate level to something that you can respond versus just a random spray and pray request for information, right? And when we get those, the hit rate will be lower because there was no prior engagement. So hats off to Jen Dwyer, Theresa Greco and the entire commercial team for doing a great job there. Eric Martinuzzi: Right. And then you talked about the smoothing of the business. Maybe I could use a brief tutorial on the transactional where you said that those started later in the year as opposed to the DAAP and the micro neighborhood that are more sort of level loaded that kicks off to each of those types of campaigns. Stephen Silvestro: Sure. Yes, happy to talk about it. I mean you think about what DAAP and what MNT or MNA does, it's principally audience creation and it's the data that drives all of the campaigns, right? It's the technology that's producing -- finding those patients wherever they're going to be. And so because that is more of a software-like play that lends itself to a normal planning cycle where renewals are going to happen earlier. That's the way pharma manages that segment of their budget and then the transactional components, which is typically message distribution, whether it's at an HCP level or if it's something that's going through DSP like a trade desk or some other way, typically is budgeted and accounted for on a quarterly basis, and it's based on performance and driven that way. So bringing DAAP to the table and getting it more mature, which we've been working very hard on, as you know, over the last several years since we launched it, and now bringing in what we acquired through the Medicx acquisition with MNT, that has really started to transform the profile of the business, and that's what you're seeing reflected in the performance of this year as well. You're seeing it front and center, but it will reflect into 2026 as well. That's given us great visibility. I think everyone feels better about what we're doing there. We're significantly up year-over-year on visibility for next year. Eric Martinuzzi: Is there -- what's the right way to think about the percentage of the revenue in 2025 versus the percentage of the revenue in 2026 between those 2 buckets? Stephen Silvestro: We don't break it out. We don't break it out at a product level. Operator: Your next question comes from Anderson Schock, B. Riley Securities. Anderson Schock: Congratulations on another really strong quarter. So first, could you provide some color on the partnership with Lamar Advertising and on the size of the opportunity here? And I guess, will this gradually roll out in specific regions? Or is this going live across their entire national inventory? Stephen Silvestro: Yes. Happy to talk about it. Great to hear from you. So the whole idea with Lamar is they're looking to transform their business model, right? And their current business model is billboards. One of the things that OptimizeRx does really well, which you're acutely aware of is patient finding and an ability to be more precise in the way that we deploy messages across our omnichannel ecosystem. So think about the capability of doing that to enable a screen that's in a desperate location that might move from a random billboard to maybe a digital screen that's large, right? And that's really what Lamar is after there. The size of the opportunity is very large. I'm not going to take a stab at the TAM because it's not might take a stab at, it's really theirs. But the partnership is going to start rolling out pretty rapidly, I would say. And it's still early for us to start quoting projections on what we think it will do. It's really piloting at this point, but we're feeling pretty optimistic about the initial testing that we've done. And we'll release more information on it as we get some more results, but early stages look pretty encouraging. Anderson Schock: Got it. And then I guess this current guidance that you've provided for 2026 factoring any contributions from this partnership? Stephen Silvestro: No, zero, nothing. Too early for us to start factoring into forecast. We're just not going to do it yet. Anderson Schock: And then could you talk about the gross margin expansion in the third quarter? What really drove this? And how should we be thinking about margins going forward in the fourth quarter and also into 2026? Stephen Silvestro: Sure. Ed, do you want to take that one? Edward Stelmakh: Yes, sure. Yes. So look, I mean, it's typically driven by our product mix or solution mix and the channel partner mix. As we said before, as we scale the business, we have much more ability to negotiate more favorable deals with our channel partners, so that's reflecting yourself in the numbers as well as growth in DAAP and the DTC platform. So those 2 things together contributed to where we are right now for the year in Q4. Going forward, I would say we're kind of stabilizing in that upper 50s to low 60s range from a guidance perspective. But you can see there's certainly upside to that number as the year progresses. Stephen Silvestro: I'll add just one quick thing to that there, Anderson. So we also, in the third quarter, had a lot more -- in the second quarter had a lot more managed services revenue and we did not have nearly as much in the third quarter and managed services revenue is our lowest margin product. . Operator: [Operator Instructions] And the next question comes from Jeff Garro with Stephens. Jeffrey Garro: I want to ask on the 2026 guide and the profitability side. If I calculate it, right, at the midpoint, I see about 60 basis points of EBITDA margin expansion. I was hoping you could talk about the mix of gross margin expansion may be dependent on channel mix versus operating leverage? And then any areas of potential variability that could lead to more or less margin expansion than what we see at the midpoint there? Stephen Silvestro: Jeff, I'm happy to answer it topically, and we won't get too deep into 2026, but happy to answer it topically. And what Andy just said is really a clear articulation of the dynamics of the business that really govern it, right? So as we continue to see our audiences grow over time through the DAAP and MNT products, margin expansion will continue to be front and center we will also manage the channel partner mix on the other side of that looking for optimal margin and that gives us the dynamic of being able to continue to improve over time. Execution will be what it's going to be, as you know, from this business, and that's fairly predictable on the highs and lows. But those are the dynamics that are sort of shaping how we're thinking about 2026 gross margin expansion opportunities and where we've landed. Hopefully, that's helpful. Jeffrey Garro: Maybe a follow-up on the operating leverage side of things. You have certainly seen, I think, a quarter-over-quarter decline in adjusted operating expenses this quarter, seeing really good leverage and maybe not expecting that to be the persistent trend over the next 5 or so quarters, but just a little more color commentary on your ability to drive additional operating leverage in the business would be helpful. Stephen Silvestro: Yes, no problem. We're going to consistently -- go ahead, Ed. Yes, why don't you take it? Go ahead. Edward Stelmakh: Yes. So OpEx, as we said before, I mean, we have a highly leverageable business model as it is now. So as I said, on a cash basis, that was actually a bit of an increase, about $2 million versus last year. And that most of that is driven by the fact that our bonuses and variable comp are tracking our overperformance on the top line this year. So once you dial that back, you can pretty much assume a relatively stable operating expense run rate on a cash basis. Operator: And this concludes our question-and-answer session. I will turn the conference back over to Steve Silvestro for any closing comments. Stephen Silvestro: Thank you, operator, and thank you all for joining us today. We're pleased to be building on a strong operational and financial momentum. Our foundation is solid, our patient-focused strategy is working, and we're confident in the path ahead. What you heard today reinforces our belief in our ability to achieve both our near-term goals and our long-term growth objectives. I remain deeply optimistic about the future of our business and the opportunities before us. We look forward to speaking with all of you again on the next earnings call and meeting many of you in the upcoming investor conferences and one-on-one meetings in the coming weeks. Wishing everyone a wonderful rest of your day and a wonderful holiday season with your families and friends. Operator: Thank you, Mr. Silvestro. Before we conclude today's call, I would like to provide the company's safe harbor statement that includes important cautions regarding forward-looking statements made during today's call. Statements made by management during today's call may include forward-looking statements within the definition of Section 27A and the Securities Act of 1993, as amended, and Section 21E of the Securities Act of 1934 as amended. These forward-looking statements would not be used -- should not be used to make investment decisions. The words anticipate, estimate, expect, possible and seeking and similar expressions identify forward-looking statements. They may speak only to the date that such statements are made. Forward-looking statements in this call include statements made defining how pharmaceutical companies, patients and prescribers connect, our value, our growth plans, creating shareholder value, becoming a Rule of 40 company, estimated 2025 revenue and adjusted EBITDA ranges, capturing greater market share, expanding our participation in the pharma industry's digital ecosystem, our technology and growth opportunities and building a strong operational and financial momentum. Forward-looking statements also include the management's expectations for the rest of the year. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or qualified. Future events and actual results could differ materially from those set forth in, contemplated by or underlying these forward-looking statements. The risks and uncertainties to which forward-looking statements are subject to include, but are not limited to, the effects of government regulation, compensation, dependence on a concentrated group of customers, cybersecurity incidents that could disrupt operations, the ability to keep pace with growing and evolving technology, the ability to maintain contact with electronic prescription platforms and electronic health records networks and other material risks discussed in the company's annual report Form 10-K for the year ended December 31, 2024, and in other filings the company has made and may make with the SEC in the future. These filings, when made, are available on the company's website and on the SEC website at sec.gov. Before we end today's conference, I would like to remind everyone that an audio recording of this conference call will be available for replay starting later this evening running through for a year on the Investors section of the company's website. Thank you for joining us today. This concludes today's conference, and you may now disconnect your lines.
Operator: Ladies and gentlemen, thank you for joining us, and welcome to the JFrog Third Quarter 2025 Financial Results Earnings Call. [Operator Instructions] I will now hand the conference over to Jeffrey Schreiner, Head of Investor Relations. Jeffrey, please go ahead. Jeffrey Schreiner: Thank you, Nicole. Good afternoon, and thank you for joining us as we review JFrog's Third Quarter 2025 Financial Results, which were announced following the market close today via press release. Leading the call today will be JFrog's CEO and Co-Founder, Shlomi Ben Haim; and Ed Grabscheid, JFrog's CFO. During this call, we may make statements related to our business that are forward-looking under federal securities laws and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements related to our future financial performance and including our outlook for the full year of 2025. The words anticipate, believe, continue, estimate, expect, intend, will and similar expressions are intended to identify forward-looking statements or similar indications of future expectations. You are cautioned not to place undue reliance on these forward-looking statements, which reflect our views only as of today and not as of any subsequent date. Please keep in mind that we are not obligating ourselves to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations. For a discussion of material risks and other important factors that could affect our actual results, please refer to our Form 10-K for the year ended December 31, 2024, which is available on the Investor Relations section of our website and the earnings press release issued earlier today. Additional information will be made available in our Form 10-Q for the quarter ended September 30, 2025, and other filings and reports that we may file from time to time with the SEC. Additionally, non-GAAP financial measures will be discussed on this conference call. These non-GAAP financial measures, which are used as a measure of JFrog's performance, should be considered in addition to, not as a substitute for or in isolation from GAAP measures. Please refer to the tables in our earnings release for a reconciliation of those measures to their most directly comparable GAAP financial measures. A replay of this call will be available on the JFrog Investor Relations website for a limited time. With that, I'd like to turn the call over to JFrog's CEO, Shlomi Ben Haim. Shlomi? Shlomi Haim: Thank you, Jeff. Good afternoon, and thank you all for joining the call. JFrog's focus as a foundational platform and system of record for software delivery continues to drive momentum in our business, and I'm pleased to report another solid quarter across all metrics. Our execution remains focused. Our investments remain strategic, and our customers continue to tell us we are helping them to meet the demands of the fast-changing technology market. In Q3, JFrog's total revenue was $136.9 million, up 26% year-over-year. Our operating margin was 18.7% in the quarter, demonstrating our ongoing discipline between expenses and strategic investments. Cloud revenue for Q3 equaled $63.4 million, representing 50% year-over-year growth. We experienced another strong quarter of cloud revenue growth driven by increased usage of conventional software packages and ongoing increases in usage of artifacts such as PyPI, Docker containers, NPM and models coming from Hugging Face for AI and machine learning. Our go-to-market teams are executing on a clear strategy of guiding cloud customers with usage overages toward higher annual commitments in order to build stronger partnerships and drive predictable long-term value for customers and for JFrog. Our enterprise sales motions continue to bear fruit with greater than $1 million customers growing to 71 compared to 46 in the year ago period, equaling 54% growth year-over-year. Customers spending more than $100,000 annually grew to 1,121 compared to 966 in the year ago period, equaling 16% year-over-year growth. In Q3, our 4 trailing quarter net dollar retention was 118%, demonstrating sustained growth among our customer base driven by strong cloud usage and fueled by our holistic software supply chain security offering. Ed will further discuss net dollar retention later in the call. Now let me spotlight Q3's wins, including cloud and security and discuss JFrog's AI and machine learning developments. First, addressing our cloud growth in Q3. Our ongoing growth in the cloud is supported by 2 vectors: our expertise in managing customers' binaries as they scale alongside AI-generated artifacts and our observation of emerging trends in AI software package volume. We believe Q3's cloud performance reinforces how customers view the JFrog platform and Artifactory at the core of their operations. JFrog is already positioned as the universal binary repository to manage all software artifacts and is becoming the model registry of their software supply chain. As software continues to be created at an ever-growing pace by both humans and machines, the volume of artifact rises, demanding not just intelligent storage but a robust binary delivery system and a single reliable system of record. As their delivery pace increases, our customers are adopting hybrid fit-for-purpose cloud strategies for their emerging AI workloads. They tell us they value cloud elasticity for AI adoption and deployment but remain flexible in their approach due to the unpredictable compute costs, advising us that it's still too early for them to go all in on the public cloud. Meanwhile, the volume of AI-driven packages is rising, fueled by our hug-and-face integration and native support for ML models, Docker, NPM, PyPI and other key components demanded by AI. We continue to monitor cloud adoption and AI-driven usage closely and believe it is still too early to bet on significant cloud usage growth. Our hybrid and multi-cloud offerings differentiate JFrog and uniquely position us to capture expansion due to AI, whether in the cloud or on-prem, delivering unmatched software supply chain, holistic platform capabilities and deployment flexibility. Next, to security. In Q3, again, we saw some of JFrog's largest customers wins, including new logos and significant multiyear contracts. Many of these deals included JFrog's holistic security solutions such as JFrog Curation and JFrog Advanced Security. We experienced this customers' purchasing behavior across multiple verticals and geographies. For example, we closed a 3-year deal with the United Kingdom's Customs and Revenue Agency with a TCV of $9 million. In a similar move, a key U.S. federal agency chose JFrog to shift left with JFrog Security Solutions and protect their software supply chain and 2,000 developers with an Enterprise+ subscription, JFrog Advanced Security and JFrog Curation as their open source software package firewall. In North America, our enterprise focus drove the closing of a net new customer deal with a TCV of more than $4 million for one of the world's top energy corporations. They were seeking to modernize and standardize software supply chain security and processes for their 3,500 developers choosing the core JFrog platform with JFrog Security Solutions in the cloud. The example wins give us confidence that the future of the software supply chain security and software governance market is being written not by point solutions but by holistic system of record that incorporate binary management and end-to-end security consolidated into a single platform. A unified platform is a growing requirement as companies have seen software supply chain attacks increases significantly over the past year. These attacks have become more sophisticated, targeting build pipelines, AI and machine learning software supply chains and exploiting vulnerabilities in software binaries. Recent NPM, PyPI and MCP attacks show hackers are keeping pace with technology but our security research team and the JFrog Curation solution have been praised by our customers for protecting them from this recent potentially devastating attacks. A cybersecurity lead at a Fortune 50 American company noted to us following the NPM attack. "Our JFrog Curation deployment provides a very effective and efficient supply chain protection. We were able to shut down recent provider attacks minute once discovered, and the control has proven 100% successful since." Nothing fuels us more than our customers' feedback, and we are committed to safeguarding their software supply chains and aiming to ensure digital trust across their software package life cycle. Hackers are targeting software supply chains. They know that binaries, software packages, containers and AI models are gateways into our customers' runtime environment. This is now a real threat to every organization. Without strong protection for your software supply chain and binaries, you remain exposed. Attacks are not a question of if but when. While one quarter doesn't define a consumption trend, Q3's adoption of JFrog Security solutions give us cautious optimism for broader long-term momentum. Now to AI and machine learning. We continue to gain traction in the market as the model registry providers and are being positioned as a system of record for AI delivery validated by some of the world's leading AI companies. In fact, Justin Boitano, VP of Enterprise AI at NVIDIA, noted at the JFrog Annual User Conference swampUP in mid-September that JFrog enables enterprises to securely build, manage and scale AI agents, the next generation of intelligent software from development to production. "AI agents are the next wave of enterprise innovation but they are also the newest and most critical software artifact to secure. This is no longer just about models. It's about industrializing intelligent autonomous agents. By integrating with NVIDIA AI Enterprise and streamlining deployment onto AI factories, JFrog is delivering the essential pipeline to rapidly secure, manage and scale these AI agents from development straight into production." Moving throughout 2025, JFrog has embraced the AI revolution, focusing on what we believe we do best, driving the next standards in the market as a single source of truth for AI software packages. We integrated JFrog ML into the JFrog platform, empowering data scientists and developers to build, test, experiment and deliver trusted models into production. We launched our MCP server alongside groundbreaking MCP security research. redefining how developers and AI agents interact with their software delivery platform. In addition, we introduced AI catalog, a new add-on to JFrog Curation designed to secure and govern both third-party and internally developed AI models, ensuring they are safe, compliant and aligned with company policies for responsible use across the organization. Our next generation of offerings in ML and AI as well as our DevOps and security products were highlighted for customers and analysts at swampUP in Q3. Every year, JFrog welcomes customers, prospects and partners to our swampUP conference, a key industry gathering for DevOps, DevSecOps and MLOps users. This year, JFrog innovations were front and center with pain solving solutions for customers. On stage, we announced a new way for companies to govern and trust their application with an innovative product, JFrog AppTrust. We were joined for the opening keynote by NVIDIA, ServiceNow, GitHub and Sona to showcase our partnerships in an industry-first DevGovOps solution. DevGovOps brings software development, security and GRC groups together, focusing on once again the key asset of any company, the software binary. As the complexity in the world of software increases, the requirements of security compliance and governance put pressure on development teams. The need to release fast and often, combined with high regulation requires automation and collection of evidence such as quality testing or security results to keep software flowing with confidence. With the new JFrog AppTrust product, companies will now have an automated way across platforms to manage governance as they deliver software faster than ever before. True to our vision of cross-industry collaboration and our commitment to build solutions that are too integrated to fail, AppTrust was launched in partnership with ServiceNow as the IT ops system of record with JFrog as the system of record for the software supply chain in the worlds of Rahul Tripathi, General Manager of ITSM at ServiceNow. The future of software built by developers and AI agents must include automated governance, achievable only through evidence-based quality gates and systems. JFrog AppTrust is paving the way to make that vision a reality. In security, we further showcased new abilities to secure developer extensions or the plug-ins developers use in their environments. This is a different type of supply chain attack and JFrog customers can now protect developer extensions in addition to their software assets. We also launched agentic remediation capabilities and demonstrated on stage how JFrog solutions use AI agents to detect vulnerabilities in source code, identify remediation methods, prioritize contextual path to fix problems and even protect against similar vulnerability in the future, first through our GitHub Copilot integration and soon available for other code assistance. Finally, we introduced JFrog Fly, the world's first agentic repository, reimagining software supply chain management in the era of AI. With JFrog Fly, AI agents become co-builders alongside developers, orchestrating artifacts seamlessly across the entire software life cycle. This allows developers to focus on what matters most, delivering software to production faster at scale and without friction. Small teams now enjoy a zero hustle AI-driven experience, tightly integrated with GitHub and native AI tools like Cursor, Cloud Code and GitHub Copilot. JFrog Fly's Agentic capabilities will be shared with selected users, giving developer teams the opportunity to experience AI-assisted software creation and delivery. These capabilities are planned for full integration into the JFrog platform, powering our customers in the new era of intelligent automated software supply chain practices built on an agentic binary repository. We believe that these product innovations share that swampUP are in the words of our customers, AT&T, a home run for our users. With that, I'll turn the call over to our CFO, Ed Grabscheid, with an in-depth recap of Q3 financial results and our updated outlook for the full fiscal year of 2025. Ed? Ed Grabscheid: Thank you, Shlomi, and good afternoon, everyone. During the third quarter of 2025, total revenues equaled $136.9 million, up 26% year-over-year. Our overachievement during the quarter was the result of strong go-to-market and operational execution, continued momentum in our cloud revenues, growing adoption in JFrog security products and expansion by customers within our enterprise-level subscriptions. As noted by Shlomi, third quarter cloud revenues grew to $63.4 million, up 50% year-over-year and represented 46% of total revenues versus 39% in the prior year. Our growth in the cloud was driven by increased usage across a broad set of package types, demand for JFrog Advanced Security and Curation and conversion of customers with usage above minimum commitments into higher annual contracts. During the third quarter, our self-managed or on-prem revenues were $73.5 million, up 10% year-over-year. We continue to proactively engage our on-prem customers to migrate DevSecOps workloads to our cloud or explore solutions better aligned with their specific use cases, including hybrid and fit-for-purpose deployments. In Q3, 56% of total revenues came from Enterprise Plus subscriptions, up from 50% in the prior year, driven by ongoing execution of our enterprise go-to-market strategy and broader customer adoption of the JFrog platform, revenue contribution from Enterprise Plus subscriptions grew 39% year-over-year. Net dollar retention for the 4 trailing quarters was 118%, consistent with the prior quarter, highlighting the continued adoption of our security core products and increased cloud data consumption, resulting in higher customer commitments. We continue to demonstrate that our customers view JFrog solutions as mission-critical to their software supply chain with gross retention that equaled 97% as of the third quarter 2025. Now I'll review the income statement in more detail. Gross profit in the quarter was $114.9 million, representing a gross margin of 83.9% versus 82.8% in the year ago period. We remain focused on cost optimization with the cloud service providers and continue to expect annual gross margins to remain between 82.5% and 83.5% for 2025. Operating expenses in the third quarter were $89.3 million, equaling 65% of revenues. This compares to $75.5 million or 69% of revenues in the year ago period. Our operating profit in Q3 increased to $25.6 million or an operating margin of 18.7% compared to $14.7 million and 13.5% operating margin in the third quarter of 2024. The continued balance between strategic investments and operational efficiency demonstrates our commitment to profitable growth. Cash flow from operations equaled $30.2 million in the third quarter. After taking into consideration CapEx requirements, our free cash flow reached $28.8 million or 21% margin compared to $26.7 million or 24% margin in the year ago period. During the third quarter, we completed payments totaling $5.7 million under a holdback agreement related to the acquisition of Qwak AI, which was completed in July 2024. Now turning to the balance sheet. We ended the third quarter of 2025 at $651.1 million in cash and short-term investments compared to $522 million at the end of 2024. As of September 30, 2025, our RPO totaled $508 million, a 47% increase year-over-year. This performance highlights the successful execution of our go-to-market strategy as customers continue to make larger multiyear commitments to our DevSecOps offerings. And now let's turn to the outlook and guidance for Q4 and the full year 2025. While we're encouraged by our strong year-to-date performance amid geopolitical uncertainty and ongoing macroeconomic volatility, we believe it remains prudent to continue to approach our forward outlook with measured caution. Our updated 2025 guidance range suggests sustained contributions from the JFrog Security core, steady expansion of customer commitments and adoption of the full JFrog platform. We continue to derisk our outlook by excluding our largest opportunities given the uncertainty regarding the timing of certain large customer deployments. We estimate our full year 2025 baseline cloud growth to now be in the range of 40% to 42%. Cloud revenue guidance continues to exclude any contribution from usage above annual customers' minimum commitments. Taking into account our strong year-to-date results and fourth quarter guidance, we are raising our expectation for net dollar retention to above 116% for 2025. For Q4, we expect revenues to be in the range of $136.5 million and $138.5 million, with non-GAAP operating profit anticipated to be between $21 million and $22 million and non-GAAP earnings per diluted share of $0.18 to $0.20, assuming a share count of approximately 125 million shares. For the full year of 2025, we anticipate a revenue range of $523 million to $525 million, representing approximately 22.3% year-over-year growth at the midpoint. Non-GAAP operating income is expected to be between $87.3 million and $88.3 million and non-GAAP diluted earnings per share of $0.78 to $0.80, assuming a share count of approximately 122 million shares. Now I'll turn the call back to Shlomi for some closing remarks before we take your questions. Shlomi Haim: Thank you, Ed. The third quarter of 2025 is behind us. We committed and we delivered on innovation, on product execution and across every financial metric. Despite macro challenges, the JFrog team sold, over the past 3 quarters, we not only earned the trust of the enterprise, we reinforced our position as the definitive system of record for the software supply chain. As the world becomes powered by AI-driven software and every aspect of software creation and delivery is being transformed, one fact stands out, more software means more packages, more artifacts, more binaries, and that's exactly where JFrog stands front and center now and in the future. We're becoming the model registry of choice, securing the entire software supply chain of our customers from passport control at the gate to safe and trusted delivery. We manage the full life cycle of AI models, and we've introduced the world's first DevGovOps solution, preparing our customers for the ongoing tsunami of AI regulation and compliance. We continue to run our business with efficiency, focus and discipline while staying deeply energized by the opportunities ahead. This quarter was also a deeply meaningful one for our Israeli team as the war in the region came to an end and hostages were finally returned safely to their families after 2 long years. We stand in solidarity with the families of the remaining hostages still held by the terrorist Organization, Hamas, and we pray for their safe return home for proper burial. As we prepare for 2026, we are ready to leap forward in product, people and business. We remain determined to continue building on what we have created by developers for the developers of the modern software world. With that, thank you for joining our call and may the frog be with you. Operator, we are now open to take questions. Operator: [Operator Instructions] Your first question comes from the line of Michael Cikos with Needham. Michael Cikos: Jeff, great to hear you on the call and for Shlomi, congrats on the strong quarter. I wanted to tap into cloud. And first, just to sanity check, the results super strong here. Was there anything one time? Or was this really just a confluence of a number of different pieces of the platform coming alongside the execution? Can you help us unpack that? Ed Grabscheid: Mike, this is Ed. I'll go ahead and start with that. There is nothing in the cloud revenues that is one time. This is a convergence of strong usage across multiple package types, geos and different verticals. In addition to that, we saw strong security. Security also is a leading driver of our cloud growth. So you had a combination of those 2 things happening but no one time. It was a very strong quarter. Michael Cikos: Excellent. And I did just want to tap in. I guess this is probably more for Shlomi but again, on the Cloud, we have a couple of quarters now of really strong growth. What is different, if anything has changed. But from an execution standpoint on the go-to-market, what have you guys implemented that continues to bear out here? How should we be thinking about that? Shlomi Haim: Mike, this is Shlomi, and thank you for the kind words. I think that what you see in the cloud is a strong and consistent execution, not only of our technology but also the go-to-market philosophy of working with our customers that have over usage, converting them to higher commitments, and that's translated to consistent cloud growth and less volatility. As you know, even when we guide, we provide you with the commitments-based guidance and consumption might come and go but we wanted to have an alignment between the go-to-market philosophy and the execution of our cloud business. That's on top, of course, to what Ed said that our cloud customers are now also embracing our security solution, which obviously gives us more room to grow and to expand. Operator: Your next question comes from the line of Sanjit Singh with Morgan Stanley. Sanjit Singh: Congrats, my congrats on the strong results this quarter. Shlomi, I was wondering if you could expand a little bit more on the theme on your script around the broadening of the types of artifacts that Artifactory is managing and storing and serving as a system of record. What does that mix start to look like between kind of traditional software artifacts, containers registries and some of the AI artifacts that are starting to come through? How -- can you speak to some of the underlying trends in terms of what Artifactory is storing and managing these days? Shlomi Haim: Yes, Sanjit. What we see, and we're obviously monitoring it closely is that artifacts or different type of artifacts that are heavily used by AI creators are seeing kind of a growth in usage in our cloud and on-prem customers. We see that obviously, Hugging Face is scaling up. This is the open source models hub for AI models but also languages that support AI development like Python with PyPI, NPM, Docker containers for distribution of models, all of them are aligned and correlated and growing together. It's still too early for us to say that this trend is actually going to lead to a higher consumption in the future. But it's very encouraging to see that our customers are using JFrog as the system of record for all packages, including AI models, and that obviously drives the higher consumption as we reported. Operator: Your next question comes from the line of Kingsley Crane with Canaccord. William Kingsley Crane: Really encouraging results. For Shlomi, the demo of JFrog Fly was really impressive at swampUP. The MCP capabilities are nice to see as well. It got me thinking AI is changing how consumers interact with technology. It's leading many companies to rethink their UI, their UX. How relevant is that for JFrog? And is that something that you're thinking about? Shlomi Haim: Yes. Thank you, Kingsley. The JFrog Fly release is a disruption to the entire software supply chain system of record. We understand that software in the future will be created not just by developers but also by agents. And therefore, whatever repository you want to build must come with a agentic capabilities. This is what we wanted first to have a JFrog Fly. The second thing based on our research with thousands of developers was that developers want to be focused on what they need to be focused on, create software, deliver software with trust fast and rapidly. JFrog Fly provide that. So instead of taking it feature by feature within Artifactory, we thought that what we will do better is to build a full agentic experience for our users, reimagining how software supply chain will look like and then slowly bring those capabilities into the JFrog platform, obviously, the enterprise market will adopt it one by one, feature by feature. The community and small team can run faster. So that's the idea behind Fly, and we are very excited to see how the market react to it. Operator: Your next question comes from the line of Koji Ikeda with Bank of America. Koji Ikeda: I wanted to ask on NRR and maybe pick on the metric just a little bit because it was flat at 118%. But when I look at the cloud growth, that's really, really strong and just knowing that NRR is calculated on the trailing 12-month metric, on a 12-month basis, that just really means that there's some new customers that are growing very fast. Is that the right interpretation on kind of looking at NRR versus the cloud performance? And if that is true, how sustainable is that growth from these new customers going forward? Shlomi Haim: Thank you, Koji. I'll start and Ed, feel free to chime in. NRR represent a tier of customers that are not committed to an annual NDR... Ed Grabscheid: NRR. Shlomi, let me go ahead and jump in here on the NDR. So first off, let me remind you that we had 3 of the largest customers closed during Q3 of last year. So we're building off of that. It's a trailing 12-month metric. But what I said in the beginning of the year, Koji, if you recall, if there was going to be an acceleration in net dollar retention, 2 things would have to happen. Number one, I want to see an uptick in my security. And number two, I want to see usage over minimum commit in the cloud, and both of those are happening. So you start on a trailing 12-month metric with a very strong base off of those 3 very large deals that were closed at the end of Q3, and we've continued to build on that. So we've actually expanded our net dollar retention rate, and we're very happy with where it is as it's stabilized quarter-over-quarter at 118%. Shlomi Haim: Yes. And Koji, sorry, I heard NRR and answered about the cloud monthly usage. Regarding net dollar retention, we also have to remember that part of the strategy of embedding our security solution into the platform will be a way to also expand our customers with a different persona. Getting our customers expanding with security actually addresses a completely different addressable market. Operator: Your next question comes from the line of Mark Cash with Raymond James. Mark Cash: Shlomi, if I could start with you. I also want to ask around Fly but more around if you see Fly opening up new customers or buying centers that you haven't serviced previously? And then what kind of go-to-market plans or tweaks would be required to drive market awareness versus maybe the market mostly thinking about JFrog more large-scale artifacts. And then if I could sneak one in for Ed. I'm just -- I mean, you beat by $9 million, raised by additional $6.5 million. So I guess maybe some of that comes with better visibility from RPO, cRPO strength but you're still taking a prudent approach you laid out. So what are the key drivers that give you confidence to raise by such an amount maybe compared to 90 days ago? Shlomi Haim: Yes, I'll start with Fly. This is obviously an opportunity but it's not our goal. Our goal is to make sure that everything that you have at the JFrog platform in the future will support both agents and developers as they manage their software supply chain. And why is that important? Because we know that in the future, the way that engineering team will be structured will be a combination of developers and agents. It will not be just developers. So software will be made by agents. And if you don't provide them, these agents will not have access to your repository, then they will have another system of record. So with Fly success, basically, what we see is how we fuel and power the entire JFrog platform. Now can small team use FLY and this will be another avenue of revenue generation? Yes, maybe. But our main goal is to make sure that we adopt this agentic experience across the platform and Fly is the North Star of adopting AI experience. Ed Grabscheid: Yes. And regarding the guidance and the confidence that I had moving into Q4, first of all, I only guide on the commitments. So I'm confident that what I'm providing to you 90 days after the last time I provided to you a guidance is the fact that I have the strong commitment. We saw a strong performance during the quarter. That's built into my forecast based on those commitment levels. And I've removed anything that's related to usage over the minimum commitments and feel very confident with those numbers provided. Operator: Your next question comes from the line of Miller Jump with Truist. William Miller Jump: Congratulations on the strong results. Yes. So for Shlomi, maybe for a couple of quarters now, we've heard about the demand for hybrid solutions correlated with AI. I'm just trying to reconcile this with the clear momentum that you're seeing in cloud. Like is this something that you're seeing shift the pipeline composition right now? And then if I could ask one for Ed as well, just throughout this year, maybe the last 2 quarters really, you've talked about the conversion of customers that are going over commit. And I'm just curious, like what are you seeing from the customers that do move on to new contracts? Like are they continuing to ramp up their consumption? How has that played out versus your expectations? Shlomi Haim: Yes. Thank you, Miller. I'll start. Well, first, what we see is what we reported in the past, and we see it still. In our pipeline, there are some big deals that part of them include cloud migration. So we hear from our customers that they need more certainty before they double down on the cloud and go there with the entire AI workload that is currently being built. So for sure, the fit for purpose that we reported in the past is still relevant. But you also know that part of our guidance philosophy, these deals are being derisked from our pipeline. And we are being very cautious with kind of hanging the expectations high when it comes to cloud migration and cloud consumption. In terms of the consumption, as I answered before to Sanjit's question, we see more software packages that are related to the AI world being used. And still, we want to make sure that this is a new behavior and not just a trend that will pass when people will decide whether they go with cloud or on-prem. Ed Grabscheid: Regarding what we see from the behavior of those customers that are above minimum commitments that go to a higher annual commitment, it's still not easy to do this. And the sales team has done a good job. That's strategically aligned with our philosophy. Budgets are still not fully aligned there yet. But for those customers, they're now secure and it gives them that confidence to flex up and down. So we continue to see strong usage across the board, especially in Q3. But we also know heading into Q4, it's a seasonably slower quarter due to the holidays. So that's also something that we take into consideration. Operator: Your next question comes from the line of Brian Essex with JPMorgan. Brian Essex: Congrats from me as well on these results. They are really nice to see the acceleration. Maybe for Shlomi, could you -- any way to quantify what kind of lift you get in the quarter or you had in the quarter from conversions to cloud? And maybe what percentage of your customer base is kind of remaining to convert? Shlomi Haim: Yes. So we are not disclosing this number, Brian. But what I can tell you that if you look at the report of the over $1 million customers, we have now 71. That's a growth of 54% year-over-year. I can say that the majority of them were not just using of more platform capabilities but also use it in the cloud. So while we are not disclosing it, the cloud for sure is a strong growth engine for the company. Operator: Your next question comes from the line of Shrenik Kothari with Baird. Shrenik Kothari: So Shlomi, definitely securing the software supply chain for AI models, continuous packages sounds like a critical pain point right now. I just wanted to hear your thoughts on what do you think about customers of truly allocating new budgets towards this and just the sustainability of these budgets? Or do you think it's getting bundled into existing DevSecOps and you are gaining from consolidation. You did note many attacks like the recent NPM and PyPI threats that are thwarted by Curation. Just curious how customers are thinking about the budgets going forward? And then I have a follow-up for Ed. Shlomi Haim: Yes, Fredrik, that's actually 2 different questions. First of all, there is a higher threat on software supply chain because hackers are after your software packages. And if you don't cover your software, it's -- as I said, it's a matter of when and not a matter of if you will be attacked. NPM, PyPI, MCP, in the past, you remember Log4j, these are all software packages and attackers are going there because this is binaries and binaries are also the asset that our customers have in the run time. So basically, if you are attacked from run time for the binaries, you have full access to the software supply chain. That's front and center for every CISO now. And the other question regarding new budget allocated to security in the world of AI, I believe the answer is yes. And it's not only the traditional security but also GRC budgets. So cyber risk organizations are also looking at what happened in terms of governance and regulation, a moment before AI is fully adopted by the biggest bank and the biggest car manufacturers and the biggest retail companies. And the gap between full adoption of AI to what we see now is basically trust, control, security and governance. So for sure, there is more budget there and more attention of CISOs and CIOs to make sure that software delivery driven by AI is not putting the company in a risk. Shrenik Kothari: Just quickly, Ed, a follow-up, Federal wins were a highlight. You mentioned meaningful TCV. So just in light of the strong Q3 and traction around security AI, the guide for Q4 does appear measured. You did touch upon it. It's coming from place of prudence but just implied is more kind of 25% to 30%. Is there more prudence coming from the Fed side? Anything that you can comment on deal timing, variability just given the prolonged shutdown? Ed Grabscheid: Yes. Thanks for the question, Shrenik. There's nothing related to a government shutdown that would change anything in terms of our sentiment going forward. We've managed this year with prudence. We're continuing to manage the year with prudence. There's a lot of factors that we take into consideration. I want to remind you, there is no usage over minimum commitments in our guide. We derisk for our largest deals as the timing of those deals are still uncertain but nothing has changed from our previous philosophy, and we're continuing to use that same philosophy in our Q4 and fiscal year guidance. Operator: Your next question comes from the line of Ittai Kidron with Oppenheimer. Ittai Kidron: Congrats, guys, really impressive. Maybe a couple for me. And just on this last comment that you made about that you don't give guide over the minimum commits. Can you tell us in the quarter itself this quarter, what was the upside from kind of spillover over the minimum commits? Ed Grabscheid: Yes. We didn't break that out, and we're not willing to provide that information. But if you think about what we've carried over from Q3 into Q4 sequentially, that is the commitment levels. Anything above that, I would consider to be usage over minimum commits. Ittai Kidron: Okay. And then Shlomi, for you. Clearly, you're doing very well. I'm kind of wondering internally, what percent of your sales force is running above quota for the year? And if that's running at a level that's higher than your normal internal averages. I'm just trying to think about, you're soon to finish the year, you have to start thinking about how you make tweaks and changes. I was wondering if you have any initial thoughts given the change in the landscape, AI, the breadth of your portfolio, do you have any initial thoughts on how you're going to tinker with comp as you go into next year? Shlomi Haim: Yes, Ittai. So obviously, we will not share some operational metrics but of course, we are tracking it. There are very important takers for the go-to-market team when it comes to the growth engine, when it's security, when it's cloud, cloud migration, AI and MLOps adoption, now DevGovOps and compliance. What you can see in the numbers, and this is not the first quarter, it's, I think, the fifth quarter in a row that we are consistently deliver what we are committed to is that not only the sales team is focused but also they use the methodologies of top-down enterprise sales, things that in the past, we didn't practice like 3 years ago or 4 years ago, when we used to sell to developers, there were no expansion. And now what you can see not only by the reports of the big numbers or the big companies but also the entire revenue growth and the consistent growth is that the team is focused on enterprise sales upmarket, know exactly how to expand the platform, and we are very pleased with the results. Operator: Your next question comes from the line of Brad Reback with Stifel. Brad Reback: Shlomi, I'll take the 5 quarters one step further and say the magnitude of the SaaS speed over those 5 quarters continues to get bigger. So maybe building on Ittai's question, is there any reason why you wouldn't accelerate sales and marketing headcount spend as we head into next year to take advantage of all this opportunity you see? Shlomi Haim: No reason. We are investing in go-to-market. We are investing in go-to-market in a responsible way. We want to see that what we deploy also comes out as the right ROI for our investment. And it's on all fronts. You can see the amount of releases from the product side, but you can also see the alignment on the go-to-market side when we deliver the numbers with such a strong bid. Operator: Your next question comes from the line of Andrew Sherman with TD Cowen. Andrew Sherman: Great. Shlomi, I wanted to ask about the security wins and pipeline, some good color there in the quarter. But for the Q4 pipeline and beyond that, how is that tracking? How much is that pipeline up? What's your confidence in closing some of these big deals? Have the sales cycles changed at all? How is the market kind of shaping up competitively for these deals, too? Shlomi Haim: Yes. Great question. We see a lot of opportunities in our pipeline, including security. Obviously, JFrog Curation following the incident of NPM is something that a lot of our customers are asking and inquiring about. The sales cycles are longer when it comes to security because no customer comes with 0 security coverage. So obviously, it's not just a matter of upgrading themselves but also displacing something that they used in the past. So the answer regarding the pipeline, it's growing, and we are very pleased with what we see there. It's also -- to remind you, it's only part of our Enterprise X and Enterprise+ subscription. So sometimes it's also drive an upgrade in the subscription. And through to our methodology, when it comes to mega deals, in the world of platform that also includes security, we are derisking it to make sure that we are not missing a quarter because the customer needs a bit more time to conclude the proof of concept. Overall, the sales cycles are a bit longer but not massively longer. I would say 3 quarters in average, sometimes it's 4 quarter really depends on how many persona are involved in what you need to adopt from JFrog. Operator: Your next question comes from the line of Jason Celino with KeyBanc. Jason Celino: Really wonderful quarter. The 2 wins you talked about that I thought were interesting, so the one U.K. customer and then the U.S. Federal Agency, did these deals directly benefit from the launch of AppTrust? I'm just trying to understand how AppTrust and the government opportunity might play as a catalyst. Shlomi Haim: Yes. So that was really a big win. And obviously, it was an RFP. So not only JFrog compete over this opportunity, and we are very proud of the team that delivered that, by the way, a very long process, obviously, in front of the government. AppTrust is not yet included. AppTrust was just announced last month, a few weeks, a baby product. We announced that together with ServiceNow. We are building the pipeline for AppTrust. And the DevOps landscape, governance is something that we know that will get even more demanding when AI will fit in. So not yet. But I will answer something that you didn't ask. There is a room to grow with all of our customers when AppTrust is in. Operator: Your next question comes from the line of Eamon Coughlin with Barclays. Eamon Coughlin: I would reiterate congrats on a great quarter. The strong enterprise customer adds really stood out in the quarter. Can you help us understand some of the key drivers there? Like are you spending more time engaging with your partner ecosystem? Is it a function of a more mature sales team? Just curious if there's anything you're doing to adjust a little bit of your sales motion or go-to-market motion. Ed Grabscheid: Thanks for the question. Yes, we're seeing great traction in the enterprise, especially those customers over $1 million. What we see, and Shlomi talked about this previously, security is becoming a driver of many of those large deals, and it's also in the cloud. So we see this expansion of the usage over the minimum commit and expanding to a bigger commitment, taking security on top of that. That drove many of the deals that we saw 10 customers that we had over $1 million during the quarter, 54% growth. It's the efforts of the go-to-market team, and it's really a 3- or 4-year investment that we made, and we're starting to see the fruits of those labor. Operator: Your next question comes from the line of Jonathan Ruykhaver with Cantor. Jonathan Ruykhaver: Congrats on the performance. I'm curious, so last week, OpenAI announced a private beta of security application called, I think it's Aardvark. But it seems to differentiate with an LLM-driven approach to vulnerability detection and remediation. And I'm curious if you could just talk about how this compares to X-ray's capabilities. But maybe I think more importantly, the announcement at swampUP around agentic remediation capabilities. How do you think this maybe further differentiates you from emerging competition? Shlomi Haim: Yes, Jon. Well, this was a very important announcement coming from OpenAI. And obviously, we saw it, and we work with OpenAI on a monthly basis, if not daily basis. This is great news because it's yet another proof that human security is -- sorry, human code creation is being covered by models. That's basically supporting the philosophy that what you need to invest in is to protect your binaries. The announcement from OpenAI is a solution that replaces static code analysis, basically code that is created in human language and not binaries. If it will drive something, I think it will drive more interest in what we bring to the market, which is a complementary solution to protect your entire software supply chain. So yes, LLM can provide your source code security, but not binaries, and that was the release from OpenAI. Operator: Your final question comes from the line of Rob Owens with Piper Sandler. Robbie Owens: Just a couple of quick ones for me. Where you talked about cloud migration and some of those in the pipeline. Taking the other side of that, the customers that aren't moving to cloud, what are some of the governors or some of the reasons that they're not moving to cloud at this point? I understand that having a hybrid architecture is part of your value proposition. But just contemplating that move to cloud and maybe some of the barriers to get certain customers to move. Shlomi Haim: Yes. That's a good question, Rob. So assuming that our customers -- enterprise big customers moving to the cloud from an on-prem setup means that they had their own projects. They understood the scope of these projects, and they wanted to move the workload to the cloud in order to kind of provide a better elasticity for the company. Now comes AI and they see a new workload. They don't know how much they will pay for storage. They don't know how much they will pay for data transfer when you train these models, where the data to train this model will be hosted. That takes a bit more time for them to analyze. Putting aside the cost predictability, they also have some security and governance concerns. Who is training this model, how this model is being exposed? What are we doing in order to protect the company from having any type of malicious models coming in. And this, I think, bring them to take a bit more time or at least this is what they tell us. They need a bit more time before they fully bet on the cloud like it used to be maybe in a process a year ago or 2 years ago. JFrog is positioned to capture the opportunity both ways. Either they will stay an on-prem customer, and we will support them and grow with them there or they will move to the cloud, and we will do it in the cloud with them on a multi-cloud basis or one cloud. Basically, the hybrid solution that JFrog provided is the fit for purpose that they ask for. Operator: There are no further questions at this time. I will now turn the call back to Shlomi for closing remarks. Shlomi Haim: Thank you, everyone, for joining us on this quarter results and earnings call. May the frog be with you. Take care. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
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, thank you for standing by. My name is Desiree, and I will be your conference operator today. At this time, I would like to welcome everyone to the OneStream's Third Quarter Fiscal Year 2025 Earnings Conference Call. [Operator Instructions] Now I would like to introduce your host for today's program, Anne Leschin, Vice President of Investor Relations and Strategic Finance. You may begin. Anne Leschin: Thank you, operator. Good afternoon, everyone, and welcome to OneStream's third quarter 2025 earnings conference call. Joining me on the call today is our Co-Founder and CEO and President, Tom Shae; and our CFO, Bill Koefoed. The press release announcing our third quarter 2025 results issued earlier today is posted on our Investor Relations website at investor.onestream.com, along with an earnings highlights presentation. Now let me remind everyone that some of the statements on today's call are forward-looking, including statements related to guidance for the fourth quarter and year ending December 31, 2025. Forward-looking statements are subject to known and unknown risks, uncertainties, assumptions and other factors. Some of these risks are described in greater detail in the documents we file with the SEC from time-to-time, including our quarterly report on Form 10-Q for the quarter ended September 30, 2025, that we filed today. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. During our call today, we will also reference certain non-GAAP financial measures. There are limitations to our non-GAAP measures, and they may not be comparable to similarly titled measures of other companies. The non-GAAP measures referenced on today's call should not be considered in isolation from or as a substitute for their most directly comparable GAAP measures. Management believes that our non-GAAP measures provide meaningful supplemental information regarding our performance and liquidity by excluding certain expenses that may not be indicative of our ongoing core operating performance. Reconciliations of our historical non-GAAP measures to the most directly comparable GAAP measures can be found in this afternoon's press release and the earnings highlights presentation posted on our Investor Relations website. We are not able to provide reconciliations for forward-looking non-GAAP measures without unreasonable effort because certain adjustments cannot be predicted with reasonable certainty and could be significant, particularly related to equity-based compensation and employee stock transactions and the related tax effects. Now I'll turn the call over to Tom. Tom? Thomas Shea: Thank you for joining us this afternoon. Third quarter was a story of focused execution. Facing headwinds and contract rationalization in our U.S. Federal business, the team exceeded expectations with strong billings growth in the quarter. More recently, at our sold-out Splash EMEA user conference, I was incredibly energized by the enthusiasm we received for our purpose-built finance AI. As we usher in the finance AI era, we remain one of the most innovative vendors in the CPM space, and we're not stopping there. We are constantly pushing forward and anticipating the growing demands of the office of the CFO. Let me start with some highlights of our third quarter performance. Year-over-year subscription revenue grew 27% and billings grew 20%. International revenue grew 37% year-over-year, particularly due to strong legacy replacement momentum in Europe. In the federal business, we renewed all of our Q3 agency customers with only one exception at a discontinued agency. We added one new federal customer and began multiple SaaS conversions, including one at our largest agency customer. CPM Express and our SensibleAI portfolio continue to show early momentum with customers. We are attracting new and existing customers by leveraging the proven customer ROI from SensibleAI Forecast. Additionally, OneStream was recognized as the exemplary leader in the 2025 Record to Report Buyers Guide by ISG Research, covering financial close, consolidation and overall record to report, achieving the highest scores in both customer and product experience. With AI at the forefront across all facets of business today, the drivers of our industry have never been more important for the office of the CFO. Number one, finance is in the initial phase of its transformation. Legacy financial systems often more than 20 years old, simply do not have the agility required for today's CFOs to effectively steer their businesses, never mind to maximize the value of AI. Finance organizations continue to look to modernize by unifying corporate data and moving core financial operations to the cloud. Number two, the role of the CFO is evolving and expanding. CFOs are being asked to do more than ever by becoming a strategic partner for the business. An integral part of that is helping them proactively look around corners, to anticipate challenges and opportunities and produce more timely and accurate forecasts. Number three, the use of AI is enabling finance teams to drive more business performance, not only measure it. In many cases, CFOs are the executive leaders taking responsibility for the AI evolution at their companies. They are being tasked with identifying key functions that can leverage these AI tools for productivity improvements and cost efficiencies. We believe platforms that provide purpose-built applied AI solutions will win the AI battle given the need for a single consistent data model and security framework. At OneStream, we have always challenged ourselves to raise the bar. Our approach to AI has been both forward thinking and deliberate. Since we began this journey a decade ago, we have gained a foundational understanding of what AI can bring to the office of the CFO by combining powerful quantitative, generative and agentic capabilities throughout our SensibleAI portfolio. We understood early on that AI for finance must run on clean data, provide context and solve specific use cases because 80% accurate is 0% useful for finance. Ultimately, we believe OneStream provides the key that unlocks the value of AI for finance through unified, secure, transparent and most importantly, contextualized information. Through our many AI announcements this year, customers are beginning to realize the growing power of our platform to drive better and faster decision-making and enhance their productivity. By modernizing the financial close process, customers are now able to, number one, unify their data on a common platform. And number two, interrogate that data using financially intelligent embedded AI; and number three, enhance and optimize the close process, enabling finance teams to focus on strategic high-value priorities such as integrated planning and forecasting. Just a few weeks ago at Splash EMEA, we again pushed the boundaries of applied AI for finance. We showed real package solutions designed specifically for finance, which we expect to deliver significant value for our customers. Let me recap some of our exciting product announcements. Since we introduced SensibleAI Studio in May, we have roughly doubled the number of algorithms currently available to 60. As you recall, Studio enables customers to quickly access a library of algorithms and routines and apply them to their own workflows. We showcased an example of this power and flexibility at Splash EMEA. Just 1 month after Studio's launch, our forward deployed engineers rapidly built our AI-powered benchmarking and outlier detection routine based on real-time customer specifications. Studio allows us to meet customers where they are in their AI journey, and we believe we are just scratching the surface of Studio's potential. We also took a big step with our SensibleAI agents, moving them out of private preview and into limited availability. So now our customers can begin to take advantage of them. Our agents are unique because they do not act alone. What's important is that they have financial context. They are embedded into solutions within OneStream, giving them direct access to all the customers' secured data stored on the platform. This allows finance teams to do tasks like ask questions in natural language, generate dynamic visualizations, query financial models and analyze contract data. Agents provide the ability to help automate repetitive work, reveal insights and help every analyst operate more like a strategic partner. We also unveiled AI-powered ESG. This enhanced solution is the culmination of our 3 strategic pillars. Core finance, operational analytics and finance AI. With AI-powered ESG, finance teams are able to link ESG reporting back to the core platform using real-time operational drivers, while automating quantitative forecasting by using SensibleAI Forecast. Further, we plan to embed our SensibleAI agents throughout the workflow to assist with data interrogation and reporting. Lastly, we continue to advance our best-in-class core finance capabilities by expanding our rapid deployment CPM Express with IFRS compliance and management. This includes a number of confirmation and validation rules adhering to IFRS Accounting Standards for our international customers. This is but one example of how we plan to expand our Express offer. Leveraging our plug-and-play architecture to bring a variety of rapid deployment productized use cases to our customers. Both at Splash EMEA and during the quarter, we had several noteworthy examples of how customers are seeing increased value from our strong and growing product line. Continuing the trend in recent quarters, OneStream is quickly becoming the CPM vendor of choice for companies transitioning from legacy systems nearing their end of life. One of the largest deals this quarter came from a Swiss multinational healthcare leader and a global leader in cancer treatments. A long-time customer of a competitive legacy CPM solution, the organization moved to OneStream to better unify financial consolidation, reporting and tax processes. They chose OneStream for our extensibility and flexibility. This significant legacy replacement marks our first big pharma win, highlighting how leading enterprises are modernizing with our unified platform. Additionally, with CPM Express, commercial customers are gaining access to the full power of OneStream with rapid deployment and best practice templates, workflows and frameworks all built in. Today, companies that are earlier in their financial journeys are starting to recognize just how valuable it can be to access our single unified platform with a preconfigured offering that can be implemented in as little as 8 to 12 weeks. One significant CPM Express win this quarter was with a leading residential real estate services company. Having recently centralized its finance and other core functions under a shared services model, the company needed greater visibility, agility and standardization across the business. Facing a legacy system infrastructure across their environment, we leveraged CPM Express to give the customer confidence in a faster, best practice-driven implementation with rapid time to value. Ultimately, they chose OneStream for our superior data integration, flexibility and finance own architecture. This empowered the finance team to streamline and modernize account reconciliations and transaction matching, all while reducing their dependency on IT. Lastly, we wanted to provide an update on a few major multinational customers that have gone live with SensibleAI Forecast and the remarkable ROI that they are realizing with the product. One of the great stories comes from the domestic healthcare division of a leading global logistics provider. They implemented SensibleAI Forecast across their U.S. operations to enhance financial forecasting as the company is developing an AI-powered approach, they reported that OneStream's SensibleAI Forecast is delivering measurable results. Gross revenue forecast accuracy has improved by 5 percentage points. Payroll forecast accuracy has improved by 8 percentage points. Forecast generation time has been reduced by 94%, freeing up more than 13,000 labor hours annually and eliminating the need for third-party specialized tools and staff augmentation. With these strong results, the organization is now expanding its use of SensibleAI Forecast to the healthcare division's international operations. Another long-time U.S. customer that builds systems and technology solutions deployed SensibleAI Forecast earlier this year. The customer was looking to transform its forecasting process for key financial metrics, including revenue, margin and SG&A using OneStream's single unified data model. SensibleAI Forecast has taken their forecasting and planning cycles from 20 days to less than 2 days, a 90% plus reduction. Additionally, the customer saw a noticeable improvement in forecast accuracy. One of the key features that led to the selection of SensibleAI Forecast was its ability to provide clear insights into how internal and external factors drive forecast outcomes. It is this level of transparency that is strengthening their trust in OneStream across its finance organization. In summary, the overarching drivers of the office of the CFO remains front and center today. OneStream has always looked to the future to anticipate and invest in what our customers will need and want to run their businesses more effectively. We have consistently been ahead in recognizing industry trends and emerging technologies as we have demonstrated with AI. Today, our customers are realizing the value that a unified and infinitely extensible platform delivers. Our SensibleAI provides insights and actions that are quantifiable and supercharged because of the high-quality and contextualized data controlled in OneStream. Our comprehensive platform has positioned us to lead the finance AI era and become the operating system for modern finance. Together with our exceptional team, we believe we have built a solid foundation to grow and scale the business. This gives me confidence in our ability to deliver unparalleled value for our customers, partners and shareholders over the long-term. I will now turn the call over to Bill to provide details on Q3 financials and our financial guidance. William Koefoed: Thanks, Tom. Good afternoon, everyone, and thank you for joining today's call. We are pleased to discuss the results of our third quarter, which proved stronger than expected as the team executed well, particularly in EMEA, while managing through a tough federal government environment in the U.S. Subscription revenue increased 27% year-over-year to $141 million, while total revenue grew 19% year-over-year to $154 million. License revenue of $4 million declined 64% compared with last year due to contract rationalization and our success in driving SaaS conversions, including at our largest federal agency customer. Professional services and other revenue was $9 million, up 38% year-over-year due to demand for our consulting services. Our international business had another strong quarter with revenue growth of 37% year-over-year, representing 34% of total revenue. Billings increased 20% year-over-year to $178 million and 21% on a trailing 12-month basis, which we believe is the best indicator of our billings momentum. This included roughly $4 million of accelerated billings from Q4 due to early renewals and add-ons. Free cash flow for the third quarter was $5 million and exceeded our expectations. We ended the quarter with 1,739 customers, up 13% year-over-year. We saw exceptional new business growth in EMEA, while in the U.S., we had particularly strong add-on business, partially offsetting the federal new business weakness and illustrating the value of our multiproduct strategy. For the first 9 months of the year, subscription revenue has increased 29% year-over-year to $400 million. Total revenue grew 23% year-over-year to $438 million. AI bookings were up 60% year-over-year, and our free cash flow for the first 9 months of the year was $70 million, up 107% over last year. Our 12-month cRPO was up 29% year-over-year and total RPO was up 24% year-over-year to $1.2 billion. Non-GAAP gross margin for the third quarter was 69% compared to 71% last year, and our non-GAAP software gross margin for the third quarter was 75% compared with 78% last year, primarily due to lower license revenue in the third quarter. Non-GAAP operating income for the third quarter was $9.3 million or 6% of revenue and increased significantly by $3.8 million or 69% compared with the prior year. This increase was due to a combination of strong revenue growth and the scaling of our operating expenses. Non-GAAP net income of $15.2 million in the third quarter increased $3.9 million from the prior year and non-GAAP earnings per share was $0.08, flat with last year. Total equity-based compensation expense for the third quarter was $25 million. We ended the quarter with $654 million in cash and cash equivalents. Now let me turn to guidance. Given our Q3 outperformance, we are raising our 2025 growth and profitability outlook. Together with our strong pipeline, we entered Q4 with a growing and more differentiated product portfolio than ever. With that, we are offering the following outlook, including an update to a onetime measure that we gave last quarter. In Q4, we expect total revenue to be between $156 million to $158 million. We expect non-GAAP operating margin to be between 4% to 6%. We expect non-GAAP net income per share to be between $0.04 to $0.07. We expect stock-based compensation expense to be approximately $25 million. Taking into account the roughly $4 million of accelerated billings in Q3, we expect billings growth of roughly 20% for the fourth quarter. For full year 2025, we expect total revenue to be between $594 million to $596 million. We expect non-GAAP operating margin to be between 2% to 3%. We expect non-GAAP net income per share to be between $0.15 to $0.19. We expect stock-based compensation expense to be between $115 million to $120 million. While we plan to give formal 2026 guidance in February, the combination of our Q3 outperformance, strong pipeline and innovative product portfolio make us comfortable with current Wall Street consensus for full year 2026 revenue and non-GAAP operating income. In conclusion, Q3 was a strong quarter. Our results underscore the power of the OneStream platform to bring the office of finance into the AI era. Now let's turn it over to the operator for Q&A. Operator: [Operator Instructions] And our first question comes from the line of John DiFucci with Guggenheim Securities. John DiFucci: Listen, on the federal dynamics this quarter, first, I want to say we really appreciate your transparency here, both last quarter and this quarter. In fact, we factored it into guidance. But your overall results really didn't skip a beat, and it's great to see subscription still growing at a really healthy clip here. It sounds like you only lost one federal contract because that agency was discontinued, but you also added a new federal customer. But I'd really like to better understand the remaining account, the renewals. And Bill, you mentioned the license rationalization. Anything you can add to help us better understand renewals in the September quarter and what this means for the future? It would be great. We're just trying to better understand the federal opportunity going forward within the context of the overall beat and raise this quarter. William Koefoed: Yes. Thanks for that, John. I'll take that and appreciate the commentary on the transparency. That's certainly something that we aspire to do and appreciate the comments. Look, the federal government, obviously, there were a lot of moving pieces as we went into the third quarter. We had SaaS conversions at a couple of our biggest agencies, and that obviously impacted license revenue, but obviously will flow through our subscription revenue in future quarters. And as you noted, we only lost one federal agency that actually doesn't exist anymore. It actually got merged into another agency. And obviously, we added a new one, as you noted. So we're really optimistic about our federal government opportunity as we turn the corner into 2026 now that I think we've gotten through this quarter, and we'll hopefully execute on that as we enter the year. Operator: Our next question comes from the line of Chris Quintero with Morgan Stanley. Christopher Quintero: Tom and Bill, congrats on a solid quarter here. I want to ask about AI. We've seen some data points that suggest that finance and accounting is actually one of the top areas that organizations are looking to deploy their AI budget dollars over the next 12 months. So I'm curious, like is that aligning with kind of what you're hearing from your customer base? And what are some of those kind of initial most important use cases that you're seeing them deploy some of your technology into? Thomas Shea: Thanks, Chris. Yes, I'll take that. As I mentioned in the remarks, we really feel great about our position in AI. We feel we're primed to lead the finance AI era. And what I mean by that is there is a lot of opportunity in finance, especially when you have a platform like OneStream that has this highly contextualized high-value information. So the use cases that you can think of -- you've heard us talk about SensibleAI Forecast, that's clearly predicting the quantitative outcomes for a business in those key line items that you heard, whether that's demand, whether that's multiple cost line items, that has a profound and direct impact on how you can manage your business. But that's just the beginning. With the comprehensive AI platform that we have, and you heard me talk about Studio as well, that opens up all kinds of additional use cases, outlier and sort of benchmarking analysis, giving companies the ability to do and measure their business in ways that they haven't been able to in the past and take immediate action. And then ultimately, agents, right? The autonomous financially intelligent coworkers that were -- we've built into the platform, that is very, very high interest in our customers because of the potential to actually interpret all this information, help take action and do repetitive work. So we feel finance is definitely embracing this opportunity. And again, our understanding of the deterministic nature of AI required for finance puts us in a great position to answer that need and interest for the customer base. Operator: Next question comes from the line of Adam Hotchkiss with Goldman Sachs. Adam Hotchkiss: I think you made the comment, Bill, about being comfortable with Street estimates for '26. And I think what's notable about that is there's less of a deceleration baked into numbers for '26 relative to '25. And so you're exuding some confidence and some growth stabilization. So if you could just maybe rank order for us qualitatively what the big drivers are there that helpful. William Koefoed: Yes. Let me talk about just about the overall performance of our business, and I think that will answer your question. And we saw this this last quarter. EMEA really performed super well this quarter. As Tom mentioned, some pretty big lighthouse wins that we had there. Obviously, considerable strong growth, strong momentum, and we're really optimistic about the opportunity that we see in EMEA. Asia Pacific continues to be a small but growing area of our business, and we expect that momentum to continue. And in the U.S., certainly, Tom's talked about CPM Express and the opportunity that we see in the commercial business. That is just getting started, as Tom mentioned, and we see strong opportunity there, particularly as we get into more verticals. Actually, I didn't mention it in EMEA, but we just released IFRS Express, which is a really awesome opportunity for us there. And then on the enterprise side here in the U.S., obviously, Q4 is our biggest quarter. And we -- as I mentioned in my commentary, we feel great about the pipeline. The team is working to execute. We actually signed a really nice big deal today, which we're excited about against 2 very strong competitors, and that all gives us optimism about 2026. Operator: Next question comes from the line of Koji Ikeda with Bank of America. Koji Ikeda: I wanted to double-click on the 2026 guide and really about pipeline assumptions and conversion assumptions in the fourth quarter guide and heading into 2026. How are you thinking about those assumptions? I guess, more specifically around conversions? Is it more conservative heading into 2026? Is it the same? I mean I just wanted to understand what is giving you the confidence to level set 2026, but also kind of expressed a lot of confidence there at the same time. William Koefoed: Yes. No, I'll take that. I mean, look, every quarter, every year as we start our forecast for the quarter and as we start our budgeting process for the next year, we look at 2 things, right? We look at our pipeline, which is arguably kind of the biggest driver of growth. And the second characteristic of that is obviously our conversion rate. And it obviously varies a little bit by quarter, but we certainly look at that as we enter the quarter and as we enter the year. In addition to the fact that we have our core business, as Tom mentioned, we're really enthusiastic about our new products. Tom's talked about our Agile Financial Analytics, which we see customers really excited about. We have our SensibleAI Forecast, which is showing some very strong growth. As I mentioned in my remarks, it's up 60% year-over-year, and we continue to see very strong pipeline as customers are seeing the results like Tom talked about in the script of better forecast accuracy, improved speed to forecast and just the benefits that we see there. Obviously, AI Studio is something Tom has talked about. And again, candidly, that new customer that I mentioned earlier has -- that's part of the solution that they've acquired. And then obviously, agents, which are just being released, we just announced limited availability when we're in Splash a few weeks ago. So look, as I mentioned in my closing remarks, we have our best product portfolio we've ever had going into any year. We have a very strong pipeline, and that gives us the confidence to obviously give our outlook for 2026. And again, I would just say like we'll give you more formal numbers when we get into February, but we just kind of wanted to give you a little bit of an update like I did. Operator: Next question comes from the line of Alex Zukin with Wolfe Research. Aleksandr Zukin: I appreciate that incremental color about the pipeline. I guess to that point, it sounds like, Bill, billings growth is going to accelerate if you take the fact that you pulled in or you had some early in Q3 and yet you're still kind of calling for really strong billings numbers in Q4. So maybe just comment on the demand environment as you kind of sit here in October? And also a metric that we haven't talked about at length previously, but like as you continue to see a lot of expansion opportunities from Sensible as well as moving into other parts of the finance workflow or outside of the core finance workflow, how should we think about NRR trends from here kind of moving forward as well? William Koefoed: So Alex, let me start with the last part of your question. I know you and I spent a lot of time talking about NRR. But we had this last quarter, as I mentioned, I think in my remarks was a really great add-on quarter. And it ended up being part of the upside that we saw in our numbers was -- were the add-ons. And candidly, it's just an illustration that our multiproduct strategy is working. A couple of years ago, we didn't have all these kind of new products that we've been introducing. And as Tom mentioned in his remarks, I think we're just getting started in our innovation around our products. Look, on the billing side, I would just tell you, again, we outperformed this quarter. We did have a bit, as I mentioned in my commentary, we saw some early renewals because -- back to your NRR point because our customers wanted to add on new products. And so we saw a bit of that in the third quarter. But obviously, in the guidance that I gave you for Q4 and as I think I mentioned that I don't expect to guide billings every quarter, but I thought it was important as we kind of went through Q3 to Q4 that we gave you that color. And obviously, we're enthusiastic about the quarter ahead. Operator: Next question comes from the line of Terry Tillman with Truist Securities. Terrell Tillman: Bill, it's always nice to hear about a deal closing, an important deal closing like in real time. William Koefoed: Terry, it's pretty exciting when we have a deal close on the day of earnings. I have to tell you, Tom and I were high-fiving at each other. Terrell Tillman: Well, if one closes before the end of the call, we'd appreciate another update. William Koefoed: We'll keep our eyes out. Terrell Tillman: My one question relates to EMEA. It does sound like you're firing on all cylinders there, and there's a lot more where it came from. What I'm curious about is there something going on with this replacement cycle. We know there's a lot of technical debt in these 20-year-old systems. Is there something that seems like it's accelerating in that cycle of replacement? And part of this is also -- but your field sales coverage is probably expanding, so maybe it's becoming more productive or maybe it's partners. But just maybe you could kind of stack rank some of the drivers that's driving that momentum. Thomas Shea: Thanks, Terry. I'll take that. And you pretty much hit on it. It's the fact that we're getting more scale in the region. So we are seeing that ability to have more coverage across the different countries. Secondarily, there is the opportunity of legacy applications that are coming up. And just to remind everybody, as I've mentioned in other calls, the foundation of getting access or being trusted to take those legacy replacements is that we've had prior success. And so when we think about that and we think about that opportunity, we're building on those foundational wins in that segment and some of those transformations that are happening. And then ultimately, when we look at the product portfolio and we look at the enthusiasm for our product, that is sort of the third component that I see driving it. But I definitely want to call out the execution of the team over there and the growth that we're seeing, and there's a lot of excitement. Operator: Next question comes from the line of Steve Enders with Citi. Steven Enders: I guess I want to follow-up on the AI side of it. I think the bookings growth you called out there, I would say it was 60%. But I guess what are you seeing maybe in the pipeline? Like are you starting to see incremental builds there from the sales build-out that you've been talking about for the past year or so? And then just how do you kind of view the future pipeline opportunity as we kind of go into '26? Thomas Shea: So we look at the current pipeline as a great validation of the momentum that we're building, first and foremost, is the way that I would talk about. So as we think about the product strategy that we have in AI, our AI portfolio consists of the first product SensibleAI Forecast, which is driving that adoption through the validation that I shared in my remarks. And so as we look going forward, what we're seeing is, again, early days, but excitement around AI Studio. It just opens up so many additional use cases. And the way that you want to think about AI Studio is AI everywhere in our platform. That's why we invented that product so that we can drive AI into meaningful workflows across our customers' set of use cases that they're enjoying on the platform. And then ultimately, we are very, very excited about what we're -- the feedback that we've been getting and the partnering, frankly, that we've had with our customers in the agentic space because, again, this is all -- this is a building process for us. It was quantitative, generative and agentic working together on a contextualized platform. And so as we look to 2026 and continuing the rollout of our limited availability of the agents, we're very excited about that opportunity and bringing that to our customers and again, building on that same momentum that we're seeing from SensibleAI Forecast. Operator: Next question comes from the line of Scott Berg with Needham. Scott Berg: Really nice quarter here. Tom or Bill, I just wanted to see if you could maybe comment on what you're seeing early with the revenue opportunity for the agents. I know they're not fully released in general availability yet. But I think a key question we've all kind of had is, as you release those, I guess, what's the uplift there? And does it impact any of your seat-based model at all? Thomas Shea: Sure. I'll take that. And as we look at agents, we're still in the early days in terms of the -- going from private preview to limited availability. So pricing, you can expect to be more of a usage-based pricing the way we price the other AI services products. And we think we have a strong applied approach, which is key here, and that is demonstrated value of our finance analyst agent. What we see this is a -- as I mentioned in one of my remarks, it's an autonomous coworker. It's the ability to help the customer get more value, do work efficiently and then let their team members do more high-value work is quite frankly, what we see. So, we see this as incremental revenue rather than sort of a replacement or displacement of seats. And I think that's largely what you're going to see in the financial space. There's certainly optimizations. But as we've highlighted in some of the studies that we've done, the 2035 finance, like you have -- finance teams are generally overworked, overstressed. It's not that there are always way too many people, right? They want to have those people working on the most important areas of the business, to be a true partner of the business. And we think that we're an unlock for that, giving them efficiency to do the things they have to do and help them be more of a business partner. Operator: Next question comes from the line of Mark Murphy with JPMorgan. Mark Murphy: Can you comment on traction in some of the emerging applications that sit outside of the core, maybe shed some light on where you see the strongest growth vectors? For instance, noticing you have account reconciliations now that are driven by SensibleAI. And then the supplier analysis, I'm wondering if there's any more interest there in the wake of the tariffs? And any brief mention on the big pharma win? Congrats on that. Just wondering if you see that as a linchpin to going a little deeper in a new vertical? Thomas Shea: Thanks, Mark. Yes, there's always -- if I can just orient everybody on our platform and our platform message. And I think this is critical to helping you -- to help everybody kind of baseline this. We think of the platform as having 3 key components: core; operational; and AI, kind of think of it as a triangle. Core is the stuff everybody has to do. Every big business has to do this, the things you have to get right. We need to help our customers become as efficient as possible. And to your point, Mark, the thing they want to do, though, is they want to help -- they want to start turning that fast-changing operational data, those operational use cases into a signal that they can take action on. So we have always seen a lot of interest in that particular space. And the fact that with our AFA or what we call Agile Financial Analytics, our ability to do more real-time analytics, no ETL, directly on top of operational sources and have our agents be able to interact with that data as well is an area that we're continuing to push into. And those are, again, some of the key innovative areas that are underpinning our excitement in the business and the opportunity that we see ahead. And so -- and when you think about these operational use cases, whether that's -- you mentioned AI-powered account reconciliations. We have that under an umbrella that we call the modern financial close. That's an opportunity for us to, again, to double down and address certain personas and make sure that they understand that we're delivering the key capabilities and technologies if you're a controller, to help you not only do your financial planning, your financial reporting, but also deliver on those and become more efficient at your closing. So any and all of those opportunities are what lie in front of us. And you'll see us continue to develop more and more productized use cases in those areas, as you mentioned, supplier analytics, and these are all areas that are part of our ongoing verticalization strategy and intention to focus in these areas. Operator: Next question comes from the line of Jake Roberge with William Blair. Jacob Roberge: I just wanted to follow-up on the new agentic offerings entering limited availability. Could you talk a little bit more about the feedback you've gotten from customers and if there are any specific agents that you're seeing drive outsized interest for the platform right now? Thomas Shea: Sure. So let me first just talk about the agent set that we have in play, just to level set for everyone. So we have our finance analyst agent. You can think of that as a structured kind of data analyst that understands the OneStream data architecture, data repository, highly contextualized data and can help with analytics, can help with reporting, answer questions that can help with education because individuals that don't understand some of the data models that customers have built now have access to that information. So it's broadly applicable. And that's a very high interest agent within our customer base. The other couple of agents that are also getting a lot of interest are our search agent and our deep analysis agent. These complement and contextualize and synthesize with our finance analyst agent. So meaning if you have an interesting set of analytics that are coming out from finance analysts, but you require additional information to provide context such as contract-based analysis, our agents, we've developed an agentic workflow. So the thing that has come out of the interaction with customers is more than -- these aren't just chat-oriented interactions. We've built an entire workflow-based interaction which will allow us to truly assign tasks that can be done on a repetitive basis. And this is some of the feedback loop and the processing that our AI engineering team has been working with to rapidly innovate that and make sure that we're iterating and delivering in real-time what the customer is looking for out of these agents. Operator: Next question comes from the line of Siti Panigrahi with Mizuho. Unknown Analyst: This is Phil on for Siti. Can you talk about what you're seeing in terms of competitive displacements like Hyperion and SAP? And how important are these legacy displacements in achieving the preliminary FY '26 growth targets? Thomas Shea: So when we look at the historical legacy replacement, it's a consistent and a large opportunity that we're continuing to focus on. And so it's obviously an important part of our numbers. It's an important part of our selling [ motion ]. But the thing I do want to make sure that we all focus on is any business -- as I mentioned, the core pillars of our platform. Any business that develops any degree of complexity in their own financial operations has a very high need for OneStream's platform. And that's, again, why we tend to focus on CPM Express and the productized approach because we view all companies that have those needs as our customers. So we want to continue to focus heavily on the replacement of legacy systems and help those customers that have been in the CPM world for a number of years, but also make sure that we're extending and onboarding any company that has that growing need for a full CPM solution. So I just want to make sure that I share the way that I see this expansive opportunity consisting of both legacy and evolving companies. Operator: Next question comes from the line of Brian Peterson with Raymond James. Unknown Analyst: This is John on for Brian. Maybe following up a bit on that earlier question on sales pipeline and as we think about customer sizes. You mentioned an acceleration in legacy CPM replacement, but then CPM Express also accelerating adoption in the commercial side of the equation there. So how have those been tracking in 2025? And as we look towards 2026, realizing that both might be the answer here, what are you most excited about? And what opportunity do you see creating the most potential upside in 2026? William Koefoed: Yes, I'll take this. It's Bill. I would go back a little bit to some of the commentary that I made earlier. We're really excited about EMEA's growth and continued trajectory. Again, I think Tom mentioned CPM Express. I mentioned IFRS Express specifically for EMEA on the commercial side, and we see that as being a really big opportunity. We see EMEA enterprise as well as a big opportunity, obviously, with the legacy replacement opportunity there. And again, there's a lot of change going on, on the ERP stack there, too, which is actually tailwind in our favor. I mentioned Asia Pacific. And in the U.S., they've been our biggest driver of AI sales so far. I think that will continue to extend to other geographies. And then as Tom mentioned, just the whole opportunity that we have to continue to grow the core, to continue to offer capabilities around Agile Financial Analytics and then as I mentioned earlier, our AI portfolio. So it's hard to choose your favorite child. We love them all, and we think they're all great opportunities for us to grow. Operator: Next question comes from the line of Brett Huff with Stephens Inc. Brett Huff: On a nice quarter. I wanted to follow-up on the Agentic AI comments you made. But first, given the market is still anxious on how long it will take enterprise AI to get ROIs, congrats on those really good proof points in the forecasting business. I thought those are notable. But the follow-up question is talking more about how your agents will or won't or how they'll interact with agents from other software firms. Do you view a world where there'll be kind of Uber software or Uber agents that coordinate things across workflows? Do you aspire to have that particular position? Or is this a battle or more of a cooperation as you look beyond the 4 walls of just your data architecture? Thomas Shea: Thanks. I'll take that. It's something that I think about a lot and my evolving thought on this is OneStream has the right to be, if not the best, one of the best agents in the financial realm, meaning, because of the highly contextualized data, we want to be the best, most reliable, understanding, again, that if you're a CFO and you're trying to use a generic non-financially aware type of agent that doesn't have high context, you're going to get inaccurate results, 80%, 50%, you name it, whatever, which will become 0% useful for the CFO. And so we really feel that we have the right to be that -- in that domain, the agent set of choice. Now to your point, with agent-to-agent protocol, multi-agent orchestration, we're not naive to think that other vendors that have platforms, that have other highly contextualized information also have a right to have agents that are highly attuned and aware of that highly contextualized information. We will -- those eventually -- my -- I'm being a futurist now. My view is that we will see those of us that have platforms and highly contextualized information, our agents will work in coordination with some sort of multi-agent protocol at a higher level. And that's where I do think there will be a battle maybe by hyperscaler or there will be a real battle in terms of who wants to own that masterful entry point into the agent ecosystem and then pick the right agent for the right question and do that synthesis. So as this plays out, we're really focused at the moment on making sure that we have the right protocols in place to play in agent-to-agent communication and multi-agent orchestration. But more importantly, at this moment is delivering the ultimate value that our customers want from our agent set within the context of the CFO. Operator: Next question comes from the line of Derrick Wood with TD Cowen. James Wood: Bill, can you give us a sense how you've handicapped some of the risks around the government shutdown as you guided for Q4? And then looking beyond just with FedRAMP High authorization with DOGE behind us, just how are you feeling about building -- rebuilding momentum in the U.S. Fed? Do you think they'll have kind of a bigger appetite to come back and spend or modernize? Or how do you feel about the visibility there? William Koefoed: Yes. No, great question. I'm going to answer your second one first. Look, this Q3 was a challenge, obviously, as all software companies were kind of coming up to the end of the government's fiscal year-end. And again, I think we executed -- we were really happy to have SaaS conversions because obviously, that's the genesis of our business. And so that was something that we were certainly hoping for, and it's nice to have that behind us for sure. As we look forward, as you mentioned, we're the only kind of cloud CPM vendor that is FedRAMP High, and that gives us the opportunity to serve agencies within the government that require that level of security, and we feel exceptionally well positioned to be able to take advantage of that opportunity. And so we're definitely taking advantage of that as well as we're working to get AI FedRAMP High certified as well because the government has actually asked us and has strong demand for AI capabilities that, again, no one else has similar capabilities that we do in that arena. Look, as it relates to the government shutdown, I think we all hope the government shutdown ends quickly. We're obviously working with our customers to kind of navigate through it. And I think all of us on this call probably have our fingers crossed that it ends quickly. Operator: Next question comes from the line of Andrew DeGasperi with BNP Paribas. Andrew DeGasperi: I just wanted to ask without getting a guide for next year, like in terms of the balance of license and services and subscription, would you say that the license revenue sort of decline, is it going to be reflective of what happened this year? Or are you expecting a more muted kind of deceleration there? And I have a follow-up. William Koefoed: Yes. Well, you're our last call -- so we'll let you do the follow-up. Although I think the operator might have cut you off. But anyway, look, this was a big year, particularly this last Q3 for a transformation from license to SaaS, arguably our biggest year. You should expect to see overall SaaS migration over the next couple of years, and at which point we likely won't have very much license revenue remaining. And as I said before, on the PS&O side, I think you'll see that be some slight growth, but we certainly -- it was a big growth quarter this year. But if you recall from last year, we had a tough Q3 last year. So -- but I think on a run rate basis, our PS&O business is probably in pretty good shape where it's at. Operator: And our last question comes from the line of Mark Schappel with Loop Capital Markets. Mark Schappel: I have a question around the sales team. Just a question around the sales team, which has been obviously executing very well here. Could you just comment on any changes or fine tuning to the sales and marketing strategy that maybe we could expect in the coming quarter or 2? And also where maybe you plan to just prioritize additional sales investments? Thomas Shea: Sure. So as we've talked about, selling the -- I'll kind of go back to my overview of the opportunity that we have in front of us, right? We're selling the -- we have the legacy market that our sales team is geared towards, understands and knows and we've been selling for years and years. We also are introducing the steady pipeline of products. So what you can expect to see from us is a more concentrated effort on scaling across those different product lines, while we maintain a strong focus on our core business that we've been talking about. So the way that I view the investments in the sales and marketing team is in that scale-based approach to make sure that we're properly positioning all the AI innovation, the CPM Express. The good news is it's that straightforward to sell a more productized solution is contained, and we're excited because you get to really scope in and meet the customer in a use case-oriented fashion. Operator: That concludes the question-and-answer session. I would like to turn the call back over to the management team for closing remarks. William Koefoed: Yes. I'd just like to say thanks, everybody, for joining us. We look forward to seeing you at upcoming events, and hope you have a great rest of your day. Thomas Shea: Thank you. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining in. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the PAR Technology 2025 Third Quarter Financial Results 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, Chris Byrnes, Senior Vice President of IR and Business Development. Please go ahead. Chris Byrnes: Thank you, Elliot, and good afternoon, everyone. I'd like to thank you for joining us today for PAR Technologies 2025 Third Quarter Financial Results Call. Earlier today, we released our financial results. The earnings release is available on the Investor Relations page of our website at partech.com, where you can also find the Q3 financial presentation as well as in our related Form 8-K furnished to the SEC. During our call today, we will reference non-GAAP financial measures, which we believe to be useful to investors and exclude the impact of certain items. A description and timing of these items, along with a reconciliation of non-GAAP measures to the most comparable GAAP measures, can be found in our earnings release. I'd also like to remind participants that this conference call may include forward-looking statements that reflect management's expectations based on currently available data. However, actual results are subject to future events and uncertainties. The information on this conference call related to projections or other forward-looking statements may be relied upon and subject to the safe harbor statement included in our earnings release this afternoon and in our annual and quarterly filings with the SEC. Finally, I'd like to remind everyone that this call is being recorded, and it will be made available for replay via a link available on the Investor Relations section of our website. Joining me on the call today are PAR's CEO and President, Savneet Singh; and Brian Benard, PAR's Chief Financial Officer. I'd now like to turn the call over to Savneet for the formal remarks portion of the call, which will be followed by general Q&A. Savneet? Savneet Singh: Good afternoon, everyone, and thanks for joining us. Q3 was another strong quarter for PAR, one that shows the progress we're making on all fronts: growth, profitability, and cash generation. We delivered $119 million in revenue, up 23% year-over-year, driven by software subscription and hardware revenue growth. Our adjusted EBITDA came in at $5.8 million. This number includes $800,000 of accounting adjustments for non-period costs, which, when further backed out, brings our adjusted EBITDA to $6.6 million, continuing a nice march upward in EBITDA and cash flow. Our commitment to a flat cost base also played out. Non-GAAP OpEx was 44% of revenue, down from 60% just 18 months ago. This result was driven by our commitment to improving our operating leverage and our ability to begin to realize the operational savings being driven by AI utilization internally. Our ARR hit $298.4 million at the end of Q3, up 15% organically, reflecting steady execution across both sides of our platform. All told, ARR grew $12 million sequentially in Q3, and we expect that number to increase in Q4 to take us to our goals for the year. Now, to dig into our business performance in the third quarter. Q3 was another quarter of solid execution for Operator Cloud. ARR increased 31% year-over-year, including 14% organic growth. In Q3, we proved we can scale large enterprise deployments, innovate with AI, and keep customer satisfaction high, all while maintaining a disciplined focus on expense management and pursuing additional multiple large Tier 1 opportunities. Our POS business continues to perform exceptionally well. Our Burger King implementation cadence during the quarter accelerated dramatically with high efficiency, and we're pacing to meet Burger King's target for 2025, which then creates great visibility for 2026. Our OPS platform had a steady quarter as we ramped into Burger King and another large Tier 1 enterprise. The real story, though, in PAR OPS is the momentum in new launches and innovation. We brought Coach AI to market, an AI-driven assistant that allows operators to prompt operational questions in natural language and get immediate answers from their data. This innovation comes from combining delegate and data center product suites, and we see cross-sell and upsell possibilities across our wider base. We also launched AI chatbot support, helping users self-service faster and reduce support ticket volume, a meaningful productivity win. We expanded our international functionality and onboarded a Burger King franchisee in Canada across all sites, including French language functionality in Quebec, showcasing our ability to deliver for global customers. The PAR OPS operational groundwork and product expansion we put in place will pay off nicely in 2026 as we enter the year with a record backlog and customer commitments. Turning to TASK. As we mentioned last quarter, we pushed that rollout to next year in preparation for large RFP work. As we now move from RFP to actual development, our goal will be to maintain our launch schedule for next year with new customers while we begin our aggressive build schedule for this Tier 1 opportunity. That's a major validation of both product and team capability, and hopefully, we will have more to share publicly in time. What is crucial is that 2025 is proving to be the strongest bookings year in the history of the Operator Cloud segment, paving the way for years of sustained growth. On last quarter's call, I mentioned that we had $20 million in POS contract value that has not yet been rolled out. Our late-stage and weighted pipeline on PAR POS more than doubles this number again, ensuring a robust growth foundation for years to come. Now turning to the Engagement Cloud, which also had a strong Q3. Engagement Cloud ARR grew 16% from Q3 last year, including 15% organic growth. We continue to see real momentum and investment in digital engagement in the markets we serve, as brands look to connect more deeply with their guests. What's exciting is that, similar to last quarter, 70-plus percent of new deals signed in the quarter were multiproduct, including loyalty ordering intake, showing that customers increasingly see the value in the full engagement ecosystem, not just one solution, but the whole connected platform, a single cockpit to manage your entire digital business. We also saw renewals and upsells for Punchh with 3 major Tier 1 brands, proving that our long-term partnerships continue to grow stronger over time. On the innovation front, we launched new capabilities for the Engage for engagement in catering and games, both of which enhance the competitiveness of our solution and add real differentiation to our overall engagement platform. Moving to PAR Ordering. I'm encouraged to report that this is our biggest win quarter for PAR Ordering to date, highlighted by 6 new customer wins, all upsells and multiproduct deals, including a 400-plus location enterprise chain, a clear signal that our products are winning at scale. In the quarter, we were also able to sign 2 new customers that were previously using the largest online ordering provider in our space. We hope this creates a template to accelerate our growth in 2026, as PAR Ordering is not only a best-in-class platform now, but also an incredibly easy proof point of our Better Together thesis. Customers of Par ordering and Punchh, and POS can now update menus in one place, push changes to third-party delivery channels, and manage every aspect of their digital business from just one system. It's one of those few times in the enterprise software world where the demo just speaks for itself. Our solution for fuel and convenience stores, PAR retail, had a standout quarter, demonstrating what execution and innovation look like working together. In Q3, we hit key integration milestones and launched new features that are driving record engagement and customer success. We also added 4 new enterprise wins, including a successful Punchh to AT Retail migration in the quarter. It's important to note that, as we finalize the transitions from Punchh to PAR Retail, there's an opportunity for us to expand gross margins by taking out Punchh convenience store costs and taking up the price for moving customers to the more robust PAR retail platform. From a product perspective, we made Command Center smarter and more dynamic and introduced the messaging center and audience experts, making it easier for retailers to launch campaigns and analyze audience data in real time. And all of this hard work and achievement is working. Nearly every customer hit an all-time high in active program membership this quarter. So a great overall quarter for PAR Retail in which continues to lead in digital trade and engagement with strong customer results and clear momentum heading into 2026. A few summary thoughts here before turning it over to Brian for a deep dive on our numbers. I briefly mentioned this earlier, but this quarter marks a major milestone in PAR's journey to redefine restaurant technology with the launch of PAR AI, our new intelligence layer built natively across the PAR platform. The first product in the suite, Coach AI, is now live and already transforming how operators manage their business. PAR AI is different. It's built in, not bolted on. We've embedded AI intelligence directly into the operational workflow across POS, back office, loyalty, drive-through, and payments. This approach turns every PAR product into an active decision engine, creating a connected intelligent restaurant ecosystem, all pulling data from a clean pane of glass. Coach AI is our first step. It's an operational intelligence assistant that enables restaurant leaders to ask natural language questions and instantly surface live insights from POS, labor, and inventory data. No spreadsheets, no extra apps, no manual reporting. Importantly, it dramatically lowers the know-how required to be an operational expert, allowing more employees to engage with the product and, most importantly, saving brands hours of time. Early customers like Charter Foods have already eliminated the need for traditional BI tools and are realizing meaningful time savings and better decision-making. What's next? Later this year, we'll introduce a marketing intelligence assistant with the PAR engagement platform, enabling marketers to instantly analyze campaign performance, loyalty data, and customer engagement metrics in real time. Imagine being able to build, segment, launch, and execute a promotional campaign all within a prompt-like interface. This is more than a product launch. It's a strategic shift to an AI-native future. As I've said before, it's not about building tools. It's about owning the workflows so that AI is in the places where we as users are actually living. This new foundation will fuel capabilities like ROI ranked operational recommendations, voice-enabled ordering, and real-time audience targeting, all designed to make restaurant operations faster, smarter, and more adaptive. As Gen AI becomes embedded in the fabric of enterprise software, we believe the platform strategy is quickly emerging as the key to long-term value. It's not just about building tools anymore. It's about building AI native workflows. Companies that act as platforms, not point solutions, are in the best position to win. Why? Because they're integrated where work actually happens. That means deeper engagement, better data, and a natural fit for generative AI features that drive real, measurable impact. Moreover, by leveraging tooling and a tool set that you already understand, you lower the bar for training and adoption, a massive issue in today's early AI products. This is exactly where PAR shines. We don't just automate tasks. We connect entire workflows across departments. While point solutions to stuck in silos, PAR brings teams together, streamlining operations, and enabling collaboration at scale. For restaurants, this isn't a nice-to-have. It's the foundation for running a smarter, faster, and more agile business. We feel deeply passionate that AI makes PAR stronger because it brings the value of better together to life faster and improves the ROI of doing more with PAR. We believe it helps take a deeper moat and also pulls more of the ecosystem our way. Bryan will now walk through our numbers. Bryan? Bryan Menar: Thank you, Savneet, and good afternoon, everyone. In Q3, we continue to execute our plan of driving organic growth across our products and the verticals we serve while also driving profit and cash flow improvement, all while ensuring the company has the right resources to execute with excellence on our large Tier 1 opportunities. Subscription services continued to fuel organic growth and represented 63% of total Q3 revenue. The growth from higher-margin revenue streams resulted in a consolidated non-GAAP gross margin of $57.5 million, an increase of $7.4 million or 15% compared to Q3 prior year. We managed the growth while continuing to drive efficient leverage of our operating expenses. Now to the financial details. Total revenues were $119 million for Q3 2025, an increase of 23% compared to the same period in 2024. Driven by subscription service revenue growth of 25% and inclusive of 16% organic growth. Net loss from continuing operations for the third quarter of 2025 was $18 million, or $0.45 loss per share, compared to a net loss from continuing operations of $21 million, or $0.58 loss per share, reported for the same period in 2024. Non-GAAP net income for the third quarter of 2025 was $2.5 million or $0.06 earnings per share, an improvement of $5.6 million compared to a non-GAAP net loss of $3.1 million or $0.09 loss per share for the prior year. Adjusted EBITDA for the third quarter of 2025 was $5.8 million, an improvement of $3.4 million compared to the same period in 2024. Q3 adjusted EBITDA of $5.8 million included $0.8 million of accounting charges for non-period costs. Removing these non-period charges, adjusted EBITDA would have been $6.6 million and more indicative of our current normalized operating profit. Now for more details on revenue. Subscription service revenue was reported at $75 million, an increase of $15 million or 25% from the $60 million reported in the prior year, and represents 63% of total PAR Revenue. Organic subscription service revenue grew 16% compared to the prior year, when excluding revenue from our trailing 12-month acquisitions. ARR exiting the quarter was $298.4 million, an increase of 22% from last year's Q3, with Engagement Cloud up 16% and Operator Cloud up 31%. Total organic ARR was up 15% year-over-year. As stated in our Q2 earnings call, we expected incremental ARR growth to accelerate in the first half of the year to the second half. During Q3, incremental ARR increased $12 million versus $5 million in Q2 when excluding the GhostSkip asset acquisition, signaling the return to stronger growth momentum, which we expect to continue in Q4. Our growth is being driven by both site growth and increased ARPU, reflecting the successful execution of our Better Together thesis, which is driving both multiproduct deals and cross-selling into our existing customer base. Hardware revenue for the quarter was $30 million, an increase of $7 million or 32% from the $23 million reported in the prior year. The increase was driven by continued penetration of hardware attachment into our expanding software customer base and increased sales volume from customer demand that was pulled forward in advance of anticipated tariff impacts. Professional service revenue was reported at $14.5 million, relatively unchanged from the $14.2 million reported in the prior year. Now turning to margins. Gross margin was $49 million, an increase of $6 million or 14% from the $43 million reported in the prior year. The increase was driven by subscription services with gross margin dollars of $41 million, an increase of $8 million or 25% from the $33 million reported in the prior year. GAAP subscription service margin for the quarter was 55.3% and in line with the 55.3% reported in Q3 of the prior year. Excluding the amortization of intangible assets, stock-based compensation, and severance, the non-GAAP subscription service margin for Q3 2025 was 66.2% compared to 66.8% in Q3 2024. The modest year-over-year decline was driven by the impact of a fixed profit contract that we acquired from one of our 2024 acquisitions. Excluding this contract, which is not reflective of core operational performance, non-GAAP subscription service margin was over 70% for the quarter, an improvement of 150 basis points versus the prior year. This contract is up for renegotiation in 2027, and we expect that the renewal process will provide an opportunity to improve the underlying economics. Hardware margin for the quarter was 17.8% versus 25.5% in the prior year. The decrease in margin year-over-year was substantially driven by increased supply chain costs resulting from recently implemented U.S. tariff policies. The company began implementing pricing adjustments during the quarter to mitigate the impact of tariffs in future periods. We expect hardware margins to return to the mid-20% range moving forward. Professional service margin for the quarter was 17.6% compared to 29.2% reported in the prior year. The decrease in margin year-over-year was primarily driven by a reclass of non-period costs from R&D and incentives offered on SaaS implementations to facilitate adoption of the recurring subscription revenue streams. We expect professional service margins to return to the mid-20% range going forward. In regard to operating expenses, GAAP sales and marketing were $12.5 million, an increase of $2 million from the $10.5 million reported for the prior year. The increase was primarily driven by inorganic increases related to our acquisitions, while organic sales and marketing expenses increased by a modest $0.7 million year-over-year. GAAP G&A was $31.7 million, an increase of $4 million from the $27.4 million reported in the prior year. The increase was substantially driven by certain noncash or nonrecurring expenses, of which $3.5 million are non-GAAP adjustments, while organic G&A, excluding non-GAAP adjustments, remained flat year-over-year. GAAP R&D was $19 million, an increase of $1 million from the $18 million recorded in the prior year. The increase was entirely driven by inorganic expenses, while organic R&D expenses actually decreased $0.2 million year-over-year. Operating expenses, excluding non-GAAP adjustments, were $52 million, an increase of $4 million or 8% versus Q3 2024. But when excluding inorganic growth, operating expenses were flat year-over-year. Exiting Q3, non-GAAP OpEx as a percent of total revenue was 43.4%, a 590 basis point improvement from the 49.3% in Q3 of the prior year, demonstrating our ability to scale efficiently and drive operating leverage. Now, to provide information on the company's cash flow and balance sheet position. As of September 30, 2025, we had cash and cash equivalents of $92 million and short-term investments of $0.5 million. For the 9 months ended September 30, cash used in operating activities from continuing operations was $15 million versus $24 million for the prior year. Operating cash flow has steadily improved throughout the year as we continue to drive incremental profitability and reduce our net working capital needs. Q3 operating cash flow was positive, with the cash provided by operating activities of $8 million for the quarter. Cash used in investing activities was $11 million for the 9 months ended September 30, versus $178 million for the prior year. Investing activities included $4 million of net cash consideration in connection with the tuck-in asset acquisition of Go Skip, capital expenditures of $3 million for fixed assets, and capital expenditures of $4 million for developed technologies associated with our software platforms. Cash provided by financing activities was $12 million for the 9 months ended September 30, versus $279 million for the prior year. Financing activities primarily consisted of the net proceeds from the 2030 notes of $111 million, of which $94 million was utilized to repay the credit facility in full. To recap, following a slower first half, Q3 marked a pivot to meaningful growth and continued incremental profitability for the second half of 2025. This momentum is evident across key financial metrics, $12 million or 17% annualized sequential ARR growth. Non-GAAP subscription service gross margin percent improved 150 basis points from Q3 2024 when excluding the nonoperational impact of the aforementioned acquired fixed profit contract. Non-GAAP OpEx as a percent of total revenue improved 590 basis points from Q3 2024. Adjusted EBITDA improved $3.4 million from Q3 2024, and operating cash flows were a positive $8 million for the quarter. I will now turn the call back over to Savneet for closing remarks prior to moving to Q&A. Savneet Singh: Thanks, Bryan. In short, Q3 was a strong execution quarter, and we possess the scale, product, subscriber base, and financial strength to lead the enterprise foodservice technology category. What's in front of us is significant business opportunities with major Tier 1 deals, an aggressive acquisition strategy to deliver sustained additional inorganic growth, and a pointed AI product approach. Moreover, our growth into new large TAM industries continues to validate our PAR Advantage, and the investments we're making should bear fruit in years to come. In 2025, we're on track to deliver nearly $450 million in revenue, approximately 2/3 of which is recurring SaaS. We're also driving gross margin expansion, building a solid cross-sell and upsell motion, and seeing results across our global installed base of over 100,000 restaurants and retail stores. The long-term plan is for PAR to be the clear enterprise winner. First in restaurants, later with C-stores, and over time in the next vertical. Being the anned winner in this niche market creates a unique market dynamic that will warrant evaluation commensurate with others who've done similar work in different verticals. We are convinced that this foundation we have built has set PAR OPS to compete for and win the largest of Tier 1 restaurant technology deals in history. In the short run, our priorities remain clear. First, continue to grow ARR in the mid-teens organically or higher; second, execute on a unified better together product road map while building and commercializing new AI-driven functionality. Third, drive operating leverage and expand EBITDA. And fourth, close and announce large strategic Tier 1 deals to provide further visibility for long-term revenue growth. A critical aspect of our story now is revenue growth visibility. While especially operator cloud products rollouts can take time, given the in-store nature of the deployments, PAR has accrued a very sizable backlog, coupled with a late-stage Tier 1 pipeline. We have a very strong foundation to build off of. In other words, the short-run priorities I just mentioned are just our baseline. This is the minimum expectation I have of our team. Our mandate continues to be to leverage our existing business to pursue more aggressive, accretive, and creative M&A opportunities. This is a buyer's market, and PAR is a proven value creator. Multiples across our sectors have compressed dramatically, allowing for the potential for creative asset acquisitions. More importantly, though, we have the expertise and grid to actually pull it off. Our current flywheel of multiproduct deals expansion is great proof of this. During our time here, we have evolved from an unfocused, hardware-driven, and money-losing business with a singular software product to a profitable platform SaaS company bidding for and executing the biggest deals in the industry. This will absolutely happen again and again. We intend to further consolidate our existing markets while building out the PAR flywheel in new verticals. Our ambition is to be larger and faster, predicated on an ever-expanding better together platform. And this ambition is deeply rooted in every single member of our team. Thanks again for your time and your continued confidence in PAR. We're happy to take your questions. Operator? Operator: [Operator Instructions] Our first question comes from the line of Samad Samana of Jefferies. Samad Samana: It's good to see the progress both on the top line and on the expense side. So congrats on that. Maybe first, Savneet, just in thinking about the word record in terms of like the pipeline, I think it was described as a tipping point in some ways by Bryan for the business. So the tone is very, very positive. Can you maybe help me understand with a little bit more precision in terms of what changed between 2Q to 3Q that's giving you, I think, what seems like incremental confidence, particularly as you ended the call with that at least mid-teens growth outlook? And then I have a couple of follow-ups. Savneet Singh: I think we had similar confidence in Q2. It's just further visibility as we signed more deals that have given us a lot more visibility for Q4 and the rest of next year, and then further progress these larger Tier 1 deals, where now we see real visibility and hopefully a couple of them, it just gives us more confidence. I think we had similar confidence, but it's rising as we get more and more deals signed. I think the other part is that we rolled out a record amount of revenue this quarter, and our backlog filled back up. And so our backlog didn't come down, which means that we're signing at a faster rate than we're actually rolling out, which I think gives us more confidence again on the visibility in the out years. Samad Samana: And then you mentioned valuations coming down in the space. You mentioned M&A. And I know the company has made a lot of progress in digesting some of the M&A from years past. So just should we take that as a signal that now that you're far enough along in the digestion of TASK and Stuzo Holdings and some of the other assets that you would maybe think about firing that M&A muscle back up again? Or is that more of an opportunistic view? Just help us think through that last comment. Savneet Singh: It's opportunistic. What I meant by that is we're seeing -- obviously, our multiples compress, but what we're noticing is a lot of the assets we wanted to buy have compressed far more. And there are also unique opportunities to carve out assets and businesses that we like as well. And so we're going to be opportunistic. We're going to be super careful about using our shares. But we're seeing enough accretive deals where I wouldn't be surprised that we found something. There's nothing imminent or anything like that, but we feel pretty good about where we stand relative to the multiples we're seeing, some of the assets we've been tracking for many years. Samad Samana: Last question for me, and I'll turn it over. But just there's been, I'd say, some mixed performances out of certain pockets of maybe groups that aren't necessarily PAR customers, but that are representative of what's going on more broadly with consumers. And so I'm just curious if you have seen that it has any impact on customer decision-making, whether that makes it more imperative than ever to have the right technology in place, and/or if it's slowing down deal cycles, or if you're seeing both of it's netting out? Just how is some of the recent news or headlines on what's happening in restaurants translating into deal closures for you guys? Savneet Singh: Yes. Great question, Samad. So the first half of the year was painful for, I think, our category across the board. We saw a meaningful slowdown in traffic and sales for many of them. We saw it pick back up towards the second half of this quarter. But I'd say categorically, we haven't seen a slowdown in RFP activity. In fact, we have more RFP activity at scale than we had before. Where it impacted us in Q2 was that at the franchisee level, rollouts were slower because franchisees were waiting for business to stabilize. I think that's now reversing, and we're seeing really good momentum. But the macro question is a good one because I think what we continue to see is that as sales volatility exists in our category, the investments in technology seem to be increasing, not decreasing. So we're seeing more excitement around a lot of the AI tooling we have. And I think maybe most exciting for PAR, we absolutely see more interest in consolidating vendors. And we are one of the few players that have I'd argue, close to a full suite of products. And so I think that's giving us a little wind in our sales. Operator: Our next question comes from George Sutton of Craig-Hallum. George Sutton: Nice message, guys. So, specifically to TASK, you had mentioned that last quarter, you had put off some implementations because you were focused on the RFPs. I just want to make sure I understand what the updated message is relative to that. Savneet Singh: Yes. I think we continue with to same plan. We've got a lot of test business needs to get rolled out get rolled out in '26. And we're moving from RFP to actual development on a larger opportunity. And so it's critical for us to hold our commitments to our customers to get those deals out in '26 while also building for this large opportunity. George Sutton: Now, with respect to 2026, you made multiple points through your prepared comments that there were different things setting you up very well for 2026, AI, the BK rollout, the template for products, et cetera. Can you just give us a broader sense of what this ultimately means for '26? Savneet Singh: Not yet. We're going to give guidance on the next call. But I think maybe the biggest takeaway is we have a lot more visibility now than we've had in the past because of the backlog that we've signed. And as a result, I think we can get more precision as we get to the end of the year. And then I think the other part about it is the market, to the last question, part of what we're also learning is that the market likes our strategy. Every single car ordering deal was a multiproduct deal, including payments and loyalty. We're starting to see that the thesis that we put out there and now the product execution is caught up. And so that should give us the opportunity to take a lot more share next year. And that's kind of my wish is I hope it s up for success because we've been really impressed with what's happened in Q3 and what's happening in Q4. Operator: Our next question comes from Mayank Tandon of Needham. Mayank Tandon: Savneet, I'll just nitpick a little bit. You've been saying that you could grow ARR 20% organically for quite some time. I think you said that your target is mid-teens plus. Is there a change in the market? Or do you think this is just a function of the type of deals you're pursuing, which may take longer to land? Maybe that's a good thing long term, but maybe it slows down the revenue ramp. I'm just curious as to why the shift from 20% organic to mid-teens organic, if I heard your comments correctly. Savneet Singh: Yes. So last quarter, we said we're going to target mid-teens. And so I'm continuing that message here. When I was running through the priorities, it was our short-term priorities, which is continuing to hit at least that and hopefully more going forward. The major delta we're talking about is 2025, where our first half was slower than we wanted. And so I think it will be hard for us to get to that 20% for this year. And so I think there's an opportunity for us to do that to accelerate in '26 and '27 as the last caller I was talking about. But right now, I think we feel really comfortable with mid-teens opportunities to go higher. And given the whole momentum we have in AI and some of these larger deals, we'll see where that shakes out on our next call. But I guess, I think we feel really good where we are. And more than anything else, I think there's more opportunity for us to get back to where we were on this call than there was last call. Mayank Tandon: And then, if I could just ask more about the competition. Just listening to Toast and other players in the market, it seems like there's obviously a share shift going on from legacy to the more modern solutions like yours and Toast and other players in the market. I'm just curious, are you starting to see each other now because they're moving upmarket? I know not in the QSR space necessarily, but making some progress in your core enterprise space. I think you've had some opportunities down market. So I'm just wondering if you're starting to maybe see each other more often and what that means for the market overall? Savneet Singh: Not as much as you think. I mean, I think we have incredible respect for the team, the business, what they've built. And we've been competing in enterprise deals for years and years. I think at the large QSRs where we make our bread and butter, traditionally, it's still the same few folks as the incumbency, ourselves, and usually one of the other legacy providers. I think, and so today, I think if we surveyed our sales team, it would say the same all. We definitely see each other more in the smaller mid-market part of the world, where they are pushing aggressively. And so we do see each other there. But the large Tier 1s have unique dynamics when we see them. And obviously, I think we think, again, very highly of them, but we feel like we continue to expand our moat, and particularly this multiproduct dynamic, I think, is really going to help us going forward. Operator: [Operator Instructions] Our next question comes from the line of Charles Nabhan of Stephens. Charles Nabhan: I wanted to clarify your comments around moving from RFP to development. Specifically, I haven't seen any big announcements, but are you alluding to one of the super Tier 1s that you had been targeting and talking about over the past couple of quarters? Savneet Singh: We're generally in a market where the press release comes out quite a bit after we've won a deal, unless it's a renewal of an incumbent. So you generally won't see the press release, honestly, until well later if we won something. In regard to what I was talking about, all I'm suggesting is that we were in an RFP process and in the deal, and now we're starting to build. And then as we get details, we'll share them as we're allowed. Charles Nabhan: And as a follow-up, I feel like I have to ask the obligatory Fiserv question here. I know Clover is downmarket from you, and it's still early days. But there's obviously quite a bit of disruption going on in the payment space and negative sentiment around some of the fees that they've been charging. So with that said, do you see an opportunity to attach payments coming out of some of the disruption, the potential disruption in the payment market? Savneet Singh: Not really. In our market, payments are a much more transparent business than it is in the SMB side of the world. And so generally, when we win payment deals, it's in 1 of 2 ways. It's a hypertransparent package with the point of sale, where we can help bring down costs, hardware funding traditional ways that point-of-sale companies win deals, or it's through our online ordering business, which is starting to grow, where our Order and Pay module is really valuable to bundle in as a package deal. So that's when we see it. As far as the disruption that's happening down there, we just don't participate in that SMB space. So it hasn't really changed anything in our area. Operator: Our next call comes from Stephen Sheldon of William Blair. Stephen Sheldon: First one here, I just wanted to see if you could help us unpack sequential trends in Operator Cloud ARR. Great to hear that the BK rollout accelerated. But just given that, I'm also a little surprised that ARR there was up less than $3 million sequentially. So, any rough sense of how much of the Burger King contract ARR, when you think about the full deployment, would be included in the 3Q ending ARR number? And are there any offsets that you saw this quarter, such as churn in the broader operator base that weighed against sequential trends? Just anything to unpack the sequential ARR growth in the operator. Savneet Singh: No meaningful churn. I think the way to think about it is back-end weighted. The last month of the quarter was an excellent acceleration for us, and that continued into October. October was our best month. So it's more just the back-end weighted. And so that's why I think you hear Bryan's comments in mind, we feel like Q4 will potentially be a nice uptick. So it's just the back-end nature of the rollouts within the quarter. And no significant churn. Stephen Sheldon: And then on loyalty, I guess, can you just talk some more about the growth you're seeing there? It seems like loyalty is becoming a much bigger focal point with brands becoming a bigger factor in consumer decision. So, how much runway is there left for part to grow in loyalty as you think about location penetration, pricing increases, et cetera? And how different does that opportunity look now between restaurants and convenience stores, broader retail? Savneet Singh: Loyalty is a mandate. It was nice to have, and now I think we're witnessing that in times of sales slowdowns, traffic slowdowns, you really need a robust loyalty program to not just grow traffic and revenues, but also keep your margins high. And so it continues to impress us how much demand there is for that. We're earlier in that cycle for convenience than we are in restaurants. But even in restaurants, I think what it's leading to is that it's not just the loyalty that you had a few years ago. It's more upsell for a new product. It's a lot more opportunities to sell the AI initiatives I talked about. And so while our loyalty product probably won't double sites in the next year or 2, I think you'll see us continue to push up ARPU with the addition of new products, because I think early on, you had an all-encompassing loyalty product. I think in the future, it's going to be a bunch of modules that are built into that, that we can upsell and create a lot of value for the customers. Operator: Our next question comes from the line of Adam Wyden of ADW Capital. Adam Wyden: The first question is around M&A. I know you spoke about it, but obviously, your shares are down almost, I guess, 2/3 from where we were in November. I guess my question to you is, would this prospective M&A be accretive to your growth rate? And I mean, how do you think about doing M&A with your stock down 2/3? I mean, if I look at it on '27 or even '26, you're trading in the teens or whatever, it's 15, 16, 18, 20x EBITDA. I mean, how do you think about buying businesses while your profitability is inflecting because the '27 is on a revenue multiple basis, you're the cheapest you've ever been, and your profitability is inflecting. So I'm just curious how you think about doing M&A within that paradigm. Savneet Singh: Yes. On the call, I think it's twofold. So one, we won't do something that's not accretive. I think we've been very strict about that in everything we've done. And so what we're observing is that while our multiples compressed, we're seeing far more compression in some of the assets that we've been tracking for a very long time. And part of that is that we think there are some carve-out opportunities that we could leverage. And so I don't think you'll see us do anything close to a big deal. I don't think you'll see us dilute you and ourselves in any way; that's irresponsible. I think you'll see us find niche assets that we can use cash on the balance sheet, or if we use our shares, there's a large margin of safety for us to make it accretive. So I think it's just relative to what we're seeing in the market; we think we can create value. It's not going to be anything crazy, but it's enough where we think we can take up the growth rate of the collective PAR by taking a product and pushing it through our distribution system now. Adam Wyden: So anything that you buy would be accretive to your existing growth rate? Meaning, you think that will day 1 be a higher growth rate than PAR? Or you're saying, like, how do you think about the growth rate? I know that's been a challenge over the years, the last couple of deals, because it slowed down TASK for the big Tier 1. So I'm just curious how you think about adding things day 1 accretive versus. Savneet Singh: Yes. So historically, that's always been the goal. Day 1 is accretive, and then the opportunity to accelerate beyond that. So that's definitely what we want to try to accomplish. Adam Wyden: And then my second question is, you made a comment about something that was in development, I guess, RFP. Now, does that mean that you're -- because I know like you've been dancing around this whole Tier 1 thing. And clearly, you lost one today. And obviously, that restaurant chain is doing very poorly, and it's not crazy for them to renew something when their hair is on fire. So it doesn't particularly bother me. But when I think about the other Tier 1s, I think you mentioned 3, and it sounds like, at least based on our channel checks, there may be 4 I mean, how do you think about where you are -- I mean, are you basically saying you won one of the super Tier 1s basically because you're saying, well, we went from RFP to development. I mean, is that what you're saying? I mean, obviously, there's no press release because there's all the stuff about compliance, and everyone doesn't want to get hacked while they're doing it. But I mean, is it fair to assume that one of the super Tier 1s is basically signed and you're now in the process of rolling out? And can you comment about the other -- I guess, the other 2, and where you think you could be in that process? Savneet Singh: Unfortunately, I can't comment on any of that from my perspective. I think where we sit today, we've never felt more excited about the pipeline that's right in front of us, right here. And I think my comments touch on where we are in some of it. So, as we get information we can share publicly, I promise we will. We're not trying to be cagey, is a limited way to say. But today, we feel really good about the pipeline that's in front of us right now. Adam Wyden: So what does it mean to go from RFP to development? I mean, what does that mean exactly? Savneet Singh: Generally, the way our business works and it's not the same for everybody. After we win an RFP, we get to some form of development. Now it's not a guarantee by any means. You still have to do a lot of work from there, but it's generally a very good sign. Operator: Our next question comes from the line of Maxwell Michaelis of Lake Street Capital Markets. Unknown Analyst: I want to go back to your comments in the prepared remarks around PAR Ordering. It sounds like a pretty good quarter. Wondering if you could give some more information around that segment as well as it sounded like you won a customer with 400 locations. Savneet Singh: Yes. Listen, it's a tiny product for us today, but it's starting to really move for us. What I think is going to be interesting about it is we feel pretty good that not only can we start to continue to attach it to our loyalty wins, but we can also upsell it to our existing customers and hopefully pull in payments alongside it. So it's a really nice opportunity for us. As I mentioned, and you just suggested, we did win a 400-plus store chain. It was a takeaway from a market leader, so we felt great about that. And I think we're hopeful more of that comes. And more than anything else, I think it's just validation that the product is now at a point where we can argue it's best-in-class, and we can absolutely argue that if you have additional PAR products, you're going to get an experience and outcomes you could not get elsewhere. And that's what I meant by some of my comments, and if you see a demo of it and you work in our category, it is one of those things that it's, oh my gosh, I can't place somebody filing it that. Operator: [Operator Instructions] Our next question comes from the line of Anja Soderstrom of Sidoti. Anja Soderstrom: Just curious, and sorry if you covered this already, but in the hardware, what happened there? It seems like there was a nice upside surprise in the quarter. Savneet Singh: Are you referring to on the revenue and the margin? Anja Soderstrom: On the revenue. Savneet Singh: Sure. Sure, and thanks for the question. What happened was we had a pull-in. We were referring to this back in Q2. We started seeing orders come in in Q2, for hardware pulled in before the kind of tariffs were getting impacted by the pricing. And so that was the execution, a lot of those actual sales and orders that got in Q2 executed and revenue in Q3. Anja Soderstrom: And then you mentioned the margin was affected by the tariffs, but you're mitigating those, and do you expect them to normalize again in the fourth quarter or? Savneet Singh: Correct. So right, those orders came in in Q2, before we actually implemented the tariff price increase. And so then we've actually implemented that during Q3. So as sales orders kind of burn off into Q4, that will be offset. Anja Soderstrom: And also, you are marketing your offering better together. But how important is the data that you are generating for your customers in your value proposition? Savneet Singh: It's hugely valuable. I mean, I think that's why Better Together is working. As I mentioned, 70-plus percent of our engagement deals for the last couple of quarters are multiproduct. And I think a huge part of it is because if you pick our loyalty and online ordering, you've got one cockpit to manage your digital experience. So you can update menus in real time. You can import the POS menu and online ordering. You can push it to third-party delivery channels. You can have distinct availability, pricing, and menu on those channels. And so that's all data that we organize in a way that I think gives us a really unique competitive advantage. And that's why we've leaned so heavily into the AI side because I think the provider that has the platform, as I talked a lot about, also has the data, and I think we can make that data actionable. Anja Soderstrom: So your customers have real-time access to the data. Savneet Singh: Through Coach AI, they have access in real time to run reports so on and so forth. And again, I think a lot of what I'm observing is that you're lowering the bar to do work. Historically, think of your traditional BI tools, you're downloading reports, trying to figure out what the margin of this campaign we did, or when we should order this product. Today, you can prompt and say, "Hey, which store should I focus my time on today? Hey, what store creates a great template for me to fix this, or what labor schedule is working, or what labor module is working? You can now really, really engage. And so in the past, I think having a lot of data was almost wasteful because it just gave you too much information. Now we can help you be decision-oriented as opposed to just flooded with a lot of reports that confuse you. Operator: This concludes the question-and-answer session. I would now like to turn it back to Chris Byrnes for closing remarks. Chris Byrnes: Thank you, Elliot, and thank you to everyone for joining us today. We appreciate your time. We look forward to updating you in the further coming weeks. Have a nice evening. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Good morning, and welcome to the Heritage Insurance Holdings Third Quarter 2025 Earnings Conference Call. Please note, today's event is being recorded. I would now like to turn the conference over to Kirk Lusk, Chief Financial Officer for the company. Please go ahead. Kirk Lusk: Good morning, and thank you for joining us today. We invite you to visit the Investors section of our website, investors.heritagepci.com, where the earnings release and our earnings call will be archived. These materials are available for replay or review at your convenience. Today's call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based upon management's current expectations and subject to uncertainty and changes in circumstances. In our earnings press release and our SEC filings, we detail material risks that may cause our future results to differ from our expectations. Our statements are as of today, and we have no obligation to update any forward-looking statements we may make. For a description of the forward-looking statements and the risks that could cause our results to differ materially from those described in the forward-looking statements, please refer to our annual report on Form 10-K, earnings release and other SEC filings. Our comments today will also include non-GAAP financial measures. The reconciliations of and other information regarding these measures can be found in our press release. With me on the call today is Ernie Garateix, our Chief Executive Officer. I will now turn the call over to Ernie. Ernesto Garateix: Thank you, Kirk. Good morning, everyone, and thank you for joining us today. We delivered strong third quarter results, having achieved net income of $50.4 million, up significantly from a year ago and maintaining the positive trajectory of our earnings. As Kirk and I have been discussing on our earnings calls over the last year, we continue to see tangible results from the successful implementation of our strategic initiatives, which were designed to generate positive and consistent shareholder returns by attaining and maintaining rate adequacy, managing exposure, enhancing our underwriting discipline and improving claims and customer service levels. This has created a significant amount of earnings power within Heritage, which continues to show through. As part of that strategy, we re-underwrote our personal lines book while taking needed rate increases to achieve adequate rates. This has led to a steady contraction in our policies in-force over the last 4 years, while our in-force premium increased from approximately $1.1 billion to an all-time record in the third quarter of $1.44 billion. At the same time, we improved both the quality and the diversification of our book of business. Looking out over the next 6 months, we expect our personal lines policy count to return to growth as we have now opened nearly all of our geographies to new business as compared to only 30% a year ago. We are already seeing our new business production ramp up with new business premium written for the third quarter of $36 million, representing an increase of 166% as compared to $13.7 million of new business written in the third quarter of last year. The decline in our policy count continues to moderate, having decreased by 6,800 policies in the third quarter as compared to a decrease of over 19,000 policies in the third quarter of 2024. In fact, our third quarter PIV count reduction was the smallest decrease that we have experienced since we deployed these strategic initiatives in June of 2021. While it takes time to open our territories, we are seeing good new business momentum continue across our regions. Based upon these factors, I believe that we are on a firm path to deliver full year policy growth in 2026. Importantly, we have long-standing relationships with agents and brokers across our geographies that we have maintained over the last 4 years despite slowing new business growth and re-underwriting our book of personal lines business. In the Northeast and portions of the Mid-Atlantic, we predominantly produce business through Narragansett Bay Insurance Company domiciled in and operated out of Rhode Island. Over the years, we have built a successful homeowners insurance business, which has expanded across the coastal regions of the Northeast and Mid-Atlantic. The company has strong relationships with independent agents based upon a trusted brand. Likewise, Zephyr Insurance operates in and serves the Hawaiian market. Although Zephyr initially focused on exclusively on Hawaiian hurricane wind risk, we subsequently expanded Zephyr's product offering to meet the needs of our customers in the overall Hawaiian market. Our organization benefits from the agility and the rapid market responsiveness typical of a regional enterprise, while also leveraging the economies of scale found in larger super regional companies. We have consolidated many functions to gain efficiency but retained the underwriting, marketing and customer service functions in each region to better address the unique needs of each market. Every region has its own unique dynamics and operating the business locally allows us to quickly adapt to changing conditions as well as provide outstanding customer service to our policyholders and agent partners. As we grow, our robust infrastructure allows us to write new personal lines business without adding significant administrative expense. We understand each of our markets and have built relationships with hundreds of master agencies, which represent thousands of agents throughout our geographic footprint. Our long-standing agency partners have expressed a willingness and desire to grow with us, which in turn provides confidence in our outlook for improved growth in the year ahead. We also remain focused on making decisions based on our data and analytics. This has been the cornerstone of our disciplined underwriting process across all of our geographies, which we will maintain as we grow and which contributed to the lower net loss ratio this quarter. As we grow, we will maintain our disciplined underwriting processes as well as rate adequacy and managing exposures. An example of our disciplined approach can be seen in the commercial residential business, which we reduced in the third quarter due to more competitive market conditions. I believe this further demonstrates the discipline of our management team. Fortunately, we have ample room to grow our personal lines business and can choose to be selective across the 16 states where we do business. We are also exploring expansion opportunities into new regions of the country as well as the delivery of new products to our existing markets. We have a long runway ahead of profitable growth of our business and deliver value to our shareholders. Reinsurance is a critical component of our business, and we have maintained a stable indemnity-based reinsurance program at manageable costs with an excellent panel of highly rated and collateralized reinsurers. Over the course of the third quarter, we continue to meet with our reinsurance partners who continue to support our growth and from whom we anticipate will offer incremental capacity as we look to our 6/1 renewal next year. Additionally, we are seeing the benefits of tort reform as industry loss expectations for Hurricane Milton have been steadily coming down, largely due to reduced litigation, which our reinsurers should begin seeing in the coming months. Given the improved litigation environment in Florida, the lack of reinsured losses and the capacity entering the reinsurance market, we are optimistic that reinsurance pricing will continue to improve looking ahead in 2026. We also believe that the impact of this necessary legislation will be favorable to the consumer in terms of the cost of insurance. To conclude, our business continues to gain momentum and the earnings power of the company is building. We are also growing capital, which will support our managed growth strategy as we expect to begin to deliver policy count growth in the quarters ahead. We are also now in a capital position to review our capital allocation strategy and believe our shares are trading below intrinsic value and do not reflect the many opportunities that we have to further grow the company. As a result, we restarted our share repurchase program in the third quarter, having repurchased 106,000 shares for a total cost of $2.3 million. I would also like to reiterate our dedication in navigating the complexities of our market with a strategic focus that prioritizes long-term profitability, shareholder value and customer service driven by our dedicated workforce. Kirk? Kirk Lusk: Thank you, Ernie, and good morning, everyone. Starting with our financial highlights. We reported net income of $50.4 million or $1.63 per diluted share in the third quarter, which compares very favorable to the $8.2 million of net income or $0.27 per diluted share that we reported in the third quarter last year. The increase was primarily driven by a significant reduction in losses and loss adjustment expenses, combined with a decrease in other operating expenses. For the 9 months ended September 30, we reported net income of $129 million or $4.17 per diluted share, which is a substantial increase from the $41 million of net income or $1.35 per diluted share that we reported for the first 9 months of 2024. Gross premiums earned rose to $362 million, up 2.2% from $354.2 million in the prior year quarter, reflecting the rate actions that we have taken, combined with organic growth in selected geographies as we open more regions for new business. This was partially offset by a decline in commercial residential business due to competitive market conditions. As Ernie touched on, we expect our growth to accelerate at a managed pace through 2026 as we ramp our new business efforts across our recently opened geographies. Net premiums earned were $195.1 million, down 1.9% from $198.8 million, resulting from increased ceded premiums. The increase in ceded premiums was driven primarily by a $4 million reinstatement premium for Hurricane Ian and an increase in the Northeast quota share program as written premiums from that program grew from the prior year quarter. The result was an increase in ceded premium ratio to 46.1%, up 2.2 points from 43.9% in the previous year third quarter. Our net investment income for the quarter was $9.7 million, relatively flat due to a higher portfolio value, offset by a lower interest rate environment. We continue to manage our investment portfolio while maintaining a conservative portfolio with high-quality investments that are durations liability matched. Our total revenues for the quarter were $212.5 million, relatively unchanged from our prior year quarter. As discussed, we expect our revenues to return to growth through 2026 as we ramp our new business efforts. Our net loss ratio for the quarter improved 27.1 points to 38.3% as compared to 65.4% in the same quarter last year, reflecting significantly lower net loss in LAE. Net weather losses for the current year quarter were $13.8 million, a decrease of $49.2 million from $63 million in the prior year quarter. There were no catastrophe losses in the current quarter as compared to $48.7 million in the prior year quarter. The reduction in weather losses was coupled with favorable reserve development as compared to the prior year. Our attritional losses continue to remain fairly stable as we believe is associated with the enhanced underwriting strategy over the last several years. Additionally, favorable net loss development was $5 million in the third quarter compared to adverse development of $6.3 million in the prior year quarter. Our net expense ratio for the quarter was 34.6%, a 60 basis point improvement from 35.2% in the prior year quarter, driven primarily by a decrease in policy acquisition costs. The reduction in policy acquisition costs was driven primarily by higher ceded commission income associated with both a larger amount of ceded premium under the net quota share program and a higher ceding commission rate due to favorable loss experience for that program. This resulted in a 1.2% reduction in policy acquisition costs, which was partially offset by a 60 basis point increase in the net general and administrative expense ratio. The net combined ratio for the quarter was 72.9%, an improvement of 19.6 points from 100.6% in the prior year quarter, driven primarily by the lower net loss ratio as well as the lower net expense ratio just highlighted. Turning to our balance sheet. We ended the quarter with total assets of $2.4 billion and shareholders' equity of $437.3 million. Our book value per share increased to $14.15 at September 30, 2025, up 49% from the fourth quarter of 2024 and up 56% from the third quarter of 2024. The increase from December 31, 2024, is primarily attributable to year-to-date net income as well as a $15.7 million net of tax benefit associated with the reduction in unrealized losses. The unrealized losses are related to a decline in interest rates that occurred through the third quarter. The average duration of our fixed income portfolio is 3.13 years as the company has extended duration from the prior year quarter to take advantage of higher yields further out on the yield curve while still maintaining a short duration, high credit quality portfolio. Nonregulated cash at quarter end was $50.1 million. In addition, combined statutory surplus at our insurance companies affiliates at quarter end was $352.2 million, which is up $93.4 million from the third quarter of 2024. The increase in statutory surplus provides for additional growth capacity as we open territories to get up to full capacity. Looking ahead, we remain focused on executing our strategic initiatives aimed at driving long-term shareholder value and providing our policyholders and agents with the service they deserve and expect. We believe that our diversified portfolio and distribution capabilities, along with our overall proactive management approach to exposures, rate adequacy and investing in technology will position us well for continued success. Thank you for your time today. Operator, we are now ready for questions. Operator: [Operator Instructions] The first question is from Mark Hughes with Truist. Mark Hughes: The growth prospects, you talked about the PIV growth in 2026. How do you evaluate the opportunity in Florida versus outside of Florida? Ernesto Garateix: Sure. So there's still plenty of opportunity for us in Florida. If you kind of go back to a couple of years, we derisked a bit in Florida, especially in some of the Tri-County areas. So there's plenty of runway for us in Florida. We understand there's more new markets in Florida, but our name has still been predominant with the agents, and that's why we talked quite a bit about our agency relationships, which remain strong. And the agents have been -- we've been working with the agents. They have reached out to us about continuing to write. So as we mentioned on the call there, $30-plus million of new business premium is something that is only gaining more momentum in Florida. Mark Hughes: Okay. Of that new business momentum, I think you talked about $36 million was -- how much of that was Florida? Ernesto Garateix: We have that number here. I'll get that for you. Mark Hughes: In the meantime, I'll ask, how do we think about the pricing or competitive environment in Florida? It looks like commercial property is really a tremendous amount of pressure. I know in homeowners, the pricing cycle is a whole lot slower. But what's your current anticipation in terms of pricing? I think you've talked about filing for maybe low mid-single-digit rate decreases in 2026. Is that still a fair assessment? And is that... Ernesto Garateix: That's still a fair assessment, right, we have a current filing with the -- pending with the OIR for a rate decrease. And the plan would be as well in '26, we've also planned for a single-digit rate decrease. Regarding commercial, you're right, there is more pressure, but I also remind people where the beginning point is when you're talking about CRs in the 70s, yes, they have pushed up slightly to 80%, but an 80% CR is still very profitable in the commercial lines arena. Kirk Lusk: About $17 million of that new business was Florida. Mark Hughes: Okay. So kind of consistent with your current mix. And then ceded premiums in absolute dollars, is this a good starting point when we think about the fourth quarter, the $166 million, $167 million? Kirk Lusk: Yes. It's probably going to be a little high. We had about a $4 million onetime adjustment in there due to reinstatement premium. So yes, I think if you look at backing off some of that, then you're going to be about where the number needs to be. Mark Hughes: So low $160s million. Is just reinstatement premium from Ian? Kirk Lusk: Yes, Ian and Milton -- sorry, it was Ian. Mark Hughes: Okay. So it shows up a couple of years later? Kirk Lusk: Yes. Mark Hughes: Okay. How much growth can you support with the surplus that you've got, the $352 million up pretty substantially? Will that be good enough for kind of what you're seeing in 2026? Kirk Lusk: Yes. Well, I think if you look at kind of where our change in statutory surplus is for the year, it's up about $66 million. And then if you assume that, that is 3:1 ratio, that type of stuff, that gives us over $180 million of net earned premium to write. And again, that's net written. So then you actually figure that, that number is going to be a little higher because of the ceded. And so therefore, I mean, you're looking at roughly well over $225 million, $250 million of premium that we can write based upon that increase in surplus. And then again, that doesn't include any improvements in that number in the fourth quarter. Mark Hughes: Yes. Yes, which I guess leads to the question, with your level of earnings and your strong capital position already, I think you talked about $2 million in buybacks in the quarter, but it seems like there's going to be a lot of excess capital floating around in pretty short order. What are the priorities there? Is that something you could act sooner rather than later on maybe further buybacks? Kirk Lusk: And again, one of the things we also mentioned is that the Board did authorize an additional $25 million worth of stock buybacks. And again, I think if you look at our capital priorities, again, it's one, it's using capital for growth because of the ROEs we're able to generate. Second of all is we do look at where our stock is trading. We still think it's undervalued. So therefore, stock buybacks is our second priority and then dividends after that with the ROEs, if we can't generate what we think are substantial ROEs. So that's kind of like the priority of our capital utilization. Mark Hughes: Yes. Yes, I hear you. Yes, your net income relative to your market cap relative to your capital requirements is pretty striking when you put all that together. Kirk Lusk: Yes. Yes, it is. Operator: The next question is from Karol Chmiel with Citizens. Karol Chmiel: I just have a follow-up question to Mark's question about the new business. So if $17 million of the $36 million was Florida, roughly $19 million was outside of Florida. Can you just maybe comment on where you're seeing the most momentum of those territories outside of Florida? Ernesto Garateix: Yes. So Virginia is a new growing state for us as well as growth in Hawaii. New York is also ramping up. And the one reminder there is that we did take additional 9%, which made us rate adequate in New York. So that started midyear. So that is only beginning and will kind of roll into '26. So additional states as California on an E&S basis also is another positive momentum growing for us. Karol Chmiel: Okay. Great. And just a quick question on this favorable development of $5 million. Is this still due to the reserve strengthening of last year? Kirk Lusk: Yes. It has partially to do with that, and it just also has to do with just kind of what we're seeing in the underlying portfolio. So again, we think that we're adequately reserved for sure. So yes, it does have to do a little bit with that where we did take a hard look at last year. Operator: At this time, there are no further questions. So this concludes our question-and-answer session. I would like to turn the conference back over to Ernie Garateix for any closing remarks. Ernesto Garateix: We'd like to thank everyone for joining the call and thank especially our workforce and our employees for all their hard work this year. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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.
Operator: Good morning, ladies and gentlemen, and welcome to the International Airlines Group Third Quarter 2025 Results Call. [Operator Instructions] I would like to remind all participants that this call is being recorded. I will now hand over to Luis Gallego, Chief Executive Officer, to open the presentation. Please go ahead. Luis Martín: Thank you very much. Good morning, everyone, and welcome to the IAG third quarter results. Today, I have with me Nicholas Cadbury, our CFO; as well as members of the IAG Management Committee. This has been another good quarter for IAG, and we are on track for another very good year. Our strong fundamentals underpin our best-in-class value creation over the long term. We are continuing to see robust demand for travel across the group. Our leading network and brands have helped to deliver a strong revenue performance in the quarter with PRASK broadly flat at constant currency against a record quarter last year. Our transformation initiatives are delivering effective cost control, supporting our competitive cost base on which we are delivering market-leading margins at 22% for the quarter and over 15% on a last 12 months basis. As Nicholas will show you, every single one of our airlines has reported a margin over 20% this quarter. This was also one of the best summers operationally that we have ever had, which is also supporting positive NPS performance. Our balance sheet continues to be strong, giving us optionality around our capital allocation, whether that is investing in the business at high rates of return or reducing our gross leverage as we take and encumber aircraft deliveries or as we increase our dividends, as we are doing with this set of results for our shareholders. And we intend to announce further returns of excess cash to shareholders at full year results in February. So for the short term, we are confirming that our outlook for this year is unchanged. And in the longer term, we are confident in our strategy to create value for our shareholders. And on that note, I will hand over to Nicholas to take you through the details for the quarter. Nicholas Cadbury: Thank you, Luis. Good morning, everyone. I'm pleased to announce another strong set of results. On the left, you can see the breakdown of the key drivers of the profit increase we've delivered in Q3. These are shown on a constant currency basis, with the impact of FX shown separately. We delivered a passenger revenue increase of EUR 177 million or 2% up. Cargo revenue decreased slightly as we cycled over the elevated yields in the Red Sea disruption in 2024, and other revenue continued to perform well, with the increase including higher IAG loyalty revenues, together with increased third-party revenues from Iberia's MRO business. As we guided, the performance of nonfuel costs continue to improve quarter-on-quarter, and the increase was partially offset by lower fuel prices. We split out the FX into a separate item, and you can see that we had an EUR 8 million overall headwind from FX and profit, with benefits from the weaker U.S. dollar more than offset by weaker sterling euro in the quarter. Overall, we increased profit by EUR 40 million on the record performance in Q3 last year. By OpCo, Iberia, Aer Lingus and Loyalty showed strong profit growth, whilst BA and Vueling profits were slightly down year-on-year. BA is shown in euros here, and so it was impacted by the depreciation of sterling against the euro, driving a larger reduction in euro terms than in sterling terms. Now let's look at the operating company's performance in more detail. Aer Lingus increased its operating profit by EUR 31 million to EUR 170 million, and its operating margins by 3 percentage points to 21.6% despite competitor capacity growth in Dublin. Q3's performance was driven by the expansion of its networks, particularly on the North Atlantic and the impact of the industrial action of approximately EUR 30 million in Q3 last year. British Airways saw its operating profits declined slightly by GBP 18 million, and its operating margins remain high at 20.2%. Unit revenues fell 1%, driven by the expected softer trading in U.S. sold North Atlantic economy leisure and by 7% capacity growth in European short haul. Nonfuel unit costs increased by 3%, driven by employee pay deals and resilient costs not being fully offset by the transformational benefits. Iberia continued to report strong results with operating profits increasing EUR 56 million to EUR 510 million, and its operating margin increasing 2.2% to 23.7%. Iberia also saw softness in the North Atlantic driven by competitive capacity into Madrid. However, it was fully more than offset by the continued strong demand in the South Atlantic routes. Nonfuel costs increased by 2.2% primarily due to resilience costs and higher ownership costs from the new aircraft. Vueling operating profit was EUR 20 million lower at EUR 272 million, but at a high operating margin of just over 25%. Good nonfuel unit cost performance was offset by a decline in unit revenue driven by slightly weaker demand, particularly in Benelux and Germany and the U.K. as well as the effect of investing and strengthening some of its core markets, which was not fully offset by the strong demand in other markets. IAG Loyalty reported GBP 141 million in operating profit, up GBP 16 million year-on-year at a margin of nearly 19%. Moving on to our revenue performance in more detail. Overall demand for travel continues to be strong, driven by demand for our network and our strong brands. The performance was in line with the guidance we gave in an outlook at the interims. We grew capacity by 2.4% with unit revenue declining by 2.4% and around 2 percentage points of which was due to currency movements, so only marginally down on underlying basis against a record quarter last year. If we look at the performance by region, North Atlantic capacity increased by 2.9% with unit revenue decreasing by 7.1%, it's really important to note that around half of this was due to currency headwinds from both weak U.S. dollar and sterling against the euro. The trends were similar to those we reported at the interim results. We continue to see some softness in U.S. point-of-sale economy leisure and an impact on our transfer flows of U.S. direct capacity growth into secondary markets in Europe. Premium demand held up well. South Atlantic continues to be the star performer in the network. Unit revenue increased 0.6% on a capacity increase of up 2.9%. Iberia's performance continues to be strong with the routes to Argentina continuing to perform well, along with routes to Venezuela, Ecuador and Colombia. Europe unit revenues decreased by 6% on a capacity increase of 2.4%. I've already mentioned weak demand for Vueling, weaker demand for Vueling and the additional capacity from British Airways. In addition, there are FX headwinds from the weak sterling euro, representing about 2 percentage points on unit revenue impact with Iberia and Aer Lingus performing better. To finish off, Asia Pacific performed well and Africa and the Middle East and South Africa, partly saw the impact of additional capacity to Saudi Arabia and South Africa. Just turning to Q4. So far, we are pleased with the revenue performance with passenger route revenue held positively year-on-year, including the North Atlantic. We did have a particularly good month -- good in-month booking in December last year following the elections, so we do have some tougher comparatives over the next few weeks. Despite this, we are confident about the long-haul market in particular. And while it's a bit further away, H1 is so far looking positively. Just to note, as you've seen the currency impact on PRASK in Q3 was minus 2%. In Q4, we currently see higher adverse FX on revenue of around 3.5 percentage points, most of which is usually the average sterling to euro rate, which was about EUR 1.2 last year. And this year, it looks like it will be around about EUR 1.15. Clearly, the majority of the translation FX impact on revenue is offset by a favorable impact on costs. I guided last quarter that the increase in our nonfuel unit costs this year will be weighted to the first half of the year, and I'm pleased that we're broadly flat in Q3 compared to plus 4.6 increase in Q2. This is a good performance overall and in line with our expectations. Currency benefited the unit costs by about 2%. Employee unit costs increased 2.9% due to agreed salary increases, which were only partially mitigated by productivity benefits for more punctual operations. Supply and cost inflation was more than offset by procurement-driven transformation initiatives, part of our wider transformation program. Ownership unit costs increased by 9% driven by investments in new aircraft products and IT. Fuel unit costs reduced by almost 11%, driven by lower commodity prices and the fuel consumption savings from the new generation aircraft we're investing in. We continue to expect nonfuel unit cost to increase around 3%, in line with the guidance I gave you at the last quarter. And likewise, on fuel, we continue to expect fuel costs to be around EUR 7.1 billion. This slide shows our financial results for the 9 months down to net profit. Operating profit increased by around 18%, and pre-exceptional profit after tax increased by approximately 20% to EUR 2.7 billion, which, in addition to a lower share count from our share buyback program drove a 27% increase in adjusted earnings per share. I'm pleased to report that our balance sheet continues to strengthen, gross leverage reduced to 1.9x, down from 2.6x at this time last year, driven by the regular maturity of our aircraft financing and paying down IAG bonds. Net debt was relatively flat year-on-year despite the shareholder returns and net leverage decreased to 0.8x due to the year-on-year profit improvement. We still plan to give approximately 2/3 of our expected 25 new aircraft deliveries unencumbered, and we still expect to spend approximately GBP 3.7 billion on CapEx this year. This is my final slide. I want to remind you about how we think about capital allocation, which is core to how we create long-term value for our shareholders. Our first priority is to make our balance sheet strength targeting net leverage below 1.8x through the cycle, which is a proxy for investment grade. Our second priority is to invest in the long-term strength of the business at high rates of return with a focus on rebuilding our fleet, improving our customer experience and enhancing our digital capabilities and advancing our sustainability agenda. We're, of course, committed to a sustainable dividend return, and I'm delighted to announce an interim dividend of EUR 220 million. This represents approximately 50% of the anticipated annual total dividend, and as with the earnings per share, the dividend per share will also benefit from the share count production. Furthermore, with the current GBP 1 billion share buyback program nearly completed, we intend to announce further returns of excess cash to shareholders at our full year 2025 results at the end of February. We are confident of the strong end to the year and feel that this is a more appropriate time for the Board to make the decision in line with pre-COVID practices. And on that positive note, I will now hand back to Luis. Luis Martín: Thank you very much, Nicholas. As usual, I would like to remind you of our strategy that focuses on 3 strategic imperatives. Firstly, our strong core. We are deploying our capacity in a disciplined focused way to leverage our market-leading positions. And we are building our brands by investing in new, more efficient aircraft and better cabins and services alongside more efficient operations. Secondly, we are building up our complementary capital-light businesses, in particular, IAG Loyalty. And thirdly, we have a robust financial and sustainability framework. We consistently executing these imperatives we can deliver and maintain targets that we think are both best-in-class and appropriate for our business through the cycle. As I mentioned earlier, we have now delivered a 15.2% margin over the last 12 months which is market-leading. Fundamentally, we believe that delivering earnings growth at these levels of margin and return on capital will create substantial value for our shareholders. As usual, there are a lot of things going on around the group, and we have highlighted a few initiatives on this slide. Our network strategy is to focus on our core markets with increasing scale in our tax, we offer our customers more choice of destinations and frequencies. We focus on delivering improvements to the customer journey in our aircraft and on the ground and through a combination of the human touch and digital innovation. A good example of this is our announcement yesterday that we are going to partner with the Starlink to provide high-speed connectivity in all of our airlines with the rollout likely starting early in 2026, and our punctuality, as a driver of both customer satisfaction and efficiency is amongst the best in the world, and in particular, has been excellent over the summer despite many external headwinds. On-time performance improved across all airlines with British Airways achieving the best OTP at Heathrow since 2012, up by 10 points year-on-year. And NPS also continues to improve around the group with Vueling NPS hitting a record high this summer. Finally, we are pleased to announce today that IAG Loyalty has signed a multiyear partnership extension with American Express. Moving on to our outlook, our expectations for the 2025 full year are unchanged. As Nicholas has explained, we are booked positively so far for Q4, including the North Atlantic, so we are on track to deliver another very good year of revenue and earnings growth, margin progression and strong shareholder returns. Demand for travel is strong and our fundamentals are proven. We have leading market positions, a great network, powerful brands and an attractive customer base. Through the transformation program, we are delivering the margins that we are reporting today. And we still have a significant number of initiatives to roll out gross revenue, costs and operations. So we believe that we can continue to deliver strong value creation for our shareholders through the cycle. So I will finish by summarizing those key elements of that business model and our long-term investment case, strong markets, strong execution and strong value creation. And on that note, we will turn the call over to Q&A. Operator: [Operator Instructions] Your first question comes from the line of Alex Irving of Bernstein. Alexander Irving: Two for me, please. We heard from -- first of all, we have some of your peers about a less peaky summer, but with the summer extending into Q4. Does that match your assessment? If so, is that a 2025 factor or a lasting change? And what does that mean for how you manage the business? Second, on the North Atlantic, we saw Alaska launch in Heathrow. Do they get that slot in your existing joint business? If so, why? And should we see that as a precursor potentially adding them into the business? Luis Martín: So for the Q4 and Q1, we currently have about 80% of the Q4 book. The overall revenue performance is good and the passenger revenue is held positively versus last year. And we need to take into consideration that last year was very strong with total PRASK up 3.1% in general and in North America was up 14%. So performance is different by region. We see improving trends in North Atlantic. And currently, revenue is quite positive. We see also a strong October and November in North Atlantic. South Atlantic, as we said in the presentation, continue to be strong. And in Europe, we continue seeing some softness in intra Europe. But with lately, we have seen improving. Rest of World is also positive. And what we can see for Q1 right now with revenues around 30% the levels of revenue that we have are also above last year. So in general, the trend that we see is positive. So Q3 was a little weaker. As we said North Atlantic point of sale, nonpremium and transfer traffic had an impact in that. But we see that the situation is improving since then. And about Alaska, maybe you want to comment, Sean. Sean Doyle: Yes. Look, I think Alaska a very important partner to American and BA and we have a very good connecting partnership over Seattle and to places in the West Coast where they've developed the network over recent years. It would be premature to talk about entry into any joint business, but we work with Alaska on a very constructive basis, and we would have helped them through the kind of slot process in advance next summer. Operator: Your next question comes from the line of James Hollins of BNP Paribas. James Hollins: One for Sean, please. Maybe if you could give us a quick update on the very sort of current news on the U.S. shutdown. And clearly, international flights are protected, but whether you might perceive there's a little bit of reticence on late bookings on your transatlantic network. And while you're on, maybe update on your BA digital transformation, I think we're getting into the upcoming? And then for Nicholas, full year cost, I -- let me put it this way, is there a good chance you beat the 3% guide, particularly with FX and obviously, the performance you've had so far? Or is there anything specific on costs in Q4 that would mean you don't beat 3%? Sean Doyle: Just on shutdown, I think it's early stages. But right now, we're not seeing any impact. And I think one thing I would say is, we have -- it's November. So there's lots of kind of ability to reaccommodate across networks if there is an impact. We flight to 27 points directly in the U.S., and we work with American closely and start selling over those networks. So I think right now, it's business as usual, and we're not seeing any effect. But I think our direct network out of London, if there is any marginal impact on connecting traffic, we'll have plenty of capacity to kind of reabsorb any rebooking that we need to do. In relation to digital transformation, yes, we are entering an exciting phase. About 50% of our bookings on dotcom now are going through what we call our new booking flow, and that's showing very encouraging results. We're happy with conversion. We're happy with the performance, and we're very happy with the CSAT. We'll begin to scale the number of bookings we put through that platform as we head in towards the December, January sale period. So the vast, vast majority of bookings heading into next summer will have come through that new booking flow. And we're in a position that we start rolling out the app phasing element of the digital transformation early in 2026. So yes, it's exciting, and we're very encouraged by what we're seeing. Nicholas Cadbury: Yes. Just on the cost side, James, we've got all the MC here. So thanks for putting them under a bit of pressure overall. We're sticking with our kind of 3% guidance at the moment. You can see FX is moving around quite a bit at the moment overall, but we think that's still -- we're holding on for that at the moment. But we're pleased with the progress we've made, particularly with supplier costs overall, particularly the kind of process improvements we're putting and the kind of procurement savings we're doing. So we're pleased with how that's going. Operator: Your next question comes from the line of Stephen Furlong of Davy. Stephen Furlong: Maybe for Luis, just talking about or thinking about into next year, even into next summer. I'm just thinking about the competitive environment, maybe you could talk -- maybe go through the regions again because I'm thinking about things like, let's say, in LatAm, is there any change? Obviously, you have Turkish investing in Air Europa. I don't know on the other side. In the U.S. or North Atlantic I'm thinking about like United or I think it's delta expanding a lot of capacity. And then for yourselves in terms of capacity, maybe you'd be able to grow a bit more at Heathrow, if there's a bit of an improvement with the trends, et cetera. So just talk about the competitive dynamics as you see over the next 12 months in general terms. Luis Martín: So I can't comment on the capacity that we see for the next quarters. We need to take into consideration that still the people they are working in the programs for summer next year. But what we see for example, for Q4 and first quarter of 2026, is that capacity from London Heathrow, North Atlantic, London Heathrow is going to decrease in comparison to previous year. So that's going to help. We see that the other hubs, the traffic with North Atlantic are going to be more difficult. So Dublin, for example, the people, they are adding a lot of capacity in winter that is not usual. So we see in the Q4, an increase of capacity of around 16% and in the first quarter, 15%. So we are going to have a very tough competitive environment there. Madrid North Atlantic, Q4, we are going to have an increase in capacity of around 5% and the first quarter, 10%. So it's true that Q3, the increase of capacity was higher and other people they are moving capacity from Madrid to other regions in Spain. If we look at Latin America, from London, we see a decrease in capacity in the last quarter and also in the first quarter. Madrid is going to have an increase of around 4% in the Q4 and around 7% in the Q1. So -- but even with this increasing capacity, we are seeing strong yields and strong load factors. And the intra Europe is different in the different subs that we have, Heathrow Europe is going to be almost flat. Madrid Europe is going to be around 7%, Barcelona Europe around 4%. And Dublin Europe, again, high increase of capacity of around 12% in the fourth quarter and 15% in the first quarter. So the competitive environment, North Atlantic, we see positive trend, it's true that others are adding capacity. But in the joint business, we keep our market share and also in number of premium seats we continue with a very good position. And the other topics that you said, for example, Turkey with Air Europa, I think is going to be an investment of 26% in the company. I suppose they will try to develop the business, but we don't see an impact of that in the short and medium term. I don't know if there was another question. Operator: Your next question comes from the line of Jaime Rowbotham of Deutsche Bank. Jaime Rowbotham: Two from me, please. First, almost certainly for Nicholas on buybacks. On Slide 11, you reiterate the plan to return cash to maintain leverage of 1.2x to 1.5x net debt to EBITDA. It's obvious question, but if we assume you're still at 0.8x by year-end, it would imply a quite staggering EUR 3 billion to EUR 5 billion of potential headroom. Is it as simple as that, Nicholas, and presumably, at the lower end of that range, you could leave some buffer for potential M&A opportunities like TAP? Second question is just really on short haul. Could you remind us what the plan is for Vueling next year? I think there were some clues there in what Luis said about capacity out of Barcelona. It seems like the short-haul environment is a little bit tougher for you. You talked about weaker demand, Benelux, Germany, U.K., not offsetting strength in other areas. So some comments, please, on short-haul outlook and the plan for Vueling. Nicholas Cadbury: Yes. So I'll just start with shareholder returns. So this year, we'll have returned by the time we get to the year-end, we returned GBP 1.2 billion of share buybacks and GBP 400 million of dividends over GBP 1.6 billion in total. We haven't quite finished the share buybacks, so we'll finish that over the next month or so overall. We've kind of held back kind of doing the next shareholder return to year-end. Just to get it back into a normal process. We did was an exceptional one that we did last year was because it was the beginning of the process, but we'll just get back into the normal swing of it. It's a normal year-end decision that we have overall. But hopefully, we've kind of said in our statement that we're confident in going to give you share -- further returns later on in the year overall. Just in terms of the kind of way we think about it, as you said, we've got that range of 1.2x to 1.5x net leverage below that overall. I think kind of right at the moment, we've got some increasing capital coming over the next few years. And as you say, the TAP, so we'll probably manage more towards the bottom end of that range rather than the top end of that range overall, but that still gives us kind of quite a lot of flexibility overall. We've had 1 or 2 analysts kind of saying that not giving shareholder buybacks for this quarter may show kind of lack of confidence in the kind of future trading, I think, kind of after the strong quarter we just had and the fact that we've just said that we're booked positively for the year-end as well and kind of confidence in our overall strategy, we kind of find that that's obviously a personal statement, but it's doesn't reflect the confidence we have in our own business. Luis Martín: About the short-haul and maybe Carolina can expand on the Vueling. But the Q3, the point-to-point traffic was okay. We suffered in the transfer traffic, as I said previously. In the Q4, what we see is that competition is high. In Q4, intra-Europe capacity is going to raise around close to 6%. But we have different performance in different countries. For example, there are markets that are working very well for us. We need also to take into consideration the impact of the FX in the Q4 that is going to be relevant. But maybe Carolina, if you can comment on Vueling. Carolina Martinoli: Sure. If we look at Q3, I think it's a mixed bag. There are different things. So some markets work very well, domestic worked very well for us. As Nicholas said before, we had some specific markets with a weak performance. Germany, U.K., Netherlands, Netherlands very linked to the tax situation there. But we have a very strong position in Barcelona, and we offer from there over 100 routes, it's a constrained airport, and we have 1/3 of domestic traffic. So we are very used to face strong competition, but we are positive about our ability to compete. If you look at our RASK, A good part of that is self dilution. So we have decided cautiously to invest in some markets, Canary is a good example. We have grown over 30% in Canary but we are already seeing the results of that investment. So although you are right, it's going to be very competitive, I think we have a good position to compete in our core markets. Operator: Your next question comes from the line of Savi Syth of Raymond James. Savanthi Syth: Maybe for Nicholas, I'm not looking for guidance or anything like that, but I was wondering if you could talk a little bit about as you look out to 2026 just across the kind of the main cost items. Just generally, what you are expecting in terms of inflation and anything, any kind of offsets or headwinds or tailwinds that we should think about? Nicholas Cadbury: Yes. We're not giving guidance for 2026 overall at the moment. I think all I'm going to say just on the cost base as well, we've given kind of clarity for the last kind of 2 quarters on this year, which we're confident delivering. We've just delivered a good quarter on the cost base overall. So that will be up about 3% year-on-year on nonfuel cost. I'm expecting kind of the transformation program and also with kind of some -- hopefully, some kind of easing inflation overall that, that kind of number should moderate into next year overall. Savanthi Syth: That's helpful. And if I may just also ask just on the demand side, if you could kind of give a little bit more color between just kind of corporate versus premium versus kind of maybe the economy leisure. Luis Martín: Yes. I think that if we look at the business traffic, year-to-date, we have volumes around in total at group level of around 70% of the volumes that we had in 2019 and revenues close to 87%, so situation is improving but slowly and with a very different performance in the different airlines. So for example, in British Airways 62%, 63%, 82% in revenue, in Iberia, close to 80% in volume and above 100% in revenue and in Aer Lingus close to 100% in volume and similar in revenue. So with this, we expect to finish 2025 with business revenue above what we had last year. If we look at the volumes in Q3, we saw a decline in comparison with last year. But what we see now in the Q4 is positive, for example, in British Airways, we are seeing now growth in North Atlantic, both U.K. and North Atlantic point of sale. So we think that this is going to help to that recovery. But in any case, as I said, in some way, we are in a stable situation and the improvements slowly. In any case, when the COVID started, we said that we were expecting to come back to levels of revenue of around 85% of the revenues we have in 2019, and we are above that. And the good news is that we are delivering these strong results with this percentage of business traffic. What it means that our model is very -- is working very well also with the premium leisure traffic. Operator: Your next question comes from the line of Harry Gowers of JPMorgan. Harry Gowers: Two questions, if I could. The first one, just if I could ask on your positively booked revenue comments for Q4, if you could maybe clarify how positively booked we're talking? And could we end up seeing RASK higher year-over-year for Q4 versus last year? And then the second question, I was just wondering if you could go into some color on the U.K. point of sale on transatlantic and also U.K. point of sale on short haul as well and if we're seeing any demand weakness or price sensitivity? Nicholas Cadbury: Yes. So just -- Harry, I'd love to give you more detail, but that's about as much as we can give you that it's booked positively overall. I mean, we're currently -- we've had a good October and November, particularly we've seen actually point of sale in North America being good on both sides, actually from U.K. and from the U.S. as well and actually the U.S. leisure point of sale in the last few weeks has been a bit better as well, which is good to see. The only thing we're just calling out is we had a particularly strong December last year across the Atlantic. After the Atlantic, it was a bit of kind of pent-up demand. And if we saw it very strong. So we're just about to enter those weeks, but we're feeling pretty positive about it overall. So I think that's all we can say overall. And ASK is going to be up about 2.3% in the quarter as well. Sean Doyle: Yes, just on the U.K. segments in terms of the booking profile, Q3, we were positive across both business and premium and non-premium leisure and Q4, it's a little bit more positive, but we don't commit to the specifics. So yes, we're seeing stable demand is the best way I would describe it, and that's relevant, I think it's prevalent in both Europe and/or our U.S. markets, as Nicholas said. Nicholas Cadbury: Does that answer your question, Harry? Harry Gowers: Yes. Operator: Next question comes from the line of Conor Dwyer of Citibank. Conor Dwyer: I'd like to come back a little bit to the buyback question. Nicholas, you obviously already talked a little bit about managing towards the lower end of that range of 1.2x to allow for some potential M&A, things like that. But obviously, that still implies basically you can pay out more than your free cash over the next few years. Is that really how we should be thinking about this? Or are there other things in there that might, let's say, move that leverage number away from that kind of level? And second question was actually on the Loyalty. So growing revenue by about 7%, obviously, that growth has been extremely high in recent years. I'm just kind of wondering, are you now kind of viewing that business as a bit more mature now? Should we be really kind of thinking that as a kind of mid-single-digit percentage growth business? Nicholas Cadbury: Just on the share buyback. I mean, we set out the guidelines on where we want to manage our balance sheet to overall. And I think when we did that, we kind of said the things that we'll be looking out for it's a forward-looking thing rather than a backwards necessarily. So we'll be looking forward to how does the outlook look. We're feeling pretty positive about that at the moment. We also looked at what M&As on the horizon, TAP maybe potentially overall. And there's also kind of CapEx, what's our CapEx commitments looking forward as well. Now CapEx, as we know, is about EUR 3.7 billion this year, next year, probably more about EUR 4 billion, but we know over the next few years after that, it starts to ramp up, and that's why we could be managing towards the bottom end of that and making sure we've got some good headroom and ready for that overall. Adam Daniels: On the loyalty side, just to come back on that specifically, yes, we are continuing to see -- if you look at the year-to-date performance because there are some specifics around promotions around particularly on issuance of the points. So if you look at it across the year, we're still seeing double-digit growth in terms of the currency that's being issued and there or thereabouts on usage of those points and how those points redeemed. So I think we're seeing a continued growth and the continued double-digit growth that we've seen over the previous years. Operator: Your next question comes from the line of Ruairi Cullinane of RBC Capital Markets. Ruairi Cullinane: First question on Cargo revenue decline. Should we expect similar dynamics in Q4, given another strong prior year comp? And then just sort of coming back to the unit revenues. Do you think North Atlantic trends you've seen is suggestive of the Liberation Day headwind, which may now be fading, given the improvement looking forward? Nicholas Cadbury: Yes. On Cargo, yes, you're right. I think we're seeing actually the supply, the demand for Cargo is still relatively good. And you can see that our weight we're carrying is still up overall. But we're just seeing some softness in yields. And as we said in the call, that's really based on the fact that we're anniversarying the high yields we had as there was a lot of disruption over the Red Sea last year overall. And that's just the supply chain around that is just kind of normalizing overall, and you'll see that probably into Q4 as well. North Atlantic, I'm not sure we can -- anything else we can really say about that overall. I mean, Liberation Day was in April, overall. Luis Martín: Yes, as we said in Q3, we were below what we expected. But since then, we see a recovery. And as Nicholas said before, we see an improving trend, which is strong October and November, and we are booked positively. So I think the effect of the Liberation Day is, by far away. Operator: Your next question comes from the line of Andrew Lobbenberg of Barclays. Andrew Lobbenberg: Can I ask 2 questions. One on what labor relations lie ahead? I think there are some at BA, but perhaps you can correct me on that and whether there are any elsewhere in the group? Second question, I'd quite like to hear your thoughts around the situation at Aena, where I mean, obviously, you want lower airport charge, I can imagine. But it appears that the airport companies becoming something of a political football in Spain, and its plans to develop the infrastructure are potentially being threatened. So where do you sit, obviously, you do want beautiful facilities for very low cost. But how do you think about your key partner providing infrastructure in Spain being such a political football? Luis Martín: So about the labor situation, I think we have closed the most important agreements at group level. We are still negotiating some places like Iberia, with the ground staff. Maybe, Marco, you can comment on that later. We have now a situation -- a difficult situation in Manchester, where, as you know, we have a strike and it's probable that we are going to continue with a strike. And in Aer Lingus, they need to negotiate agreements with different collectives and in Vueling also, some of the agreements they expire at the end of this year and they are negotiating. So maybe you can comment maybe, Lynne, the situation in Manchester. Lynne Embleton: Yes. The -- just about Manchester in context, first of all, it takes 2 aircraft in Manchester base applies transatlantic. We're mounting through the strike. We've been accommodating -- we are accommodating more than 90% of our customers in strike date so far. We reached agreement with United on 2 separate occasions, and they've got the recommended deal for their members, which the members rejected. So we've benchmarked there. We've been working through ACAS. I think the key thing here is we need to be cost competitive, Manchester needs to be able to perform financially, it needs to justify its asset allocation. We're part of a group where capital is constrained and distributed where returns can be made the most and I'm very conscious of that when we look into our industrial relation situations. Luis Martín: Okay. Maybe, Marco, you want to comment on the ground staff. Marco Sansavini: Yes. Indeed. In terms of the labor relations in Iberia last year, there was a major milestone that was achieved. It was to set the new collective agreement with our pilots that, as you know, is a system where we share the benefits of and the results of the company, not only linking the pay evolution and the one-off evolution and a payment to the EBIT results of the group, but also to the productivity of our staff to the NPS and the OTP, so the capability to deliver to our customers. And the same has been achieved this year with our cabin crews. And we're just starting now the process of opening the negotiation with our brand personnel, and we are confident that the same scheme and system, of course, with the nuances for the specific collectives can be applied also there. It's very beneficial also for the people. And one remark, as you know, we also introduced the possibility for people to buy shares and become shareholders. And more than 1,000 of our staff currently have subscribed to that. That is another element of sharing the benefits of the resource of the company. And maybe a comment in terms of the Aena situation. Of course, our strategic plans implied the necessity of an alignment with Aena, and we have a common view of bringing to the full potential of the Spanish both operating companies and infrastructure. Of course, that needs to be done at an affordable price, it's the same view that the group has with regard to the U.K. So and we are in close contact with Aena to ensure that, that will happen. Andrew Lobbenberg: Can I just check? Is everything done and dusted on CLAs at BA? Or are there any... Nicholas Cadbury: Yes. our collective agreements go to the end of '26 and mid- '27, so we concluded those over the last 18 months. Operator: Your next question comes from the line of Patrick Creuset of Goldman Sachs. Patrick Creuset: Just coming back to your comments on Q4 trading, please. When you say booked passenger revenue for Q4 is up year-on-year including on the Atlantic. Just double checking that, that is after the FX headwind that you flagged or is this constant currency? And then secondly, if we look at your ASK guide of 2.3% for the quarter, again, coming back to your comment on increasing passenger revenue overall, and that would imply RASK at least somewhere around flat year-on-year, consensus standing at minus 2% for the quarter. So is that a fair interpretation? And then on the basis of that, looking at consensus expectations of somewhere around EUR 5 billion -- just shy of EUR 5 billion of profit for the year. Do you sort of feel comfortable with that? Nicholas Cadbury: Just you're right. The guidance we've given on the positive booking includes the FX. So it's not in constant currency overall it takes account of the currency impact as well. I'm afraid I can't give you -- I'm not going to give you PRASK guidance for -- with North Atlantic for Q4 overall, exactly, I think we said we were positive overall. I mean that's taking account the ASK growth as well, but we've got positive momentum on that overall. And so the last question on consensus, yes, you're right, consensus is just under GBP 5 billion. And if we weren't happy with that, we would have to say something, and we're not saying anything. Operator: Your next question comes from the line of Muneeba Kayani of Bank of America. Muneeba Kayani: I just wanted to touch on this new Amex partnership extension. How should we be thinking about it in terms of impacting the loyalty, top line margins? And then just related to that, overall margins into next year, you're very much at the top end of your midterm guide. You talked about positively unit cost inflation being better next year, you're seeing good demand trends. Like how are you thinking about that margin into next year, please? Adam Daniels: Yes. Just starting on the Amex agreement. Yes, so we're very pleased that we've reached an agreement with a -- long-term agreement with American Express. That continues the good work that we've done previously in terms of that. That agreement includes the British Airways co-brand, the Membership Rewards business and the acceptance of Amex across the different airlines this time to include LEVEL as well. So we're delighted that we have this multi-year agreement, and that will help the loyalty business as we go through the next few years to have that agreement in place, and we look forward to working with Amex in the years to come. Nicholas Cadbury: Yes, just on guidance, we're not giving guidance next year, but I mean I think kind of with the dynamics that we're seeing, we still see strong demand for travel, we still see a constraint in supply of aircraft into the market next year. Overall, we've got our transformation program, which is both driving our own revenues and also the kind of costs under control, which I said should moderate overall. So if you put those dynamics together, there's no reason why we shouldn't be at the top end of our guidance and sustain there overall. Of course, it depends on where fuel is and inflation ends up overall. But I think we're feeling confident in that. Operator: Your next question comes from the line of Gerald Khoo of Panmure Liberum. Gerald Khoo: One, if I can. There's been a lot to talk about the sort of ongoing strength in premium leisure. I was just wondering whether you could give an indication as to the relative importance of premium leisure within the Premium cabin. I know you probably won't give an exact figure, but just something to give a rough indication of how important that is proportionately? And what -- in terms of that trend of growth, what could derail it? What could cause that premium leisure strength to reverse or soften? And certainly, I think there was some talk about strong short-haul capacity growth at British Airways. So I just wanted to kind of understand where that was and why that was done, please? Nicholas Cadbury: Yes. Just in kind of premium leisure, yes, we don't disclose the kind of precise mix we've got on premium leisure Premium seats. If you look at it, it's different by different airlines, of course, if you look at British Airways, we've got about 45% of our seats are Premium overall, but a significant part of that is leisure. We've got about 20% of our overall customers and corporate customers. And more of that when you look at SME businesses overall, but they're important part of our growth. And you can see that in terms of corporate customers overall, they're still down year-on-year, but actually that's been filled very successfully by the demand for leisure, particularly at the front end of the plane. So it still continues to be strong. In terms of derailing one of the concerns we had as you get up to the -- we're approaching the U.S. -- U.K. election, which feels like it could be targeted more at the -- our customers at the wealthier end of the line. So you would expect maybe some slowdown, but we're seeing the opposite of that at the moment as well. So the people have got money, they've got money at the moment. Sean Doyle: In terms of short-haul capacity, there's probably 2 dimensions driving it. One is we have been replacing A319s with A320s and 321s at Heathrow. So that's a chunk of gauge. We've also been reorienting the network to fly to probably more of the Southern European leisure markets, which gives us a stage of that effect, which increases ASKs. And we've been continuing to build back our Euroflyer businesses at Gatwick. So that's operating kind of 25, 26 aircraft, which is probably where it was back in 2017, '18. So there are kind of 3 drivers of that capacity increase. And we've had some gauge benefits as well at London City, where again, we're adding some ASKs, but again, primarily into longer sector leisure markets, which were robust over summer. Operator: Your next question comes from the line of James Goodall of Rothschild. James Goodall: So just firstly, following up on Muneeba's question on Amex. Has there been any changes in commercial terms with Amex as a result of the new agreement? And how should we think about the cash remuneration element going forward? And then secondly, just given the strong on-time performance in all entities in Q3. Can you quantify what the benefit was to both revenue and costs from lower disruption in the quarter, please? Nicholas Cadbury: Yes. I mean the Amex card, it's a commercial sensitive agreement, so we can't really give any details in terms of the specifics overall, both in terms of, kind of, be it margin and cash, I don't know if you want to add anything. Adam Daniels: No, I just have to say, I think that's right. But clearly, we're very happy with that agreement. It works for both our South American Express, and we're very pleased to have extended it for the long term. Luis Martín: And about disruption cost, in the case of BA this year, the costs were almost half, 45% less than the growth that we had last year. Operator: Your next question comes from the line of Jarrod Castle of UBS. Jarrod Castle: Two as well. It seems like the MRO business is doing pretty well. So if you could just give a little bit more color in terms of pipeline of work and what you're seeing there? And then just secondly, I mean, a lot of attention to Loyalty. And obviously, the changes happened, I think, it was April this year. Loyalty members, they're going to get their tier status. I would imagine sometime in March next year. Just interested, within the different tiers, gold, silver, bronze at BA, has the mix changed, i.e., or some of the gold members as a percent of total mix slipping down or some of the silver going up? And what are signings like into the loyalty program at the moment. So any color on how you see that evolving going into March? Luis Martín: Maybe, Marco, you want to comment on MRO, mainly the engine business. Marco Sansavini: Yes. The engine business is still cycling over the post-COVID phase. So indeed, as you say, is recuperating, you see that a lot of the non-airline revenue growth has been driven by the growth of maintenance. So it's coming back to pre-COVID levels of profitability, and we are currently in the phase of setting the stages of the next longer-term view of the strategic opportunities there. So I think we will come back in time on that. Sean Doyle: In relation to the club and the relaunch, I think it's performing as we would expect, I think the tier sizes are broadly tracking the way they were last year. But we are hearing anecdotes of people who are higher-value customers getting their tier quicker. So we don't expect to see so much movements in terms of tier sizes. But we do think that the club tiers will be rewarding our higher revenue customers more quickly and more fairly. Adam Daniels: Yes. And I think I'd add to that, just in terms of the club, you asked about where the numbers are, we are still seeing some good growth in terms of people joining the club, both in terms of BA Club and Iberian Club. Active members, so that's somebody who's done something in the last 12 months is up double digits. So we're seeing a lot of activity. And we're also starting to see, which we talked about last quarter, people increasingly using their holiday as a method of obtaining tier point. So that's another trend that we're seeing. Operator: Your next question comes from the line of Alex Paterson of Peel Hunt. Alexander Paterson: Yes. So just continuing that theme of holiday sales to BA club members. Has that really benefited the third quarter? And if I look ahead, your -- the number of ATOLS that you have paid for is flat year-on-year. So if I think about then where is the growth in IAG Loyalty going to come from? If it's not from the number of holidays? Is it -- are you going more upscale? Or is it the growth is going to come from more Avios issuance? Adam Daniels: Yes, thanks for that. Yes, in terms of club members, we are seeing more revenue coming from club members, that's up on where we were in terms of if you look at it year-to-date. And we are expecting that to continue. So -- and you're right in thinking that the quality of revenue that come from those members tends to be strong. And so that's definitely where we're seeing some of the growth. In terms of ATOLs, I've always said that ATOLs are bit of an art rather than a science. And so we certainly plan to grow the business into '26. And in Q3, we definitely saw that growth in a lot of areas, I would highlight Greece is probably the region that's had its strongest summer certainly for us. So yes, that growth continues. Operator: There are no further questions. I will now hand back to Luis Gallego for final remarks. Luis Martín: Okay. So thank you very much. Thank you very much, everybody, for being here today. As we said at the beginning, a strong set of results, positive trend in bookings for the third quarter and first quarter. So we continue -- we are going to continue executing our strategy that is delivering better results than average. Thank you very much.
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: Greetings, and welcome to HASI's Third Quarter 2025 Earnings Conference Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Aaron Chew, the Senior Vice President of Investor Relations. Aaron Chew: Thank you, operator, and good afternoon to everyone joining us today for HASI's Third Quarter 2025 Conference Call. Earlier this afternoon, HASI distributed a press release reporting our third quarter 2025 results, a copy of which is available on our website, along with the slide presentation we will be referring to today. This conference call is being webcast live on the Investor Relations page of our website, where a replay will be available later today. Some of the comments made in this call are forward-looking statements, which are subject to risks and uncertainties described in the Risk Factors section of the company's Form 10-K and other filings with the SEC. Actual results may differ materially from those stated. Today's discussion also includes some non-GAAP financial measures. A reconciliation of GAAP to non-GAAP financial measures is available in our earnings release and presentation. Joining us on the call today are Jeff Lipson, the company's President and CEO; as well as Chuck Melko, our Chief Financial Officer. And also available for Q&A are Susan Nickey, our Chief Client Officer; and Marc Pangburn, our Chief Revenue and Strategy Officer. To kick things off, I will turn it over to our President and CEO, Jeff Lipson. Jeff? Jeffrey Lipson: Thank you, Aaron, and thank you, everyone, for joining the call. Welcome to the HASI Q3 2025 Earnings Call. Before we discuss the prepared slides, I'd like to start the call today by reiterating 4 aspects of our business model and how they interact with recent market developments. One, the demand for energy continues to increase and virtually all forecasts expect this trend to continue. This demand will clearly result in greater supply, facilitating ongoing development by our clients, which in turn increases HASI's total addressable market. Therefore, the current underlying economic trends are a tailwind for our business. Additionally, if demand causes power curves to increase, our existing portfolio of investments will become increasingly more valuable. Two, the operating environment remains conducive to business-as-usual activities. Capital markets have experienced relatively low recent volatility, and our clients' pipelines continues to be active and growing. Therefore, the backdrop remains very supportive for expanding our investment volumes. Three, we continue to demonstrate that our business is able to achieve meaningful EPS growth in all interest rate environments. Since interest rates began to rise in 2022, we've been able to continue to grow our earnings with higher-yielding investments, prudent hedging strategies and opportunistic debt issuances. With 3 investment-grade ratings and our CCH1 co-investment vehicle, we have become even less exposed to changes in interest rates. If the yield curve steepens going forward, we do not expect any material impact on our profitability. And four, virtually all of our investment markets are currently providing attractive opportunities. Utility scale renewables and storage, distributed solar and storage, energy efficiency, renewable natural gas and transportation have all been active markets for us in 2025 and continue to be well represented in the pipeline. And we remain excited with the emergence of our pipeline of Next Frontier opportunities. In summary, these 4 items reinforce the framework of our successful business model, further evidenced by our outstanding results this quarter. We just completed the most profitable quarter in our history and closed the largest investment in our history as we continue to consistently achieve our goals and provide outstanding returns to our investors. Now let's turn to the slides, beginning on Slide 3 and highlight a few key metrics. Our adjusted earnings per share in Q3 was $0.80, the highest quarterly EPS we have ever reported. This result was driven by strong growth in all of our components of revenue, which Chuck will discuss in more detail. Adjusted recurring net investment income, the new financial measure we introduced last quarter is 27% higher year-to-date over last year. And our managed assets, which includes our portfolio as well as our partners' assets in CCH1 and the assets we have securitized off balance sheet, were up 15% year-over-year to $15 billion. And our year-to-date adjusted ROE also has experienced significant year-over-year growth, rising to 13.4%. We are reaffirming our guidance for 8% to 10% compound annual EPS growth through 2027 and noting that we expect to achieve roughly 10% adjusted EPS growth in 2025. As detailed on Slide 4, we continue to make progress in the key areas of value creation for our business: one, originating new investments; two, optimizing return on our existing assets; and three, managing our liabilities and lowering our cost of capital. First, in terms of new investments, as the box on the left indicates, both volumes and returns have been strong year-to-date. Not only did we close more than $650 million of new transactions in Q3 for a total of $1.5 billion through the first 3 quarters of 2025, but we closed on a $1.2 billion investment early in Q4 that has put us on a path to close more than $3 billion for the full year 2025, up more than 30% year-over-year. We will discuss this investment in greater detail later in the call. Importantly, it is not only volumes that have been elevated, but our returns as well, with new asset yield in Q3 greater than 10.5% for the sixth quarter in a row. Meanwhile, our pipeline remains above $6 billion, even after taking into account the large October transaction. Second, we do not simply create value originating investments, but also in how we optimize returns over the life of the investment. One example of this is the targeted asset rotation strategy we executed in 2024 through which we were able to monetize certain lower-yielding assets in our portfolio for a gain while generating cash that we were able to recycle into higher-yielding assets. In Q3 of this year, we refinanced the senior ABS debt within the SunStrong residential solar lease portfolio, resulting in significant paydown of our mezzanine debt investments and a meaningful cash distribution to the SunStrong equity owners, of which we are 50%. This distribution created significant earnings in the quarter as we began to monetize the increasingly valuable SunStrong platform. We have also maintained a strong risk return profile in our portfolio as evidenced by minimal annual realized loss rate of under 10 basis points. This low level of losses reinforces the predictability of our cash flow and our ability to effectively underwrite investment opportunities. And lastly, we maximize value in our business with our low-cost, diversified and efficient debt and capital platform. It's notable to highlight that even after refinancing a portion of our low-cost debt due in 2026 at today's higher market rates, the increase in our cost of debt was only 10 basis points at 5.9% in Q3. In addition, we opportunistically added $250 million in hedges in September that reduced the base rate risk for our next debt issuance. Turning to Slide 5. As I briefly mentioned a moment ago, we are excited to announce a new investment that closed in October but is significant enough to mention on our Q3 call. It is a $1.2 billion structured equity investment in a major component of what will be the largest clean energy infrastructure project in North America once completed in Q2 of next year. HASI's involvement in providing capital to this project is truly a milestone event for our company and a reflection of the transaction size we can now accommodate given our access to capital. Developed and managed by one of the world's largest developers and owners of clean energy and transmission infrastructure, the project has several components. Our specific investment is for 2.6 gigawatts of wind power supplied by the largest U.S. turbine manufacturer and backed by PPAs with a weighted average life of almost 15 years, including counterparties spanning energy majors, utilities, community electricity providers and universities. Consistent with our discussion last quarter, we are investing at a derisked stage as most of our funding will occur in the first half of 2026. The expected return on the investment is consistent with our typical return targets on recent utility scale investments. The total investment commitment is $1.2 billion. However, the net impact to HASI's balance sheet will be much lower due to the investment closing in CCH1, resulting in an initial proportional commitment of approximately $600 million. Subsequently, we may add back leverage to the investment, further reducing our long-term hold. As noted earlier, this is not included in our Q3 financials and will be considered a closed transaction in Q4 with the vast majority of funding expected in Q2 of 2026. Turning to Slide 6. Our pipeline remains above $6 billion, including a pro forma adjustment to remove the $1.2 billion project just discussed as other investment opportunities have replaced this amount in the pipeline. Our pipeline of new investments remains highly diversified with strong undercurrents of demand in each of our key end markets. Higher retail electricity rates are facilitating demand in our BTM asset classes, including not just rooftop solar, but importantly, energy efficiency as well. Meanwhile, residential solar leases are expected to gain market share from loans and cash sales following the expiration of the 25D ITC at year-end. And our business is largely focused on leases and serving this end market. In addition, the grid-connected end market is experiencing larger project sizes to accommodate the growth in U.S. power demand, clearly driven by data centers, but also domestic manufacturing and the expanding use cases of electrification in general. Likewise, demand underpinning our fuels, transport and nature end market remains strong with RNG facilities in construction or in development expected to double the current installed base in North America. And finally, our Next Frontier asset classes remain an exciting new opportunity. And with that, I will ask Chuck to discuss our financial results. Charles Melko: Thank you, Jeff. On Slide 7, we highlight our Q3 profitability. And as you can see, we had meaningful growth in many of our key metrics. Jeff already highlighted our record quarterly adjusted EPS of $0.80, and our year-to-date adjusted EPS is at $2.04, up 11% year-over-year. This growth is driven largely by our primary source of revenue, adjusted recurring net investment income, which grew year-over-year by 42% in the quarter and 27% year-to-date. We are growing the recurring earnings portion of our adjusted EPS, and our equity efficiency has also helped us increase our year-to-date adjusted ROE to 13.4% compared to 12.7% for the same period last year. This growth in our adjusted ROE is demonstrating the meaningful benefits from our CCH1 co-investment vehicle, which I will speak to in a few slides. One last point on our metrics. Our GAAP net investment income does not include the earnings from our equity investments. Therefore, the adjusted recurring NII will continue to be greater than our GAAP NII. Now that I have highlighted the key results for the quarter, some additional context is useful. Jeff mentioned our diversified business model earlier, and I will add that it is also versatile, where we can generate value in different ways, such as through recurring earnings from the underwritten returns on our investments and also optimization transactions where we capture additional value that is embedded in our portfolio, such as through project-level refinancing activities, which we saw this quarter. These optimization transactions may not occur every quarter, but we consistently identify these opportunities year after year. Now on to Slide 8. Through the first 3 quarters of this year, we have closed $1.5 billion of transactions, which is greater than the same period last year. And when incorporating the transaction that Jeff spoke to earlier, we are on track to meaningfully exceed last year's total closed transactions. While transaction closings on their own are not an indicator of profitable growth, if you take into account our ability to generate new balance sheet transaction yields at an attractive level above 10.5%, we're also setting the stage for continued growth in adjusted EPS and ROE. Even as interest rates and our own cost of debt have risen over the last couple of years, it is important to note that we have been able to maintain our margins through the increase in our new asset yields and our hedging program. We expect we will continue to maintain attractive margins as well in a declining interest rate environment given our approach to investment, funding and managing interest rate risk. Next on Slide 9, we are experiencing double-digit growth in our managed assets as well as our portfolio. They have grown 15% and 20%, respectively, from a year ago. This is the base of assets from which we generate our recurring income. As we have discussed previously, we are migrating to a business model that is less dependent on new equity issuance to generate earnings growth. And the factor in accomplishing this is our CCH1 co-investment vehicle. As of the end of Q3, CCH1 has completed funding of $1.2 billion of investments, leaving $1.4 billion of available capital for future investment with the potential to increase it to $1.8 billion with additional debt at the CCH1 level while keeping its leverage level below a debt-to-equity ratio of 0.5. Our portfolio yield is at 8.6%, up from 8.3% last quarter as we are starting to see the new asset investments with yields greater than 10.5% start to come through our portfolio. The portfolio yield is the largest contributor to the growth in our adjusted recurring net investment income that is illustrated on the next slide. On to Slide 10, we provide a buildup of our new financial measure that we introduced last quarter, adjusted recurring net investment income. We are now utilizing this metric in addition to our adjusted EPS to measure the profitability of our managed assets as a whole, inclusive of both the net investment income from our portfolio as well as the recurring fee income from the other assets we manage that are not on our balance sheet. Our year-to-date adjusted recurring net investment income of $269 million has grown 27%. This component of revenue is a consistent source of earnings generated from our existing managed assets. Turning to Slide 11. We highlight a few items that will contribute to managing our liquidity and liability structure and further reduce our cost of capital. Over the past couple of years, we have significantly broadened our sources of capital and between our bank facilities, commercial paper program and our investment-grade ratings, we have a capital platform that is well-positioned to fund our growth needs at an attractive cost. First to mention is a $250 million term loan that closed after quarter end that will provide another source of potential liquidity for the refinancing of our senior bonds due next year. As we reported last quarter, we retired a large portion of the upcoming maturity through a tender offer. With our current liquidity at $1.1 billion at the end of the quarter, this term loan and our access to the investment-grade debt market, we are well-positioned to retire the remaining notes outstanding. Next, in furtherance of our focus on managing our interest rate risk, we executed an additional $250 million of SOFR-based hedges related to anticipated debt issuances and now have hedged up to $1.4 billion of our future debt issuance. On to Slide 12. This slide is a good illustration of the changes we have made to the business over the past couple of years that is accelerating our growth and returns for shareholders. We have historically just provided the total adjusted ROE metric that is highlighted in the dark blue. And while it was steadily increasing over time, it is not painting the complete picture on where our business is headed. With the introduction of CCH1 last year and obtaining our investment-grade ratings, we have meaningfully changed the profile of our adjusted ROE for new transactions. It may take some time for the higher profitability from our incremental business to fully show up in our adjusted ROE given the previous transactions on our balance sheet. So we want to illustrate where our business is headed with the adjusted ROE from incremental business by period. As you can see with our current business model since the start of CCH1 early in 2024, our newer transactions are generating a higher adjusted ROE with year-to-date being 19.6%. We expect this trend to continue and even increase as CCH1 investments are funded from debt at CCH1. Over time, you will see our adjusted ROE increase to the higher ROE that we are generating from our new business. I will now turn the call back to Jeff for closing remarks. Jeffrey Lipson: Thanks, Chuck. Turning to Slide 13, we display our sustainability and impact highlights, noting our cumulative carbon count and water count numbers reflect the significant impact of our investment strategy. We also remain very proud of our recognition, our targeted advocacy activities and the generosity of the HASI Foundation. Concluding on Page 14. To summarize the themes of this call, we just completed the most profitable quarter in the company's history, and we expect our investment volumes to exceed last year's by more than 30%. Economic trends remain favorable to our continued profitable growth. This success is the result of a resilient business model that focuses on asset level investing with long-term programmatic partners. Our approach also relies on disciplined underwriting and reasonable assumptions, and the model is further enhanced by a diversified and prudent approach to obtaining access to attractive sources of capital. Combining all of these elements with a talented and dedicated team results in consistent success despite periodic market volatility. Thank you, as always, to our talented team for this outstanding quarter. Operator, please open the line for questions. Operator: [Operator Instructions] The first question comes from Jon Windham from UBS. Jonathan Windham: Great result, by the way. I'll be very specific. It sounds a lot like you're describing the SunZia project on Pattern Energy in New Mexico. Is there a reason you're not naming the project? That's sort of a quick question. And then any color you can talk about what sort of equity stake and the economics of it would be interesting. Jeffrey Lipson: Thanks, Jon. I appreciate the question. It is the SunZia project and as you described. And -- in terms of returns, I think we talked about it being consistent with returns on recent other transactions we've had in our grid-connected portfolio. So, I think that's probably the best way we could describe the return. And it is a preferred equity investment. So, it has some structure to it. It's not a common equity investment. Jonathan Windham: Right. This is similar to other wind investments you've made in the past, you sort of get paid first. That's on the equity stack. Jeffrey Lipson: Yes. That's correct. Operator: The next question comes from Chris Denginos from RBC. Christopher Dendrinos: Echoing Jon's comments on the solid quarter. I wanted to ask about the pipeline. And I think you mentioned $6 billion, so flat quarter-on-quarter, but you've got -- I guess, if you adjust in the $1.2 billion transaction in October, it'd be up significantly. So can you just maybe talk about the pipeline here? It looks like it's strengthened quite a bit quarter-on-quarter. And just curious what you're kind of seeing from that perspective, if there's any sort of demand pull forward going on as a result of? Jeffrey Lipson: Sure, Chris. I would say, as we discussed in the prepared remarks, we did replace the grid-connected pipeline, in particular, with enough new volume such that it didn't go down after this $1.2 billion transaction that we described. Beyond that, our pipeline disclosure is, of course, not precise. We say greater than $6 billion. So I know it's hard from the outside looking in to tell if it actually went up or down in the quarter. But it's certainly at above $6 billion at a level that we're comfortable we'll have enough to invest in, in 2026 to achieve our goals. And we're not seeing too much in the way of pull forward. I would describe what we're seeing as ordinary course. And as we talked about last quarter, folks executing on their pipeline, meaning our clients, everything they're working on now is grandfathered or safe harbor, but I don't really think this is the result of any kind of pull-through. Operator: The next question comes from Noah Kaye from Oppenheimer. Noah Kaye: I want to ask sort of a broader question around investments resulting from this announcement today, the $1.2 billion. We've historically thought about the business as making smaller investments spread across a large number of projects. This is a pretty big one. But of course, as you said, energy projects are getting bigger. You've talked about data centers as the Next Frontier asset class and they're getting just on the energy infrastructure, this type of investment. So, I guess, how should we think about this investment and what it signals for your appetite to take on larger single projects going forward? Jeffrey Lipson: Well, it's a good question, Noah. We've built the business on some small and modest-sized transactions over time, but we've always, at least after -- since 2020, supplemented that with some larger transactions as well. I think this transaction is a reflection in many ways of our access to capital through both being investment grade and our CCH1 relationship. The amount of capital we can bring to the table is more significant. So, we've become a player in these larger transactions. And when it makes sense, we'll do that. We're, of course, going to manage our risk accordingly. I talked about half of this being in CCH1 and some other pathways to a lower long-term hold level. So, we're certainly managing our risk. But in terms of your broader question of how we think about the business, I think you should think about the business as we're being active in both smaller transactions where we've historically found great value and continue to find opportunities, but also supplemented by some periodic larger transactions where it makes sense for us. And so, I think this is in many ways -- I use the word milestone, but it's we graduating into access to some of these larger transactions, which are going to be more frequent, as you mentioned, because of data centers and the grid-connected development focusing on larger projects. Noah Kaye: It is a milestone, and we want to recognize that. A housekeeping item, just the ABS, the SunStrong ABS refinancing. Can you kind of quantify what the benefit was to the quarter in that because the ROE expansion this quarter was pretty noticeable? Jeffrey Lipson: Sure. And I'm going to ask Chuck to do that. But before I do that, Noah, I'm going to clarify a little bit a few items around SunStrong. I expected us to get a question on it, and I don't want there to be any confusion about what this distribution was. So let me just answer that a little more broadly and say we often refer to SunStrong and folks talking about us refer to SunStrong in a singular capacity, but we actually own 50% of 2 separate entities. One of them is SunStrong Capital Holdings, which is an AssetCo that primarily owns solar leases, most of which have been securitized. And the distribution we received this quarter was the result of refinancing the ABS debt, which due to de-levering and the very strong performance of the underlying leases resulted in essentially a cash out refi. So, there was meaningful cash distribution to the equity owners. And going forward, as an equity owner in SunStrong Capital Holdings, we'll just get the normal distributions from the waterfall of the securitized assets. The refi was a bit of a onetime. Now separate from that, we own 50% of SunStrong Management or SSM, as we call it, which is truly an operating business that provides servicing to consumer and commercial loans and leases, including the legacy SunPower and Sunnova portfolios. Now SSM is an operating business. It has its own executive team. It's performing very well. It has a business plan, which includes ongoing growth in the platform and expansion ideas. And our accounting for our SSM investment is as an equity method investment that we hold at fair value. So to the extent the underlying value of SSM increases, that would positively impact HASI's earnings. So I just wanted to create that clarification of when we say SunStrong, what we actually mean. This distribution that we're talking about in the third quarter was from SunStrong Capital Holdings. So sorry for the deviation to your actual question, I'm going to defer to Chuck. Charles Melko: Noah, so our investment in SunStrong consisted of both mezzanine level loans as well as a small amount of equity. The total proceeds from the ABS that we received was around $240 million. And the composition of that was roughly about $200 million of it went to pay off our mezzanine loans. of which we're redeploying back into additional accretive investments. But then we also -- the other remaining $40 million was related to our equity, of which we did have some small investment, like I said. And of that $40 million that we received, roughly about $24 million of it was a gain in excess of our investment. So the impact to the quarter was $24 million. Operator: The next question comes from Davis Sunderland from Baird. Davis Sunderland: Congrats on an awesome quarter. Just one for me. I wanted to ask just how much the tax credit changes from Big Beautiful Bill have maybe impacted the types of investments you're seeing by asset class? And I guess the root of my question is just wondering if you've seen any opportunities in the last couple of months in discussions to step into a potential hole in the cap stack or any other ways that there have been puts or takes. Jeffrey Lipson: Sure. Thanks, Davis. I'm going to ask Susan to answer that one. Susan Nickey: I think at this point, with the extension of the tax credits for wind and solar, by and large, for 5 years with safe harbor and started construction and storage and some of the other credits that extend longer, I think we're still seeing the traditional combination of tax equity structures and transfer structures to dominate the market. So, we're still -- we still have this longer transition period before we expect to see a change in the capital stack to not include tax credits. Operator: The next question comes from Maheep Mandloi from Mizuho. John Hurley: Jack on for Maheep here. Congrats on the quarter. A lot of third-party ownership have talked about prepaid leases. Is that a kind of product that would interest you guys? And would you see similar yields as traditional leases? Jeffrey Lipson: Sure. Thanks, Jack. I'm going to ask Marc to answer that one. Marc T. Pangburn: Jack, that's something that we could certainly take a look at but haven't been presented any opportunities yet. So we'll have to defer on that until the future. Operator: The next question comes from Vikram Bagri from Citibank. Unknown Analyst: It's Ted on for Vik. Just looking at the principal collections, it looks like it was a larger quarter with about $382 million returns. Could you just give some insight into what the maturity profile and roll-off schedule of the existing portfolio looks like? Should we expect the pace of that to potentially increase as you approach the new wind investment? Charles Melko: Yes. This is Chuck. So, the $300 million number that you're seeing there, the biggest driver of why that's a little bit higher has to do with the SunStrong refinancing that I just mentioned. When I said that roughly about $200 million of the proceeds went to pay down the mezz loans that came through that line. So that was a little bit of an acceleration of normal amort profile that you'll see from our portfolio. But the way I generally think of it is that the lives of our assets, weighted average life is around 10 years or so. So you could expect looking at our portfolio that our amort in any given period will mirror that. Operator: [Operator Instructions] The next question comes from Mark Strouse from JPMorgan. Michael Fairbanks: This is Michael Fairbanks on for Mark. Just wondering if you could talk about how this large transaction and the $3 billion of volumes this year might impact the EPS growth algorithm in '26 and beyond. I know you reaffirmed the 8% to 10% range, but should we be thinking about a possible step-up in '26 from these volumes? Jeffrey Lipson: Thanks, Michael. Good question. Our cadence has consistently been to talk about guidance in February, and I think we're going to stick to that. So we're working diligently right now on our business plan with our Board. And I think we'll have more to say about '26 and '27 in February. Michael Fairbanks: Okay. Great. And then maybe just for a follow-up. It looks like SunZia was excluded from the greater than $6 billion pipeline, which makes sense. Just wondering if it was included in that number last quarter? Jeffrey Lipson: It was. It was in last quarter's pipeline. That's correct. Operator: The next question is a follow-up question from Chris Dendrinos from RBC. Christopher Dendrinos: I just wanted to follow up here. And I think you mentioned during your prepared remarks, the really low rate of bad debt. I think bp Lightsource or subsidiary had reported a default with one of their suppliers. And I'm curious, I think you all have worked with them in the past. Is there anything related to that, that would impact you all? Jeffrey Lipson: Thanks, Chris. No, there wouldn't be. We do work with bp Lightsource. But again, we're monetizing project cash flows. And the challenge that you discussed has no impact on the project in which we're invested. Operator: Thank you very much. There are no further questions at this time. Ladies and gentlemen, that does conclude today's conference for today. You may now disconnect your lines at this time, and thank you very much for your participation.
Operator: Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Azimut Group 9 Months 2025 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Giorgio Medda, CEO of Azimut. Please go ahead, sir. Medda Giorgio: Thank you, and good afternoon, everyone, and thank you for joining us today for the Azimut's 9 Months 2025 Results Presentation. I'm Giorgio Medda, CEO of the Group, and I'm very pleased to be here with Alessandro Zambotti, our CEO and Group CFO; and Alex Soppera, Head of Investor Relations. This period marks another important step in our growth journey, reflecting both the strength of our business model and the consistency of our strategies across markets. This year, in 2025, we continue seeing a great execution and delivery in terms of objectives, translating into tangible results and exciting corporate development that we will certainly elaborate in detail later. So moving on to Slide 3, please. So let me start with the key highlights for the period. So the first 9 months of 2025 represent the best on record for Azimut in terms of managed net inflows, reaching EUR 13 billion, together with a strong 17% growth in recurring net profit. These results confirm the strength of our diversified business model and certainly the quality of our recurring revenue base. We also made very significant progress on the TNB transaction, which continues to advance and represent a transformational step for the group. Alessandro will discuss about this in more detail later. But now we certainly -- I can say we operate with greater clarity and visibility over the next regulatory steps related to the TNB project whose authorization is expected by the second quarter of 2026. Building on the strong commercial momentum to date, we are raising our core group net profit guidance for 2025. And today, we are projecting the core group net profit to exceed EUR 500 million in 2025, while we see 2026 net profit, including the expected contribution from the TNB transaction to surpass EUR 1 billion. As a result of the updated time line regarding the TNB authorization, we have decided to anticipate selected key guidelines from our Elevate 2030 strategic plan, in particular relating to our global business. The new strategic plan will outline an even more ambitious growth trajectory, further cementing Azimut's leadership position among global independent players. And -- but certainly, I mean, I will be able to elaborate on that in greater detail later in the presentation. So moving to Slide 4 and turning to the highlights for the first 9 months of the year. Let me mention that total assets have reached EUR 123 billion, marking a new record for the group. Net inflows were equally strong at EUR 15 billion, of which 43% came from our global operations. This demonstrates and shows the continued diversification of our growth and the relevance of our global platform, which once again outperformed other players in the Italian asset management industry. Revenues in the 9 months exceeded EUR 1 billion, supported by a 9% increase in recurring revenues, confirming the quality and resilience of our business mix. EBIT stood at EUR 471 million with recurring EBIT up 12% year-on-year, and group net profit reached EUR 386 million, representing a 17% growth compared to the same period last year. That is essentially driven by the steady expansion of our recurring profit base. And finally, let me stress what is the contribution from our global operations, reaching EUR 60 million, corresponding to EUR 43 million in the same period of 2024. So this is almost 50% growth versus the 9 months last year. This consistent growth across regions confirms the effectiveness of our international strategy and the scalability of our global business model. And let me say as a general comment that these figures put us in a strong position to continue executing our long-term growth agenda while we continue creating value for our shareholders. So looking at the bridge between 9 months 2024 and 9 months 2025, I'm looking actually at Slide #5. Our group net profit reached EUR 386 million compared with EUR 439 million in the same period last year. And the difference here mainly reflects lower performance fees and capital gains below the operating profit line, while recurring profitability continues to grow very strongly. So recurring EBIT increased by 12% after costs, confirming the solid momentum of our core operations, while performance fees were lower by about EUR 19 million, mainly due to insurance-related products. However, I would like to highlight our strong 3Q results and a solid start into Q4. Strategic affiliates in GP stakes have contributed slightly less than last year, with dividends from our GP stake in activities offset by lower net results from Sanctuary Wealth and AZ NGA. Under other items below EBIT, the comparison is significantly affected by nonrecurring items, most notably the capital gain from the sale of our stake in Kennedy Lewis. And as such, it's important that throughout this call and for the broader analysis in general, I would rather focus solely on recurring growth, which posted a 17% growth year-on-year as a result of our continued expansion across the globe. So on Page 6, you will see how our total assets have evolved since the start of the year under the new reporting method. I won't go too much into the detail of this analysis as these are figures that have been already published and commented on press releases. But the thing I would like to mention here that what is remarkable is the fact that growth was essentially coming from organic flows, which have totaled almost EUR 12 billion during the period and represents the best results on record in Azimut's history. And while we don't have all the final numbers as of yet, let me anticipate that October is poised to be another month with very strong inflows across the board. Turning to Page 7. Again, here, I wouldn't go too much into the details of this, which will be also commented by Alessandro more in detail. But let me certainly mention in Slide 7, the breakdown based on our 4 distribution lines. Integrated Solutions is our core line of engagements with clients, including Italy, Brazil, Egypt, Mexico, Taiwan and Turkey. This continues to be a powerhouse and command superior margins that are driven by the vertically integrated business model and market-leading positions that we have in these geographies. We have then the Global Wealth division, which brings together the group's hubs in Monaco, Dubai, Singapore, Switzerland and the United States that is becoming an increasingly important growth driver, serving high net worth and ultra net worth clients worldwide. And then we have the institutional and wholesale effort that is gaining traction and saw a very strong increase in profitability. Let me remind you that this segment brings together our global institutional initiatives across LatAm, Asia and EMEA and certainly Italy. The strategic importance of this business is rising and will continue to do so. It's a source of innovation, distribution diversity and partnerships such as the contribution for Nova. And also, let me mention that strategic affiliates remain in a phase of growth and consolidation, and we still have investments ramping up to expand the respective aggregating platforms of financial advisers in the U.S. and Australia. And very important also to mention that as we keep growing, the group is able to maintain a very healthy recurring net profit margin at 43 basis points. So moving to Slide #8 and zooming in on the performance by region. The results confirm the strength and the diversification of our global platform. Again, here, I won't go into details too much as numbers and the notes speak for themselves. But let me tell you that something that is very, very important to highlight here, Azimut has evolved from a successful Italian player into a global platform with very strong local routes and international breadth that spans 20 countries. Every region is contributing to growth, guided by unified culture, consistent governance and the shared vision for the long-term value creation. We're going to talk about Elevate 2030 later, but these results set a very solid foundation for the ambitious growth targets that we are setting for ourselves in the years to come. So let me now hand over to Alessandro for a more detailed commentary on the figures. Alessandro Zambotti: Thank you, Giorgio, and good afternoon to everybody. So we can now move to Slide 9. Total revenue in the first 9 months 2025 go up to EUR 1 billion, so marking an overall increase of 6%, EUR 61 million year-on-year. This is the result of an increase in recurring fees, plus EUR 58 million, thanks to the strong growth recorded in terms of total assets. And in particular, EUR 31 million came from the Italian perimeter with a strong contribution from all business lines from mutual funds, alternative funds and pension funds and also to Nova. Some numbers, at the level of the alternative funds, we have a positive contribution of EUR 12.5 million to the growth. Mutual funds around EUR 7 million and discretionary advisory services and pension funds contributed for EUR 9 million. With regards to our global operation, we have a contribution of about EUR 27 million, thanks in this case as well to the asset growth, mainly driven by U.S., Brazil, Singapore and Monaco. We should also factor in the change in perimeter due to the consolidation of Kennedy Capital and HighPost, which occurred for EUR 17 million. So moving to the performance fees were EUR 4 million lower year-on-year, mainly reflecting softer results in the first half of the year, but partially offset by strong third quarter performance, thanks to Brazil, Turkey and Monaco. Then at the level of the insurance revenue, we have a decrease by EUR 80 million compared to the first 9 months of last year. But however, in this case as well, despite market volatility, we have a positive contribution from performance fees of about EUR 27 million in these 9 months and in particular, strong contribution in the third quarter. We also grew our recurring revenue by about EUR 8 million compared to last year. And these 2 components largely compensated for the lower performance contribution resulting in an overall variance of EUR 16 million compared with last year. And to conclude this first part of the revenues at the level of the other revenue were up to about EUR 15 million compared to last year. And I mean, in general, we continue to see good consistency across all the areas that contribute to this line. But I would like particularly to highlight the contribution from a structuring fee related to our Brazilian private infrastructure business. These fees are not recurring on a quarterly basis since they depend on deployment activity. But however, given the size and the ongoing growth of our infrastructure platform, we do expect them to recur on an hourly basis, although with varying amount depending on timing and at the level of the single transaction. So then now moving to Slide 10. We are going to focus on cost trend. Compared to revenue growth of about EUR 61 million, cost increased by a total of about EUR 33 million. Distribution costs increased by EUR 24 million. This change is explained by the general increase in distribution costs, mainly within the Italian perimeter directly correlated to the growth of our assets and revenues and EUR 8 million as well from the growth of the variable and dispensing component, so an increase in marketing costs is also directly connected to the TNB project operation. And finally, EUR 4 million stemming from the increase in costs directly linked to the growth of our foreign business. The administrative costs were up by about EUR 11 million, and this is largely explained by the change in perimeter, meaning the line-by-line consolidation of Kennedy Capital and HighPost that contributed about EUR 4 million with offsetting effect from the FX. And we also would like to highlight anyway the cost discipline, especially concerning the Italian perimeter. And then D&A on the other hand, we see that it is substantially in line with the previous year. Moving to Slide 11. As you can see, considering the revenues and cost, the dynamic just explained, we're recording a strong EBIT growth of 12% or EUR 47 million year-on-year. Equally important, we recorded a growth in the recurring net profit of about 17%, EUR 44 million versus the first 9 months of last year. Before moving to the next slide, let's highlight also the significant contribution from the finance income item, which shows an increase of about EUR 62 million, driven by EUR 37 million from assets and portfolio performance, EUR 19 million from the fair value option and equity participation, EUR 9 million from interest and EUR 8 million from GP stakes & affiliates. And then also, we had a negative, in this case, negative impact of the IFRS for EUR 11 million. Now moving to Slide 12. We have the classic picture of our net financial position, which is a positive balance at the end of September of EUR 765 million, substantially the same value of last year compared to June, we have an increase of around EUR 120 million. That can be reconciled considering the pretax results of EUR 198 million less the tax advance of EUR 7 million, EUR 8 million, its M&A for EUR 8.5 million, the proceeds from the sale of RoundShield that contributed to the cash for EUR 38 million and then a technical adjustment of EUR 27 million from UCI units moved out from the net financial position. Moving to Slide 13. Let me share a key update on the TNB project. During the past month, we secured the antitrust approval to acquire the banking license. And I am delighted to announce today that we have signed yesterday a binding agreement with the Banca di Sconto. Our negotiation with FSI continued following the press release published to date. We have updated the project finalization time line to Q2 '26. This timetable establishes a clear and orderly process, providing Azimut and its shareholders with greater visibility on the final stages of the transaction. The schedule is fully aligned with the operational work already underway for the launch of TNB. And then I remind you, once again, the extraordinary long-term value of this transaction. So again, the EUR 1.2 billion potential total consideration plus the EUR 2.4 billion revenue guarantee plus the 20% stake that we will maintain in TNB. Turning to Slide 14. We have here shared the '25 targets. We confirm our net inflow target for the full year of EUR 28 billion to EUR 31 billion. We have already achieved more than EUR 15 billion of net inflows at the end of September. We saw preliminary figures for October and an expected contribution of about EUR 14 billion from the NSI integration could lead us to reach up the guidance. And then moving to Slide 15. Given the strong results achieved in the first 9 months, we are pleased to announce an upgrade to our '25 core group net profit target. We now expect to exceed EUR 500 million in '25 compared to our previous lower end guidance of EUR 400 million. Looking ahead to 2026, including the expected contribution from TNB in this year, as a result of the updated time line, we estimate group net profit to amount above EUR 1 billion. Finally, reflecting both the strength of our results and our solid capital position, the Board of Directors intend to propose announced the dividend policy for the 2025 financial year. This will be above last year EUR 1.75 per share, which represented a 61% payout on recurring net profit, further demonstrating our commitment to rewarding shareholders through sustainable and growing returns. We will share the final details with our full year '25 results presentation that will be happening at the beginning of March '26. Thank you for your time and your attention. Now I hand over to Giorgio, again. Medda Giorgio: Thank you, Alessandro, and I will move to Slide 16. So following the completion of the ordinary supervisory review by the Bank of Italy on part of our Italian business, we can say that we have full clarity and greater visibility on the regulatory time lines ahead. This gives us a very solid foundation to move forward with confidence towards the launch of TNB that is a key milestone in Azimut's evolution. The group strategic plan, Elevate 2030, which will include targets for all business lines and both the Italian and global platforms will be presented in full as previously announced to the market following the authorization of the TNB transaction. However, global expansion continues to be a cornerstone of Azimut's strategy, and we continue building on our presence in 20 markets. And we are very determined to continue strengthening our leadership among the world's leading independent players. And that is why, in the meantime, we have decided to share a few key guidelines focused on our global business that is a part not impacted by the supervisory review. This plan emphasize growth, diversification and sustainable value creation for shareholders. With Elevate 2030, we are certainly defining an even more ambitious growth trajectory, one that will showcase the full potential of our diversified global platform and reinforce Azimut's position as a truly global success story. But let us now take a closer look at what lies ahead, and I will move to Slide 17. So first of all, to help everyone to better understand the potential of our global operations, we started with a bottom-up analysis of the expected contribution in terms of net inflows from each region. This has historically been an area where the market underestimated our potential, and we believe these figures better illustrate the scalability of our platform. What we're showing here are the expected yearly net inflows from our global operations only, and we are excluding Italy. These targets are indeed very ambitious, but we see them as incredibly realistic. They are consistent with our historical growth trajectory, which also reflects a clear step-up as we continue to scale, broaden our investment solution base and bring innovation to our markets. And indeed, we believe a strong potential for Azimut to replicate the success that we have achieved in Italy. We expect total net inflows from our global platform between EUR 5 billion and EUR 8 billion per year, with the Americas region remaining a major growth driver, contributing EUR 2 billion to EUR 3 billion annually, supported by the integration of NSI in the United States, which will add approximately $16 billion or EUR 14 billion upon closing of the transaction at the end of the year. Our strategic affiliates led by Sanctuary Wealth in the U.S., AZ NGA in Australia, also very well positioned now to capture powerful structural trends and the shift of top financial advisers away from bank-owned networks towards independent platforms continues to accelerate and the ongoing intergenerational wealth transfer in both markets is expanding every day the addressable client base for advisory-driven models like ours. For the strategic affiliates, we are expecting to add between EUR 1.5 billion and EUR 2.5 billion of annual inflows, confirming the strength of our partnership model in high potential markets. The EMEA and Asia Pacific regions will also contribute steadily, driven by our ongoing expansion in markets such as Egypt, Taiwan and Singapore. And overall, this figure illustrates the depth and balance of our global business. In general, what I would like to stress here that the international component of Azimut is becoming an increasingly powerful engine of growth and value creation under the new strategic plan. So moving to Slide 18. Here, we are really converting the inflows into the overall asset base at the end of the period. And we are now projecting our global average total assets to grow from around EUR 54 billion to between EUR 95 billion and EUR 110 billion by 2030. This is a very exciting plan. We are essentially showing here our ambition to double our asset base. But certainly, it demonstrates the strength and maturity of our global platform. Achieving these goals will require certainly focus and determination, but I believe we have all the right elements in place. We have now a robust and diversified product offering across public and private markets. We have the ability to tailor solution to the specific needs of each client, and we have a unique entrepreneurial model and mindset that will allow us to move quickly and seize opportunities. This combination gives Azimut a unique and clear competitive advantage and positions us among the very few independent global players able to grow at scale while preserving quality and agility. And now moving to Slide 19. I want to really focus on margin. This is a very important element to help the market better understand what lies ahead and the true earnings power of our global business. Here, we show where our current net profit margins stand today by region and where we expect them to evolve by 2030. We have provided what is a wide enough range to capture different market conditions, but also we want to illustrate what is the significant operating leverage and the economies of scale that our global platform can deliver as it continues to grow. The Americas are expected to see margins rising from around 27 basis points today to between 25 and 35 basis points by 2030. And this will be our largest region by total assets, supported by the NSI integration and the planned launch of active ETFs, which will bring Azimut's global product capabilities to the world's largest market. EMEA remains our most profitable region with margins expanding towards 50 to 60 basis points, while we see the potential for the Asia Pacific region to gradually improve its contribution as the region scales and matures. Looking at these figures on a consolidated level, we expect the global business, excluding Italy and the strategic affiliates, to reach a net profit margin between 30 and 40 basis points by 2030, corresponding to an annual profit of approximately EUR 180 million to EUR 280 million. This compares with a margin of around 35 basis points and a net profit of EUR 70 million generated in the first 9 months of this year. Also, I think it's important here to put into perspective that since 2019, our global net profit has grown at a compound annual growth rate well above 35%. And this gives us a very strong base and clear visibility on the profitability path we are building towards 2030. I would move to Slide 19, 20 and 21. And on the next 3 slides, you see the same breakdown as before, but this time by business line rather than geography. And that should help everyone to cross check our assumptions and better understand the contribution of each vertical to the overall growth plan. I will not spend too much time here, but it's important to highlight the strength and balance across our global platform. And let me tell you that the Elevate 2030 plan will bring greater transparency to the market by showing our strategic and financial objectives through these 4 verticals that we have already introduced this year with the new reporting structure. This structure certainly enhances clarity, ensures consistency in how we represent value creation and makes it easier to appreciate the growth and profitability potential for each business line. And obviously, 4 verticals provide a diversified and complementary growth platform that is underpinning our market leadership, operational integration and long-term strategic partnerships. I would move now to Slide 23, where there is essentially highlighted what is a key pillar for Elevate 2030, that is strategic capital management. This is a framework designed to enhance our valuation to strengthen financial flexibility and deliver consistent and attractive returns to our shareholders. Our focus is on improving transparency and disclosure to help close the valuation gap that we continue to believe the market is still applying to the stock and not really truly appreciating the potential of Azimut. We are also proactively managing regulatory risk by simplifying our structure and ensuring greater operational clarity across jurisdictions. And we furthermore plan to unlock value from our global operations through a series of operations that could potentially include targeted demergers, dual listings and/or strategic partnerships. We're also very pleased today to announce a new share buyback program with a commitment to cancel up to EUR 500 million of repurchased shares over the next 18 to 24 months, equivalent to around 10% of our share capital. This initiative aims to maximize shareholder remuneration and reflects the constructive feedback that we have received from our investors over the last few months. And it's a clear signal of our confidence in the strength of the group, the resilience of our cash generation and our commitment to delivering tangible value to shareholders. Beyond this, we remain committed to maintaining a debt-free position given the strong cash flow generation of our business. However, we will preserve the optionality for future value-accretive M&A opportunities to be financed via debt. And as Alessandro has already highlighted, we will propose a new enhanced ordinary dividend for the full year 2025 versus the prior year. And certainly, we will give you more insight with our full year results in March 2026 when it comes to a broader and more comprehensive dividend policy as part of the Elevated 2030 plan. I mean, I think we can already anticipate that when it comes to shareholder remuneration, one key principle will be that any policy that we will announce to the market will be aligned with cash flow generation to ensure an attractive and sustainable payout over time. So let me move to the last slide, really to wrap up everything that we discussed and shared with you today. So first of all, we are upgrading our 2025 core net profit target to above EUR 500 million, and we project now net income to exceed EUR 1 billion in 2026. This reflects the solid momentum we have built throughout the year and continued strength of our recurring earnings. Second, we have made meaningful progress on the TNB transaction, gaining enhanced clarity on the time line for the next steps. And this gives us a clear regulatory and strategic pathway to move forward. Third, with Elevate 2030, we are releasing ambitious yet achievable targets for our global operations, and we project between EUR 5 billion and EUR 8 billion of annual net inflows over the next 5 years and total assets between EUR 95 billion and EUR 110 billion by 2030, with an expected net profit margin in the region of 30 to 40 basis points. And last point, our strategic capital management remains a key driver of value creation, supported by a EUR 500 million share buyback program with full cancellation of repurchased shares and the new dividend policy to be presented in 2026 after the completion of the TNB transaction. But as we mentioned, already we are providing an announced dividend payout for 2025, obviously applying on a payment in 2026. Together, we believe these initiatives position Azimut for a new chapter of profitable discipline and sustainable growth. With this, we are done and we certainly open the floor to any questions. Operator: [Operator Instructions] The first question is from Gian Luca Ferrari of Mediobanca. Gian Ferrari: Three for me, please. The first one is on the foreign business. I think what you are telling us today, Giorgio, is that the foreign operations are closing this year very close to the cost of capital you put in that development outside Italy. And given the trajectory you are disclosing today, is it fair to assume that by 2027, the IRR of this will reach 20% or something very close to that level? The second is on Nova. Last week, Amundi and then UniCredit, they have been pretty vocal in what is the relationship among them. I will not ask you the level of AUM you are expecting from UniCredit given the acceleration of the divorce, let's say, from Amundi. But I'm more curious to understand what is the level of margins after 2028? So after UniCredit will have exercised the call option. Is it fair to assume that your 20% in Nova will represent something like 15, 20 basis points on the AUM that UniCredit will have transferred at that point? The third question is, I don't know if I can ask this question, but are you eventually considering a dual listing of Azimut even in other stock exchange like in the U.S., for example? And sorry, if I may, the last one. I saw in the press release, you -- after the Bank of Italy inspection, you have some, let's say, adjustments to the business to be compliant with what Bank of Italy is asking to you. Are the costs related to that material or we are talking about a few million euros? Medda Giorgio: Gian Luca, I'll pick your first and second question. So regarding the foreign business or the global business, as we call it [indiscernible], you look at this year and you look at what we have delivered for the first 9 months, I think it would be fair to assume that we will generate a return on invested capital of between 13% to 15% that I think is above our cost of capital. So I think we are already proving value creation. And yes, indeed, when you look at the earnings trajectory over the next couple of years, certainly, I see as very realistic, a return on invested capital in the region of 20% within this time frame. When it comes to Nova, as you know, and I think it's important for me to stress it again, we will never, never disclose any confidential information regarding the activity of clients with our platform. We have never done that with any client. We will never do with Nova. But let me guide you towards some generic principles that govern our partnership with Nova. Certainly, the moment that UniCredit will exercise the call option to buy 80% of Nova, that should not have a material impact on earnings contribution. As already today, we have an agreement under which we are working like UniCredit was already an 80% shareholder. And when it comes to basis points, I think we've guided in the past a range between 40 to 50 basis points. I would assume that we are ballpark again in line with that level in the second stage of this partnership if we get to the second stage after the exercise of the call option. You were also asking about dual listing. Yes, indeed, the U.S. stock exchange remains a very viable option for us. Certainly, we see today a very significant valuation differential for players in our industry being listed there as opposed to be listed in European markets, but we will retain obviously full optionality in deciding which exchange will be eventually decided for our alternative listing. Alessandro Zambotti: I take the Bank of Italy side. So in general, as you said and as you probably read on the press, the report is focused on increase our strength in terms of [indiscernible] strategic planning. So nothing let's say, that cause us an impact on the business and therefore, on the P&L of the group. Therefore, it's just a matter to focus on paperwork and fix what, let's say, they found missing. But as you said also during the question, it's just a few, let's say, a few euros to spend to fix quickly the gap and then looking forward, focusing on our business. Operator: The next question is from Giovanni Razzoli of Deutsche Bank. Giovanni Razzoli: Two set of questions. The first one is on the target for the international operation contribution. You are targeting EUR 5 billion to EUR 8 billion of inflows, half of that are from the states. But if I look at the 9 months run rate, you are already at close to EUR 4 billion, EUR 4.5 billion with U.S. at EUR 2.5 billion. So I was wondering if we can consider the low end of the range, this EUR 5.8 billion contribution of inflows from the international operation as a quite conservative target. The second question relates to the announcement of the share buyback. I was wondering how shall we look at the 10% share buyback that you have announced in the context of the 3% treasury shares that you have already owned. So shall we assume that the 10% is on top of the 3% or you will proceed with the cancellation of the 3% and then on top of that, in 2 years' time, you will buy another 10% with the cancellation? And then as you have mentioned medium, long-term targets, given that your net financial position is very strong, actually, you are cash positive with a capital-light business, shall we assume that apart from this EUR 500 million share buyback, if I move forward, I don't know, 3, 4 years down the road, the share buyback becomes a kind of recurring component of your distribution strategy, let's say, EUR 500 million of share buyback in 2 years' time as a kind, as I said, of recurring contribution of your remuneration policy? Medda Giorgio: Yes, Giovanni. So let me start with the question regarding the EUR 5 billion to EUR 8 billion expected net new money from our non-Italian operations. Indeed, we have provided you a target. This is a target applied for a 5-year period. Certainly, we always work with the ambition of beating the targets that we set for ourselves. And indeed, I would say that the bottom end of that range assumes a deterioration in market conditions and things changing as opposed to what we are leaving now. But the range is a range, is a long period of time, and I would certainly with everyone in Azimut to make sure that our real objective is to beat that range. When it comes to the share buyback, I don't know which figure you are looking at, but I would say that probably today, treasury shares amount to 1% of our outstanding capital. And you should assume that the 10% is on top of this 1%. And for the question regarding what will happen in the next 3 to 4 years, I would certainly be thinking what we have announced today. And time will tell. I think we are making a very strong statement in terms of committing to ensure that our shareholder remuneration policy is inclusive and makes all our shareholders to benefit from the value that we create every day in our business around the world. What is important to say here is that after the TNB transaction, we'll be able to provide a more comprehensive shareholder remuneration policy, including also the ordinary payout policy when it comes to dividends. Operator: The next question is from Hubert Lam of Bank of America. Hubert Lam: [indiscernible] in the global business. Just wondering how much of that would you expect it to be coming from organic in your plans? And how much is it M&A? Do you need M&A to kind of get there? Or are you confident that organic, you can still achieve your targets? Second question is on the share buyback, the EUR 500 million. I'm just wondering in terms of timing when it could start, do you need the approval for the new bank first before you can start the share buyback? Or can it come before that? And lastly, any questions on the new bank. Any update in terms of expected profits you expect from this, both in '26 and maybe beyond that? Medda Giorgio: Hubert, I'll reply to your first 2 questions. I'm not sure I got right your first one. But let me start with the first one regarding organic growth from our global operations, the guidance we provided, you should assume it's mostly organic. And by the way, when you look at what we have done this year, again, the figure that we mentioned earlier is essentially mostly organic. So you should really consider any M&A contributing to this level. When it comes to the share buyback, as a matter of fact, the share buyback is live in the market because we had already approved the share buyback with our AGM in the first quarter this year. What the AGM will approve next year will be the renewal of the plan and the cancellation of the repurchased shares. But the share buyback is, as a matter of fact, right now live in the market. And as far as your first question is concerned, we missed it. Hubert Lam: Yes. Sorry about that. Yes, so the answer to the first 2 are very clear. The third question -- yes, sorry, on the new bank. Just wondering how much in terms of profit contribution we can expect from it in terms of delivering profits in '26. I know that's just the first year and also like beyond, any update in terms of guidance around that? Alessandro Zambotti: Well, nowadays, it's running around -- with the projection at the end of the year, it's around EUR 60 million for '25. Therefore, I would say we are going to be the 20% of this range less a few costs that obviously has to be incurred through the fact that it has no spending banks. Therefore, I would say that we are in this range. Operator: The next question is from Alberto Villa of Intermonte SIM. Alberto Villa: A few left. One is on the acquisition side. I read that your Chairman also indicated that there might be opportunities for future acquisitions, especially in LatAm. So I was wondering if you can give us an idea what is, let's say, of interest for the group in terms of completing the setup of the global operations you have. And broadly speaking, what is the leverage that you would consider as a good setup for the group if you find an interesting opportunity also inorganic in the framework of the -- also the capital remuneration and shareholder remuneration that you have in mind? Medda Giorgio: Okay. Thank you, Alberto. So your first question referring to the interview of our Chairman a couple of weeks ago in Italy. Indeed, we will continue to explore and to seek acquisition opportunities on a bolt-on basis and acquisitions that will never be material in terms of cash outlay and certainly will carry a strong strategic sense in terms of adding and complementing our existing businesses around the world. I think during the interview, it was mentioned our interest in Latin America. Let me tell you that there are a few situations we are looking at in Brazil, but that would be negligible in terms of cash investment for the firm, but certainly we will strengthen our distribution business in the country. And when it comes to the leverage, we often said that we certainly recognize the merits of having an optimal capital structure policy. And in general, we would guide the market when it comes to what we would envisage in the case of a transformative or material M&A transaction in terms of leverage, probably in a situation where we have a net debt to EBIT in the region of 1 to 1.5x ratio. Operator: The next question is from Elena Perini of Intesa Sanpaolo. Elena Perini: I have some left. The first one is about your new net profit target for '25 and 2026. So basically, you move the more than EUR 1 billion target to next year due to the timing of the conclusion of the TNB transaction, if I understand correctly. And while you have for 2025, a target about EUR 500 million. In terms of targets, just to refer to your global business. The wide range that you set for 2030 is EUR 180 million to EUR 280 million is only due to the different range of annual flows and due to the different potential margins on the assets? Or are there any other factors that could explain this wide range? And then a clarification about other income and tax rate. About other income, you mentioned structuring fees. Are there any recurring items for next quarters too? Or do they represent a one-off item? While for the tax rate, I think that there are some one-offs for this quarter as you confirm your guidance of 25% for the full year, but I'm asking you about this. Alessandro Zambotti: Yes. Thank you, Elena. I'm going to take a few of your questions, and then Giorgio will conclude. So starting from your first part relating to the net profit, the new target and as well the moving of the EUR 1 billion to the '26, it's clearly -- your understanding is correct. I mean the contribution of TNB that we plan -- I mean, we're planning at the end of the year is not going to happen. Therefore, obviously, the contribution and the equity transaction is going to happen in '26 and therefore, as well the P&L impact from this transaction is going to be booked next year. And at the same time, following the good results and the good trend of the group, we were updating the guidance for the, let's say, the simple reason that the projection that we see, the trajectory that we see for the last few months of the year is if nothing happens, let's say, complicate, we will be able to get the target. Then you refer to the other income. As you were saying, there is a one-off effect that is linked to the structuring fees. But at the same time, as I was saying at the beginning, it has not to be considered one-off for the yearly basis because it's quarterly basis, for sure, we cannot say that every quarter, we will have this contribution. But looking on a yearly basis, this amount I mean could happen that following this type of services that we are providing, they came up -- I mean, a contribution as well on the other income on the future years. And then at the level of the tax, I think it's more close to the constant of seasonability. I mean, this quarter, it's always lower than in December, considering also the provision of all the dividends coming from the other countries, we will probably get higher impact of tax for that, we kept the guidance stable as per the previous. Medda Giorgio: And yes, when it comes to the 2030 margin targets, the EUR 180 million to EUR 280 million net profit from global operations. Look, this range is admittedly very large. It reflects simply the addition of the lower bound targets for each division or geography and the upper bound. There is nothing else there. It certainly is a basic assumption that the business mix going forward will essentially remain unchanged or not dramatically different from what it is today. But as I said, we work every day to beat the target that we give ourselves, and we certainly do our best to even do better than what we are disclosing today. It's 5 years, it's a pretty long period of time, but we are starting off a very strong base, and I see us capable of doing very, very well. Operator: The next question is from Ian White of Autonomous Research. Ian White: Just a couple from me, please. First of all, can you call out some of the most important drivers of the improved organic net inflow performance this year, please? I'm particularly interested in where you think you've seen the strongest growth in your market share, thinking about the organic flows specifically. That's question one. And question two, in terms of the Bank of Italy's inspection, can you say a bit more about the specific findings there and the remediations that you're going to introduce? Am I right to read into the statement today that the delay to TNB approval is linked to the regulators' findings? And if so, what's your view as to why the regulator has connected those things, please? Medda Giorgio: Okay. Let me take your questions. So I'll start with the first regarding the underlying drivers of our terrific net new money performance this year. I think we -- if you look at the presentation that we have shown earlier, Slide 6, you find what is a pretty accurate detailed breakdown in terms of net new money to different product lines as opposed to different geographies. Let me tell you from a qualitative standpoint that fund solutions have been doing very well in Italy. Certainly, we have the contribution of Nova here, but let me mention what also we have done in Turkey, in Egypt, in the U.S., that is certainly our key product, our bread and butter, and we are proving now to be able to grow both catering to individual clients and institutional as well in terms of wholesale agreement. Let me mention that our Wealth Management business has been this year delivering incredible growth out of Asia, out of the Middle East. Switzerland, Monaco as well doing better than the previous years. And we see now what is a very sustained momentum that is a testament of our ability of building now a cross-border platform and being able to deal with high net worth, ultra net worth individuals that are recognizing Azimut's the ability and the capability to deliver performance vis-a-vis even larger players. Then when it comes to your question regarding the ordinary inspection from Bank of Italy, yes, again, I would refer to the press release, you should assume that we are subject to inspections every week. As you can imagine, we operate across 20 countries. We are subject to the supervision of 20 regulators, sometimes in certain markets like in the U.S. by 2 regulators in the same country. That is also the case for Italy, by the way. And there are routine inspections. So you can say that every day, we are subject to an inspection. So I do not see the Bank of Italy inspection in Italy has been particularly different from others that we have been subject to. And also, let me stress you that the -- let's say, the topic of the inspection was not the announced transaction with TNB. The inspection was very much covering for our, let's say, asset management product factory activities and has been very much referring to this aspect of the business that is not related to the announced transaction with FSI. One of the outcomes of the transaction was that we need to put in place some very ordinary remedial actions. And as you can imagine, although these actions are not related to the TNB transaction and considering the time line is relatively short, we will work on this remediation plan with some very close deadlines, also suggesting that there's nothing dramatic there, maintaining what is an achievable target for the transaction to close within Q2. By the way, this inspection started even before the binding agreement was signed with FSI, and it's really to be seen as completely unrelated. Maybe unfortunate in terms of timing, but to be honest, not really a reason of concern for us. Ian White: Okay. If I can just clarify, I'm not sure if I missed this. In terms of the -- is the delay to TNB approval a direct consequence of things that the regulator has found on its -- during its ordinary inspection? Or am I reading that incorrectly? Medda Giorgio: Not at all. It's procedural, if you want. And as we said very often, the 2 things are separate. There is no really -- we should not see the TNB transaction as the inspection that could be related to each other. As a matter of fact, the transaction occurs in a way where the company that is spinning off half of our network is the one that was subject to the inspection, but nothing of the activities that will be spun off has been subject to the inspection itself. It was mostly related to funds management to discretion portfolio management, really nothing at all that was related to the asset base that will be spun off. Operator: [Operator Instructions] Mr. Medda, there are no more questions registered at this time. Medda Giorgio: Okay. Let's close the call here, and let me wish everyone a good end of the year. And obviously, we keep looking forward to seeing you soon. Thank you. Operator: Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones.